Court Opinion

ID: 4040130
Source: CourtListenerOpinion
Date Created: 2016-09-28 22:26:05.699549+00
Date Added: 2024-06-11T14:26:58.862451
License: Public Domain

ACCEPTED
                                                                                      03-14-00197-CV
                                                                                              4929353
                                                                            THIRD COURT OF APPEALS
                                                                                       AUSTIN, TEXAS
                                                                                4/17/2015 10:36:54 AM
                                                                                     JEFFREY D. KYLE
                                                                                                CLERK
                         NO. 03-14-00197-CV
           _____________________________________________
                                                         FILED IN
                        IN THE COURT OF APPEALS   3rd COURT OF APPEALS
                    THIRD JUDICIAL DISTRICT OF TEXAS   AUSTIN, TEXAS
                                AT AUSTIN         4/17/2015 10:36:54 AM
                                                      JEFFREY D. KYLE
         ________________________________________________
                                                           Clerk

                   GRAPHIC PACKAGING, INC.,
                                  Appellant

                                      v.

GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF
  THE STATE OF TEXAS; AND KEN PAXTON, ATTORNEY
         GENERAL OF THE STATE OF TEXAS,
                                  Appellees.

       FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT,
      CAUSE NO. D-1-GN-12-003038, THE HONORABLE DARLENE BYRNE PRESIDING

         REPLY BRIEF FOR APPELLANT
James F. Martens                               Amy L. Silverstein
jmartens@textaxlaw.com                         asilverstein@sptaxlaw.com
Texas Bar No. 13050720                         California Bar No. 154221
Amanda G. Taylor                               SILVERSTEIN & POMERANTZ LLP
ataylor@textaxlaw.com                          12 Gough Street, Second Floor
Texas Bar No. 24045921                         San Francisco, California 94103
Lacy L. Leonard                                Tele: (415) 593-3502
lleonard@textaxlaw.com                         Fax: (415) 593-3501
Texas Bar No. 24040561
Danielle Ahlrich                               ATTORNEYS FOR APPELLANT
dahlrich@textaxlaw.com
                                               GRAPHIC PACKAGING, INC.
Texas Bar No. 24059215
MARTENS, TODD, LEONARD, TAYLOR & AHLRICH
301 Congress Avenue, Suite 1950
Austin, Texas 78701
Tele: (512) 542-9898
Fax: (512) 542-9899
                    ORAL ARGUMENT REQUESTED
                 IDENTITY OF PARTIES AND COUNSEL

            APPELLANT                              APPELLEES

Graphic Packaging, Inc.                Glenn Hegar, Comptroller of Public
                                       Accounts of the State of Texas, and
                                       Ken Paxton, Attorney General of the
                                       State of Texas

Appellate Counsel:                     Appellate Counsel:
Amy L. Silverstein                     Rance Craft,
asilverstein@sptaxlaw.com              Assistant Solicitor General
SILVERSTEIN & POMERANTZ LLP            rance.craft@texasattorneygeneral.gov
12 Gough Street, Second Floor          Cynthia A. Morales,
San Francisco, California 94103        Assistant Attorney General
Tele: (415) 593-3502                   cynthia.morales@texasattorneygeneral.gov
Fax: (415) 593-3501                    OFFICE OF THE ATTORNEY GENERAL
                                       P.O. Box 12548 (MC 059)
                                       Austin, Texas 78711-2548
Trial and Appellate Counsel:           Tele: (512) 936-2872
James F. Martens                       Fax: (512) 474-2697
jmartens@textaxlaw.com
Amanda G. Taylor
ataylor@textaxlaw.com                  Trial Counsel:
Lacy L. Leonard                        Kevin D. Van Oort
lleonard@textaxlaw.com                 Formerly with the Office of the Attorney
Danielle Ahlrich                       General
dahlrich@textaxlaw.com
MARTENS, TODD, LEONARD, TAYLOR &
AHLRICH
301 Congress Avenue, Suite 1950
Austin, Texas 78701
Tele: (512) 542-9898
Fax: (512) 542-9899

                                   i
                                        TABLE OF CONTENTS
IDENTITY OF PARTIES AND COUNSEL .............................................................i

TABLE OF CONTENTS .......................................................................................... ii

INDEX OF AUTHORITIES.....................................................................................iv

ABBREVIATIONS ...................................................................................................x
REPLY ARGUMENT ...............................................................................................1
        I.       Section 171.106(a) Did Not Impliedly Repeal the Compact
                 Formula. ................................................................................................3

        II.      The Compact Is Valid And Binding...................................................... 5

                 A.       The Compact Bears Clear Indicia of a Binding Compact. ......... 5
                          1.        The Commission’s Establishment. ................................... 8

                          2.        No Unilateral Modification or Repeal. ............................. 9

                          3.        Requires Reciprocal Action. ...........................................11
                 B.       The Compact is Not an Advisory Compact or a Uniform
                          Law. ...........................................................................................12

        III.     THE COMPACT’S ELECTION PROVISION IS
                 UNAMBIGUOUSLY MANDATORY. .............................................14

                 A.       The Express Terms are Mandatory. ..........................................14
                 B.       The Most Relevant Extrinsic Evidence Supports the
                          Mandatory Election. ..................................................................16

                 C.       The Conduct of Other Party States Cannot Override the
                          Compact’s Express Terms. .......................................................17

                 D.       The Compact Does Not Surrender Texas’s Power to Tax........ 19
                          1.        The Compact Election Does Not Involve the
                                    “Power to Tax.” ..............................................................19
                          2.        No Surrender or Suspension. ..........................................21
                                                           ii
        IV.     COMPACT LAW AND THE CONTRACT CLAUSE
                PRECLUDE TEXAS FROM UNILATERALLY
                ELIMINATING THE ELECTION. ....................................................22

                A.       Settled Principles for Construing Compacts Are
                         Applicable. ................................................................................22
                B.       The Contract Clause Would Be Violated By Elimination
                         of The Compact Election. .........................................................25

        V.      The Franchise Tax Is an Income Tax under the Compact
                Definition.............................................................................................29

CERTIFICATE OF SERVICE ................................................................................34

CERTIFICATE OF COMPLIANCE .......................................................................34

                                                         iii
                                    INDEX OF AUTHORITIES

CASES
Alabama v. North Carolina,
     560 U.S. 330 (2010)............................................................................ 9, 16, 19

Alcorn v. Wolfe,
      827 F. Supp. 47 (D. D.C. 1993).....................................................................23
Allied Structural Steel Co. v. Spannaus,
       438 U.S. 234 (1978).......................................................................................28
Arizona v. California,
      292 U.S. 341 (1934).......................................................................................16
Blair v. State Tax Assessor,
       485 A.2d 957 (Me. 1984) ....................................................................... 21, 22

Bolton v. Terra Bella Irrigation Dist.,
      106 Cal. App. 313 (1930) ..............................................................................22
City of Charleston v. Pub. Serv. Comm’n,
       57 F.3d 385 (4th Cir. 1995) ...........................................................................26
CT Hellmuth & Association, Inc. v. Washington Metro Area Transit Authority,
     414 F. Supp. 408 (D. Md. 1976)....................................................................24

Cuyler v. Adams,
      449 U.S. 433 (1911).......................................................................................23

Dartmouth College v. Woodward,
     17 U.S. 518 (1819).........................................................................................20

Doe v. Ward,
      124 F. Supp. 2d 900 (W.D. Pa. 2000) ...........................................................25

Energy Reserves Group v. Kan. Power & Light Co.,
     459 U.S. 400 (1983)................................................................................ 27, 28
Gaar, Scott & Co. v. Shannon,
      115 S.W. 361, 362 (Tex. Civ. App.—Austin 1908) aff’d,
      233 U.S. 468 (1912).......................................................................................20

                                                        iv
General Expressways, Inc. v. Iowa Reciprocity Board,
     163 N.W.2d 413 (Iowa 1968) ........................................................................25

Gillette Co. v. Franchise Tax Board,
       207 Cal. App. 4th 1369 (2012) ............................................................... 18, 26

Green v. Biddle,
     21 U.S. 1 (1823)...................................................................................... 25, 28

Harsha v. Detroit,
     246 N.W. 849 (Mich. Sup. Ct. 1939) ............................................................19

In re C.B.,
       188 Cal. App. 4th 1024 (2010) ........................................................................9

Int’l Serv. Ins. Co. v. Jackson,
       335 S.W.2d 420 (Tex. App.—Austin 1960, writ ref’d n.r.e.) .........................3
Int’l Union of Operating Eng'rs, Local 542 v. Del. River Joint Toll Bridge Comm’n,
       311 F.3d 273 (3rd Cir. 2002) ...........................................................................9
Int'l Business Machines Corp. v. Dept. of Treasury,
       852 N.W.2d 865 (Mich. 2014) .............................................................. passim
Kansas v. Colorado,
     514 U.S. 673 (1995)................................................................................ 18, 19
McComb v. Wambaugh, 934 F.2d 474 (3rd Cir. 1991) ................................ 9, 16, 24
Memphis & Little Rock Railroad v. Railroad Comm.,
    112 U.S. 609 (1884).......................................................................................19

National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Railway Co.,
      470 U.S. 451 (1985).......................................................................................10

Northeast Bancorp, Inc. v. Bd. of Governors of the Federal Reserve,
      472 U.S. 159 (1985)............................................................................... passim

Oklahoma v. New Mexico,
     501 U.S. 221 (1991).......................................................................................16

People v. Board of Supervisors of Calaveras County,
      126 Cal. App. 670 (1932) ..............................................................................20

                                                        v
Railroad Tax Cases,
      13 F. 722 (D. Cal. 1882) ................................................................................20

Rhoades v. State,
     934 S.W.2d 113 (Tex. 1996) ...........................................................................4

Seattle Masters Builders Ass'n v. Pacific Northwest Electric Power and
       Conservation Planning Council,
       786 F.2d 1359 (9th Cir. 1986) ............................................................... passim
Sheehy v. Public Empl. Retirement Div.,
     864 P.2d 762 (Mont. Sup. Ct. 1993)..............................................................21
Standard Oil Co. v. Johnson,
      10 Cal. 2d. 758 (1938) ...................................................................................21
State Bank of Ohio v. Knoop,
       57 U.S. 369 (1854).........................................................................................20
State Highway Dep’t v. Gorham,
      162 S.W.2d 934 (Tex. 1942) .......................................................................4, 5

Sunbeam Envtl. Servs. v. Tex. Workers’ Comp. Ins. Facility,
     71 S.W.3d 846 (Tex. App.–Austin 2002, no pet.) .........................................28

Switzer v. Phoenix,
      341 P.2d 427 (Ariz. Sup. Ct. 1959) ........................................................ 21, 22
Tarrant Reg’l Water Dist. v. Hermann,
     186 L. Ed. 2d 153 (2013) .................................................................. 10, 16, 19

Texas v. New Mexico,
      462 U.S. 554 (1983).......................................................................................16

Texas v. New Mexico,
      482 U.S. 124 (1987).......................................................................................29

Trinova Corp. v. Dep’t of Treasury,
      498 U.S. 358 (1991).......................................................................................29
U.S. Steel Corp. v. Multistate Tax Commission,
      434 U.S. 452 (1978)............................................................................... passim

                                                        vi
U.S. Trust Co. of N.Y. v. New Jersey,
      431 U.S. 1 (1976)........................................................................ 25, 26, 27, 28

Valencia Energy Co. v. Dep’t of Rev.,
      959 P.2d 1256 (Ariz. Sup. Ct. 1998) .............................................................19

Virginia v. Tennessee,
      148 U.S. 503 (1893).......................................................................................23

West Virginia ex rel. Dyer v. Sims,
      341 U.S. 22 (1951).....................................................................................9, 23

STATUTES & RULES
1971 Fla. Laws ch. 71-980 § 2.................................................................................17
1981 Nev. Stat. ch. 181, at 350 ................................................................................18

1985 Neb. Laws L.B. 344 ........................................................................................18
1985 W. Va. Acts ch. 160 ........................................................................................18
2005 Me. Laws ch. 332, § 29 ...................................................................................18

2006 Tex. Gen. Laws 1, 38 ......................................................................................29
2012 Cal. Stat. ch. 37, § 3 ........................................................................................18
2013 Minn. Ch. Law 143 (H.F. 677) .......................................................................18

2014 Mich. Pub. Acts 282, § 1.................................................................................18
Cal. Fish & Game Code § 14001 ...............................................................................8

Cal. Gov’t Code § 66800 .........................................................................................10

Cal. Veh. Code § 15207 ...........................................................................................10
Fla. Stat. § 214.71 ....................................................................................................17

I.R.C. § 55 ................................................................................................................31

I.R.C. § 63 ................................................................................................................31

I.R.C. § 151 ..............................................................................................................31
                                                             vii
I.R.C. §§ 101-140.....................................................................................................30

Mich. Comp. Laws § 205.581....................................................................................3
Mo. Rev. Stat. § 32.200 ...........................................................................................17

Mont. Code Ann. § 15-1-601 ...................................................................................17

N.D. Cent. Code § 57-59-01 ....................................................................................17
N.M. Stat. Ann. § 7-5-1 ...........................................................................................17

Tex. Code Crim. Proc. art. 42.19 ...............................................................................8
Tex. Const. art. III, § 36 .........................................................................................4, 5
Tex. Const. art. VIII, § 4 ............................................................................. 19, 21, 22

Tex. Fam. Code § 60.010 .........................................................................................10

Tex. Gov’t Code § 510.017......................................................................................10

Tex. R. App. P. 38.3.................................................................................................28
Tex. Tax Code § 141.001 ................................................................................. passim
Tex. Tax Code § 171.106 ................................................................................. passim
Tex. Tax Code § 171.1011 .......................................................................................30

Tex. Tax Code § 171.1012 .......................................................................................30

Tex. Tax Code § 171.1013 .......................................................................................31

                                                         viii
OTHER AUTHORITIES
California Chamber of Commerce,
      Special Exhibits Re: A.B. 1304: Ratifying Multistate Tax Compact (Jul. 13,
      1973) ..............................................................................................................18

Caroline Broun, Richard Masters and others, The Evolving Use and Changing Role
      of Interstate Compacts (ABA 2006)............................................. 9, 12, 13, 24
Fletcher Cyclopedia of the Law of Corporations ....................................................30

Interstate Compacts vs. Uniform Laws,
       at cglg.org/media/1302/ compacts_vs_uniform_laws-csgncic.pdf (last visited
       Apr. 9, 2015) ..................................................................................................14
Kearns B. Taylor, Texas’ Exciting Answer in the Battle with Proponents of Federal
     Control Over State Taxation of Interstate Commerce,
     30 Tex. B.J. 773 .............................................................................................15

Lilian V. Faulhaber, The Hidden Limits of the Charitable Deduction: An
       Introduction to Hypersalience,
       92 B.U. L. Rev. 1307 (2012) .........................................................................31
Public Law 86-272 ...................................................................................................29

Texas House of Representatives Ways & Means Committee HB 3........................29
Texas House Research Organization HB 3..............................................................29
Walter Hellerstein, State Taxation
      ¶ 9.01[1] n.12.19, ¶ 7.12[7] ...........................................................................30

                                                            ix
                                ABBREVIATIONS
      For ease of reference, Graphic Packaging, Inc. uses the following abbreviated

references to the record and the parties herein:

Abbreviation                 Reference

Graphic                      Graphic Packaging, Inc.

The Comptroller              Appellees Glenn Hegar, Comptroller of Public
                             Accounts of the State of Texas, and Ken Paxton,
                             Attorney General of the State of Texas, collectively

The Compact                  Multistate Tax Compact

The Compact Election         The election contained in Texas Tax Code Section
                             141.001, art. III(1)
The Compact Formula          The apportionment formula contained in Texas Tax
                             Code Section 141.001, art. IV, i.e., an
                             equally-weighted, three-factor formula consisting of a
                             property factor, a payroll factor, and a sales factor

The Texas Formula            The apportionment formula contained in Texas Tax
                             Code Section 171.106(a), i.e., a single factor formula
                             consisting of only a sales factor

UDITPA                       The Uniform Division of Income for Tax Purposes Act

                                          x
                             REPLY ARGUMENT
      Graphic properly used the Compact Formula to determine its franchise tax

base. Texas became a party to the Compact in 1967 and thereby agreed to all of its

terms, including the core provision allowing all taxpayers to elect to apportion

income by either the Compact Formula or an alternative state formula, the Texas

Formula. Tex. Tax Code § 141.001, art. III(1).

      Texas has never repealed the Compact Election or Formula.                The

Comptroller contends that Texas Tax Code § 171.106(a) eliminated the Compact

Formula. Yet, neither the plain language of Section 171.106(a) nor its legislative

history indicate an amendment of the Compact to mandate the Texas Formula.

      In International Business Machines Corp. v. Department of Treasury, 852
N.W.2d 865 (Mich. 2014) (“IBM”), the Michigan Supreme Court rejected a nearly

identical argument involving the same Compact. The Court agreed that Michigan’s

apportionment statute was mandatory, but “the Legislature gave no clear indication

that it intended to repeal the [Compact Election],” so it assumed “the Legislature

intended for both to remain in effect.” Id. at 875. When enacted, the Compact

“contemplat[ed] the future enactment of a state income tax with a mandatory

apportionment formula different from the Compact's apportionment formula.” Id.

at 874.   The statutes were compatible: if a taxpayer elects the Compact, the

Compact Formula applied; otherwise, the taxpayer was “required to apportion its tax

                                        1
base consistently with the mandatory language of” the Michigan’s statute. Id. at

875. The Michigan Supreme Court’s reasoning is on point here and provides the

proper analytical path for reconciling the terms of the Compact and the franchise tax

law. If this Court agrees, then it need not reach any other issues.

      Furthermore, the Compact is valid and binding on Texas until it withdraws.

The states and the drafters understood compacts were an established mechanism for

resolving cross-border issues and intended the Compact to be binding. The plain

terms of the Compact demonstrate a clear intent to create a binding interstate

compact. The legislative history confirms that intent.      There is no evidence of

intent to enact a mere model law. Enactment and withdrawal provisions and a

commission are never features of garden-variety statutes. And, there is no evidence

of intent to allow piecemeal amendment of the Compact’s terms. Subsequent

actions of party states are inconsistent; some states never deviated from the Compact

Election, some states withdrew, and most notably, some states deviated from the

Compact Election and later withdrew.

      Finally, the Compact Election applies because the franchise tax is an “income

tax” under the Compact’s broad definition. All of Texas’s alternative tax bases,

especially the cost of goods sold computation, begin with gross income and allow

deductions not directly related to specific transactions. Thus, they are income taxes

under the Compact.

                                          2
I.     SECTION 171.106(A) DID NOT IMPLIEDLY REPEAL THE
       COMPACT FORMULA.
       Tex. Tax Code § 171.106(a) did not impliedly repeal the Compact Formula.

An implied repeal would require that the statutes were irreconcilable or that repeal

was “plainly intended by the Legislature...              The implication must be clear,

necessary, irresistible, and free from reasonable doubt.” Int’l Serv. Ins. Co. v.

Jackson, 335 S.W.2d 420, 424 (Tex. Civ. App. 1960).

       Sections 171.106(a) and 141.001 are harmonized to preserve both: if a

taxpayer makes the Compact Election, the Compact Formula applies; otherwise, the

Texas Formula applies. See Appellant’s Brief 23-24.

       The Michigan Supreme Court in IBM, 852 N.W.2d 865, adopted this analysis,

holding the Compact Election reconciled the Compact Formula with the Michigan

Formula, which is materially similar to Section 171.106(a). 1

              [The state’s apportionment formula] is not the only
              provision of Michigan’s tax laws pertaining to the
              apportionment of business income--the Compact's
              election provision shares the same purpose. Therefore, we
              cannot interpret [the state’s apportionment formula] in a
              vacuum… The Department's argument overlooks that
              the Compact's election provision, by using the terms “may
              elect,” contemplates a divergence between a party state's
              mandated apportionment formula and the Compact's own
              formula--either at the time of the Compact's adoption by a

1. Compare Mich. Comp. Laws § 205.581, art. IV(9) (2011), with Section 171.106(a). The
Michigan statute also contained a clause stating “except as otherwise provided in this act.” IBM,
852 N.W.2d at 873.

                                               3
             party state or at some point in the future. Otherwise, there
             would be no point in giving taxpayers an election between
             the two. In fact, reading the Compact's election provision
             as forward-looking--i.e., contemplating the future
             enactment of a state income tax with a mandatory
             apportionment formula different from the Compact's
             apportionment formula--is the only way to give meaning
             to the provision when it was enacted in Michigan.
             Viewed in this light, the [state’s] mandatory
             apportionment language may plausibly be read as
             compatible with the Compact's election provision.

Id. at 873-74.

      To say that prior to enacting the franchise tax in 2006, the “Legislature never

has intended to apply” the Compact Formula does not establish a policy or say

anything about legislative intent in 2006. Appellees’ Brief 36. Silence does not

evidence intent to eliminate the Compact Formula. Rather this Court must assume

“the Legislature intended for both to remain in effect.” IBM, 852 N.W.2d at 875.

      Finally, the Comptroller’s interpretation would violate Tex. Const. art. III, §

36, which is aimed at eliminating confusion and uncertainty; requiring amended

statutes to be re-enacted and published allows “their meaning [to be] known without

the necessity of examining the statute amended.” Rhoades v. State, 934 S.W.2d
113, 121 (Tex. 1996) (quoting Tex. Const. art. III, § 36 commentary). However,

Section 171.106(a) as interpreted by the Comptroller gives no notice it affects

Section 141.001, creating just the confusion and uncertainty the Constitution intends

to prevent. See Appellees’ Brief 39; State Highway Dep’t v. Gorham, 162 S.W.2d
4
934, 937 (Tex. 1942) (a law restricting application of a statute and not expressly

referencing the title of the provisions it restricted, violated Tex. Const. art. III, §

36). Id. at 937.

       Section 171.106(a) did not impliedly repeal the Compact Election or Formula.

II.    THE COMPACT IS VALID AND BINDING.
       The Compact bears clear indicia of a binding compact. Appellant’s Brief

38-41 (discussing enactment provisions, imposition of mutual obligations on party

states, withdrawal provision, creation of Commission). History confirms the states

and the drafters understood compacts to be an established mechanism for resolving

cross-border issues, and they intended the Compact to be a binding compact. Id.

Claiming that the Compact is a uniform law disregards its plain terms and its

legislative history. Appellees’ Brief 54-55. Arguing that without an express

prohibition, party states are free to ignore the Compact (Id. at 55-60), turns the

concept of compacts on its head.2

      A.      The Compact Bears Clear Indicia of a Binding Compact.
       Northeast Bancorp, Inc. v. Board of Governors of the Federal Reserve, 472
U.S. 159 (1985), and Seattle Masters Builders Association v. Pacific Northwest

2. The Comptroller misreads Tex. Tax Code § 141.001, art. XI(a) (“Nothing in this compact shall
be construed to … [a]ffect the power of any state or subdivision thereof to fix rates of taxation,
except that a party state shall be obligated to implement Article III.2 of this compact.”). See
Appellees’ Brief 53 n.8. This language anticipates and preempts an argument that Article III.2
might interfere with the power to set tax rates.

                                                5
Electric Power and Conservation Planning Council, 786 F.2d 1359 (9th Cir. 1986),

did not establish absolute requirements for the existence of a compact but rather

discussed certain indicia common in compacts in a manner pertinent to the facts in

those cases. Seattle Master Builders also recognized that “[a]n unusual feature of a

compact does not make it invalid.” 786 F.2d at 1364.

      One issue in Northeast Bancorp was whether statutes in Massachusetts and

Connecticut permitting the acquisitions of banks by out-of-state entities were an

invalid compact under the Compact Clause due to lack of Congressional approval.

Northeast Bancorp, 472 U.S. at 162. The statutes were not titled compacts, were

not “entered into” with other states, and lacked withdrawal provisions.         The

Supreme Court rejected the Compact Clause challenge, expressing doubt as to

“whether there is an agreement amounting to a compact.” Id. at 175-76. The

Court noted:

               The two statutes are similar in that they both require
               reciprocity and impose a regional limitation... But
               several of the classic indicia of a compact are missing.
               No joint organization or body has been established to
               regulate regional banking or for any other purpose.
               Neither statute is conditioned on action by the other State,
               and each State is free to modify or repeal its law
               unilaterally. Most importantly, neither statute requires a
               reciprocation of the regional limitation.

Id. at 175.

                                            6
      Seattle Master Builders paraphrased Northeast Bancorp in determining the

Pacific Northwest Electric Power and Conservation Planning Council was a

compact organization, not a federal agency (subject to the Constitutional

appointments clause):

             The Supreme Court recently outlined some of the indicia
             of compacts.      These are establishment of a joint
             organization for regulatory purposes; conditional consent
             by member states in which each state is not free to modify
             or repeal its participation unilaterally; and state
             enactments which require reciprocal action for their
             effectiveness.

Seattle Master Builders, 786 F.2d at 1363 (citing Northeast Bancorp).

      U.S. Steel Corp. v. Multistate Tax Commission, 434 U.S. 452 (1978), supports

Appellant. The Court reviewed the Compact’s terms before determining it was

legal without Congressional consent. See id. at 471 (detailing the Compact’s

obligations and the “multilateral nature of the agreement”); Appellant’s Brief 14. If

the Court doubted whether the Compact was a binding compact, it would have said

so, like in Northeast Bancorp, and the lengthy Compact Clause analysis would have

been irrelevant. The Court held the Compact was valid and the audits authorized by

the Compact could proceed. U.S. Steel, 434 U.S. at 472-78.

      In any event, the Compact indeed contains the “classic indicia of a compact”

discussed in Northeast Bancorp.

                                         7
            1.      The Commission’s Establishment.
      The Compact established the Commission, a classic characteristic of a

binding compact. See Northeast Bancorp, 472 U.S. at 175 (indicia includes “a joint

organization or body has been established to regulate regional banking or for any

other purpose”). The Commission has been in existence for more than 45 years,

employs a large number of people, has a sizeable budget, assembles leaders to

advance important proposals, and undertakes numerous audits. See Tex. Tax Code

§ 141.001, arts. VI-VIII; see also, www.mtc.gov (Commission website detailing its

activities) and www.mtc.gov/Audit.aspx?id=578 (reporting over 1600 audits in the

last five years).   Although the term “regulatory” power is not defined, the

Commission is a robust organization with significant influence and powers. See

Northeast Bancorp, 472 U.S. at 175 (failing to define “regulatory” power).

      Seattle Master Builders imprecisely paraphrased Northeast Bancorp, and no

case holds a compact must create a compact agency with regulatory power to be

binding. A compact agency is highly suggestive of a compact’s existence, but it

does not need to be a regulatory agency, because even the absence of a regulatory

agency does not necessarily mean no compact exists.         Many compacts have

advisory commissions (see Pacific Marine Fisheries Compact (Cal. Fish & Game

Code § 14001)), and others have no commission at all (see, e.g., Interstate

Corrections Compact (Tex. Code Crim. Proc. art. 42.19) (imposing obligations on

                                        8
states without creating a commission)). See also Caroline Broun, Richard Masters

and others, The Evolving Use and Changing Role of Interstate Compacts (ABA

2006) (“Broun”), at 133-47 (discussing various structures for administering

compacts).

              2.    No Unilateral Modification or Repeal.
         Silence in the Compact does not mean states may modify Compact

provisions. In effect, the Comptroller argues the Compact had to expressly prohibit

eliminating the Election provision.    Appellees’ Brief 55-60.     The rule is the

opposite – the terms of a compact are mandatory, and a party cannot alter or ignore

them unless expressly authorized. See, e.g., West Virginia ex rel. Dyer v. Sims, 341
U.S. 22, 28 (1951); McComb v. Wambaugh, 934 F.2d 474, 479 (3rd Cir. 1991); In re

C.B., 188 Cal. App. 4th 1024, 1031 (2010); Int’l Union of Operating Eng'rs, Local

542 v. Del. River Joint Toll Bridge Comm’n, 311 F.3d 273, 281 (3rd Cir. 2002)

(“This is because the ‘concurred in’ provision introduces the issue of, and

mechanism for, modification, without which there is absolutely no authority for, let

alone specific means of accomplishing, a modification of the Compact…”); Broun

at 23.

         Likewise, a withdrawal provision does not render a Compact non-binding.

Many binding compacts have withdrawal provisions.          See Alabama v. North

Carolina, 560 U.S. 330, 352-53 (2010) (discussing analogous withdrawal provision

                                         9
in Southeast Interstate Low-Level Radioactive Waste Management Compact); Cal.

Gov’t Code § 66800, art. X (c) (Tahoe Regional Planning Compact: “A State party

to this compact may withdraw therefrom by enacting a statute repealing the

compact…”); Cal. Veh. Code § 15027 (Driver’s License Compact: “any party state

may withdraw from this compact by enacting a statute repealing the same…”); Tex.

Fam. Code § 60.010, art. XI (Interstate Compact on Juveniles); Tex. Gov’t Code §

510.017, art. XI (Interstate Compact for Adult Offender Supervision).

      The Comptroller cites National R.R. Passenger Corp. v. Atchison, Topeka &

Santa Fe Railway Co., 470 U.S. 451, 465-66 (1985), stating that “‘absent some clear

indication that the legislature intends to bind itself contractually,’ an enacted law

does not create contractual or vested rights.” However, that case is inapplicable

because it did not involve a compact. Moreover, the very choice of a compact

communicates the legislature’s intent to enter into a binding agreement.

Appellant’s Brief 38-39.

      Similarly, the concept that “[s]tates rarely relinquish their sovereign powers”

and “when they do we would expect a clear indication of such devolution, not

inscrutable silence” is not applicable because the Compact’s election provision is

unambiguously mandatory. See Appellees’ Brief 51 (quoting Tarrant Reg’l Water

Dist. v. Hermann, 186 L. Ed. 2d 153, 169 (2013)); see § III.A infra. Similarly, the

                                         10
course of conduct by member states does not establish a right to unilaterally amend

the Compact. See § III.C infra.

             3.      Requires Reciprocal Action.
      The Compact requires reciprocal action by the party states for effectiveness,

because it did not “enter[] into force” until enacted by seven states. Tex. Tax Code

§ 141.001, art. X(1); Seattle Master Builders Ass’n, 786 F.2d at 1363 (provisions

requiring reciprocal action constitute indicia of a compact). The Comptroller

claims, “the Supreme Court could not have meant that the joint action necessary to

establish an advisory body with no regulatory power is evidence of a binding

regulatory compact.” Appellees’ Brief 48. This statement, without any authority,

misconstrues the authorities (particularly Northeast Bancorp, which did not refer to

regulatory power) and the facts (the Commission has broad powers beyond simply

providing advice).     Appellant’s Brief 37-38; see § II.A.1 supra.          Requiring

enactment by multiple states is never a characteristic of regular statutes and satisfies

the requirement of reciprocal action that characterizes a binding compact. The

Comptroller is correct that the Compact would have been effective as a regular

statute even if seven other states did not enact it. Appellees’ Brief 48. But this

misses the point. Enactment by seven states elevated it to a binding compact.

      The Compact Election also is reciprocal because it ensures states that their

taxpayers will be afforded the Compact Election when they do business in other

                                          11
party states. This reciprocity was central to staving off Congressional pre-emption,

one of the Compact’s main purposes. See Appellant’s Brief 44-45. The sales/use

tax credit provision is also reciprocal because party states agree provide credits for

taxes paid in other states.

      B.    The Compact is Not an Advisory Compact or a Uniform Law.
      The Commissioner cites Broun for its claim that the Compact is “an advisory

compact containing model laws.” Appellees’ Brief 42-43. According to Broun,

“[b]y their very terms, advisory compacts cede no state sovereignty nor delegate any

governing power to a compact-created agency.”          Broun at 14.     Because the

Compact does cede some state sovereignty, including particularly the authority to

impose an exclusive apportionment formula, Broun confirms that it is not an

advisory compact. Appellant’s Brief 36-45.

      Advisory compacts also “lack formal enforcement mechanisms and are

designed not to actually resolve an interstate matter, but simply to study such

matters.”   Broun at 13.      However, the Compact was designed to resolve an

interstate matter, i.e., to secure base-line uniformity through binding obligations

upon the party states. And the terms go beyond simply study, e.g., they require

party states to provide the Election to apportion under the Compact, to honor

sales/use tax exemptions and credits, and to pay dues and provide members to the

Commission. Tex. Tax Code § 141.001, arts. III(1), V, VI(1), VI(4)(b). The

                                         12
Commission also does more than study; it has a robust audit function. Id. at art.

VIII. 3

          Regardless, no authority (including Broun) says advisory compacts are not

binding. See Appellees’ Brief 42 (as an advisory compact, the Compact does not

“carr[y] the preemptive force that Graphic assigns to it”). A state entering into an

advisory compact must conduct the compact’s study. Advisory compacts are one

of three general types of compacts: boundary compacts, advisory compacts, and

regulatory compacts.         Broun distinguishes all compacts from administrative

agreements, which are between state agencies. Broun at 16-17. The Compact is

between states, not state agencies.          Thus, Broun supports the conclusion that

because an advisory compact is one of three established types of compacts, states are

bound to the obligations they undertake by entering into an advisory compact.

          UDITPA does not operate as a uniform law when enacted as part of the

Compact. 4 It was drafted in the late 1950s to address the lack of uniformity in state

taxation, but it was insufficient to establish uniformity. See Appellant’s Brief 2-6.

3. Not requiring Congressional consent is not a feature of an advisory compact but rather a
consequence of a compact not tending to “encroach upon or interfere with the just supremacy of
the United States.” U.S. Steel, 434 U.S. at 471.
4. The Comptroller’s statement that the “Compact simply sets those articles into its text without
any prefatory language requiring members to maintain those provisions unchanged in their laws or
any means of compelling them to do so” is incorrect. Appellees’ Brief 54. The terms of the
Compact require it to be enacted “in the form substantially” as written by the drafters.
Appellant’s Brief, Att. G at 4 (Council of State Governments memorandum accompanying the
Compact’s final text).

                                               13
To stave off Congressional preemption, the states and drafters chose a different

vehicle, a binding agreement containing the Compact Election.                         Id. at 6-7.

According to the Council on State Government’s National Center for Interstate

Compacts: “If uniform provisions are embodied in a compact, no state could

subsequently destroy this uniformity by unilateral amendment of its own statute

except to the extent that such variation might be permitted by specific provision of

the compact.” 5 Interstate Compacts vs. Uniform Laws, at cglg.org/media/1302/

compacts_vs_uniform_laws-csgncic.pdf (last visited Apr. 9, 2015).

III. THE  COMPACT’S   ELECTION                                         PROVISION                IS
     UNAMBIGUOUSLY MANDATORY.
      A.      The Express Terms are Mandatory.
       The Comptroller incorrectly argues, “applying Article III.1 to the franchise

tax creates a latent ambiguity.” Appellees’ Brief 55.

       The Compact Election states:

               A taxpayer subject to an income tax … may elect to
               apportion and allocate his income in the manner provided
               by the laws of such States … without reference to this
               compact, or may elect to apportion and allocate in
               accordance with Article IV.

5. The Comptroller also quotes the Commission’s first annual report as saying the Compact had
“been enacted as a uniform law” by 15 states. Appellees’ Brief 55. The Commission knew then
the Compact was not a uniform law. Supp.CR.29. Thus, the more reasonable interpretation of
this statement is that it refers simply to the uniform template used by states to enact the Compact.

                                                14
Tex. Tax Code § 141.001, art. III(1). Because a taxpayer “may elect,” the party

states must make the Election available. In 1970, the Commission agreed:

             The Multistate Tax Compact thus preserves the right of
             the states to make such alternative formulas available to
             taxpayers even though it makes uniformity available to
             taxpayers where and when desired.

Supp.CR.47; see Kearns B. Taylor, Texas’ Exciting Answer in the Battle with

Proponents of Federal Control Over State Taxation of Interstate Commerce, 30 Tex.

B.J. 773, 821 (the Compact “provides for giving a taxpayer the option to achieve

uniformity if he so desires, by utilizing the Uniform Division of Income for Tax

Purposes Act”).

      The Compact Election was the central provision of the Compact. See § II.B

supra. If the Election were optional, the Compact would have failed its purpose of

establishing the uniformity Congress demanded. Appellant’s Brief 44-45. In fact,

the Compact Election advances each of its express purposes.               The Election

facilitates proper determination of taxpayers’ state and local tax liabilities, equitably

apportions their tax bases among states, prevents duplicative taxation, and secures

base-line uniformity and compatibility. In addition, using the same formula in

multiple states simplifies compliance.          Id. at Att. G at 1 (Council of State

Governments memorandum accompanying the Compact’s final text), Att. H at 1

(Council of State Governments Compact Summary and Analysis). Tex. Tax Code

                                           15
§ 141.001, art. XII directs, the “[C]ompact shall be liberally construed so as to

effectuate the purposes thereof.”

      By contrast, the Comptroller’s interpretation eviscerates the Compact’s

purposes. Different formulas ensure complexity, raise compliance costs, reduce

uniformity, and risk double-taxation. Oklahoma v. New Mexico, 501 U.S. 221,

230-31 (1991) (compact must be interpreted consistent with its stated purposes).

     B.     The Most Relevant Extrinsic Evidence Supports the Mandatory
            Election.
      The construction aids the Comptroller mentions (Appellees’ Brief 57) are

irrelevant because there is no ambiguity in the Compact’s terms. Tarrant, 186 L.

Ed. 2d 153.      Nonetheless, if this Court considers extrinsic evidence, the

contemporaneous drafting and negotiation evidence and the Compact’s express

purposes are most probative of the parties’ intent, not evidence of conduct years or

decades later as cited by the Comptroller. See Alabama v. North Carolina, 560

U.S. at 345-48; Oklahoma v. New Mexico, 501 U.S. at 231-37 (relying on “purpose

and negotiating history” to interpret ambiguous phrases in Canadian River

Compact); Texas v. New Mexico, 462 U.S. 554, 568 n.14 (1983) (using context at

time of compact’s enactment to aid interpreting ambiguous provision); Arizona v.

California, 292 U.S. 341, 359-60 (1934); McComb, 934 F.2d at 481. That evidence

indicates the states and the drafters knew what compacts were and how they

operated, and intended to enter into such a binding agreement. See Appellant’s

                                        16
Brief 44. The Election was a core element of the Compact to secure a base-line

level of uniformity and thus avoid federal imposition of a single apportionment

formula. See id. at 43. A model law (UDITPA) had already proven insufficient to

stave off federal action.

     C.     The Conduct of Other Party States Cannot Override the Compact’s
            Express Terms.
      The claim “the Compact states consistently have construed that silence to

mean that members may unilaterally change or restrict the Compact’s terms in their

own laws” is incorrect. See Appellees’ Brief 51.

      First, the Commission’s 1972 resolution is inapposite because Fla. Stat. §

214.71 set forth the same formula as Compact Article IV. 1971 Fla. Laws ch.

71-980 § 2 (amending Fla. Stat. § 214.71 and describing an equally-weighted

three-factor formula).      Accordingly, Florida did not meaningfully change the

Compact Formula after it repealed Articles III and IV.           The Commission’s

resolution supports this: “Whereas, the State of Florida has repealed Articles III and

IV of the Multistate Tax Compact, while still legislatively adhering to the spirit of

the Compact…” CR.487.

      Moreover, many states have not altered the Election. See, e.g., Missouri

(Mo. Rev. Stat. § 32.200); North Dakota (N.D. Cent. Code § 57-59-01); Montana

(Mont. Code Ann. § 15-1-601); New Mexico (N.M. Stat. Ann. § 7-5-1). Other

states have withdrawn from the Compact. See U.S. Steel, 434 U.S. at 454 n.1

                                         17
(citing statutes repealing the Compact in Florida, Illinois, Indiana, and Wyoming);

Nevada (1981 Nev. Stat. ch. 181, at 350); Maine (2005 Me. Laws ch. 332, § 29);

Nebraska (1985 Neb. Laws L.B. 344, § 9); West Virginia (1985 W. Va. Acts ch.

160); California Chamber of Commerce, Special Exhibits Re: A.B. 1304: Ratifying

Multistate Tax Compact (Jul. 13, 1973) (explaining that New York withdrew

because of its opposition to “mandat[ing] uniformity”).

      The most that can be gleaned from states’ deviations from the Compact

Formula after the complaint in Gillette Co. v. Franchise Tax Board, 207 Cal. App.
4th 1369 (2012), was filed is those states recognized a controversy existed about

their ability to modify the Compact. Most importantly, some states that previously

deviated from the Compact Formula have since withdrawn from the Compact.

California (2012 Cal. Stat. ch. 37, § 3); Michigan (2014 Mich. Pub. Acts 282, § 1

(S.B. 156)); Minnesota (2013 Minn. Law ch. Law 143, art. 13, § 24 (H.F. 677)).

Other states repealed and re-enacted the Compact. See Appellees’ Brief 12-13

(Oregon, Utah, and the District of Columbia). From this patchwork of states’

conduct, it is impossible to draw a conclusion that party states “consistently have

construed that silence” to allow unilateral amendment.

      Finally, no court has used course of performance evidence to override the

express terms of a compact, as opposed to aiding in the interpretation of an

ambiguous compact provision. In Kansas v. Colorado, 514 U.S. 673 (1995), the

                                        18
Supreme Court explicitly refused to allow “the subsequent practice of the parties” to

alter the Court’s interpretation of the Arkansas River Compact when that practice

was inconsistent with the compact’s “clear language.” Id. at 690; cf. Tarrant, 186

L. Ed. 2d at 172 (looking to party states’ practical conduct to interpret ambiguous

compact provisions); Alabama v. North Carolina, 560 U.S. at 345-46 (considering

party states’ practical conduct in interpreting ambiguous compact provision).

     D.     The Compact Does Not Surrender Texas’s Power to Tax.
      A mandatory Compact Election does not violate Texas Constitution, Article

VIII, Section 4: “The power to tax corporations and corporate property shall not be

surrendered or suspended by act of the Legislature, by any contract or grant to which

the State shall be a party.” A choice of apportionment formula is not the “power to

tax.” Nor is it a permanent or irrevocable surrender or suspension because Texas

may withdraw under the Compact’s terms.

             1.    The Compact Election Does Not Involve the “Power to Tax.”
      The purpose of states’ anti-surrender provisions was to prohibit legislatures

from granting corporate charters with tax immunities they could not later alter. See,

e.g., Valencia Energy Co. v. Dep’t of Rev., 959 P.2d 1256, 1263-65 (Ariz. Sup. Ct.

1998); Memphis & Little Rock Railroad v. Railroad Comm., 112 U.S. 609 (1884);

Harsha v. Detroit, 246 N.W. 849, 852 (Mich. Sup. Ct. 1939).

                                         19
             Article 13, §§ 1, 6, says that ‘the power of taxation shall
             never be surrendered or suspended by any grant or
             contract to which the state shall be a party.’ … By a
             contract authorizing certain persons to form a corporation
             and exercise its franchises, however valuable the
             consideration received, the state cannot, as we have seen,
             surrender or suspend its rights to tax its property besides,
             as all other property is taxed.

Railroad Tax Cases, 13 F. 722, 776 (D. Cal. 1882). States conceived of such

provisions after Supreme Court cases enforced perpetual tax exemptions in

corporate charters. See, e.g., Dartmouth College v. Woodward, 17 U.S. 518 (1819);

State Bank of Ohio v. Knoop, 57 U.S. 369 (1854).

      Anti-surrender provisions prohibit relinquishing the power to impose or

collect a tax, in particular through an irrevocable contractual tax exemption. For

example, in People v. Board of Supervisors of Calaveras County, 126 Cal. App. 670

(1932), the court rejected the argument that cancelling taxes due on land acquired by

the state would violate the anti-surrender provision: “[T]he power of taxation has

[not] been surrendered by the state either by grant or contract. The facts before us

show that the power of taxation was exercised, and that by operation of law, it has

ceased to be a charge upon the land for the reason that the land is now the property of

the state.” Id. at 674.

      Similarly, in Gaar, Scott & Co. v. Shannon, 115 S.W. 361, 362 (Tex. Civ.

App.—Austin 1908) aff’d, 233 U.S. 468 (1912), the sole case cited by the

Comptroller, a taxpayer’s 10-year business permit did not preclude the state from
                                          20
imposing additional franchise taxes because of Texas’s anti-surrender provision. See

also Switzer v. Phoenix, 341 P.2d 427, 430-31 (Ariz. Sup. Ct. 1959) (parallel

provision is a “prohibition against the surrender or relinquishment of the right to

impose a tax” and “against the irrepealable grant of immunity from taxation”);

Sheehy v. Public Empl. Retirement Div., 864 P.2d 762, 766 (Mont. Sup. Ct. 1993)

(Under Montana’s anti-surrender provision, “the state cannot promise any group of

taxpayers that it will never tax them.”); Blair v. State Tax Assessor, 485 A.2d 957,

960 (Me. 1984) (Maine Constitution prevents legislature from granting permanent

tax exemptions); Standard Oil Co. v. Johnson, 10 Cal. 2d. 758, 763-64 (1938)

(because state reserved power to tax in ceding federal jurisdiction over national

parks, the provision was not implicated).

      Providing taxpayers a choice between formulas to apportion income does not

implicate the power to impose or collect a tax. See U.S. Steel, 434 U.S. at 457

(explaining a party state retains complete control over the tax base, the tax rate, its

tax revenues, and the means and methods of tax collection).               Rather, the

apportionment formula plays a role in the computation of the amount of tax a

multistate corporation ultimately owes.

             2.     No Surrender or Suspension.
      In addition, the Compact Election is not a surrender or suspension by grant or

contract. Tex. Const. art. VIII, § 4. Anti-surrender provisions bar irrevocable

                                          21
exemptions from taxation. The legislature cannot act on a permanent basis or even

for a specific amount of time (for example, a 10-year charter exempting taxation),

without the ability to revoke the tax exemption. See, e.g., Switzer, 341 P.2d at 431;

Blair, 485 A.2d at 960.        Here, Texas can reclaim full control over the

apportionment formula by withdrawing from the Compact. Tex. Tax Code §

141.001, art. X(2); U.S. Steel, 434 U.S. at 473; see also Bolton v. Terra Bella

Irrigation Dist., 106 Cal. App. 313, 328 (1930) (anti-surrender provision not

implicated when legislative grant can be withdrawn).

      In sum, the Compact Election does not violate Texas Constitution, Article

VIII, Section 4.

IV. COMPACT LAW AND THE CONTRACT CLAUSE
    PRECLUDE     TEXAS    FROM UNILATERALLY
    ELIMINATING THE ELECTION.
     A.     Settled Principles for Construing Compacts Are Applicable.
      The argument that “a non-approved compact’s preeminence over other state

law arises from its status as a contract” is incomplete and misleading, and Appellant

does not concede it. See Appellees’ Brief 63. Compacts “are a unique type of

arrangement, conceptualized by the courts as simultaneously both contracts and

binding reciprocal statutes among sovereign states.” Appellant’s Brief 32. This

accounts for the fundamental interpretive principle of compacts, that they supersede

inconsistent state law. Id.

                                         22
      Lack of Congressional consent does not change compacts’ interpretive

principles. See id. at 34-36. Both Congressionally-approved and unapproved

compacts solve cross-border problems. States and other stakeholders rely on the

binding nature of compacts. If a state could override a compact term at will, the

compact would not serve its vital purposes.          Both types of Compacts are

simultaneously statutes and binding agreements among sovereign states, and this

results in a compact superseding other state laws.

      By contrast, Congressional consent is unrelated to states’ and other

stakeholders’ need to rely on the binding nature of compacts. Congressional

consent serves an entirely different purpose. A compact requires consent only if it

“tend[s] to the increase of political power in the States, [and thus] may encroach

upon or interfere with the just supremacy of the United States.” U.S. Steel, 434

U.S. at 471 (citing Virginia v. Tennessee, 148 U.S. 503, 518-19 (1893)). In that

case, consent ensures Congress affirmatively agrees to the agreement.

      Prior to Cuyler v. Adams, 449 U.S. 433 (1911), it was not clear that

Congressionally approved compacts were federal law; yet, pre-Cuyler cases

consistently held compacts supersede other state laws. Dyer, 341 U.S. at 28.

Thus, Congressional approval is merely an additional reason subsequent state law

cannot override a compact. See Alcorn v. Wolfe, 827 F. Supp. 47, 52 (D. D.C.

1993) (“In light of the Supremacy Clause … and because compacts are analogous

                                         23
to contracts between states, the terms of the [] compact cannot be modified

unilaterally by state legislation and take precedence over conflicting state law.”)

(emphasis added); Broun at 65 (“Congressional consent may change the venue in

which compact disputes are ultimately litigated; it does not change the controlling

nature of the agreement on the member states.”); Appellant’s Brief 35-36.

      The IBM dissent is wrong. It began by stating that IBM cited only two cases

to support the proposition that non-Congressionally approved compacts supersede

conflicting state law, McComb, 934 F.2d at 479, and CT Hellmuth & Association,

Inc. v. Washington Metro Area Transit Authority, 414 F. Supp. 408, 409 (D. Md.

1976).

      While those cases do support the principle that the Compact supersedes

conflicting state law, IBM did not rely on them exclusively. Rather, IBM and its

amici thoroughly discussed the purposes of compacts, and analyzed the caselaw

involving compacts, both Congressionally-approved and unapproved.              The

dissent’s failure both to acknowledge and to consider those facts and legal

authorities caused it to reach the wrong conclusion. This Court should not make the

same mistake. To do so would have negative reverberations throughout the law of

compact interpretation and operation.

                                        24
     B.     The Contract Clause Would Be Violated By Elimination of The
            Compact Election.
      Green v. Biddle, 21 U.S. 1, 84 (1823), held that “any deviation” from the

terms of a compact violates the Contract Clause. Green has not been questioned or

overruled and is still frequently cited in modern compact cases.          See    Gen.

Expressways, Inc. v. Iowa Reciprocity Board, 163 N.W.2d 413, 420-21 (Iowa 1968);

Doe v. Ward, 124 F. Supp. 2d 900, 914-15 (W.D. Pa. 2000).

      The multi-step analysis invoked by the Comptroller (Appellees’ Brief 65) was

developed to strike a balance between the nature of a contract’s impairment and the

state’s justification for that impairment. However, this approach has never been

applied to a compact among states (rather than a contract with at least one private

party). This is sensible because compacts are agreements among sovereign states

related to collective governance that cannot be unilaterally altered.

      Even applying the multi-step analysis, the conclusion is the same. Contract

Clause analysis raises two questions: (1) was there substantial impairment, and (2) if

so, was it “reasonable and necessary to serve an important public purpose.” U.S.

Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 22, 25 (1976). Elimination of the

Compact Election, which was essential to the Compact’s purposes, is a substantial

impairment. See § III.B supra.

      To avoid this result, the Comptroller focuses on the language of a

non-compact case which states, “of greatest concern appears to be the contracting

                                          25
parties’ actual reliance on the abridged contractual term.” Appellees’ Brief 66.

The Comptroller contends Graphic could not have relied on the Compact Election

because it did not use it until March 2011 and because states can withdraw at will.

Id.

       However, the Comptroller’s subjective reliance analysis is wrong.6 “When

assessing whether there has been the requisite reliance, the Court has looked to

objective evidence of reliance.” City of Charleston v. Pub. Serv. Comm’n, 57 F.3d
385, 392 (4th Cir. 1995) (emphasis added).                   Objective factors confirm that

eliminating the Compact Election would substantially impair the Compact. U.S.

Trust, 431 U.S. 1, 19-21; Tex. Tax Code § 141.001, art. X(2); see § III.B supra.

First, the Compact does not indicate the Compact Election is subject to impairment

by unilateral amendment by the states. Instead, by entering into a compact, the

states bound themselves to the Compact’s terms until they withdrew. Tex. Tax

Code § 141.001, art. X(2).

       Second, prior regulation of state taxation does not diminish the reliance

interests of party states and taxpayers. By acting collectively through a compact,

6. The Comptroller argues that Graphic was not an intended third-party beneficiary of the
Compact. Appellees’ Brief 65. The Comptroller is mistaken. See Gillette. 209 Cal. App. 4th at
952 (“This is a right specifically extended not to the party states but to taxpayers as third parties
regulated under the Compact, and as such Taxpayers may seek to enforce this right as part of its tax
refund suit.”).

                                                 26
the states agreed the Compact's terms bound them, thus eliminating any expectation

the states would enact subsequent statutes in conflict with the Compact.

      Third, the fact that Texas did not modify the Compact Election but purported

to eliminate it is strong evidence of substantial impairment. U.S. Trust, 431 U.S. at

19 (state law which “totally eliminated” the state’s promise that Port Authority

revenues pay bondholders was a substantial impairment).

      Fourth, the Compact Election was the central undertaking (core provision) of

the party states when they entered into the Compact. See § III.B supra.

      In sum, objective criteria establish reliance and substantial impairment of the

Compact if the Election was eliminated.

      The Comptroller also claims “Section 171.106 serves a significant and

legitimate purpose” because doing so “treats both local and foreign concerns with an

even hand.” Appellees’ Brief 66-67. In actuality, an apportionment formula

based only upon gross receipts is universally understood to benefit in-state interests

over out-of-state interests. It does not treat them with an even hand. Moreover,

the legitimate public purposes that can save an otherwise unconstitutional

impairment are typically economic emergencies, such as the Great Depression, or

the necessity to regulate a broad-based social ill under a state’s police powers.

Energy Reserves Group v. Kan. Power & Light Co., 459 U.S. 400, 411-12 (1983);

                                          27
Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 242-44 (1978). No such

exigencies exist.

       Finally, the Comptroller argues Section 171.106 is reasonable and appropriate

because “[t]he Supreme Court has repeatedly held that the single-factor

apportionment methods are ‘presumptively valid.’” Appellees’ Brief 67. This

does not explain why eliminating the Compact Election is reasonable. Nor does it

explain why eliminating the Compact Election was necessary, another requirement

of the multi-step analysis. U.S. Trust, 431 U.S. at 22, 25. If the Legislature

determined a mandatory apportionment formula should be imposed on all taxpayers,

it had the authority to withdraw from the Compact. See id. at 30 (state may not

impose a drastic impairment when an alternative course is available). In sum,

eliminating the Compact Election would violate the Compact and Contract Clauses.7

7. Graphic did not waive its Contract Clause argument. Appellees’ Brief 67-68. Pursuant to
Tex. R. App. P. Rule 38.3, Graphic is free to dispute the applicability of Energy Reserves
because both Appellant’s and Appellees’ Briefs discussed the Contract Clause. See Appellant’s
Brief 46-48; Appellees’ Brief 62-67. Further, Energy Reserves is not authoritative here because
it did not concern a compact, whereas Green did. Compare Energy Reserves, 459 U.S. 400,
with Green, 21 U.S. 1. See Sunbeam Envtl. Servs. v. Tex. Workers’ Comp. Ins. Facility, 71
S.W.3d 846, 851 (Tex. App.–Austin 2002, no pet.) (the argument alleged to have been waived
not raised in appellee’s reply brief).

                                              28
V.     THE FRANCHISE TAX IS AN INCOME TAX UNDER THE
       COMPACT DEFINITION.
       The Comptroller’s arguments that Texas’s franchise tax is not an income tax

under this Court’s definition, or as the phrase “is commonly understood,” and the

Legislature stated the tax was not an income tax, miss the point. Appellees’ Brief

22, 26. The Compact’s definition of an “income tax” controls here, and the

franchise tax satisfies that definition. Texas v. New Mexico, 482 U.S. 124, 128

(1987) (a compact is “a legal document that must be construed and applied in

accordance with its terms”). Appellant’s Brief 48-57.

       The Legislature’s characterization of Texas’s franchise tax does not control

because the Legislature only considered the definition under Public Law 86-272,

which is materially different. 8 2006 Tex. Gen. Laws 1, 38 (“[T]he franchise tax

imposed by Chapter 171, Tax Code, as amended by this Act, is not an income tax

and Pub. L. No. 86-272 does not apply to the tax.”); Texas House of Representatives

Ways & Means Committee HB 3 Analysis at 4; Texas House Research Organization

HB 3 Bill Analysis at 9. Each time the foregoing documents describe how the

Texas franchise tax “is not an income tax,” they refer only to Public Law 86-272, not

the Compact. See Trinova Corp. v. Dep’t of Treasury, 498 U.S. 358, 374 (1991)

8. Public Law 86-272’s definition does not include the broadening phrase, “an amount arrived at
by deducting expenses from gross income, one or more forms of which expenses are not
specifically and directly related to particular transactions.” Tex. Tax Code § 141.001, art. II(4).

                                                29
(“labeling the SBT a tax on ‘business activity’ does not permit [the court] to forgo

[sic] examination of the actual tax base”). 9

       The franchise tax is an income tax under the Compact. “Total revenue” is

federal gross income less federal exclusions (I.R.C. §§ 101-140) and Texas

deductions. Tex. Tax Code § 171.1011(c)(1)(B). The Comptroller disregards

exclusions because they are not available to all taxpayers. Appellees’ Brief 28.

The Compact does not require this. Even under the federal income tax and all other

state income taxes, not every taxpayer deducts every expense or includes all income.

See I.R.C. §§ 101-140, 261-280H.

       Additionally, the tax base at issue is an income tax base.                       The only

calculation that is relevant here is cost of goods sold (“COGS”), which Appellant

used. The Compact definition does not require more than “one type of expense,”

(Appellees’ Brief 27) but at least one type of expense that is “not specifically and

directly related to particular transactions.” Tex. Tax Code § 141.001, art. II(4).

COGS deductions satisfy this definition because they do not directly relate to any

particular transaction, but instead represent the total costs for products sold in the

reporting period. Tex. Tax Code § 171.1012 (c), (d) (COGS deductions include

9. Fletcher Cyclopedia of the Law of Corporations is not persuasive because it is not a tax treatise
and it omits Wyoming as a non-income tax state although it does not impose anything resembling
a corporate income tax. State Taxation does not take a position regarding Texas but merely
observes there is conflict regarding whether the tax is an income tax under the Compact. Walter
Hellerstein, State Taxation ¶ 9.01[1] n.12.19, ¶ 7.12[7].

                                                30
both the direct costs of acquiring and producing goods and indirect costs, such as

insurance, utilities, rent, administrative salaries, and payroll and property taxes).

      An alternative computation, compensation, allows the following deductions

not specifically and directly related to particular transactions: total wages, salaries

and benefits paid to officers, directors, owners, partners, and employees, including

administrative staff. Tex. Tax Code § 171.1013(a), (b).

      The Comptroller is also incorrect that taxpayers that deduct the greater of $1

million or 30% of their gross income do not deduct any expenses. Appellees’ Brief

26-27. Those deductions are proxies for the taxpayer’s actual expenses, just as the

federal standard deduction and exemptions (under both the federal alternative

minimum tax and the federal personal income tax) are proxies for a taxpayer’s

expenses. I.R.C. §§ 55(b)(1), (d), 63, 151; see also Lilian V. Faulhaber, The

Hidden Limits of the Charitable Deduction: An Introduction to Hypersalience, 92

B.U. L. Rev. 1307, 1321-22 (2012).

      The IBM Court properly applied the Compact’s “broad definition” of an

income tax. 852 N.W.2d at 878. It concluded “the MGRT [Michigan Gross

Receipts Tax] fits within the broad definition of ‘income tax’ under the Compact by

taxing a variation of net income--the entire amount received by the taxpayer as

determined from any gainful activity minus inventory and certain other deductions

that are expenses not specifically and directly related to a particular transaction.”

                                           31
Id. at 880. “[A] tax is an income tax if the tax measures net income by subtracting

expenses from gross income, with at least one of the expense deductions not being

specifically and directly related to a particular transaction.” Id. at 878.

      Like Texas’s tax, the computation of Michigan’s tax began with gross receipts

and was reduced “for the purchase of inventory during the tax year, including

freight, shipping, delivery, or engineering charges included in the original contract

price.” Id. at 880. The Court noted, “several of these exclusions or deductions are

not specifically and directly related to particular transactions,” e.g., [d]epreciable

assets can be assets used over a certain number of years and, thus, not related to a

single transaction,” “[m]aterials and supplies purchased during a tax year can be

used at any time for the operation of a business and for any amount of transactions,”

and “the purchase of inventory, which includes such things as goods held for resale

or raw materials, some of which can stay in a taxpayer's warehouse for an

indeterminate amount of time, can be an expense not specifically or directly related

to a particular transaction.” Id.

       The tax base used by Graphic and the other tax bases readily satisfy the

Compact’s income tax definition.

                                          32
Respectfully submitted,

SILVERSTEIN & POMERANTZ, LLP
   12 Gough Street, 2nd Floor
   San Francisco, California 94103
   (415) 593-3502
   (415) 593-3501 (Facsimile)

By: /s/ Amy Silverstein
     Amy L. Silverstein
     California State Bar No. 154221
     asilverstein@sptaxlaw.com
     Admitted Pro Hac Vice

MARTENS, TODD, LEONARD, TAYLOR
& AHLRICH
    James F. Martens
    jmartens@textaxlaw.com
    State Bar No. 13050720
    Lacy L. Leonard
    lleonard@textaxlaw.com
    State Bar No. 24040561
    Danielle Ahlrich
    dahlrich@textaxlaw.com
    State Bar No. 24059215
    Amanda Taylor
    ataylor@textaxlaw.com
    State Bar No. 24045921
    301 Congress Avenue, Suite 1950
    Austin, Texas 78701
    Tele: (512) 542-9898
    Fax: (512) 542-9899

ATTORNEYS FOR APPELLANT
GRAPHIC PACKAGING, INC.

      33
                         CERTIFICATE OF SERVICE
      Pursuant to the Texas Rules of Appellate Procedure and Local Rules for the
Third Court of Appeals, a true and correct copy of the foregoing was served on
counsel, via e-service and e-mail, as listed below, on the 17th day of April, 2015.
Tex. R. App. P. 9.5; Local Rule 4(d).

      Rance Craft,
      Assistant Solicitor General
      Texas Bar No. 24035655
      rance.craft@texasattorneygeneral.gov
      Cynthia A. Morales,
      Assistant Attorney General
      Texas Bar No. 14417420
      cynthia.morales@texasattorneygeneral.gov
      OFFICE OF THE ATTORNEY GENERAL
      P.O. Box 12548 (MC 059)
      Austin, Texas 78711-2548
      Tele: (512) 936-2872
      Fax: (512) 474-2697

                                      /s/ Amy Silverstein
                                      Amy Silverstein

                      CERTIFICATE OF COMPLIANCE
       I hereby certify that this Appellant’s Reply Brief complies with the typeface
requirements of Tex. R. App. P. 9.4(e) because it has been prepared in a
conventional typeface no smaller than 14-point for text and 12-point for footnotes.
This document also complies with the word-count limitations of Tex. R. App. P.
9.4(i) because, according to the word count tool of the computer program used to
prepare this document, it contains 7,494 words, excluding any parts exempted by
Tex. R. App. P. 9.4(i)(1).

                                      /s/ Amy Silverstein
                                      Amy Silverstein

                                        34
                                                                                                                   Page 1

               ALLIED STRUCTURAL STEEL CO. v. SPANNAUS, ATTORNEY GENERAL OF
                                    MINNESOTA, ET AL.

                                                       No. 77-747

                                  SUPREME COURT OF THE UNITED STATES

                 438 U.S. 234; 98 S. Ct. 2716; 57 L. Ed. 2d 727; 1978 U.S. LEXIS 130; 1 Employee
                                             Benefits Cas. (BNA) 1477

                                                 April 25, 1978, Argued
                                                 June 28, 1978, Decided

SUBSEQUENT HISTORY:                Petition For Rehearing     contractual relationship. The Court noted that the State's
Denied October 2, 1978.                                       police power was limited when its exercise effected
                                                              substantial modifications of private contracts. The Act
PRIOR HISTORY: APPEAL FROM THE UNITED                         did not possess the attributes of the state laws that in the
STATES DISTRICT COURT FOR THE DISTRICT OF                     past had survived challenge under the Contract Clause. It
MINNESOTA.                                                    was not enacted to deal with a broad, generalized
                                                              economic or social problem. It invaded an area never
DISPOSITION:        449 F. Supp. 644, reversed.                before subject to regulation by the State. It did not effect
                                                              simply a temporary alteration of the contractual
CASE SUMMARY:                                                 relationships of those within its coverage, but worked a
                                                              severe, permanent, and immediate change in the
                                                              relationships, irrevocably and retroactively. Its narrow
PROCEDURAL POSTURE: Appellant employer filed                  aim was leveled only at employers who voluntarily
an action for injunctive and declaratory relief and claimed   agreed to establish pension plans for their employees.
that the Private Pension Benefits Protection Act (Act),
Minn. Stat. 181B.01 et seq., unconstitutionally impaired      OUTCOME: The Court reversed the district court's
the employer's contractual obligations to its employees       judgment that upheld the constitutional validity of the
under its pension agreement. The United States District       Act as applied to the employer.
Court for the District of Minnesota upheld the
constitutional validity of the Act as applied to the          CORE TERMS: pension plan, pension, plant, state laws,
employer. The employer appealed.                              pension benefits, funding, vesting, Minnesota Act,
                                                              contractual obligations, terminated, impairment, vested,
OVERVIEW: Pursuant to the Act, the State assessed a           pension right, social problem, contractual relationships,
pension funding charge against the employer because it        termination, terminate, severe, private contracts,
closed one of its offices and several of the discharged       retroactive, discharged, impairing, emergency, pension
employees did not have vested pension rights under the        funds, state legislation, police power, contingency,
employer's pension plan. The Court reversed the               mortgage, monthly, Protection Act
judgment that upheld the validity of the Act. As applied
to the employer, the Act violated the Contract Clause         LexisNexis(R) Headnotes
because it operated as a substantial impairment of a
                                                                                                                  Page 2
                                          438 U.S. 234, *; 98 S. Ct. 2716, **;
                                      57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130

                                                              tailored to the emergency that it was designed to meet;
                                                              (4) that the imposed conditions were reasonable; (5) that
                                                              the legislation was limited to the duration of the
Pensions & Benefits Law > Employee Benefit Plans >            emergency. Another consideration in upholding a state
Single-Employer Plans                                         law against a Contract Clause attack: is whether the
[HN1] Minn. Stat. § 181B.04.                                  petitioner had purchased into an enterprise already
                                                              regulated in the particular to which he now objects.
Constitutional Law > Congressional Duties & Powers >
Contracts Clause > General Overview                           Constitutional Law > Congressional Duties & Powers >
[HN2] See U.S. Const. art. I, § 10.                           Contracts Clause > General Overview
                                                              Contracts Law > Contract Modifications > General
Constitutional Law > Congressional Duties & Powers >          Overview
Contracts Clause > General Overview                           Governments > State & Territorial Governments >
Governments > State & Territorial Governments >               Police Power
Police Power                                                  [HN7] Although the absolute language of the Contract
[HN3] Literalism in the construction of the Contract          Clause leaves room for the "essential attributes of
Clause would make it destructive of the public interest by    sovereign power," necessarily reserved by the states to
depriving the State of its prerogative of self-protection.    safeguard the welfare of their citizens, that power has
                                                              limits when its exercise effects substantial modifications
                                                              of private contracts. Despite the customary deference
Constitutional Law > Congressional Duties & Powers >          courts give to state laws directed to social and economic
Contracts Clause > General Overview                           problems, legislation adjusting the rights and
Governments > State & Territorial Governments >               responsibilities of contracting parties must be upon
Police Power                                                  reasonable conditions and of a character appropriate to
[HN4] The Contract Clause does not operate to obliterate      the public purpose justifying its adoption.
the police power of the states.

                                                              Constitutional Law > Congressional Duties & Powers >
Constitutional Law > Congressional Duties & Powers >          Contracts Clause > General Overview
Contracts Clause > General Overview                           Governments > State & Territorial Governments >
[HN5] One whose rights are subject to state restriction       Legislatures
cannot remove them from the power of the State by             [HN8] The first inquiry in determining whether a state
making a contract about them. The contract will carry         law violates the Contract Clause, must be whether the
with it the infirmity of the subject matter.                  state law has, in fact, operated as a substantial
                                                              impairment of a contractual relationship. The severity of
                                                              the impairment measures the height of the hurdle the state
Contracts Law > Contract Conditions & Provisions >
                                                              legislation must clear. Minimal alteration of contractual
General Overview
                                                              obligations may end the inquiry at its first stage. Severe
Governments > State & Territorial Governments >
                                                              impairment, on the other hand, will push the inquiry to a
Legislatures
                                                              careful examination of the nature and purpose of the state
Governments > State & Territorial Governments >
                                                              legislation.
Police Power
[HN6] Despite the Contract Clause, the states retain
residual authority to enact laws to safeguard the vital       Constitutional Law > Congressional Duties & Powers >
interests of their people. In upholding a state law, the      Contracts Clause > General Overview
following factors are significant; (1) that the state         [HN9] The severity of an impairment of contractual
legislature has declared in the Act itself that an            obligations can be measured by the factors that reflect the
emergency need for the protection existed; (2) that the       high value the Framers placed on the protection of private
state law was enacted to protect a basic societal interest,   contracts. Contracts enable individuals to order their
not a favored group; (3) that the relief was appropriately    personal and business affairs according to their particular
                                                                                                                       Page 3
                                          438 U.S. 234, *; 98 S. Ct. 2716, **;
                                      57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130

needs and interests. Once arranged, those rights and           subject to state regulation at the time the company's
obligations are binding under the law, and the parties are     contractual obligations were originally undertaken, but
entitled to rely on them.                                      invaded an area never before subject to regulation by the
                                                               state, (3) it did not effect simply a temporary alteration of
SUMMARY:                                                       the contractual relationships of those within its coverage,
                                                               but worked a severe, permanent, and immediate change
     A company with an office in Minnesota had a               in those relationships, irrevocably and retroactively, and
pension plan, under which employees could receive a            (4) its narrow aim was leveled not at every Minnesota
pension upon retirement at age 65 regardless of length of      employer, and not even at every Minnesota employer
service. Furthermore, an employee's right to a pension         who left the state, but only at those who had in the past
vested prior to age 65 if certain requirements as to length    been sufficiently enlightened to voluntarily agree to
of service and age were met. The company was the sole          establish pension plans for their employees.
contributor to the pension fund, but the plan neither
required the company to make specific contributions nor             Brennan, J., joined by White and Marshall, JJ.,
imposed any sanction for failing to contribute adequately.     dissented, expressing the view that (1) the statute, which
The company retained a virtually unrestricted right to         simply created an additional duty for the company but
amend the plan, and was free to terminate it and               which did not abrogate or dilute any obligation due a
distribute the assets at any time according to a               party to a private contract, did not implicate the contract
predetermined method. Minnesota enacted a statute,             clause in any way, the clause not protecting all
under which private employers of 100 or more employees         contract-based expectations including that of an employer
providing pension benefits under qualified plans were          that his obligations to his employees not be legislatively
subject to a "pension funding charge" upon termination of      enlarged beyond those explicitly provided in its pension
the plan or closing of an office within the state. The         plan, and (2) the statute did not violate the due process
charge was assessed if pension funds were not sufficient       clause of the Fourteenth Amendment.
to cover full pensions for all employees working at least
10 years. After enactment of the statute, in a move                Blackmun, J., did not participate.
planned before its passage, the company closed its
Minnesota office. Several discharged employees, who            LAWYERS' EDITION HEADNOTES:
had no vested pension rights under the plan, were
nonetheless pension obligees under the statute. The state           LAW §271 ;
notified the company that it owed a significant pension
funding charge, and the company brought suit in the                contract clause -- state statute -- pensions -- ;
United States District Court for the District of Minnesota
for injunctive and declaratory relief, claiming that the act       Headnote:[1A][1B]
unconstitutionally impaired its contractual obligation to
its employees under its pension agreement. A three-judge            A state statute which subjects certain private
District Court upheld the statute as applied to the            employers who provide pension benefits under a covered
company (449 F Supp 644).                                      plan to a "pension funding charge" if the employer
                                                               terminates the plan or closes an office within the state,
     On direct appeal, the United States Supreme Court         such charge being assessed if the pension fund is
reversed. In an opinion by Stewart, J., joined by Burger,      insufficient to cover full pensions for all employees
Ch. J., and Powell, Rehnquist, and Stevens, JJ., it was        working at least 10 years, violates the contract clause of
held that the Minnesota statute, as applied to the             the Federal Constitution (Art I, 10, cl 1) insofar as it
company, violated the contract clause of the Federal           applies to an employer, some of whose employees,
Constitution (Art I, 10, cl 1), it not being necessary to      having been discharged upon the closing of its office, had
hold that the state law impaired the obligation of the         no vested rights under its pension plan (which predated
company's employment contracts without moderation or           the statute) but nonetheless qualified as pension obligees
reason or in a spirit of oppression, since (1) the law was     under the statute, it not being necessary to hold that the
not enacted to deal with a broad, generalized, economic        state statute impairs the obligation of the company's
or social problem, (2) it did not operate in an area already   employment contracts without moderation or reason or in
                                                                                                                     Page 4
                                           438 U.S. 234, *; 98 S. Ct. 2716, **;
                                       57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130

a spirit of oppression, where (1) the statute was not               LAW §124 ;
enacted to deal with a broad, generalized economic or
social problem, (2) the statute does not operate in an area       contract clause -- limitations on state power -- police
already subject to state regulation at the time the            power -- ;
company's contractual obligations under the pension plan
                                                                   Headnote:[4]
were originally undertaken, but instead invades an area
never before subject to regulation by the state, (3) the            The contract clause of the Federal Constitution (Art
statute does not effect simply a temporary alteration of       I, 10, cl 1) imposes limits upon the power of the state to
the contractual relationships of those within its coverage,    abridge existing contractual relationships, even in the
but works a severe, permanent, and immediate change in         exercise of its otherwise legitimate police power.
those relationships, irrevocably and retroactively, and (4)
the statute's narrow aim is leveled not at every employer
within the state, or not even at every employer leaving             LAW §128 ;
the state, but only at those employers who in the past
were sufficiently enlightened to voluntarily agree to              contract clause -- state legislation -- ;
establish pension plans for their employees. (Brennan,
                                                                   Headnote:[5]
White, and Marshall, JJ., dissented from this holding.)
                                                                    For purposes of the contract clause of the Federal
     LAW §214(1) ;                                             Constitution (Art I, 10, cl 1), despite the customary
                                                               deference courts give to state laws directed to social and
    contract clause -- state police power -- ;                 economic problems, legislation adjusting the rights and
                                                               responsibilities of contracting parties must be upon
    Headnote:[2]                                               reasonable conditions and of a character appropriate to
                                                               the public purpose justifying its adoption.
     The contract clause of the Federal Constitution (Art
I, 10, cl 1) does not operate to obliterate the police power
of the state; the interdiction of statutes impairing the            CONTRACTS §145 ;
obligation of contracts does not prevent the state from
exercising such powers as are vested in it for the                 bilateral contract -- diminution of duties -- ;
promotion of the common weal, or are necessary for the
                                                                   Headnote:[6A][6B]
general good of the public, though contracts previously
entered into between individuals may thereby be affected,          In any bilateral contract the diminution of duties on
and this police power, which is an exercise of the             one side effectively increases the duties on the other.
sovereign right of the government to protect the lives,
health, morals, comfort and general welfare of the people,     SYLLABUS
is paramount to any rights under contracts between
individuals.                                                         Appellant, an Illinois corporation, maintained an
                                                               office in Minnesota with 30 employees. Under
                                                               appellant's pension plan, adopted in 1963 and qualified
     LAW §142 ;
                                                               under § 401 of the Internal Revenue Code, employees
    contract -- subject matter infirmity -- ;                  were entitled to retire and receive a pension at age 65
                                                               regardless of length of service, and an employee's
    Headnote:[3]                                               pension right became vested if he satisfied certain
                                                               conditions as to length of service and age. Appellant was
     One whose rights, such as they are, are subject to        the sole contributor to the pension trust fund, and each
state restriction, cannot remove them from the power of        year made contributions to the fund based on actuarial
the state by making a contract about them, since the           predictions of eventual payout needs. But the plan
contract will carry with it the infirmity of the subject       neither required appellant to make specific contributions
matter.                                                        nor imposed any sanction on it for failing to make
                                                               adequate contributions, and appellant retained a right not
                                                                                                                 Page 5
                                          438 U.S. 234, *; 98 S. Ct. 2716, **;
                                      57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130

only to amend the plan but also to terminate it at any time   requirement was applied only to those employers who
and for any reason. In 1974, Minnesota enacted the            terminated their pension plans or who, like appellant,
Private Pension Benefits Protection Act (Act), under          closed their Minnesota offices, thus forcing the employer
which a private employer of 100 employees or more (at         to make all the retroactive changes in its contractual
least one of whom was a Minnesota resident) who               obligations at one time. Pp. 244-247.
provided pension benefits under a plan meeting the
qualifications of § 401 of the Internal Revenue Code, was          (c) The Act does not possess the attributes of those
subject to a "pension funding charge" if he terminated the    state laws that have survived challenge under the
plan or closed a Minnesota office. The charge was             Contract Clause. It was not even purportedly enacted to
assessed if the pension funds were insufficient to cover      deal with a broad, generalized economic or social
full pensions for all employees who had worked at least       problem, cf. Home Building & Loan Assn. v. Blaisdell,
10 years, and periods of employment prior to the              290 U.S. 398, 445, but has an extremely narrow focus
effective date of the Act were to be included in the          and enters an area never before subject to regulation by
10-year employment criterion. Shortly thereafter, in a        the State. Pp. 247-250.
move planned before passage of the Act, appellant closed
its Minnesota office, and several of its employees, who       COUNSEL: George B. Christensen argued the cause for
were then discharged, had no vested pension rights under      appellant. With him on the briefs were Chester W. Nosal
appellant's plan but had worked for appellant for 10 years    and John R. Kenefick.
or more, thus qualifying as pension obligees under the
                                                              Byron E. Starns, Chief Deputy Attorney General of
Act. Subsequently, the State notified appellant that it
                                                              Minnesota, argued the cause for appellees. With him on
owed a pension funding charge of $ 185,000 under the
                                                              the brief were Warren Spannaus, Attorney General, pro
Act. Appellant then brought suit in Federal District
                                                              se, Richard B. Allyn, Solicitor General, and Kent G.
Court for injunctive and declaratory relief, claiming that
                                                              Harbison, Richard A. Lockridge, and Jon K. Murphy,
the Act unconstitutionally impaired its contractual
                                                              Special Assistant Attorneys General. *
obligations to its employees under its pension plan, but
the court upheld the Act as applied to appellant. Held:              * Peter G. Nash, Eugene B. Granof, and Stanley
The application of the Act to appellant violates the                 T. Kaleczyc filed a brief for the Chamber of
Contract Clause of the Constitution, which provides that             Commerce of the United States as amicus curiae
"[no] State shall . . . pass any . . . Law impairing the             urging reversal.
Obligation of Contracts." Pp. 240-251.
                                                              JUDGES: STEWART, J., delivered the opinion of the
     (a) While the Contract Clause does not operate to
                                                              Court, in which BURGER, C. J., and POWELL,
obliterate the police power of the States, it does impose
                                                              REHNQUIST, and STEVENS, JJ., joined. BRENNAN,
some limits upon the power of a State to abridge existing
                                                              J., filed a dissenting opinion, in which WHITE and
contractual relationships, even in the exercise of its
                                                              MARSHALL, JJ., joined, post, p. 251. BLACKMUN, J.,
otherwise legitimate police power. "Legislation adjusting
                                                              took no part in the consideration or decision of the case.
the rights and responsibilities of contracting parties must
be upon reasonable conditions and of a character
                                                              OPINION BY: STEWART
appropriate to the public purpose justifying its adoption."
United States Trust Co. v. New Jersey, 431 U.S. 1, 22.
                                                              OPINION
Pp. 242-244.
                                                                  [*236] [***731] [**2718] MR. JUSTICE
     (b) The impact of the Act upon appellant's
                                                              STEWART delivered the opinion of the Court.
contractual obligations was both substantial and severe.
Not only did the Act retroactively modify the                       [***LEdHR1A] [1A]The issue in this case is
compensation that appellant had agreed to pay its             whether the application of Minnesota's Private Pension
employees from 1963 to 1974, but it did so by changing        Benefits Protection Act 1 to the appellant violates the
appellant's obligations in an area where the element of       Contract Clause of the United States Constitution.
reliance was vital -- the funding of a pension plan.
Moreover, the retroactive state-imposed vesting                      1 Minn. Stat. § 181B.01 et seq. (1974). This is
                                                                                                                    Page 6
                                      438 U.S. 234, *236; 98 S. Ct. 2716, **2718;
                                57 L. Ed. 2d 727, ***LEdHR1A; 1978 U.S. LEXIS 130

        the same Act that was considered in Malone v.         Although those contributions once made were
        White Motor Corp., 435 U.S. 497, a case               irrevocable, in the sense that they remained part of the
        presenting a quite different legal issue.             pension trust fund, the plan neither required the company
                                                              to make specific [***732] contributions nor imposed
    I                                                         any sanction on it for failing to contribute adequately to
                                                              the fund.
     In 1974 appellant Allied Structural Steel Co.
(company), a corporation with its principal place of               The company not only retained a virtually
business in Illinois, maintained an office in Minnesota       unrestricted right to amend the plan in whole or in part,
with 30 employees. Under the company's general                but was also free to terminate the plan and distribute the
pension plan, adopted in 1963 and qualified as a              trust assets at any time and for any reason. In the event
single-employer plan under § 401 of the Internal Revenue      of a termination, the assets of the fund were to go, first, to
Code, 26 U.S. C. § 401 (1976 ed.), 2 salaried employees      meet the plan's obligation to those employees already
were covered as follows: At age 65 an employee was            retired and receiving pensions; second, to those eligible
entitled to retire and receive a monthly pension generally    for retirement; and finally, if any balance remained, to the
computed by multiplying 1% of his average monthly             other employees covered under the plan whose pension
earnings by the total number of his years of employment       rights had not yet vested. 5 Employees within each of
with the company. 3 Thus, an employee aged 65 or more         these categories were assured payment only to the extent
could retire without satisfying any particular                of the pension assets.
length-of-service requirement, but the size of his pension
would reflect the length of his service with the company.             5      Apart from termination of the fund and
4 An employee could also [*237] become entitled to                    distribution of the trust assets, there was no other
receive a pension, payable in full at age 65, if he met any           situation in which employees in this third
one of the following requirements: (1) he had worked 15               category would receive anything from the pension
years for the company and reached the age of 60; or (2)               fund.
he was at least 55 years old and the sum of his age and
his years of service with the company was at least 75; or          [*238] The plan expressly stated:
(3) he was less than 55 years old but the sum of his age
                                                                   "No employee shall have any right to, or interest in,
and his years of service with the company was at least 80.
                                                              any part of the Trust's assets upon termination of his
Once an employee satisfied any one of these conditions,
                                                              employment or otherwise, except as provided from time
his pension right became vested in the sense that any
                                                              to time under this Plan, and then only to the extent of the
subsequent termination of employment would not affect
                                                              benefits payable to such employee out of the assets of the
his right to receive a monthly pension when he reached
                                                              Trust. All payments of benefits as provided for in this
65. [**2719] Those employees who quit or were
                                                              Plan shall be made solely out of the assets of the Trust
discharged before age 65 without fulfilling one of the
                                                              and neither the employer, the trustee, nor any member of
other three conditions did not acquire any pension rights.
                                                              the Committee shall be liable therefor in any manner."
        2       The plan was not the result of a
                                                                   The plan also specifically advised employees that
        collective-bargaining agreement, and no such
                                                              neither its existence nor any of its terms were to be
        agreement is at issue in this case.
                                                              understood as implying any assurance that employees
        3 The employee could elect to receive instead a
                                                              could not be dismissed from their employment with the
        lump-sum payment.
                                                              company at any time.
        4 Thus, an employee whose average monthly
        earnings were $ 800 and who retired at 65 would           In sum, an employee who did not die, did not quit,
        receive eight dollars monthly if he had worked        and was not discharged before meeting one of the
        one year for the company and $ 320 monthly if he      requirements of the plan would receive a fixed pension at
        had worked for the company for 40 years.              age 65 if the company remained in business and elected
                                                              to continue the pension plan in essentially its existing
     The company was the sole contributor to the pension
                                                              form.
trust fund, and each year it made contributions to the fund
based on actuarial predictions of eventual payout needs.
                                                                                                                  Page 7
                                     438 U.S. 234, *238; 98 S. Ct. 2716, **2719;
                                   57 L. Ed. 2d 727, ***732; 1978 U.S. LEXIS 130

     On April 9, 1974, Minnesota enacted the law here in     vested pension rights under the company's plan, but had
question, the Private Pension Benefits Protection Act,       worked for the company for 10 years or more and thus
Minn. Stat. §§ 181B.01-181B.17. Under the Act, a             qualified as pension obligees of the company under the
private employer of 100 employees or more -- at least one    law that Minnesota had enacted a few months earlier. On
of whom was a Minnesota resident -- who provided             August 18, the State notified the company that it owed a
pension benefits under a plan meeting the qualifications     pension funding charge of approximately $ 185,000
of § 401 of the Internal Revenue Code, was subject to a      under the provisions of the Private Pension Benefits
"pension funding charge" if he either terminated the plan    Protection Act.
or closed a Minnesota office. 6 The charge was assessed
if the pension funds were not sufficient to cover full                8 According to the stipulated facts, the closing of
pensions for all employees who had worked at least 10                 the company's Minnesota office resulted from a
years. The Act required the employer to satisfy the                   shift of that office's duties to the main company
deficiency by purchasing deferred annuities, payable to               office in Illinois the previous December. The
the employees at their normal retirement age. A separate              closing was not completed until February 1975,
provision [*239] specified that periods of employment                 by which time the Minnesota Act had been
prior to the effective date of the Act were to be included            pre-empted by federal law. See Malone v. White
in the 10-year employment criterion. 7                                Motor Corp., 435 U.S., at 499. We deal here
                                                                      solely with the application of the Minnesota Act
       6 Although the company had only 30 employees                   to the 11 employees discharged in July 1974.
       in Minnesota, it was subject to the Act because it
       had over 100 employees altogether.                           The company brought suit in a Federal District
       7 Entitled "Nonvested Benefits Prior to Act,"         Court asking [*240] for injunctive and declaratory
       [HN1] Minn. Stat. § 181B.04 provided:                 relief. It claimed that the Act unconstitutionally impaired
                                                             its contractual obligations to its employees under its
            "Every employer who hereafter ceases to          pension agreement. The three-judge court upheld the
       operate a place of employment or a pension plan       constitutional validity of the Act as applied to the
       within this state shall owe to his employees          company, Fleck v. Spannaus, 449 F. Supp. 644, and an
       covered by sections 181B.01 to 181B.17 a              appeal was brought to this Court under 28 U.S. C. §
       pension funding charge which shall be equal to        1253 (1976 ed.). 9 We noted probable jurisdiction. 434
       the present value of the total amount of nonvested    U.S. 1045.
       pension benefits based upon service occurring
       before April 10, 1974 of such employees of the                 9 The claims of Walter Fleck and the other two
       employer who have completed ten or more years                  individual plaintiffs were dismissed by the
       of any covered service under the pension plan of               District Court for lack of standing, Fleck v.
       the employer and whose nonvested pension                       Spannaus, 421 F. Supp. 20, leaving only the
       benefits have been or will be forfeited because of             company as an appellant. Warren Spannaus, the
       the employer's ceasing to operate a place of                   Attorney General of Minnesota, is an appellee.
       employment or a pension plan, less the amount of
                                                                 II
       such nonvested pension benefits which are
       compromised or settled to the satisfaction of the         A
       commissioner as provided in sections 181B.01 to
       181B.17."                                                  There can be no question of the impact of the
                                                             Minnesota Private Pension Benefits Protection Act upon
       [***733] [**2720] During the summer of 1974           the company's contractual relationships with its
the company began closing its Minnesota office. On July      employees. The Act substantially altered those
31, it discharged 11 of its 30 Minnesota employees, and      relationships by superimposing pension obligations upon
the following month it notified the Minnesota                the company conspicuously beyond those that it had
Commissioner of Labor and Industry, as required by the       voluntarily agreed to undertake. But it does not
Act, that it was terminating an office in the State. 8 At    inexorably follow that the Act, as applied to the
least nine of the discharged employees did not have any      company, violates the Contract Clause of the
                                                                                                                    Page 8
                                      438 U.S. 234, *240; 98 S. Ct. 2716, **2720;
                                    57 L. Ed. 2d 727, ***733; 1978 U.S. LEXIS 130

Constitution.                                                  powers as are vested in it for the promotion of the
                                                               common weal, or are necessary for the general good of
     The language of the Contract Clause appears               the public, though contracts previously entered into
unambiguously absolute: [HN2] "No State shall . . . pass       between individuals may thereby be affected. This
any . . . Law impairing the Obligation of Contracts." U.S.     power, which in its various ramifications is known as the
Const., Art. I, § 10. The Clause is not, however, the          police power, is an exercise of the sovereign right of the
Draconian provision that its words might seem to imply.        Government to protect the lives, health, morals, comfort
As the Court [***734] has recognized, [HN3]                    and general welfare of the people, and is paramount to
"literalism in the construction of the contract clause . . .   any rights under contracts between individuals."
would make it destructive of the public interest by            Manigault v. Springs, 199 U.S. 473, 480. As Mr. Justice
depriving the State of its prerogative of self-protection."    Holmes succinctly put the matter in his opinion for the
W. B. Worthen Co. v. Thomas, 292 U.S. 426, 433. 10             Court in Hudson Water Co. v. McCarter, 209 U.S. 349,
                                                               357: [HN5] "One whose rights, such as they are, are
       10 See generally B. Schwartz, A Commentary              subject to state restriction, cannot remove them from the
       on the Constitution of the United States, Pt. 2,        power of the State by making a contract [*242] about
       The Rights of Property 266-306 (1965); B.               them. The contract will carry with it the infirmity of the
       Wright, The Contract Clause of the Constitution         subject matter."
       (1938).
                                                                   B
     [*241] Although it was perhaps the strongest single
constitutional check on state legislation during our early            [***LEdHR4] [4]If the Contract Clause is to retain
years as a Nation, 11 the Contract Clause receded into         any meaning at all, however, it must be understood to
comparative desuetude with the adoption of the                 impose some limits upon the power of a State to abridge
Fourteenth Amendment, and particularly with the                existing contractual relationships, even in the exercise of
development of the large body of jurisprudence under the       its otherwise legitimate police power. The existence and
Due Process Clause of that Amendment in modern                 nature of those limits were clearly indicated in a series of
constitutional history. 12 Nonetheless, the Contract           cases in this Court arising from the efforts of the States to
[**2721] Clause remains part of the Constitution. It is        deal with the unprecedented emergencies brought on by
not a dead letter. And its basic contours are brought into     the severe economic depression of the early 1930's.
focus by several of this Court's 20th-century decisions.
                                                                    In Home Building & Loan Assn. v. Blaisdell, 290
       11 Perhaps the best known of all Contract Clause        U.S. 398, the Court [***735] upheld against a Contract
       cases of that era was Dartmouth College v.              Clause attack a mortgage moratorium law that Minnesota
       Woodward, 4 Wheat. 518.                                 had enacted to provide relief for homeowners threatened
       12     Indeed, at least one commentator has             with foreclosure. Although the legislation conflicted
       suggested that "the results might be the same if        directly with lenders' contractual foreclosure rights, the
       the contract clause were dropped out of the             Court there acknowledged that, [HN6] despite the
       Constitution, and the challenged statutes all           Contract Clause, the States retain residual authority to
       judged as reasonable or unreasonable deprivations       enact laws "to safeguard the vital interests of [their]
       of property." Hale, The Supreme Court and the           people." Id., at 434. In upholding the state mortgage
       Contract Clause: III, 57 Harv. L. Rev. 852,             moratorium law, the Court found five factors significant.
       890-891 (1944).                                         First, the state legislature had declared in the Act itself
                                                               that an emergency need for the protection of homeowners
                                                               existed. Id., at 444. Second, the state law was enacted to
                                                               protect a basic societal interest, not a favored group. Id.,
  [***LEdHR2] [2] [***LEdHR3] [3]First of all, it is to        at 445. Third, the relief was appropriately tailored to the
be accepted as a commonplace that [HN4] the Contract
                                                               emergency that it was designed to meet. Ibid. Fourth, the
Clause does not operate to obliterate the police power of      imposed conditions were reasonable. Id., at 445-447.
the States. "It is the settled law of this court that the      And, finally, the legislation was limited to the duration of
interdiction of statutes impairing the obligation of           the emergency. Id., at 447.
contracts does not prevent the State from exercising such
                                                                                                                      Page 9
                                      438 U.S. 234, *242; 98 S. Ct. 2716, **2721;
                                    57 L. Ed. 2d 727, ***735; 1978 U.S. LEXIS 130

    The Blaisdell opinion thus clearly implied that if the     21, that power has limits when its exercise effects
Minnesota moratorium legislation had not possessed the         substantial modifications of private contracts. Despite
characteristics attributed to it by the Court, it would have   the customary deference courts give to state laws directed
been invalid under the Contract Clause of the                  to social and economic problems, "[legislation] adjusting
Constitution. 13 [*243] These implications were given          the rights and responsibilities of contracting parties must
concrete force in three cases that followed closely in         be upon reasonable conditions and of a character
Blaisdell's wake.                                              appropriate to the public purpose justifying its adoption."
                                                               Id., at 22. Evaluating with particular scrutiny a
       13 In Veix v. Sixth Ward Building & Loan Assn.,         modification of a contract to which the State itself was a
       310 U.S. 32, 38, the Court took into account still      party, the Court in that case held that legislative alteration
       another consideration in upholding a state law          of the rights and remedies of Port Authority bondholders
       against a Contract Clause attack: the petitioner        violated the Contract Clause because the legislation was
       had "purchased into an enterprise already               neither necessary nor reasonable. 15
       regulated in the particular to which he now
       objects."                                                       14 See also El Paso v. Simmons, 379 U.S. 497.
                                                                       There the Court held that a Texas law shortening
      In W. B. Worthen Co. v. Thomas, 292 U.S. 426, the                the time within which a defaulted land claim
Court dealt with an Arkansas law that exempted the                     could be reinstated did not violate the Contract
proceeds of a life insurance policy from collection by the             Clause. "We do not believe that it can seriously be
beneficiary's judgment creditors.           Stressing the              contended that the buyer was substantially
retroactive effect of the state law, the Court held that it            induced to enter into these contracts on the basis
was invalid under the Contract Clause, since it [**2722]               of a defeasible right to reinstatement . . . or that he
was not precisely and reasonably designed to meet a                    interpreted that right to be of everlasting effect.
grave temporary emergency in the interest of the general               At the time the contract was entered into the
welfare. In W. B. Worthen Co. v. Kavanaugh, 295 U.S.                   State's policy was to sell the land as quickly as
56, the Court was confronted with another Arkansas law                 possible . . . ." Id., at 514. In sum, "[the] measure
that diluted the rights and remedies of mortgage                       taken . . . was a mild one indeed, hardly
bondholders. The Court held the law invalid under the                  burdensome to the purchaser . . . but nonetheless
Contract Clause. "Even when the public welfare is                      an important one to the State's interest." Id., at
invoked as an excuse," Mr. Justice Cardozo wrote for the               516-517.
Court, the security of a mortgage cannot be cut down                   15 The Court indicated that impairments of a
"without moderation or reason or in a spirit of                        State's own contracts would face more stringent
oppression." Id., at 60. And finally, in Treigle v. Acme               examination under the Contract Clause than
Homestead Assn., 297 U.S. 189, the Court held invalid                  would laws regulating contractual relationships
under the Contract Clause a Louisiana law that modified                between private parties, 431 U.S., at 22-23,
the existing withdrawal rights of the members of a                     although it was careful to add that "private
building and loan association. "Such an interference with              contracts are not subject to unlimited modification
the right of contract," said the Court, "cannot be justified           under the police power." Id., at 22.
by saying that in the public interest the operations of
building associations may be controlled [***736] and                III
regulated, or that in the same interest their charters may
be amended." Id., at 196.                                            [***LEdHR6A] [6A]In applying these principles to
                                                               the present case, [HN8] the first inquiry must be whether
  [***LEdHR5] [5]The most recent Contract Clause case          the state law has, in fact, operated as a substantial
in this Court was United States Trust Co. v. New Jersey,       impairment of a contractual relationship. 16 [*245] The
431 U.S. 1.14 In [*244] that case the Court again              severity of the impairment [***737]              [**2723]
recognized that [HN7] although the absolute language of        measures the height of the hurdle the state legislation
the Clause must leave room for "the 'essential attributes      must clear. Minimal alteration of contractual obligations
of sovereign power,' . . . necessarily reserved by the         may end the inquiry at its first stage. 17 Severe
States to safeguard the welfare of their citizens," id., at    impairment, on the other hand, will push the inquiry to a
                                                                                                                  Page 10
                                      438 U.S. 234, *245; 98 S. Ct. 2716, **2723;
                                    57 L. Ed. 2d 727, ***737; 1978 U.S. LEXIS 130

careful examination of the nature and purpose of the state    amount based on the plan's requirements for vesting. The
legislation.                                                  plan satisfied the current federal income tax code and was
                                                              subject to no other legislative requirements. And, of
       16                                                     course, the company was free to amend or terminate the
                                                              pension plan at any time. The company thus had no
             [***LEdHR6A] [6B]The novel construction          reason to anticipate that its employees' [*246] pension
       of the Contract Clause expressed in the dissenting     rights could become vested except in accordance with the
       opinion is wholly contrary to the decisions of this    terms of the plan. It relied heavily, and reasonably, on
       Court. The narrow view that the Clause forbids         this legitimate contractual expectation in calculating its
       only state laws that diminish the duties of a          annual contributions to the pension fund.
       contractual obligor and not laws that increase
       them, a view arguably suggested by Satterlee v.             The effect of Minnesota's Private Pension Benefits
       Matthewson, 2 Pet. 380, has since been expressly       Protection Act on this contractual obligation was severe.
       repudiated. Detroit United R. Co. v. Michigan,         The company was required in 1974 to have made its
       242 U.S. 238; Georgia R. & Power Co. v.                contributions throughout the pre-1974 life of its plan as if
       Decatur, 262 U.S. 432. See also, e. g., Sherman v.     employees' pension rights had vested after 10 years,
       Smith, 1 Black 587; Bernheimer v. Converse, 206        instead of vesting in accord with the terms of the plan.
       U.S. 516, 530; Henley v. Myers, 215 U.S. 373;          Thus a basic term of the pension contract -- one on which
       National Surety Co. v. Architectural Decorating        the company had relied for 10 years -- was substantially
       Co., 226 U.S. 276; Columbia R., Gas & Electric         modified. The result was that, although the company's
       Co. v. South Carolina, 261 U.S. 236;                   past contributions were adequate when made, they were
       Stockholders of Peoples Banking Co. v. Sterling,       not adequate when computed under the 10-year statutory
       300 U.S. 175. Moreover, in any bilateral contract      vesting requirement. The Act thus forced a current
       the diminution of duties on one side effectively       recalculation of the past 10 years' contributions based on
       increases the duties on the other.                     the new, unanticipated 10-year vesting requirement.

            The even narrower view that the Clause is              Not only did the state law thus retroactively modify
       limited in its application to state laws relieving     the compensation that the company had agreed to pay its
       debtors of obligations to their creditors is, as the   employees from 1963 to 1974, but also it did so by
       dissent recognizes, post, at 257 n. 5, completely at   changing the company's obligations in an area where the
       odds with this Court's decisions. See Dartmouth        element of reliance was vital -- the funding of a pension
       College v. Woodward, 4 Wheat. 518; Wood v.             plan. 18 As the Court has recently recognized:
       Lovett, 313 U.S. 362; El Paso v. Simmons, supra.
       See generally Hale, The Supreme Court and the                [***738] "These [pension] plans, like other forms
       Contract Clause, 57 Harv. L. Rev. 512, 514-516         of insurance, depend on the accumulation of large sums
       (1944).                                                to cover contingencies. The amounts set aside are
       17 See n. 14, supra.                                   determined by a painstaking assessment of the insurer's
                                                              likely liability. Risks that the insurer foresees will be
     [HN9] The severity of an impairment of contractual       included in the [*247] calculation of liability, and the
obligations can be measured by the factors that reflect the   rates or contributions charged will reflect that calculation.
high value the Framers placed on the protection of private    The occurrence of major unforeseen contingencies,
contracts. Contracts enable individuals to order their        however, jeopardizes the insurer's solvency and,
personal and business affairs according to their particular   ultimately, the insureds' benefits. Drastic changes in the
needs and interests. Once arranged, those rights and          legal rules governing pension and insurance funds, like
obligations are binding under the law, and the parties are    other unforeseen events, [**2724] can have this effect."
entitled to rely on them.                                     Los Angeles Dept. of Water & Power v. Manhart, 435
U.S. 702, 721.
     Here, the company's contracts of employment with
its employees included as a fringe benefit or additional             18 In some situations the element of reliance
form of compensation, the pension plan. The company's                may cut both ways. Here, the company had relied
maximum obligation was to set aside each year an                     upon the funding obligation of the pension plan
                                                                                                                Page 11
                                      438 U.S. 234, *247; 98 S. Ct. 2716, **2724;
                                    57 L. Ed. 2d 727, ***738; 1978 U.S. LEXIS 130

       for more than a decade. There was no showing of               legislature's purpose.
       reliance to the contrary by its employees. Indeed,
       Minnesota did not act to protect any employee               But whether or not the legislation was aimed largely
       reliance interest demonstrated on the record.          at a single employer, 20 it clearly has an extremely
       Instead, it compelled the employer to exceed           [***739] narrow focus. It applies only to private
       bargained-for expectations and nullified an            employers who have at least 100 employees, at least one
       express term of the pension plan.                      of whom works in Minnesota, and who have established
                                                              voluntary private pension plans, qualified under § 401 of
      Moreover, the retroactive state-imposed vesting         the Internal Revenue Code. And it applies only when
requirement was applied only to those employers who           such an employer closes his Minnesota office or
terminated their pension plans or who, like the company,      terminates his pension plan. 21 Thus, this law can [*249]
closed their Minnesota offices. The company was thus          hardly be characterized, like the law at issue in the
forced to make all the retroactive changes in its             Blaisdell case, as one enacted to protect a broad societal
contractual obligations at one time. By simply                interest rather than a narrow class. 22
proceeding to close its office in Minnesota, a move that
had been planned before the passage of the Act, the                  20 In Malone v. White Motor Corp., 435 U.S., at
company was assessed an immediate pension funding                    501 n. 5, the Court noted that the White Motor
charge of approximately $ 185,000.                                   Corp., an employer of more than 1,000 Minnesota
                                                                     employees, had been prohibited from terminating
     Thus, the statute in question here nullifies express            its pension plan until the expiration date of its
terms of the company's contractual obligations and                   collective-bargaining agreement, May 1, 1974.
imposes a completely unexpected liability in potentially             International Union, UAW v. White Motor Corp.,
disabling amounts. There is not even any provision for               505 F.2d 1193 (CA8). On April 9, 1974, the
gradual applicability or grace periods. Cf. the Employee             Minnesota Act was passed, to become effective
Retirement Income Security Act of 1974 (ERISA), 29 U.                the following day. When White Motor proceeded
S. C. §§ 1061 (b)(2), 1086 (b), and 1144 (1976 ed.). See             to terminate its collectively bargained pension
n. 23, infra. Yet there is no showing in the record before           plan at the earliest possible date, May 1, 1974, the
us that this severe disruption of contractual expectations           State assessed a deficiency of more than $ 19
was necessary to meet an important general social                    million, based upon the Act's 10-year vesting
problem. The presumption favoring "legislative judgment              requirement.
as to the necessity and reasonableness of a particular               21     Not only did the Act have an extremely
measure," United States Trust Co., 431 U.S., at 23,                  narrow aim, but also its effective life was
simply cannot stand in this case.                                    extremely short. The United States House of
                                                                     Representatives had passed a version of the
    The only indication of legislative intent in the record          Employee Retirement Income Security Act of
before us is to be found in a statement in the District              1974, 29 U.S. C. § 1001 et seq. (1976 ed.), on
Court's opinion:                                                     February 28, 1974, 120 Cong. Rec. 4781-4782
                                                                     (1974), and the Senate on March 4, 1974, id., at
                                                                     5011. Both versions expressly pre-empted state
                                                                     laws. That the Minnesota Legislature was aware
"It seems clear that the problem of plant closure and                of the impending federal legislation is reflected in
pension plan termination was brought to the attention                the explicit provision of the Act that it will
[*248] of the Minnesota legislature when the                         "become null and void upon the institution of a
Minneapolis-Moline Division of White Motor                           mandatory plan of termination insurance
Corporation closed one of its Minnesota plants and                   guaranteeing the payment of a substantial portion
attempted to terminate its pension plan." 449 F.Supp., at            of an employee's vested pension benefits pursuant
651. 19
                                                                     to any law of the United States." Minn. Stat. §
                                                                     181B.17. ERISA itself, effective January 1, 1975,
       19    The Minnesota Supreme Court, Fleck v.
                                                                     expressly pre-empts all state laws regulating
       Spannaus, 312 Minn. 223, 251 N.W.2d 334,
                                                                     covered plans. 29 U.S. C. § 1144 (a) (1976 ed.).
       engaged in mere speculation as to the state
                                                                                                                  Page 12
                                      438 U.S. 234, *249; 98 S. Ct. 2716, **2724;
                                    57 L. Ed. 2d 727, ***739; 1978 U.S. LEXIS 130

       Thus, the Minnesota Act was in force less than          State.
       nine months, from April 10, 1974, until January 1,
       1975. The company argues that the enactment of
       the law while ERISA was on the horizon totally
       belies the State's need for this pension legislation.     [***740] [***LEdHR1A] [1B]This Minnesota law
       22 In upholding the constitutionality of the Act,       simply does not possess the attributes of those state laws
       the District Court referred to Minnesota's interest     that in the past have survived challenge under the
       in protecting the economic welfare of its older         Contract Clause of the Constitution. The law was not
       citizens, as well as their surrounding economic         even purportedly enacted to deal with a broad,
       communities. 449 F. Supp. 644.                           generalized economic or social problem. Cf. Home
                                                               Building & Loan Assn. v. Blaisdell, 290 U.S., at 445. It
     [**2725] Moreover, in at least one other important        did not operate in an area already subject to state
respect the Act does not resemble the mortgage                 regulation at the time the company's contractual
moratorium legislation whose constitutionality was             obligations were originally undertaken, but invaded an
upheld in the Blaisdell case. This legislation, imposing a     area never before subject to regulation by the State. Cf.
sudden, totally unanticipated, and substantial retroactive     Veix v. Sixth Ward Building & Loan Assn., 310 U.S. 32,
obligation upon the company to its employees, 23 was not       38. 25 It did not effect simply a temporary alteration of
enacted to deal with a situation remotely approaching the      the contractual relationships of those within its coverage,
broad and desperate emergency economic conditions of           but worked a severe, permanent, and immediate change
the early 1930's -- conditions of which the Court in           in those relationships -- irrevocably and retroactively. Cf.
Blaisdell took judicial notice. 24                             United States Trust Co. v. New Jersey, 431 U.S., at 22.
                                                               And its narrow aim was leveled, not at every Minnesota
       23 Compare the gradual applicability of ERISA,          employer, not even at every Minnesota employer who left
       which itself is not even mandatory. At the outset       the State, but only at those who had in the past been
       ERISA did not go into effect at all until four          sufficiently enlightened as voluntarily to agree to
       months after it was enacted. 29 U.S. C. § 1144         establish pension plans for their employees.
       (1976 ed.). Funding and vesting requirements
       were delayed for an additional year. §§ 1086 (b),                25 See n. 13, supra.
       1061 (b)(2) (1976 ed.). By contrast, the
       Minnesota Act became fully effective the day                 "Not Blaisdell's case, but Worthen's (W. B. Worthen
       after its passage. The District Court rejected out      Co. v. Thomas, [292 U.S. 426]) supplies the applicable
       of hand the argument that employers were                rule" here. W. B. Worthen Co. v. Kavanaugh, 295 U.S.,
       constitutionally entitled to some grace period to       at 63. It is not necessary to hold that the Minnesota law
       adjust their pension planning. 449 F.Supp., at          impaired the obligation of the company's employment
       651.                                                    contracts "without moderation or reason or in a spirit of
       24 This is not to suggest that only an emergency        oppression." Id., at 60. 26 But we do hold that if the
       of great magnitude can constitutionally justify a       Contract Clause means anything at [*251] all, it means
       state law impairing the obligations of contracts.       that Minnesota could not constitutionally do what it tried
       See, e. g., Veix v. Sixth Ward Building & Loan          to do to the company in this case.
       Assn., 310 U.S., at 39-40; East New York Savings
                                                                        26     As Mr. Justice Cardozo's opinion for the
       Bank v. Hahn, 326 U.S. 230; El Paso v. Simmons,
                                                                        Court in the Kavanaugh case made clear, these
       379 U.S. 497.
                                                                        criteria are "the outermost limits only." The
     Entering a field it had never before sought to                     opinion went on to stress the state law's "studied
regulate, the Minnesota Legislature grossly distorted the               indifference to the interests" of creditors. 295
company's existing contractual relationships with its                   U.S., at 60.
employees by superimposing retroactive obligations upon
                                                                   The judgment of the District Court is reversed.
the company substantially [*250] beyond the terms of
its employment contracts. And that burden was imposed              It is so ordered.
upon the company only because it closed its office in the
                                                                                                                   Page 13
                                        438 U.S. 234, *251; 98 S. Ct. 2716, **2725;
                                  57 L. Ed. 2d 727, ***LEdHR1A; 1978 U.S. LEXIS 130

      [**2726] MR. JUSTICE BLACKMUN took no part                 pension plans. As the Minnesota Supreme Court
in the consideration or decision of this case.                   indicated, see Fleck v. Spannaus, 312 Minn. 223, 231,
                                                                 251 N.W.2d 334, 338 (1977), the impetus for the law
DISSENT BY: BRENNAN                                              must have been a legislative belief -- shared by Congress,
                                                                 see generally Employee Retirement Income Security Act
DISSENT                                                          of 1974 (ERISA), 29 U.S. C. § 1001 et seq. (1976 ed.) --
                                                                 that private pension plans often were grossly unfair to
     MR. JUSTICE BRENNAN, with whom MR.                          covered employees. Not only would employers often
JUSTICE WHITE and MR. JUSTICE MARSHALL join,                     neglect to furnish their employees with adequate
dissenting.                                                      information concerning their rights under the plans,
                                                                 leading to erroneous expectations, but also because
     In cases involving state legislation affecting private
                                                                 employers often failed to make contributions to the
contracts, this Court's decisions over the past half
                                                                 pension funds large enough adequately to fund their
century, consistently with both the constitutional text and
                                                                 plans, employees often ultimately received only a small
its original understanding, have interpreted the Contract
                                                                 amount of those benefits they reasonably anticipated.
Clause as prohibiting state legislative Acts which, "[with]
                                                                 See Fleck v. Spannaus, supra, at 231, 251 N.W. 2d, at
studied indifference to the interests of the [contracting
                                                                 338. Acting against this background, Minnesota, prior to
party] or to his appropriate protection," effectively
                                                                 the enactment of ERISA, adopted the Act to remedy,
diminished or nullified the obligation due him under the
                                                                 inter alia, what was viewed as a related serious social
terms of a contract. W. B. Worthen Co. v. Kavanaugh,
                                                                 problem: the frustration of expectation interests that can
295 U.S. 56, 60 [***741] (1935). But the Contract
                                                                 occur when an employer closes a single plant and
Clause has not, during this period, been applied to state
                                                                 terminates the employees who work there. 1
legislation that, while creating new duties, in nowise
diminished the efficacy of any contractual obligation                   1 Since appellant's plan remains in force at its
owed the constitutional claimant. Cf. Goldblatt v.                      other plants, this case does not involve a
Hempstead, 369 U.S. 590 (1962). The constitutionality of                termination of a pension plan, and I will therefore
such legislation has, rather, been determined solely by                 not discuss the aspect of the statute that involves
reference to other provisions of the Constitution, e. g., the           such contingencies except to observe that it, too,
Due Process Clause, insofar as they operate to protect                  is a sensitive attempt to protect employees'
existing economic values.                                               expectation interests.
     Today's decision greatly expands the reach of the                 Pension plans normally do not make provision to
Clause. The Minnesota Private Pension Benefits                   protect [*253] the interests of employees -- even those
Protection Act (Act) does not abrogate or dilute any             within only a few months of the "vesting" of their rights
obligation due a party to a private contract; rather, like all   under the plan -- who are terminated because an
positive social legislation, the Act imposes new,                employer closes one of his plants. See generally
additional obligations on a particular class of persons. In      Bernstein, Employee Pension Rights When Plants Shut
my view, any constitutional infirmity in the law must            Down: Problems and Some Proposals, 76 [***742]
therefore derive, not from the Contract Clause, but from         Harv. L. Rev. 952 (1963). Even assuming -- contrary to
the Due Process Clause of the Fourteenth Amendment.              common experience -- [**2727] that an employer
[*252] I perceive nothing in the Act that works a denial         adequately informs his employees that a termination for
of due process and therefore I dissent.                          any reason prior to vesting will result in forfeiture of
                                                                 accrued pension credits, denial of all pension benefits not
    I
                                                                 because of job-related failings, but only because the
     I begin with an assessment of the operation and             employees are unfortunate enough to be employed at a
effect of the Minnesota statute. Although the Court              plant that closes for purely economic reasons, is harsh
disclaims knowledge of the purposes of the law, both the         indeed. For unlike discharges for inadequate job
terms of the Act and the opinion of the State Supreme            performance, which may reasonably be foreseen, the
Court disclose that it was designed to remedy a serious          closing of a plant is a contingency outside the range of
social problem arising from the operation of private             normal expectations of both the employer and the
                                                                                                                     Page 14
                                       438 U.S. 234, *253; 98 S. Ct. 2716, **2727;
                                     57 L. Ed. 2d 727, ***742; 1978 U.S. LEXIS 130

employee -- as is made clear by the fact that Allied did                  undertaking to set up a pension plan for the
not rely upon the possibility of a plant's closing in                     benefit of its employees.
calculating the amount of its contributions to its pension
plan fund. 2                                                                   Although the Court refers to the fact that,
                                                                          under the terms of the plan, no sanctions could be
       2    All parties to this case agree that Allied's                  imposed on appellant for not adequately funding
       actuarial assumptions in calculating its annual                    it, no substantial objection can be levied against
       contributions to the pension plan did not include                  the Act to the extent that it mandates funding
       the possibility of a plant's closing.                              sufficient to meet the employer's original
                                                                          undertaking. The plan in the present case can be
     The Minnesota Act addresses this problem by                          interpreted as imposing a duty on the employer to
selecting a period -- 10 years of employment -- after                     fund it adequately, see App. to Brief for Appellant
which this generally unforeseen contingency may not be                    10a (§ 10 of the plan), and the employees here
the basis for depriving employees of their accumulated                    surely would have understood it as imposing that
pension fund credits, and by establishing a mechanism to                  requirement. There can be no serious objection to
provide the employees with the equivalent of the earned                   a measure that makes such a promise enforceable.
pension plan credits. Although the Court glides over this
fact, it should be apparent that the Act will impose only             I emphasize, contrary to the repeated [***743]
minor economic burdens on employers whose pension               protestations of the Court, that the Act does not impose
plans have been adequately funded. For, where, as was           "sudden and unanticipated" burdens. The features of the
true here and as will generally be true, the possibility of a   Act involved in this case come into play only when an
plant's closing was not relied upon by actuaries in             employer, after the effective date of the Act, closes a
calculating the amount of the employer's contributions to       plant. The existence of the Act's duties -- which are
the plan, an [*254] adequate pension plan fund would            similar to a legislatively imposed requirement of [*255]
include contributions on behalf of terminated employees         severance pay measured by the length of the discharged
of 10 or more years' service whose rights had not vested.       employees' service -- is simply one of a number of factors
Indeed, without the Act, the closing of the plant would         that the employer considers in making the business
create a windfall for the employer, because, due to the         decision whether to close a plant and terminate the
resulting surplus in the fund, his future contributions         employees who work there. In no sense, therefore, are
would be reduced. In denying the windfall, the Act              the Act's requirements unanticipated. While the extent of
requires that the employer use the money he will save in        the employer's obligation depends on pre-enactment
the future to purchase annuities for the terminated             [**2728] conduct, the requirements are triggered solely
employees. 3 Of course, the consequence for the                 by the closing of a plant subsequent to enactment. 4
employer may be a slightly higher pension expense; the
greater outlay might arise, in part, because the past                     4 Although appellant here apparently decided to
contributions to the plan would have reflected the                        close its Minnesota plant prior to the Act's
actuarial possibility that some of the employees who had                  effective date, appellant had every opportunity to
served 10 years might not ultimately satisfy the plan's                   reconsider that decision after the Act was adopted
vesting requirement.                                                      and presumably reached its final decision after
                                                                          weighing the possible liabilities under the Act.
       3 Because appellant's pension plan was, at the
       time of the plant closing, underfunded by in                  II
       excess of $ 295,000, appellant's pension-funding
                                                                     The primary question in this case is whether the
       charge -- which the parties stipulate will be
                                                                Contract Clause is violated by state legislation enacted to
       between $ 114,000 and $ 195,000 -- will not in
                                                                protect employees covered by a pension plan by requiring
       fact be offset by future out-of-pocket savings.
                                                                an employer to make outlays -- which, although not in
       But this is incidental. What is critical is that
                                                                this case, will largely be offset against future savings -- to
       appellant, like all covered employers, will be
                                                                provide terminated employees with the equivalent of
       forced to assume an economic burden only a little
                                                                benefits reasonably to be expected under the plan. The
       greater than that inherent in its original
                                                                Act does not relieve either the employer or his employees
                                                                                                                  Page 15
                                      438 U.S. 234, *255; 98 S. Ct. 2716, **2728;
                                    57 L. Ed. 2d 727, ***743; 1978 U.S. LEXIS 130

of any existing contract obligation. Rather, the Act           courts; and "commodity payment laws," permitting
simply creates an additional, supplemental duty of the         payments in certain enumerated commodities at a
employer, no different in kind from myriad duties created      proportion, often three-fourths or four-fifths, of actual
by a wide variety of legislative measures which defeat         value. See id., at 454-459 (Sutherland, J., dissenting);
settled expectations but which have nonetheless been           Sturges v. Crowninshield, 4 Wheat. 122, 204 (1819); see
sustained by this Court. See, e. g., Usery v. Turner           also B. Wright, The Contract Clause of the [*257]
Elkhorn Mining Co., 428 U.S. 1 (1976); Hadacheck v.            Constitution 4 (1938); Hale, The Supreme Court and the
Sebastian, 239 U.S. 394 (1915). For this reason, the           Contract Clause, 57 Harv. L. Rev. 512-513 (1944).
Minnesota Act, in my view, does not implicate the
Contract Clause in any way. The basic fallacy of today's            Thus, the several provisions of Art. I, § 10, of the
decision is its mistaken view that the Contract Clause         Constitution -- "No State shall . . . coin Money; emit Bills
protects all contract-based expectations, including that of    of Credit; [**2729] make any Thing but gold and silver
an employer that his obligations to his employees will not     Coin a Tender in Payment of Debts; [or] pass any . . .
be legislatively enlarged beyond those explicitly provided     Law impairing the Obligation of Contracts . . . ." -- were
in his pension plan.                                           targeted directly at this wide variety of debtor relief
                                                               measures. Although the debates in the Constitutional
     [*256] A                                                  Convention and the subsequent public discussion of the
                                                               Constitution are not particularly enlightening in
     Historically, it is crystal clear that the Contract       determining the scope of the Clause, they support the
Clause was not intended to embody a broad constitutional       view that the sole evil at which the Contract Clause was
policy of protecting all reliance interests grounded in        directed was the theretofore rampant state legislative
private contracts. It was made part of the Constitution to     interference with the ability of creditors to obtain the
remedy a particular social evil -- the state legislative       payment or security provided for by contract. The
practice of enacting laws to relieve individuals of their      Framers regarded the Contract Clause as simply an
obligations under certain contracts -- and thus was            adjunct to the currency provisions of Art. I, § 10, which
intended to prohibit States from adopting "as [their]          operated primarily to bar legislation depriving creditors
policy the repudiation of debts or the destruction of          of the payment of the full value of their loans. See
contracts or the denial of means to enforce them," Home        Wright, supra, at 5-16. The Clause was thus intended by
Building & Loan Assn. v. Blaisdell, 290 U.S. 398, 439          the Framers to be applicable only to laws which altered
(1934). But the Framers never contemplated that the            the obligations of contracts by effectively relieving one
Clause would limit the legislative power of States to          party of the obligation to perform a contract duty. 5
enact laws creating duties [***744] that might burden
some individuals in order to benefit others.                            5 Of course, as our recent decisions make plain,
                                                                        the applicability of the Clause has not been
     The widespread dissatisfaction with the Articles of                confined to classic "debtor relief" laws, but has
Confederation and, thus, the adoption of our Constitution,              been regarded as implicated by any measure
was largely a result of the mass of legislation enacted by              which dilutes or nullifies a duty created by a
various States during our earlier national period to relieve            contract. See, e. g., El Paso v. Simmons, 379 U.S.
debtors from the obligation to perform contracts with                   497 (1965).
their creditors. The economic depression that followed
the Revolutionary War witnessed "an ignoble array of                B
[such state] legislative schemes." Id., at 427. Perhaps the
most common of these were laws providing for the                    The terms of the Contract Clause negate any basis
emission of paper currency, making it legal tender for the     for its interpretation as protecting all contract-based
payment of debts. In addition, there were "installment         expectations from unjustifiable interference. [***745]
laws," authorizing the payment of overdue obligations in       It applies, as confirmed by consistent judicial
several installments over a period of months or even           interpretations, only to state legislative Acts. See
years, rather than in a single lump sum as provided for in     generally Tidal Oil Co. v. Flanagan, 263 U.S. 444
a contract; "stay laws," statutes staying or postponing the    (1924). Its inapplicability to impairments by state judicial
payment of private debts or temporarily closing the            acts or by national legislation belies interpretation of the
                                                               Clause as [*258] intended broadly to make all contract
                                                                                                                    Page 16
                                        438 U.S. 234, *258; 98 S. Ct. 2716, **2729;
                                      57 L. Ed. 2d 727, ***745; 1978 U.S. LEXIS 130

expectations inviolable. Rather, the only possible                      that the impairment of a contract may consist in
interpretation of its terms, especially in view of its                  "adding to its burdens" as well as in diminishing
history, is as a limited prohibition directed at a particular,          its efficacy. Georgia R. & Power Co. v. Decatur,
narrow social evil, likely to occur only through state                  supra, at 439. These opinions reflect the
legislative action. This evil is identified with admirable              then-prevailing philosophy of economic due
precision: "[Laws] impairing the Obligation of                          process which has since been repudiated. See
Contracts." (Emphasis supplied.) It is nothing less than an             Ferguson v. Skrupa, 372 U.S. 726 (1936). In my
abuse of the English language to interpret, as does the                 view, the reasoning of Georgia R. & Power Co.
Court, the term "impairing" as including laws which                     and Detroit United R. Co. is simply wrong.
create new duties. While such laws may be
conceptualized as "enlarging" the obligation of a contract            [**2730] C
when they add to the burdens that had previously been
                                                                      The Court seems to attempt to justify its distortion of
imposed by a private agreement, such laws cannot be
                                                                 the meaning of the Contract Clause on the ground that
prohibited by the Clause because they do not dilute or
                                                                 imposing new duties on one party to a contract can upset
nullify a duty a person had previously obligated himself
                                                                 his contract-based expectations as much as can laws that
to perform.
                                                                 effectively relieve [***746] the other party of any duty
     Early judicial interpretations of the Clause explicitly     to perform. But it is no more anomalous to give effect to
rejected the argument that the Clause applies to state           the term "impairment" and deny a claimant protection
legislative enactments that enlarge the obligations of           under the Contract Clause when new duties are created
contracts. Satterlee v. Matthewson, 2 Pet. 380 (1829), is        than it is to give effect to the Clause's inapplicability to
the leading case. There, this Court rejected a claim that a      acts of the National Government and deny a Contract
state legislative Act which gave validity to a contract          Clause remedy when an Act of Congress denies a creditor
which the state court had held, before the enactment of          the ability to enforce a contract right to payment. Both
the statute, to be invalid at common law could be said to        results are simply consequences of the fact that the
have "impaired the obligation of a contract." It reasoned        Clause does not protect all contract-based expectations.
that "all would admit the retrospective character of [the
                                                                      More fundamentally, the Court's distortion of the
particular state] enactment, and that the effect of it was to
                                                                 meaning of the Contract Clause creates anomalies of its
create a contract between parties where none had
                                                                 own and threatens to undermine the jurisprudence of
previously existed. But it surely cannot be contended,
                                                                 property rights developed over the last 40 years. The
that to create a contract, and to destroy or impair one,
                                                                 Contract Clause, of course, is but one of several clauses
mean the same thing." Id., at 412-413. 6 Since creating an
                                                                 in the Constitution that protect existing economic values
obligation where none had existed previously is not an
                                                                 from governmental interference. The Fifth Amendment's
impairment of contract, it of course should follow
                                                                 command that "private property [shall not] be taken for
necessarily that [*259] legislation increasing the
                                                                 public use, without just [*260] compensation" is such a
obligation of an existing contract is not an impairment. 7
                                                                 clause. A second is the Due Process Clause, which
See Hale, supra, at 514-516.
                                                                 during the heyday of substantive due process, see
        6 Satterlee, which was written by Mr. Justice            Lochner v. New York, 198 U.S. 45 (1905), largely
        Washington, necessarily rejected the contrary            supplanted the Contract Clause in importance and
        dictum of Green v. Biddle, 8 Wheat. 1, 84 (1823),        operated as a potent limitation on government's ability to
        another of Mr. Justice Washington's Court                interfere with economic expectations. See G. Gunther,
        opinions.                                                Cases and Materials on Constitutional Law 603-604 (9th
        7 In Georgia R. & Power Co. v. Decatur, 262              ed. 1975); Hale, The Supreme Court and the Contract
        U.S. 432 (1923), Detroit United R. Co. v.                Clause: III, 57 Harv. L. Rev. 852, 890-891 (1944).
        Michigan, 242 U.S. 238 (1916), and in dictum in          Decisions over the past 50 years have developed a
        other cases, see ante, at 244-245, n. 16, this Court     coherent, unified interpretation of all the constitutional
        embraced, without any careful analysis and               provisions that may protect economic expectations and
        without giving any consideration to Satterlee v.         these decisions have recognized a broad latitude in States
        Matthewson, 2 Pet. 380 (1829), the contrary view         to effect even severe interference with existing economic
                                                                                                                  Page 17
                                      438 U.S. 234, *260; 98 S. Ct. 2716, **2730;
                                    57 L. Ed. 2d 727, ***746; 1978 U.S. LEXIS 130

values when reasonably necessary to promote the general              legislation. Second, the assertion that Minnesota
welfare. See Penn Central Transp. Co. v. New York City,              here "invaded an area never before subject to
ante, p. 104; Pittsburgh v. Alco Parking Corp., 417 U.S.             regulation" takes an exceedingly restrictive view
369 (1974); Goldblatt v. Hempstead, 369 U.S. 590                     of the subject matter of the Act. If it is regarded
(1962); Sproles v. Binford, 286 U.S. 374 (1932); Euclid              not as a private pension plan, but rather as the
v. Ambler Realty Co., 272 U.S. 365 (1926). At the same               compensation afforded employees by large
time the prohibition of the Contract Clause, consistently            employers, then the statute operates in an area that
with its wording and historic purposes, has been limited             has been extensively regulated. The only
in application to state laws that diluted, with utter                explanation for the Court's decision is that it
indifference to the legitimate interests of the beneficiary          subjectively values the interests of employers in
of a contract duty, the existing contract obligation, W. B.          pension plans more highly than it does the
Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935); see                    legitimate expectation interests of employees.
United States Trust Co. v. New Jersey, 431 U.S. 1 (1977);
cf. El Paso v. Simmons, 379 U.S. 497 (1965); Home                   To permit this level of scrutiny of laws that interfere
Building & Loan Assn. v. Blaisdell, 290 U.S. 398 (1934).      with contract-based expectations is an anomaly. There is
                                                              nothing sacrosanct about expectations rooted in contract
     Today's conversion of the Contract Clause into a         that justify according them a constitutional immunity
limitation on the power of States to enact laws that          denied other property rights. Laws that interfere with
impose duties additional to obligations assumed under         settled expectations created by state property law (and
private contracts must inevitably produce results difficult   which impose severe economic burdens) are uniformly
to square with any rational conception of a constitutional    held constitutional where reasonably related to the
order. Under the Court's opinion, any law that may be         promotion of the general welfare. Hadacheck v.
characterized as "superimposing" new obligations on           Sebastian, 239 U.S. 394 (1915) is illustrative. There a
those provided for by contract is to be [*261] regarded       property owner had established on a particular parcel
as creating "sudden, substantial, and unanticipated           [*262] of land a perfectly lawful business of a brickyard,
[***747] burdens" and then to be subjected to the most        and, in reliance on the existing law, continued to operate
exacting scrutiny. [**2731] The validity of such a law        that business for a number of years. However, a local
will turn upon whether judges see it as a law that deals      ordinance was passed prohibiting the operation of
with a generalized social problem, whether it is              brickyards in the particular locale and diminishing the
temporary (as few will be) or permanent, whether it           value of the claimant's parcel and thus of his investment
operates in an area previously subject to regulation, and,    by nearly 90%. Notwithstanding the effect of the
finally, whether its duties apply to a broad class of         ordinance on the value of the investment, the ordinance
persons. See ante, at 249-250. The necessary                  was sustained against a taking claim. See also Miller v.
consequence of the extreme malleability of these rather       Schoene, 276 U.S. 272 (1928) (statute required cutting
vague criteria is to vest judges with broad subjective        down ornamental red cedar trees because they had cedar
discretion to protect property interests that happen to       rust which would be harmful to apple trees in the
appeal to them. 8                                             vicinity).

       8 With respect, the Court's application of these            There is no logical or rational basis for sustaining the
       criteria illustrates this point. First, I find it      duties created by the laws in Miller and Hadacheck, but
       difficult to understand how the Court can assert       invalidating the duty created by the Minnesota Act.
       that the Act's attempt to protect the expectation      Surely, the Act effects no greater interference with
       interests of employees to pension plans does not       reasonable reliance interests than did these other laws.
       deal with a "broad, generalized . . . social           Moreover, the laws operate identically: They all create
       problem" but that the mortgage moratorium in           duties that burden one class of persons and benefit
       Home Building & Loan Assn. v. Blaisdell, 290           another. The only difference between the present case
       U.S. 398 (1934), did. The Court's suggestion that      and Hadacheck or Miller is that here there was a prior
       the Act has a "narrow aim" because it applies only     contractual relationship between the members of the
       to pension plans overlooks that it is the existence    benefited and burdened classes. I simply cannot accept
       of the pension plan that creates the need for this     [***748] that this difference should possess
                                                                                                                   Page 18
                                        438 U.S. 234, *262; 98 S. Ct. 2716, **2731;
                                      57 L. Ed. 2d 727, ***748; 1978 U.S. LEXIS 130

constitutional significance. The only means of avoiding         the fruits of their labor -- the operators and the coal
this anomaly is to construe the Contract Clause                 consumers." Id., at 18.
consistently with its terms and the original understanding
and hold it is inapplicable to laws which create new                 A similar analysis is appropriate here. The Act is an
duties.                                                         attempt to remedy a serious social problem: the utter
                                                                frustration of an employee's expectations that can occur
    III                                                         when he is terminated because his employer closes down
                                                                his place of work. The burden on his employer is surely
     But my view that the Contract Clause has no                far less harsh than that saddled upon coal operators by the
applicability whatsoever to the Minnesota Act does not          federal statute. Too, a large part of the employer's outlay
end the inquiry in this case. The Due Process Clause of         that the Act requires will be offset against future savings.
the Fourteenth Amendment limits a State's power to enact        To this extent, the Act merely [*264] prevents the
such laws and I therefore address that related challenge to     employer from obtaining a windfall, an effect which
the Act's validity. 9 [**2732] I think that any claim           would immunize this aspect of the statutory requirement
based on due process has no merit.                              from attack even under the more stringent standards the
                                                                Court reads into the Contract Clause. See El Paso v.
          9 I recognize that the only question presented by     Simmons, 379 U.S., at 515 and cases [***749] cited. To
          appellant is whether the Minnesota Act violates       the extent the Act does more than prevent a windfall, it is
          the Contract Clause. See Jurisdictional Statement     simply implementing a reasonable legislative judgment
          2. However, I think that a due process claim is       that the expectation interests of employees of more than
          fairly subsumed by the question presented and,        10 years' service in the receipt of a pension but who, as
          under the circumstances, elementary fairness          an actuarial matter, would not satisfy the vesting
          requires that I address the due process claim. This   requirements of the pension plan, should not be frustrated
          reasoning does not apply to the other possible        by the generally unforeseen contingency of a plant's
          challenges to the Act -- e. g., ones based on the     closing.
          "Taking" Clause or on the Commerce Clause --
          for these others involve rather different                  Significantly, also, the Minnesota Act, unlike the
          considerations from those involved in the             federal statute upheld in Turner Elkhorn Mining, is not
          Contract and Due Process Clause analyses.             wholly retrospective in its operation. The Act requires an
                                                                outlay from an employer like appellant only if after the
     [*263] My conclusion rests to a considerable extent        enactment date of the Act (thus when it may give full
upon Usery v. Turner Elkhorn Mining Co., 428 U.S. 1             consideration to the economic consequences of its
(1976). That case involved a federal statute that required      decision) the employer decides to close its plant.
the operators of coal mines to compensate employees
who had contracted pneumoconiosis even though the                    Nor, finally, do I believe it relevant that the Act is
employees had terminated their work in the coal-mining          limited in coverage to large employers. "In establishing a
industry before the Act was passed. This federal statute        system of unemployment benefits the legislature is not
imposed a new duty on operators based on past acts and          bound to occupy the whole field. It may strike at the evil
applied even though the coal mine operators might not           where it is most felt." Carmichael v. Southern Coal &
have known of the danger that their employees would             Coke Co., 301 U.S. 495, 519-520 (1937).
contract pneumoconiosis at the time of the particular
employees' service. Id., at 17; see also id., at 40 n. 4            In sum, in my view, the Contract Clause has no
(POWELL, J., concurring in part). While indicating that         applicability whatsoever to the Act, and because I
the Due Process Clause may place greater limitations on         conclude the Act is consistent with the only relevant
the Government's power to legislate retrospectively than        constitutional restriction -- the Due Process Clause -- I
it does on the Government's ability to act prospectively,       would affirm the judgment of the District Court.
the statute was upheld on the ground that Congress had
broad discretion to deal with the serious social problem        REFERENCES
of pneumoconiosis affecting former miners and that it           State's exercise of police power as constituting
was "a rational measure to spread the costs of the              impairment of obligation of private contract in violation
employees' disabilities to those who have profited from         of contract clause (Art I, 10, cl 1) of Federal Constitution
                                                                                                               Page 19
                                     438 U.S. 234, *264; 98 S. Ct. 2716, **2732;
                                   57 L. Ed. 2d 727, ***749; 1978 U.S. LEXIS 130

16 Am Jur 2d, Constitutional Law 438, 450                  ALR Quick Index, Impairment of Contract Obligations

USCS, Constitution, Article I, Section 10, Clause 1        Federal Quick Index, Impairment of Contract Obligations

US L Ed Digest, Constitutional Law 271                              Annotation References:

ALR Digests, Constitutional Law 203                        State's exercise of a police power as constituting
                                                           impairment of obligation of private contract in violation
L Ed Index to Annos, Impairment of Contract                of contract clause (Art I, 10, cl 1) of Federal Constitution.
Obligations                                                57 L. Ed. 2d 1279.
                                                                                                                    Page 1

                                         ARIZONA v. CALIFORNIA ET AL.

                                            [NO NUMBER IN ORIGINAL]

                                   SUPREME COURT OF THE UNITED STATES

                          292 U.S. 341; 54 S. Ct. 735; 78 L. Ed. 1298; 1934 U.S. LEXIS 714

                               April 2, 1934, Return to Rule to Show Cause Presented
                                                May 21, 1934, Decided

PRIOR HISTORY:       MOTION FOR LEAVE TO                       but attempts would be made thereafter to interfere with
FILE BILL TO PERPETUATE TESTIMONY.                             its rights, and that it was not possible to bring the issues
                                                               that would arise to an immediate judicial investigation or
     ORIGINAL application upon the part of the State of        determination. The issue before the Court was whether
Arizona for leave to file a bill to perpetuate testimony for   the testimony that the State proposed to take would be
use in future litigation against the State of California and   material and competent evidence in the contemplated
other parties named.                                           litigation. Denying leave to file, the Court held in part
                                                               that the evidence sought to be perpetuated was not
DISPOSITION: Leave to file denied.                             competent to prove that Congress intended, by the Act, to
                                                               exclude another state from the waters allotted by the
CASE SUMMARY:                                                  Compact and to reserve all of those waters to the State.

                                                               OUTCOME: The court denied leave to file the bill to
PROCEDURAL POSTURE: Plaintiff State filed an
                                                               perpetuate testimony.
original application for leave to file a bill to perpetuate
testimony for use in future litigation against defendants,
                                                               CORE TERMS: compact, basin, river, acre-feet,
another State and related others. Plaintiff had filed an
                                                               Boulder Canyon Project Act, upper, apportioned,
action against defendants, seeking a declaration that the
                                                               apportion, tributaries, surplus waters, apportionment,
Colorado River Compact and the Boulder Canyon Project
                                                               beneficial, perpetuated, ratification, per annum,
Act of 1928 be declared to be unconstitutional and void.
                                                               perpetuate, treaty, consumptive, stream, leave to file,
The bill had been dismissed without prejudice.
                                                               negotiator, perpetuate testimony, depositions, aggregate,
                                                               ratify, use of water, negotiation, negotiating, ambiguous,
OVERVIEW: The State sought a declaration that the
                                                               ambiguity
Secretary of the Interior and other states be permanently
enjoined from carrying out the Compact or the Act; and
                                                               LexisNexis(R) Headnotes
that they be enjoined from performing contracts which
had been executed by the Secretary on behalf of the
United States for the use of stored water and developed
power after the project shall have been completed, and
from doing any other thing under color of the Act. In the      Civil Procedure > Discovery > Methods > Perpetuation
State's original bill of complaint to perpetuate testimony,    of Testimony
it alleged that none of its rights had been interfered with,   [HN1] A bill to perpetuate testimony may be entertained
                                                                                                                    Page 2
                                            292 U.S. 341, *; 54 S. Ct. 735, **;
                                        78 L. Ed. 1298, ***; 1934 U.S. LEXIS 714

in aid of litigation pending in the United States Supreme       and also all parts of said States located without the
Court, or to be begun there.                                    drainage area of the Colorado River system which are
                                                                now or shall hereafter be beneficially served by waters
                                                                diverted from the system below Lee Ferry.
Civil Procedure > Discovery > Methods > Oral
Depositions
Civil Procedure > Discovery > Methods > Perpetuation            Governments > State & Territorial Governments >
of Testimony                                                    Water Rights
Civil Procedure > Discovery > Methods > Written                 [HN5] By Article III of the Colorado River Compact, the
Depositions                                                     apportionment is made: (a) There is hereby apportioned
[HN2] To sustain a bill to perpetuate testimony, it must        from the Colorado River system in perpetuity to the
appear that the facts which a plaintiff expects to prove by     upper basin and to the lower basin, respectively, the
the testimony of the witnesses sought to be examined will       exclusive beneficial consumptive use of 7,500,000
be material in the determination of the matter in               acre-feet of water per annum, which shall include all
controversy; that the testimony will be competent               water necessary for the supply of any rights which may
evidence; that depositions of the witnesses cannot be           now exist; (b) In addition to the apportionment in
taken and perpetuated in the ordinary methods prescribed        Paragraph (a), the lower basin is hereby given the right to
by law, because the then condition of the suit (if one is       increase its beneficial consumptive use of such waters by
pending) renders it impossible, or (if no suit is then          1,000,000 acre-feet per annum; (d) The States of the
pending) because the plaintiff is not in a position to start    upper division (Colorado, New Mexico, Utah and
one in which the issue may be determined; and that              Wyoming) will not cause the flow of the river at Lee
taking of the testimony on bill in equity is made               Ferry to be depleted below an aggregate of 75,000,000
necessary by the danger that it may be lost by delay.           acre-feet for any period of 10 consecutive years reckoned
                                                                in continuing progressive series beginning with the first
                                                                day of October next succeeding the ratification of this
Governments > State & Territorial Governments >                 compact.
Legislatures
Governments > State & Territorial Governments >
Water Rights                                                    Governments > State & Territorial Governments >
[HN3] The Boulder Canyon Project Act of 1928 approves           Water Rights
the Colorado River Compact subject to certain limitations       International Law > Dispute Resolution > Comity
and conditions, the approval to become effective upon the       Doctrine > General Overview
ratification of the Compact, as so modified, by the             [HN6] Article III of the Colorado River Compact does
legislatures of California and at least five of the six other   not in terms apportion as between the upper and the lower
states.                                                         basin the surplus waters in excess of the amounts
                                                                specifically allocated. But it recognizes in Paragraph (c)
                                                                that there may be "surplus" waters in the River,
Governments > State & Territorial Governments >                 applicable to the lower basin.
Water Rights
[HN4] By Article II the Colorado River Compact defines
the terms used: (a) The term "Colorado River system"            Contracts Law > Types of Contracts > Covenants
means that portion of the Colorado River and its                Governments > State & Territorial Governments >
tributaries within the United States of America; (b) The        Water Rights
term "Colorado River Basin" means all of the drainage           [HN7] The Colorado River Compact does not purport to
area of the Colorado River system and all other territory       apportion between the States of the lower basin the share
within the United States of America to which the waters         of each in the waters of the Colorado River System; but
of the Colorado River system shall be beneficially              the Boulder Canyon Project Act of 1928 makes some
applied; and (g) The term "Lower Basin" means those             provision for such apportionment. By § 4(a) it provides
parts of the States of Arizona, California, Nevada, New         that California, by act of its legislature, shall agree
Mexico and Utah within and from which waters naturally          irrevocably and unconditionally with the United States
drain into the Colorado River system below Lee Ferry            and for the benefit of the States of Arizona, Colorado,
                                                                                                                  Page 3
                                          292 U.S. 341, *; 54 S. Ct. 735, **;
                                      78 L. Ed. 1298, ***; 1934 U.S. LEXIS 714

Nevada, New Mexico, Utah and Wyoming, as an express          Water Rights
covenant and in consideration of the passage of the Act,     Real Property Law > Water Rights > Beneficial Use
that the aggregate annual consumptive use (diversions        [HN10] The provision of Article III(b) of the Colorado
less returns to the river) of water of and from the          River Compact, like that of Article III(a) is entirely
Colorado River for use in the State of California,           referable to the main intent of the Compact which is to
including all uses under contracts made under the            apportion the waters as between the upper and lower
provisions of this Act and all water necessary for the       basins. The effect of Article III (b) (at least in the event
supply of any rights which may now exist, shall not          that the lower basin puts the 8,500,000 acre-feet of water
exceed 4,400,000 acre-feet of the waters apportioned to      to beneficial uses) is to preclude any claim by the upper
the lower basin States by paragraph (a) of Article III of    basin that any part of the 7,500,000 acre-feet released at
the Colorado River Compact, plus not more than one-half      Lee Ferry to the lower basin may be considered as
of any excess or surplus waters unapportioned by said        "surplus" because of Arizona waters which are available
Compact, such uses always to be subject to the terms of      to the lower basin alone. Congress apparently expected
said Compact.                                                that a complete apportionment of the waters among the
                                                             States of the lower basin would be made by the
                                                             sub-compact which it authorized Arizona, California and
Contracts Law > Remedies > Ratification                      Nevada to make. If Arizona's rights are in doubt it is, in
Governments > State & Territorial Governments >              large part, because she has not entered into the Colorado
Water Rights                                                 River Compact or into the suggested sub-compact.
Real Property Law > Water Rights > Beneficial Use
[HN8] Section 4 of the Boulder Canyon Project Act of
1928 authorizes Arizona, California and Nevada to enter      International Law > Treaty Formation > General
into an agreement which, among other things, shall           Overview
provide: (1) That of the 7,500,000 acre-feet annually        International Law > Treaty Interpretation > General
apportioned to the lower basin States by paragraph (a) of    Overview
Article III of the Colorado River compact, there shall be    [HN11] When the meaning of a treaty is not clear,
apportioned to the State of Nevada 300,000 acre-feet and     recourse may be had to the negotiations, preparatory
to the State of Arizona 2,800,000 acre-feet for exclusive    works, and diplomatic correspondence of the contracting
beneficial consumptive use in perpetuity, and (2) that the   parties to establish its meaning. But that rule has no
State of Arizona may annually use one-half of the excess     application to oral statements made by those engaged in
or surplus water unapportioned by the Colorado River         negotiating the treaty which were not embodied in any
compact, and (3) that the State of Arizona shall have the    writing and were not communicated to the government of
exclusive beneficial use of the Gila River and its           the negotiator or to its ratifying body.
tributaries within the boundaries of said State, and (7)
said agreement to take effect upon the ratification of the   LAWYERS' EDITION HEADNOTES:
Colorado River compact by Arizona, California and
Nevada.
                                                                   DEPOSITIONS, §3 ;

Governments > State & Territorial Governments >                    prerequisites of bill to perpetuate testimony for
Water Rights                                                 future action. -- ;
[HN9] The Boulder Canyon Project Act of 1928 does not
                                                                 Headnote:[1]
purport to apportion among the states of the lower basin
the waters to which the lower basin is entitled under the         To sustain a bill to perpetuate testimony in an action
Colorado River Compact. The Act merely places limits         to be brought in the future, it must appear that the facts
on California's use of waters under Article III(a) of the    expected to be proved will be material and the testimony
Compact and of surplus waters; and it is such uses which     competent, that depositions of the witnesses cannot be
are subject to the terms of said Compact.                    taken and perpetuated in the ordinary methods prescribed
                                                             by law, because the plaintiff is not in a position to start a
Governments > State & Territorial Governments >              suit in which the issue may be determined, and that
                                                                                                                     Page 4
                                           292 U.S. 341, *; 54 S. Ct. 735, **;
                                       78 L. Ed. 1298, ***; 1934 U.S. LEXIS 714

taking of the testimony on bill in equity is made                  Nondocumentary evidence, consisting of testimony
necessary by the danger that it may be lost by delay.          of what persons said some years before while negotiating
                                                               the Colorado River Compact between several states, not
                                                               embodied in any writing and not communicated to
     EVIDENCE, §834                                            Congress or the legislatures of the ratifying states, is not
                                                               competent to prove that Congress, by the Boulder
     STATES, §52 ;
                                                               Canyon Project Act, intended to exclude a certain state
     materiality -- compact between other states. -- ;         from the waters allotted by the Compact.

    Headnote:[2]                                               SYLLABUS

     The meaning of a compact between several states,               1. This Court may entertain a bill to perpetuate
considered as a contract, cannot be material in litigation     testimony in aid of future litigation within its original
against signatory states by a state which refused to ratify    jurisdiction. P. 347.
it and is not a party thereto, nor can the construction of
the compact by a signatory state or by Congress be                  2. The sole purpose of such a suit is to perpetuate the
material in any suit by the nonsignatory state based upon      testimony; and in order to sustain the bill it must appear
the contract.                                                  that the facts which the plaintiff expects to prove by the
                                                               testimony of the witnesses sought to be examined will be
                                                               material to the determination of the matter in controversy;
     EVIDENCE, §551                                            that the testimony will be competent evidence; that
                                                               depositions of the witnesses can not be taken and
     STATES, §52 ;                                             perpetuated in the ordinary methods prescribed by law,
                                                               because the then condition of the suit (if one is pending)
     Colorado River Compact -- ambiguity -- extrinsic
                                                               renders it impossible, or (if no suit is then pending)
evidence of meaning. -- ;
                                                               because the plaintiff is not in a position to start one in
    Headnote:[3]                                               which the issue may be determined; and that taking of the
                                                               testimony on bill in equity is made necessary by the
     The provision of the Colorado River Compact               danger that it may be lost by delay. P. 347.
between several states that, in addition to the
apportionment made elsewhere therein, the "lower basin"             3. Arizona asked leave to file a bill to perpetuate the
is given the right to increase its beneficial consumptive      testimony of persons who took part in the formulation of
use of water by 1,000,000 acre-feet per annum, is not          the "Colorado River Compact," apportioning the waters
ambiguous, so as to admit extrinsic evidence to show its       of the Colorado River, which was adopted by all the
meaning, although the additional waters thereby                States embracing the water-shed of that river, except
appropriated are claimed thereunder exclusively by the         Arizona, and was approved, subject to certain limitations
state seeking to introduce such evidence, on the ground of     and conditions, by the Act of Congress of December 21,
the geographical situation of the states, where other states   1928, known as the Boulder Canyon Project Act (see 283
were included in the lower basin, and the Compact left to      U.S. 423). By the bill she claimed that § 4 (a) of the Act,
later agreement the apportionment of the water among the       imposing limitations on the use of water by California,
states in each basin.                                          was intended for the benefit of Arizona; that § 4 (a)
                                                               embodies by reference Article III (b) of the Compact for
                                                               the purpose of defining those limitations, and that the
     EVIDENCE, §593                                            proper interpretation of Art III (b) will be, therefore,
                                                               essential in future litigation to the determination of
     STATUTES, §145 ;                                          Arizona's rights under the statute; that, read in the light of
                                                               other parts of the Compact, Art. III (b) is ambiguous; and
     extrinsic evidence to show intent of Congress --
                                                               that the testimony sought to be perpetuated will be
Boulder Canyon Project Act. -- ;
                                                               material and admissible in removing the ambiguity, and
    Headnote:[4]                                               will show that the water apportioned by Art. III (b) to the
                                                                                                                Page 5
                                           292 U.S. 341, *; 54 S. Ct. 735, **;
                                       78 L. Ed. 1298, ***; 1934 U.S. LEXIS 714

lower basin of the water-shed -- 1,000,000 acre feet per      Mr. U. S. Webb, Attorney General of California, and
annum -- is for the sole and exclusive use and benefit of     Messrs. I. W. Stewart, Arvin B. Shaw, Charles L.
Arizona. Held:                                                Childers, E. C. Finney, Ray L. Chesebro, James M.
                                                              Stevens, and Fred M. Bottorf were on the brief for
    (1) That the meaning of the Compact, considered           California et al., defendants.
merely as a contract, can never be material to the
contemplated litigation, since Arizona refused to ratify       Messrs. James H. Howard, Northcutt Ely, Ray W. Bruce,
the Compact. P. 356.                                          C. L. Byers, Phil D. Swing, and Thos. Whelan, were on
                                                              the brief for the Metropolitan Water District of Southern
     (2) The bill does not show that Art. III (b) of the      California et al., defendants.
Compact is relevant to the interpretation of § 4 (a) of the
Act. The Act does not purport to apportion among the          Mr. Paul P. Prosser, Attorney General of Colorado, Mr.
States of the lower basin (to which Arizona and               Gray Mashburn, Attorney General of Nevada, Mr. E. K.
California belong) the waters to which the lower basin is     Neumann, Attorney General of New Mexico, Mr. Joseph
entitled under the Compact; it merely limits California's     Chez, Attorney General of Utah, and Mr. Ray E. Lee,
use of waters under Art. III (a) and of surplus waters; and   Attorney General of Wyoming, were on the brief for
there can be no claim that Art. III (b) is relevant in        Colorado et al., defendants.
defining surplus waters under § 4 (a) of the Act. P. 357.
                                                              Solicitor General Biggs, Assistant Attorney General
     (3) Proof that Congress understood that Article III      Blair, and Messrs. Charles Bunn, Aubrey Lawrence, and
(b) had allotted all the waters therein to Arizona would      Nathan R. Margold were on the brief for Ickes, Secretary
not make Art. III (b) relevant to the interpretation of § 4   of the Interior, defendant.
(a) of the Act. P. 358.
                                                              By leave of Court, Messrs. James D. Parriott, R. C.
     (4) Ambiguity in Art. III (b) is not shown. The          Hecox, Malcolm Lindsey, and Stanley P. Smith filed a
Compact makes an apportionment only between the               brief on behalf of the City and County of Denver, as
upper and lower basins. The fact that any of the waters       amici curiae.
apportioned to the lower basin are useful to Arizona only
or have been appropriated by her does not contradict the      JUDGES: Hughes, Van Devanter, McReynolds,
clear intent of Paragraph (b) to apportion the 1,000,000      Brandeis, Sutherland, Butler, Stone, Roberts, Cardozo
acre-feet therein to the States of the lower basin and not
specifically to Arizona alone. P. 358.                        OPINION BY: BRANDEIS

    (5) The proposed testimony, even if it were relevant,     OPINION
would not be competent, since the Act rests not upon
what was thought or said by negotiators of the Compact,           [*344] [**736] [***1299] MR. JUSTICE
but upon its ratification by the six States other than        BRANDEIS delivered the opinion of the Court.
Arizona. P. 359.
                                                                    On October 13, 1930, Arizona sought, by an original
      4. The rule permitting recourse to the negotiations,    bill, a declaration that the Colorado River Compact and
preparatory works, and diplomatic correspondence of the       the Boulder Canyon Project Act be decreed to be
contracting parties to establish the meaning of a treaty      unconstitutional and void; that the Secretary of the
when not clear, has no application to oral statements         Interior and California, Nevada, Utah, New Mexico,
made by those engaged in negotiating the treaty which         Colorado and Wyoming be permanently enjoined from
were not embodied in any writing and were not                 carrying out said Compact or said Act; and that they be
communicated to the Government of the negotiator or to        enjoined from performing contracts which had been
its ratifying body. P. 360.                                   executed by the Secretary on behalf of the United States
                                                              for the use of stored water and developed power after the
COUNSEL: Mr. Arthur T. LaPrade, Attorney General of           project shall have been completed, and from doing any
Arizona, and Messrs. Charles A. Carson, Jr., and A. M.        other thing under color of the Act. The bill was
Crawford were on the brief for plaintiff.                     "dismissed without prejudice to an application for relief
                                                                                                                      Page 6
                                        292 U.S. 341, *344; 54 S. Ct. 735, **736;
                                     78 L. Ed. 1298, ***1299; 1934 U.S. LEXIS 714

in case the stored water is used in such a way as to                  [*346] (f) The General Regulation of the Secretary
interfere with the enjoyment by Arizona, or those               of the Interior, concerning the storage of water in Boulder
claiming under it, of any rights already perfected or with      Dam Reservoir and the delivery thereof, dated April 23,
the right of Arizona to make additional legal                   1930, as amended September 28, 1931.
appropriation and to enjoy the same." Arizona v.
California, 283 U.S. 423, 464.                                       [***1300] The bill alleges, among other things:

      [*345] On February 14, 1934, Arizona moved for                 That no right of Arizona has yet been interfered with;
leave to file in this Court its original bill of complaint to   that attempts will be made hereafter to interfere with its
perpetuate testimony in an action or actions arising out of     rights; that it is not possible to bring the issues which will
the Boulder Canyon Project Act which "at some time in           arise to an immediate judicial investigation or
the future" it will commence in this Court against              determination and it may be years before this can be done
California, and others therein named as defendants. 1 The       because "the cause or causes of action have not accrued
bill sets forth:                                                and may not accrue for years to come"; that facts known
                                                                only to certain named persons will be evidence material
       1     Namely, Colorado, Nevada, New Mexico,              in the determination of such controversy or
       Utah, Wyoming, Harold L. Ickes, Secretary of the         controversies; that these persons will be necessary
       Interior, Palo Verde Irrigation District, Imperial       witnesses in the prosecution of the action or actions
       Irrigation District, Coachella Valley Water              which Arizona will be compelled to institute in order to
       District, Metropolitan Water District of Southern        protect its rights and those of persons claiming under it;
       California, City of Los Angeles, City of San             and that all the persons with present knowledge of the
       Diego, and County of San Diego.                          present facts may not be available as witnesses when the
                                                                cause or causes of action shall have accrued to the
     (a) The Act of Congress, August 19, 1921, c. 72, 42        plaintiff. The prayer is for process to take the oral
Stat. 171, which authorized Arizona, California,                depositions and to perpetuate the testimony of these
Colorado, Nevada, New Mexico, Utah and Wyoming to               witnesses.
enter into a compact regarding the waters of the Colorado
River; and the appointment of a representative to act for            On February 20, 1934, a rule issued to those named
the United States.                                              as defendants to show cause why leave to file the bill
                                                                should not be granted. All filed returns. Colorado,
     (b) The Colorado River Compact dated November              Nevada, New Mexico, Utah and Wyoming stated that
24, 1922, signed by representatives of the seven States --      they have no objection to the filing of the bill or to the
to "become binding and obligatory when it shall have            taking of any competent testimony; and prayed that to
been approved by the legislature of each of the signatory       each state should be granted the right of
States and by the Congress of the United States."               cross-examination and the right to object to any such
                                                                testimony on any ground either at the time of the taking
     (c) The Act of Congress, December 21, 1928, known          or of its presentation to this Court. California and the
as the Boulder Canyon Project Act, c. 42, 45 Stat. 1057,        public agencies of that state expressed a doubt as to the
which approved the Colorado River Compact subject to            existence of jurisdiction in this Court. They opposed the
certain limitations and conditions, the approval to become      granting of the motion on the ground that the testimony
effective upon the ratification of the compact, as so           if taken [*347] would not be admissible in evidence;
modified, by the legislature of California and at least five    opposed also on the ground that the United States is an
of the other six States.                                        indispensable party; and insisted that the bill should not
                                                                be received in the absence of consent by the United States
     (d) The Act of California, c. 16, March 4, 1929,
                                                                to be sued. The Secretary of the Interior conceded that
limiting its use of the waters of the Colorado River in
                                                                this Court has jurisdiction, but objected on the same
conformity with the Boulder Canyon Project Act.
                                                                grounds as California to granting the motion. Thereupon,
      [**737] (e) The Proclamation of the President             a brief was filed by Arizona, reply briefs by respondents
declaring the Boulder Canyon Project Act to be in effect,       and a brief amicus curiae by the City and County of
June 25, 1929, 46 Stat. 3000.                                   Denver, Colorado.
                                                                                                                      Page 7
                                         292 U.S. 341, *347; 54 S. Ct. 735, **737;
                                      78 L. Ed. 1298, ***1300; 1934 U.S. LEXIS 714

    First. No bill to perpetuate testimony has heretofore        sufficient to show danger of losing the evidence by delay;
been filed in this Court; but no reason appears why such         and also to show Arizona's inability to perpetuate the
[HN1] a bill may not be entertained in aid of litigation         testimony by the ordinary methods prescribed by law for
pending in this Court, or to be begun here. Bills to             the taking of depositions. The only question which
perpetuate testimony had been known as an independent            requires consideration is whether the testimony which it
branch of equity jurisdiction before the adoption of the         is proposed to take would be material and competent
Constitution. 2 Congress provided for its exercise by the        evidence in the litigation contemplated.
lower federal courts. 3 There the jurisdiction has been
repeatedly invoked; 4 and it has been recognized by this              Second. The action or actions which Arizona expects
Court. 5                                                         to bring may rest upon a claim that "the stored water is
                                                                 used in such a way as to interfere with the enjoyment by
        2 1 Pomeroy's Equity Jurisprudence, (4th ed.) §          Arizona, or those claiming under it, of any rights already
        211; West v. Lord Sackville, L.R. [1903] 2 Ch.           perfected or with the right of Arizona to make additional
        Div. 378.                                                legal appropriations and to enjoy the same." Specifically,
        3     Revised Statutes, § 866: ". . . any circuit        Arizona claims rights under § 4 (a) of the Boulder
        [district] court upon application to it as a court of    Canyon Project Act; these rights, it is said, are governed
        equity, may, according to the usages of chancery,        in turn by the terms of the Colorado River Compact.
        direct depositions to be taken in perpetuam rei          Briefly, the Compact apportions the waters of the
        memoriam, if they relate to any matters that may         Colorado River between a group of States, termed the
        be cognizable in any court of the United States. . .     upper basin, north of Lee Ferry, and a group south
        ."                                                       thereof, the lower basin, among which are Arizona and
        4 New York & Baltimore Coffee Polishing Co. v.           California. The interference apprehended will, it is
        New York Polishing Co., 9 Fed. 578; 11 Fed. 813;         alleged, arise out of a refusal of the respondents to accept
        Richter v. Jerome, 25 Fed. 679; Westinghouse             as correct that construction of Article III (b) of the
        Machinery Co. v. Electric Storage Battery Co.,           [*349] Compact which Arizona contends is the proper
        170 Fed. 430; reversing 165 Fed. 992; The West           one. It claims that this paragraph, which declares:
        Ira, 24 F.2d 858; Todd Engineering Co. v. United
        States, 32 F.2d 734; Union Solvents Corp. v.                  "In addition to the apportionment in Paragraph (a),
        Butacet Corp., 2 F. Supp. 375.                            the lower basin is hereby given the right to increase its
        5     Richter v. Union Trust Co., 115 U.S. 55;           beneficial consumptive use of such waters by 1,000,000
        compare Green v. Compagnia Generale, 82 Fed.             acre-feet per annum"
        490, 494-5.
                                                                     means:
     [1]The sole purpose of such a suit is to perpetuate the
                                                                      "that the waters apportioned by Article III (b) of said
testimony. [HN2] To sustain a bill of this character, it
                                                                 compact are for the sole and exclusive use and benefit of
must appear that the facts which the plaintiff expects
                                                                 the State of Arizona."
[***1301] to prove [*348] by the testimony of the
witnesses sought to be examined will be material in the               The bill charges that the Secretary of the Interior and
determination of the matter in controversy; that the             the other defendants refuse to accept such construction;
testimony will be competent evidence; that depositions of        and that, by certain contracts made between the
the witnesses cannot be taken and perpetuated in the             Secretary and the California defendants, they are
ordinary methods prescribed by law, because the then             asserting a right to appropriate the said 1,000,000
condition of the suit (if one is pending) renders it             acre-feet of water to California uses. The bill states that
impossible, or (if no suit is then pending) because the          the decision in some future action construing Paragraph
plaintiff is not in a position to start one in which the issue   (b) will materially affect rights of Arizona arising under
may be determined; and that taking of the testimony on           the Boulder Canyon Project Act, in particular § 4 (a)
bill in equity [**738] is made necessary by the danger           thereof. 6
that it may be lost by delay.
                                                                        6 It is claimed that a future decision as to the
    The allegations of the bill presented by Arizona are                meaning of Article III (b) will affect rights also
                                                                                                                     Page 8
                                        292 U.S. 341, *349; 54 S. Ct. 735, **738;
                                     78 L. Ed. 1298, ***1301; 1934 U.S. LEXIS 714

       under (a) the Colorado River Compact, (b) the            one million acre-feet per annum.'
       conditions required by the Boulder Canyon
       Project Act to be attached to patents, grants,                "It was agreed between all the representatives of the
       contracts, concessions, leases, permits, rights of       various States and the representative of the United States,
       way and other privileges from the United States,         negotiating said compact, that said one million acre-feet
       (c) the relative and respective rights of each of the    apportioned by subdivision (b) of Article III of said
       parties (to the suit to perpetuate testimony) in the     compact was intended for and should go to the State of
       waters of the Colorado and its tributaries, and the      Arizona to compensate for the waters of the Gila River
       use thereof and the burdens and restrictions upon        and [*351] its tributaries being included within the
       such use.                                                definition of the Colorado River System and the
                                                                allocations of said compact, and that said one million
     Arizona seeks, as stated in the bill, to perpetuate, and   acre-feet was to be used exclusively by and for the State
proposes to introduce in support of its construction of         of Arizona, that being the approximate amount of water
Paragraph (b) of Article III, of the Compact, in the            then in use within the State of Arizona from the Gila
actions to be brought in the future, testimony to the           River and its tributaries, and it was agreed that in view of
following effect by those who in 1922 were connected            the fact that no appropriation or allocation of water had
with the negotiation of the Compact:                            otherwise been made by said compact directly to any
                                                                State, the one million acre-feet for the State of Arizona
     "The representatives of all the States and the United      should be included in said compact by an allocation for
States except the Arizona delegation were in agreement          the Lower Basin. And it was further agreed that a
[*350] as to the definition of the Colorado River System,       supplemental compact between the States, California,
including the [***1302] Gila River and its tributaries,         Nevada and Arizona should be adopted and that such
and as to the division proposed, which substantially            supplemental compact should so provide.
apportioned the waters of the Colorado River at Lee
Ferry, the point selected as dividing the Upper Basin                "The Arizona delegation stated that if it were agreed
from the Lower Basin. The Arizona delegation refused            by all the representatives of the several States and of the
and declined to accept the proposed compact because of          United States that said million acre-feet should be for the
the inclusion of the Gila River and its tributaries without     exclusive benefit of the State of Arizona to provide
any compensating provision to the State of Arizona in           compensation to Arizona on account of the inclusion of
lieu of the waters thereof, which had already been              the waters of the Gila River and its tributaries in said
appropriated and in which no other State could have any         compact, they would accept said compact, otherwise they
interest on account of the further fact that the waters of      would refuse to accept said compact. It was thereupon
the Gila River and its tributaries enter the Colorado River     agreed by all representatives of all the States and of the
at Yuma, at a point so far down stream and of such low          United States, participating in said negotiations and
elevation that it was and is impossible to put the waters       conferences, that the waters apportioned by Article III (b)
thereof to beneficial use in the United States after they       of said compact were for the sole and exclusive use and
reach the main stream of the Colorado River. Hence, the         benefit of the State of Arizona, and it was further agreed
Arizona delegation pointed out that the conference was          that a supplemental compact between the States of
discussing something which had already been disposed of         California, Nevada and Arizona should be adopted and
and in any event could not concern any State, other than        that such supplemental compact should so provide.
Arizona. Several days elapsed in a discussion between           Thereupon said compact was signed by the
the said representatives of this problem before a solution      representatives of the several States and of the United
was found. The problem was finally thought solved by            States."
adding subdivision (b) of Article III to the compact as
finally approved by said representatives which reads as             Third. In this suit Arizona asserts rights under the
follows:                                                        Boulder Canyon Project Act of 1928, not under the
                                                                Colorado River Compact, which she has refused to ratify.
      "'(b) In addition to the apportionment in paragraph       [*352] [HN3] That Act approved the Colorado River
(a), the Lower Basin is hereby given [**739] the right to       Compact [***1303] subject to certain limitations and
increase its beneficial consumptive use of such waters by       conditions, the approval to become effective upon the
                                                                                                                    Page 9
                                         292 U.S. 341, *352; 54 S. Ct. 735, **739;
                                      78 L. Ed. 1298, ***1303; 1934 U.S. LEXIS 714

ratification of the Compact, as so modified, by the              (a), the lower basin is hereby given the right to increase
legislatures of California and at least five of the six other    its beneficial consumptive [**740] use of such waters
states. It was so ratified. Arizona claims that § 4 (a) of       by 1,000,000 acre-feet per annum."
that Act imposing limitations on the use of water by
California was intended for her benefit; that § 4 (a)                 "(d) The States of the upper division [Colorado, New
embodies by reference Article III (b), among others, of          Mexico, Utah and Wyoming] will not cause the flow of
the Compact for the purpose of defining the limitation           the river at Lee Ferry to be depleted below an aggregate
and that the proper interpretation of Article III (b) will be,   of 75,000,000 acre-feet for any period of 10 consecutive
therefore, essential to a determination of Arizona's rights      years reckoned in continuing progressive series beginning
under the statute; that, read in the light of other sections     with the first day of October next succeeding the
of the Compact, Article III (b) is ambiguous; and that the       ratification of this compact."
testimony sought to be perpetuated will be material and
                                                                     [HN6] Article III does not in terms apportion as
admissible in removing the ambiguity. The elaborate
                                                                 between the upper and the lower basin the surplus waters
argument in support of these contentions appears to be, in
                                                                 in excess of the amounts specifically allocated. But it
substance, as follows:
                                                                 recognizes in Paragraph (c) that there may be "surplus"
    1. Colorado River Compact, apportions the water of           waters in the River, applicable to the lower basin. 7
the Colorado River System between the upper and the
                                                                        7 Paragraph (c) provides: "If, as a matter of
lower basin. [HN4] By Article II it defines the terms
                                                                        international comity, the United States of
used:
                                                                        America, shall hereafter recognize in the United
     "(a) The term 'Colorado River system' means that                   States of Mexico any right to the use of any
portion of the Colorado River and its tributaries within                waters of the Colorado River system, such waters
the United States of America."                                          shall be supplied first from the waters which are
                                                                        surplus over and above the aggregate of the
     "(b) The term 'Colorado River Basin' means all of the              quantities specified in paragraphs (a) and (b); and
drainage area of the Colorado River system and all other                if such surplus shall prove insufficient for this
territory within the United States of America to which the              purpose, then, the burden of such deficiency shall
waters of the Colorado River system shall be beneficially               be equally borne by the upper basin and the lower
applied."                                                               basin, and whenever necessary the States of the
                                                                        upper division shall deliver at Lee Ferry water to
     "(g) The term 'Lower Basin' means those parts of the               supply one-half of the deficiency so recognized in
States of Arizona, California, Nevada, New Mexico and                   addition to that provided in paragraph (d).
Utah within and from which waters naturally drain into
the Colorado River system below Lee Ferry and also all               2. [HN7] The Colorado River Compact does not
parts of said States located without the drainage area of        purport to apportion between the States of the lower basin
the Colorado River system which are now or shall                 [***1304] the share of each in the waters of the
hereafter be beneficially served by waters diverted from         Colorado River System; [*354] but Boulder Canyon
the system below Lee Ferry."                                     Project Act makes some provision for such
                                                                 apportionment. By § 4 (a) it provides that:
    [*353] [HN5] By Article III, the apportionment is
made:                                                                 "California, by act of its legislature, shall agree
                                                                 irrevocably and unconditionally with the United States
    "(a) There is hereby apportioned from the Colorado           and for the benefit of the States of Arizona, Colorado,
River system in perpetuity to the upper basin and to the         Nevada, New Mexico, Utah and Wyoming, as an express
lower basin, respectively, the exclusive beneficial              covenant and in consideration of the passage of this Act,
consumptive use of 7,500,000 acre-feet of water per              that the aggregate annual consumptive use (diversions
annum, which shall include all water necessary for the           less returns to the river) of water of and from the
supply of any rights which may now exist."                       Colorado River for use in the State of California,
                                                                 including all uses under contracts made under the
    "(b) In addition to the apportionment in Paragraph           provisions of this Act and all water necessary for the
                                                                                                                     Page 10
                                         292 U.S. 341, *354; 54 S. Ct. 735, **740;
                                      78 L. Ed. 1298, ***1304; 1934 U.S. LEXIS 714

supply of any rights which may now exist, shall not              of the Compact plus one-half [**741] of the "surplus
exceed four million four hundred thousand acre-feet of           waters unapportioned by said compact"; that § 4 (a)
the waters apportioned to the lower basin States by              declares that such uses by California are "always to be
paragraph (a) of Article III of the Colorado River               subject to the terms of said compact"; that California
compact, plus not more than one-half of any excess or            claims that, in addition to the waters already mentioned,
surplus waters unapportioned by said compact, such uses          she is entitled, as one of the parties to the Compact, to
always to be subject to the terms of said compact."              draw upon the Article III (b) waters; and that, acting upon
                                                                 this assumption, the Secretary of the Interior has already
    And that [HN8] section authorizes Arizona,                   contracted with California users for delivery of 5,362,000
California and Nevada to enter into an agreement which,          acre-feet of water per annum from the main [*356]
among other things, shall provide:                               stream of the Colorado River, though this water is not yet
                                                                 being delivered; whereas [***1305] Arizona contends
     "(1) That of the 7,500,000 acre-feet annually               that by a proper interpretation of Article III (b) California
apportioned to the lower basin States by paragraph (a) of        is excluded from all the waters thereunder in favor of
Article III of the Colorado River compact, there shall be        Arizona.
apportioned to the State of Nevada 300,000 acre-feet and
to the State of Arizona 2,800,000 acre-feet for exclusive             5. In support of the contention that Article III (b) is
beneficial consumptive use in perpetuity, and (2) that the       ambiguous, Arizona points out that, whereas the Compact
State of Arizona may annually use one-half of the excess         awards to the lower basin, in the aggregate, 8,500,000
or surplus water unapportioned by the Colorado River             acre-feet of water, 8 Article III (d) of the Compact shows
compact, and (3) that the State of Arizona shall have the        that only 7,500,000 of this is to come from the main
exclusive beneficial use of the Gila River and its               stream of the Colorado River, since that section provides:
tributaries within the boundaries of said State . . . (7) said
agreement to take effect upon the ratification of [*355]                8 That is the 7,500,000 of the Article III (a)
the Colorado River compact by Arizona, California and                   waters and the 1,000,000 of the Article III (b)
Nevada."                                                                waters.

     3. Arizona refused to ratify the Colorado River                  "The States of the upper division will not cause the
Compact, and the authority conferred upon Arizona,               flow of the River at Lee Ferry to be depleted below an
Nevada and California by the Boulder Canyon Project              aggregate of 75,000,000 acre-feet for any period of 10
Act to enter into an agreement for apportioning the              consecutive years reckoned in continuing progressive
waters has not been acted on. But California bound itself,       series beginning with the first day of October next
by the Act of its legislature, March 16, 1929, to the            succeeding the ratification of this compact."
limitation of 4,400,000 acre-feet, plus one-half of the
surplus; Arizona claims that the limitation on California's           It argues that the 75,000,000 was doubtless arrived at
use must have been enacted for the benefit solely of             through multiplying by ten the 7,500,000 acre-feet per
Arizona, since geographically she alone could use waters         annum apportioned to the lower basin under Article III
in the lower basin which California may not use; and             (a); that though the lower basin is entitled to 8,500,000
that, because it is embodied in a statute, the limitation        acre-feet, it can only call on the upper basin to release
imposed by Congress on California's use confers rights           7,500,000 acre-feet from the main stream; that the only
upon Arizona, although she failed to sign either the             other waters below Lee Ferry which are available to the
principal or the subsidiary compact.                             lower basin come from tributaries entirely in Arizona;
                                                                 that these waters enter the Colorado River at a point so
     4. In support of the contention that Article III (b) of     far south that they could not be used in the United States
the Compact has a bearing on the interpretation of the           after they enter the Colorado; and they have in fact been
limitation of § 4 (a) of the Act, Arizona points to the fact     appropriated for use in Arizona; that, therefore, what has
that while the Boulder Canyon Project Act makes no               in terms been awarded to the lower basin is in practical
mention of the 1,000,000 acre-feet assigned to the lower         effect available only to that part of the lower basin
basin by Article III (b) of the Compact, § 4 (a) of the Act      constituted by Arizona.
limits California, in terms, to 4,400,000 acre-feet of the
waters apportioned to the lower basin under Article III (a)          [2]Fourth. It is clear that the meaning of the
                                                                                                                    Page 11
                                         292 U.S. 341, *356; 54 S. Ct. 735, **741;
                                      78 L. Ed. 1298, ***1305; 1934 U.S. LEXIS 714

Compact, considered merely as a contract, can never be                  Act.
material in the contemplated litigation, since Arizona
refused to ratify [*357] the Compact. Arizona rests her                [3]Sixth. The considerations to which Arizona calls
rights wholly upon the Acts of Congress and of                   attention do not show that there is any ambiguity in
California. Arizona claims that California's construction        Article III (b) of the Compact. Doubtless, the anticipated
of § 4 (a) of the statute would allow her water which            physical sources of the waters which combine to make
under the Compact has been assigned to Arizona, and that         the total of 8,500,000 acre-feet are as Arizona contends,
a conflict is thus raised between the statute and the            but neither Article III (a) nor (b) deal with the waters on
Compact which the suggested testimony is competent to            the basis of their source. Paragraph (a) apportions waters
resolve. But the resolution of this alleged conflict can         "from the Colorado River system," i. e., the Colorado and
never be material to any case based on the Compact               its tributaries, and (b) permits an additional use "of such
considered as contract, since Arizona neither has nor            waters." The Compact makes an apportionment only
claims any contractual right.                                    between the upper and lower basin; the apportionment
                                                                 among the states in each basin being left to later
     Fifth. Nor does Arizona show that Article III (b) of        agreement. Arizona is one of the states of the lower basin
the Compact is relevant to an interpretation of § 4 (a) of       and any waters useful to her are by that fact useful to the
the Boulder Canyon Project Act upon which she bases              lower basin. But the fact that they are solely useful to
her claim of right. It may be true that the Boulder              Arizona, or the fact that they have been appropriated by
Canyon Project Act leaves in doubt the apportionment             her, does not contradict the intent clearly expressed in
among the states of the lower basin of the waters to             Paragraph (b) (nor the rational character thereof) to
which the lower basin is entitled under Article III (b).         apportion the 1,000,000 acre-feet to the states of the
But [HN9] the Act does not purport to apportion among            lower basin and not specifically to Arizona alone. It may
the states of the lower basin the waters to which the lower      be that, in apportioning among the states the 8,500,000
basin is entitled under the Compact. The Act merely              acre-feet allotted to the lower basin, Arizona's share of
places limits on California's use of waters under Article        waters from the main stream will be affected by the fact
III (a) and of surplus waters; and it is "such" uses which       that certain of the waters assigned to the lower basin can
are "subject to the terms of said compact."                      be used only by her; but that is a matter entirely outside
                                                                 the scope of the Compact.
     There can be no claim that Article III (b) is relevant
in defining surplus waters under § 4 (a) of the Act; for              [HN10] The provision of Article III (b), like that of
both Arizona and California apparently consider the              Article III (a) is entirely referable to the main intent of
waters under Article III (b) as apportioned. 9 It is true that   the [*359] Compact which was to apportion the waters
Arizona alleges (not in the bill however but in her brief)       as between the upper and lower basins. The effect of
that she "hopes to be able to show in the case hereafter to      Article III (b) (at least in the event that the lower basin
be brought" by evidence of Congressional Committee               puts the 8,500,000 acre-feet of water to beneficial uses) is
hearings and other legislative history that the failure in       to preclude any claim by the upper basin that any part of
the statute to apportion the 1,000,000 acre-feet of waters       the 7,500,000 acre-feet released at Lee Ferry to the lower
was due to an [***1306] understanding by Congress                basin may be considered as "surplus" because of Arizona
that Article [*358] III (b) of the Compact had already           waters which are available to the lower basin alone.
assigned these waters to Arizona and that the limitation         Congress apparently expected that a complete
on California was passed in the light of this                    apportionment of the waters among the States of the
understanding. This hope if fulfilled would not make             lower basin would be made by the sub-compact which it
Article III (b) relevant. The allegation is, not that            authorized Arizona, California and Nevada to make. If
Congress incorporated Article III (b) into the Act; it is        Arizona's rights are in doubt it is, in large part, because
that Congress understood that Article III [**742] (b) had        she has not entered into the Colorado River Compact or
allotted all the waters therein to Arizona.                      into the suggested sub-compact.

        9 The Secretary of the Interior in his brief seems            [4]Seventh. Even if the construction to be given
        to be of the opinion that waters under Article III       Paragraph (b) of the Compact were relevant to the
        (b) might be surplus waters under § 4 (a) of the         interpretation of any provision in the Boulder Canyon
                                                                                                                 Page 12
                                        292 U.S. 341, *359; 54 S. Ct. 735, **742;
                                     78 L. Ed. 1298, ***1306; 1934 U.S. LEXIS 714

Project Act and such provision were ambiguous, the             v. Thompson, 263 U.S. 197, 223; Cook v. United States,
evidence sought to be perpetuated is not of a character        288 U.S. 102. See Yu, The Interpretation of Treaties, pp.
which would be competent to prove that Congress                138, 192; Chang, The Interpretation of Treaties, p. 59 et
intended by § 4(a) of the 1928 Act to exclude California       seq. But that rule has no application to oral statements
entirely from the waters allotted by Article III (b) to the    made by those engaged in negotiating the treaty which
states of the lower basin and to reserve all of those waters   were not embodied in any writing and were not
to Arizona. The evidence sought to be perpetuated is not       communicated to the government of the negotiator or to
documentary. It is testimony as to what divers persons         its ratifying body. There is no allegation that the alleged
said six years earlier while negotiating a compact with a      agreement between the negotiators made in 1922 was
view to preparing the proposal for submission to the           called to the attention of Congress in 1928 when enacting
legislatures of the seven States and to Congress for           the Act; nor that it was called to the attention of the
approval -- a proposal which Arizona has not ratified and      legislatures of the several States.
which the six other States and Congress did ratify, as
later modified, by statutes enacted in 1928 and 1929. The           As Arizona has failed to show that the testimony
Boulder Canyon Project Act rests, not upon what was            which she seeks to have perpetuated could conceivably
thought or said in 1922 by negotiators of the Compact,         be material or competent evidence bearing upon the
but upon its ratification by the six States.                   construction to be given Article III, Paragraph (b), in any
                                                               action which may hereafter be brought, the motion for
     [***1307] It has often been said that [HN11] when         leave to file the bill should be denied. We have no
the meaning of a treaty is not clear, recourse may be had      occasion to determine whether leave to file the bill should
to the negotiations, [*360] preparatory works, and             be denied also because [**743] the United States was
diplomatic correspondence of the contracting parties to        not made a party and has not consented to be sued.
establish its meaning. Nielsen v. Johnson, 279 U.S. 47,
52; compare United States v. Texas, 162 U.S. 1; Terrace            Leave to file bill denied.
                                                                                                                    Page 1

                            MARGUERITE D. BLAIR et al. v. STATE TAX ASSESSOR

                                               Law Docket No. Sag-83-379

                                           Supreme Judicial Court of Maine

                                          485 A.2d 957; 1984 Me. LEXIS 856

                                              September 4, 1984, Argued
                                              December 13, 1984, Decided

DISPOSITION:             [**1] The entry is: Judgment          granted in favor of the assessor.
affirmed.
                                                               CORE TERMS: retirement allowances, retirement
CASE SUMMARY:                                                  benefits, gross income, taxation, exemption, adjusted,
                                                               different meaning, taxable income, repeal, assessor's,
                                                               state income tax, income tax, implied repeal, contractual,
PROCEDURAL POSTURE: Plaintiff certified class of               retirement, repealed, earlier act, state income, subject
taxpayers sought review of the decision of the Superior        matter, summary judgment, employees' contributions,
Court, Sagadahoc County (Maine), which granted                 term used, pertinent part, personal exemptions,
defendant state tax assessor's motion for summary              modifications,    instituted,  tax-exempt,     exempted,
judgment in the certified class's action that sought review    semantic, bare
of the assessor's determination that Maine state retirement
benefits and allowances in excess of employees'                LexisNexis(R) Headnotes
contributions were subject to state income tax.

OVERVIEW: The lower court granted the assessor's
summary judgment motion after deciding that by
enactment of the state income tax in 1969, the legislature     Tax Law > State & Local Taxes > Administration &
impliedly repealed Me. Rev. Stat. Ann. tit. 5, § 1003          Proceedings > General Overview
(Supp. 1984), which exempted state retirement benefits         [HN1] Me. Rev. Stat. Ann. tit. 36, § 5102(11) (Supp.
from taxation. The court held that the enactment of the        1984) provides in part: Any other term used in this part
state income tax system in 1969 did in fact repeal by          has the same meaning as when used in a comparable
implication the exempt status of state retirement benefits.    context in the laws of the United States relating to federal
There was no merit in the certified class's contention that    income taxes, unless a different meaning is clearly
there was no inconsistency between the statutes on which       required.
to premise an implied repeal of § 1003. The legislature in
1969 enacted a comprehensive system of state income            Pensions & Benefits Law > Governmental Employees >
taxation that pre-empted the entire area, and the court        State Pensions
noted that it had to give effect to the later statute as the   Tax Law > State & Local Taxes > Administration &
most recent expression of the legislative will.                Proceedings > General Overview
                                                               Tax Law > State & Local Taxes > Income Tax >
OUTCOME: The court affirmed the summary judgment
                                                                                                                    Page 2
                                       485 A.2d 957, *; 1984 Me. LEXIS 856, **1

Individuals, Estates & Trusts > General Overview               art. 9, § 9.
[HN2] Me. Rev. Stat. Ann. tit. 5, § 1003 (Supp. 1984)
states in part: The right of a person to a retirement          COUNSEL: Attorney for the Plaintiffs: Roger S. Golin,
allowance, such retirement allowance itself, to the return     Esq. (orally). Bath.
of contributions, any optional benefit or death benefit or
any other right accrued or accruing to any person under        Attorneys for the Defendant: James E. Tierney, Esq.
this chapter, and the moneys in the various funds created      Attorney General. Crombie J. D. Garrett, Esq. (orally).
thereby, shall be exempted from any state, county or           Jerome S. Matus, Esq. Assistant Attorneys General.
municipal tax in the State.                                    Bureau of Taxation. Augusta.

                                                               JUDGES: Glassman, J. wrote the opinion. McKusick,
Pensions & Benefits Law > Governmental Employees >             C.J., and Nichols, Roberts, Violette, Wathen, Glassman,
State Pensions                                                 and Scolnik, JJ.
Tax Law > Federal Income Tax Computation >
Dependent & Personal Exemptions (IRC secs. 151-153)            OPINION BY: GLASSMAN
Tax Law > Federal Taxpayer Groups > Individuals >
Adjustments to Income (IRC secs. 62, 71, 215, 911) >           OPINION
Adjusted Gross Income (IRC sec. 62)
[HN3] Me. Rev. Stat. Ann. tit. 36, § 5111 imposes a tax             [*958] The plaintiffs, 1 a certified class consisting
for each taxable year on the entire taxable income of          of all persons who receive Maine state retirement
every resident individual of this state. Me. Rev. Stat.        allowances and are subject to income taxation by the
Ann. tit. 36, § 5121 (1978) defines "entire taxable            State of Maine, appeal from an order of the Superior
income" as: federal adjusted gross income as defined in        Court, Sagadahoc County, granting the defendant's
the laws of the United States with the modifications and       motion for summary judgment. We agree with the
less the deductions and personal exemptions provided in        decision of the Superior Court and affirm the judgment.
this chapter. The Internal Revenue Code defines adjusted
gross income as gross income minus enumerated                          1      The case was certified as a class action
deductions, none of which apply to the retirement                      pursuant to M.R. Civ. P. 23 on July 11, 1980. The
benefits in excess of employees' contributions at issue                court's order certified the class to be "all persons
here. I.R.C. § 62. The Code clearly includes income                    receiving Maine State Retirement benefits who
derived from pensions and retirement allowances in an                  are subject to income taxation by the State of
individual's federal gross income. I.R.C. § 61(a)(11).                 Maine, not excluding those who are not presently
                                                                       taxed on said retirement benefits under federal
                                                                       law."
Governments > Legislation > Expirations, Repeals &
Suspensions                                                         [**2] Following the state tax assessor's decision on
[HN4] The court will find a repeal by implication when a       the petition of the plaintiffs for reconsideration, the
later enactment encompasses the entire subject matter of       plaintiffs instituted this action against the assessor in the
an earlier act, or when a later statute is inconsistent with   Superior Court. The plaintiffs sought review of the
or repugnant to an earlier statute. When a later statute       assessor's determination that Maine state retirement
does not cover the earlier act in its entirety, but is         benefits and allowances in excess of employees'
inconsistent with only some of its provisions, a repeal by     contributions were subject to state income tax. The
implication occurs to the extent of the conflict.              complaint also alleged the plaintiffs' federal and state
                                                               constitutional rights to due process, freedom of contract,
                                                               and equal protection had been violated by the assessor's
Constitutional Law > Congressional Duties & Powers >           decision.
Contracts Clause > General Overview
Governments > State & Territorial Governments >                    Both parties moved for summary judgment, neither
Legislatures                                                   presenting issues of fact for resolution. The Superior
[HN5] The legislature shall never, in any manner,              Court granted the defendant's motion, deciding that by
suspend or surrender the power of taxation. Me. Const.         enactment of the state income tax in 1969, the legislature
                                                                                                                    Page 3
                                     485 A.2d 957, *958; 1984 Me. LEXIS 856, **2

impliedly repealed 5 M.R.S.A. § 1003 (Supp. 1984),                    attachment, assignment or other process." 5
which exempted state retirement benefits from taxation.               M.R.S.A. § 1003 (Supp. 1984).
The court found that the "enactment of a comprehensive
system of taxation 'completely covers' the subject matter          The precise question presented is whether enactment
of state income taxation and its exemptions." The court       of the state income tax system in 1969 repealed by
further found that by adopting the specific federal           implication the exempt status of state retirement benefits.
definition of "income," the legislature intended to repeal    [HN3] Title 36 M.R.S.A. § 5111 imposes a tax "for each
section 1003. Additionally, the court [**3] held that         taxable year on the entire taxable income of every
subsection 11 of 36 M.R.S.A. § 5102 bars reference to 5       resident individual of this State." 36 M.R.S.A. § 5111
M.R.S.A. § 1003 to support a different meaning for a          (Supp. 1984). Section 5121 of title 36 defines "entire
term used in the income tax statutes. 2 Finally, the court    taxable income" as:
found the [*959] plaintiffs' constitutional and contract
claims to be without merit.                                             federal adjusted gross income as defined
                                                                      in the laws of the United States with the
       2 [HN1] Subsection 11 provides in pertinent                    modifications [**5]        and less the
       part:                                                          deductions and personal exemptions
                                                                      provided in this chapter.
                   11. Other terms. Any other
               term used in this Part has the same            36 M.R.S.A. § 5121 (1978). The Internal Revenue Code
               meaning as when used in a                      defines adjusted gross income as gross income minus
               comparable context in the laws of              enumerated deductions, none of which apply to the
               the United States relating to federal          retirement benefits in excess of employees' contributions
               income taxes, unless a different               at issue here. See I.R.C. § 62. The Code clearly includes
               meaning is clearly required.                   income derived from pensions and retirement allowances
                                                              in an individual's federal gross income. I.R.C. §
       36 M.R.S.A. § 5102, subsec. 11 (Supp. 1984).           61(a)(11). None of the modifications, deductions, or
                                                              personal exemptions provided by chapter 805 of title 36
     This case involves the continued vitality of the first   involves state retirement allowances. See 36 M.R.S.A. §§
paragraph of 5 M.R.S.A. § 1003, originally enacted in         5122, 5123, 5124-A, 5125, 5126 (1978 & Supp. 1984).
essentially its present form in 1942, when the Maine state
retirement system was instituted. 3 [HN2] The section              [HN4] This court will find a repeal by implication
states in pertinent part:                                     when a later enactment encompasses the entire subject
                                                              matter of an earlier act, or when a later statute is
           The right of a person to a retirement              inconsistent with or repugnant to an earlier statute. State
       allowance, such retirement allowance                   v. London, 156 Me. 123, 127, 162 A.2d 150, 152 (1960);
       itself, to the return of contributions, any            accord State ex rel. Tierney v. Ford Motor Co., 436 A.2d
       optional benefit or death benefit or any               866, 871 (Me. 1981). When a later statute does not cover
       other right [**4] accrued or accruing to               the earlier act in its entirety, but is inconsistent with only
       any person under this chapter, and the                 some of its provisions, a repeal by implication occurs
       moneys in the various funds created                    [**6] to the extent of the conflict. State v. London, 156
       thereby, shall be exempted from any state,             Me. at 128, 162 A.2d at 153.
       county or municipal tax in the State . . . .
                                                                   We find no merit in the plaintiffs' contention that
5 M.R.S.A. § 1003 (Supp. 1984).                               there is no inconsistency between the statutes on which to
                                                              premise an implied repeal of section 1003. Relying on
       3     Section 1003 was amended in 1983 by the          subsection 11 of 36 M.R.S.A. § 5102, the plaintiffs claim
       addition of a second paragraph providing for the       that section 1003 "clearly requires" a different meaning
       availability of state retirement allowances "to        than that ascribed to "entire taxable income" by the laws
       satisfy child support obligations otherwise            of the United States. We agree with the Superior Court's
       enforceable by execution, garnishment,                 holding that the subsection 11 language "unless a
                                                                                                                    Page 4
                                     485 A.2d 957, *959; 1984 Me. LEXIS 856, **6

different meaning is clearly required" applies only to the     comprehensive system of state income taxation that
tax statutes in title 36 M.R.S.A. 4 The legislature's          pre-empted the entire area, wherever in the revised statute
adoption in section 5121 of the federal definition of          reference may be found.
"adjusted gross income," which incontrovertibly includes
retirement allowances, is patently contrary to the 1942             This court has never favored finding the implied
exemption.                                                     repeal of one statute by another and will not uphold such
                                                               a result in a dubious case. State v. London, 156 Me. at
       4 We do not, however, perceive subsection 11            126, 162 A.2d at 152; accord State ex rel. Tierney v.
       to command our passive acceptance of all                Ford Motor Co., 436 A.2d at 871. In this case there is no
       interpretations of language in the federal statute as   question that the adoption of the federal definition of
       pronounced by federal tribunals. Central Maine          "adjusted gross income" is clearly inconsistent with the
       Power Co. v. Public Utilities Commission, 382           1942 exemption from state tax in section 1003. 5 We
       A.2d 302, 320 (Me. 1978).                               therefore give effect to the later statute as the most recent
                                                               expression of the legislative will. State v. London, 156
     [**7] In Tiedemann v. Johnson, this court discussed       Me. at 128-29, 162 A.2d at 153-54 (quoting Knight v.
the legislative intent behind the adoption of federal          Aroostook River Railroad Co., 67 Me. 291, 293 (1877)).
adjusted gross income as the standard by which "entire
taxable income" would be measured in Maine,                           5 Our decision has no effect on the remaining
concluding:                                                           provisions of section 1003; the section is repealed
                                                                      by implication only to the extent of the conflict
            [*960] The Legislature intended to                        with the 1969 enactment.
       resolve, a priori, semantic conflicts such
       as those suggested by the bare words of                       [**9] The plaintiffs argue that a repeal of section
       the statute. As evidence of this intent, the            1003 would amount to a breach of contract, on the theory
       Legislature did not undertake creation of a             that the tax-exempt status of their retirement benefits is
       unique or complicated income tax scheme.                an essential term of their "contractual" retirement plan
       Nor did it provide the vast administrative              arrangement with the state. They also argue that an
       machinery which would be necessary to                   implied repeal of section 1003 deprives the plaintiffs of
       supply the interpretive and investigative               property without due process and violates the plaintiffs'
       functions of the Internal Revenue Service.              equal protection right. Even if we were to find the
       We think . . . that our Legislature sought              exemption to be a contractual right of state employment,
       to     foreclose    the    necessity     for            the legislative grant of such a right would violate the
       determination of the "source, nature or                 Maine Constitution, which states: [HN5] "The
       composition of the funds."                              Legislature shall never, in any manner, suspend or
                                                               surrender the power of taxation." Me. Const. art. 9, § 9.
 316 A.2d 359, 364 (Me. 1974) (quoting Katzenberg v.           We cannot presume the legislature would intentionally
Comptroller of the Treasury, 263 Md. 189, 282 A.2d 465,        enact a statute that would contract away the power to tax
473 (1971)).                                                   on a permanent basis. We hold that the plaintiffs have no
                                                               contractual entitlement to tax-exempt retirement benefits;
     The plaintiffs contend that our determination of the      we therefore need not reach the plaintiffs' constitutional
legislature's intent in Tiedemann applies only to title 36     challenges.
and does not affect the exemptions of 5 M.R.S.A. § 1003.
We find the plaintiffs' construction of "semantic conflicts        The entry is:
such as those suggested by the bare words [**8] of the
                                                                   Judgment affirmed.
statute" too narrow. The legislature in 1969 enacted a
                                                                                                                     Page 1

                    W. A. BOLTON, Respondent, v. TERRA BELLA IRRIGATION DISTRICT,
                                                  Appellant

                                                         Civ. No. 215

                   COURT OF APPEAL OF CALIFORNIA, FOURTH APPELLATE DISTRICT

                               106 Cal. App. 313; 289 P. 678; 1930 Cal. App. LEXIS 525

                                                   June 9, 1930, Decided

SUBSEQUENT HISTORY:             [***1] A Petition for a          free from the lien of the district assessments. The court
Rehearing of this Cause was Denied by the District Court         determined that the purchaser acquired the land by virtue
of Appeal on June 30, 1930, and a Petition by                    of Cal. Pol. Code § 3785, which provided that a deed
Respondent to have the Cause Heard in the Supreme                could not be delivered until redemption was made of all
Court, after Judgment in the District Court of Appeal,           taxes of any previous delinquency and that such deed was
was Denied by the Supreme Court on August 7, 1930.               subject to the provisions of Cal. Pol. Code § 3787. The
                                                                 court found that § 3787 provided that title would pass by
PRIOR HISTORY: APPEAL from a judgment of the                     the deed and that district taxes were an exception to the
Superior Court of San Diego County. S. M. Marsh,                 clear title. The court concluded that aside from § 3787,
Judge.                                                           there was no statute providing that an unencumbered
                                                                 deed passed to the purchaser from the tax sale and in the
DISPOSITION: Reversed.                                           absence of statutes providing otherwise, the deed was
                                                                 subject to all existing liens, including the district's
CASE SUMMARY:                                                    assessment liens.

                                                                 OUTCOME: The court reversed a judgment against the
PROCEDURAL POSTURE: Appellant irrigation                         irrigation district's lien on property acquired by the
district challenged an order from the Superior Court of          purchaser from a tax sale.
San Diego County (California), which in respondent
purchaser's partition action against his partner and the         CORE TERMS: deed, irrigation district, levied, state
district, adjudicated that the district had no lien upon land    taxes, tax deed, tax sales, delinquent, county taxes,
acquired by the purchaser and his partner in a tax sale.         legislative intent, encumbrances, collected, purchaser,
                                                                 delegated, convey, public agency, tax collector, legal
OVERVIEW: The purchaser acquired land in a tax sale              rights, statutory construction, conveyed, quiet, municipal,
and commenced an action against his partner and the              general laws, state government, power of taxation,
irrigation district seeking, inter alia, to quiet his title to   equitable relief, real property, incorporating, irrigation,
the property as against the district's lien for the prior        grantee, annual
owner's delinquencies in the payment of assessments.
The lower court found that the district had no lien against      LexisNexis(R) Headnotes
the property. On appeal, the court reversed the judgment
holding that the purchaser did not take title to the land
                                                                                                                     Page 2
                                           106 Cal. App. 313, *; 289 P. 678, **;
                                             1930 Cal. App. LEXIS 525, ***1

Governments > State & Territorial Governments >                 having no personal interest in it, or with its concerns, and
Legislatures                                                    only acting as organs of the state in effecting a great
Tax Law > State & Local Taxes > Administration &                public improvement, it is a public corporation.
Proceedings > Tax Liens
Tax Law > State & Local Taxes > Real Property Tax >
                                                                Tax Law > State & Local Taxes > Administration &
Assessment & Valuation > General Overview
                                                                Proceedings > Assessments
[HN1] Section 40 of the Irrigation District Act provides
                                                                Tax Law > State & Local Taxes > Administration &
that the assessment upon land is a lien against the
                                                                Proceedings > Tax Liens
property assessed from and after the first Monday in
                                                                Tax Law > State & Local Taxes > Sales Tax > General
March for any year. County taxes also become a lien on
                                                                Overview
the first Monday in March in each year. Cal. Pol. Code §
                                                                [HN3] Where a statute makes the state taxes a superior
3718. An irrigation district is a public agency of the state.
                                                                lien to municipal taxes or local assessments, or where
The legislature can without referring the matter to local
                                                                both classes of taxes are to be collected in the same
authority, institute and carry out projects, having
                                                                manner and by the same proceedings, those of the latter
purposes similar to those of an irrigation district. The
                                                                class will be cut off and their lien extinguished by a sale
legislature has power to determine how revenues shall be
                                                                for state taxes in which the local taxes or assessments
levied and collected, whether by the state itself or by
                                                                might have been included. But otherwise the purchaser
local legislative or administrative agencies. The county is
                                                                will take subject to existing taxes of the inferior class.
an agency of the state for performing certain functions of
government. The legislature has likewise provided for,
and authorized, irrigation districts to carry out another       Governments > Public Improvements > Assessments
function of government.                                         Governments > State & Territorial Governments >
                                                                Legislatures
                                                                Tax Law > State & Local Taxes > Real Property Tax >
Governments > Local Governments > Elections
                                                                General Overview
Governments > Public Improvements > General
                                                                [HN4] An irrigation district assessment, although it is an
Overview
                                                                annual charge, it is an assessment for benefits. The
Tax Law > State & Local Taxes > Real Property Tax >
                                                                legislature is authorized to apportion the amount of
Assessment & Valuation > General Overview
                                                                money to be raised in order to meet the expenses of an
[HN2] For the purpose of meeting the cost of acquiring
                                                                improvement according to either the ad valorem or
property, the district is authorized, upon the vote of a
                                                                assessment according to benefits plan, or to adopt any
majority of its electors, to issue its bonds, and these
                                                                principle of apportionment which might be devised under
bonds and the interest thereon are to be paid by revenues
                                                                the sovereign power of taxation.
derived under the power of taxation, and for which all the
real property in the district is to be assessed. Under this
power of taxation, one of the highest attributes of             Real Property Law > Financing > Secondary Financing
sovereignty, the title of the delinquent owner of the real      > Lien Priorities
estate assessed, may be divested by sale, and power is          Tax Law > State & Local Taxes > Administration &
conferred upon the board of directors to establish              Proceedings > Tax Liens
equitable by-laws, rules, and regulations for the               Tax Law > State & Local Taxes > Real Property Tax >
distribution and use of water among the owners of said          General Overview
lands, and generally to perform all such acts as shall be       [HN5] A lien for unpaid taxes or assessments is superior
necessary to fully carry out the purpose of the act. Here       to all contract liens, whether prior or subsequent in time.
are found the essential elements of a public corporation,       But even a tax lien is not entitled to rank ahead of a
none of which pertain to a private corporation. The             preexisting mortgage or other contract lien, unless the
property held by the corporation is in trust for the public,    legislative enactment creating the tax lien has given it
and subject to the control of the state. Its officers are       priority. It is competent for the legislature to make taxes a
public officers, chosen by the electors of the district, and    paramount lien on the property of the taxpayer, the
invested with public duties. Where a corporation is             consequence being that a lien for taxes takes precedence
composed exclusively of officers of the government,             of every other lien or claim upon the property of
                                                                                                                    Page 3
                                          106 Cal. App. 313, *; 289 P. 678, **;
                                            1930 Cal. App. LEXIS 525, ***1

whatsoever kind, however created, and whether attaching        [HN8] Cal. Pol. Code § 3787 was amended to provide
before or after the assessment of taxes. But this              that the deed under Cal. Pol. Code § 3785 conveys to the
preference does not belong to the tax lien unless it is so     state the absolute title to the property described therein,
declared by statute, and a law, for example, which merely      free of all encumbrances, except any lien for taxes levied
enacts that taxes shall be a lien on real property does not    for municipal, or for irrigation, reclamation, protection,
make them a first lien.                                        flood control, public utility or other district purposes, or
                                                               for special assessments which are collected on tax-rolls,
                                                               and except any lien or assessment for other amounts
Tax Law > State & Local Taxes > Real Property Tax >            which by law are collected upon tax-rolls by or for
Collection > Tax Deeds & Tax Sales                             account of municipalities, and except interest and
[HN6] Cal. Pol. Code §§ 3764 and 3771 provide for a            penalties on the same, and other amounts which would be
sale by the tax collector direct to an individual. Cal. Pol.   paid municipalities or for their account in the event of
Code § 3785b provides the form of a deed where real            redemption of such property from sales for such taxes,
property should be sold to an individual instead of to the     assessments or other amounts, and except when the land
state and also provides that such deed should not be           is owned by the United States or this state.
delivered until redemption has been made of all taxes and
penalties of any previous tax sale or delinquency. It
further provides that the provisions of Cal. Pol. Code §§      Real Property Law > Deeds > Types > Tax Deeds
3786 and 3787 are made applicable to the deed herein           Tax Law > State & Local Taxes > Real Property Tax >
provided for.                                                  General Overview
                                                               [HN9] The phrase "such deed," with which both Cal. Pol.
                                                               Code §§ 3786 and 3787 begin, must, in the present
Real Property Law > Title Quality > General Overview           condition of the code, be understood to refer both to the
Tax Law > State & Local Taxes > Administration &               deed authorized by Cal. Pol. Code § 3785 and to that
Proceedings > Tax Liens                                        authorized by Cal. Pol. Code § 3785b.
Tax Law > State & Local Taxes > Real Property Tax >
Assessment & Valuation > General Overview
[HN7] Cal. Pol. Code § 3786 provides that the deed             Governments > Legislation > Effect & Operation >
under Cal. Pol. Code § 3785 is primary evidence of             Amendments
certain things set forth in that section. Cal. Pol. Code §     Governments > Legislation > Interpretation
3787 provides that such deed is conclusive evidence of         [HN10] When one statute by reference incorporates
certain other proceedings, and also provides what title        another, the effect is as though the wording of the
shall pass by the deed. In 1913, that portion was amended      incorporated statute had been written at length into the
to provide that taxes levied for municipal purposes should     incorporating statute, and that no subsequent amendment
be an additional exception to the clear title passed by        or repeal of the statute incorporated has any effect upon
such a deed. In 1917 that portion of § 3787 was again          the incorporating statute.
amended to include irrigation district taxes as an
additional exception, and to provide that such deed
                                                               Governments > Legislation > Interpretation
conveys to the state the absolute title to the property
                                                               Governments > Legislation > Special Acts
described therein, free of all encumbrances, except any
                                                               [HN11] It is a rule of statutory construction that the
lien of taxes levied for municipal or irrigation district
                                                               adoption in one statute, for the purpose of carrying its
purposes and except when the land is owned by the
                                                               provisions into effect, of the provisions of another statute
United States or this state.
                                                               by reference thereto, does not include subsequent
                                                               modifications of these provisions in the statute referred
Tax Law > State & Local Taxes > Administration &               to, unless a clear intent to do so is expressed. This rule is
Proceedings > Assessments                                      subject to a qualified exception in cases of the adoption
Tax Law > State & Local Taxes > Administration &               into a special act of the provisions of law then in force by
Proceedings > Tax Liens                                        virtue of general laws. In such cases, subsequent
Tax Law > State & Local Taxes > Public Utilities Tax >         modifications of the general law will be deemed to be
General Overview                                               within the intent of such adoption, so far as they are
                                                                                                                     Page 4
                                           106 Cal. App. 313, *; 289 P. 678, **;
                                             1930 Cal. App. LEXIS 525, ***1

consistent with the purposes of the particular act. A           of irrigation districts. The word includes both general
repeal of the adopted statute will not take from the            taxes and special assessments.
adopting statute the operative force of these provisions,
so far as they may be necessary to carry the later statute
                                                                Governments > State & Territorial Governments >
into effect, but these provisions will be regarded as if
                                                                Legislatures
they had been originally incorporated therein at length.
                                                                Tax Law > State & Local Taxes > Real Property Tax >
Under the same principles, any amendment of these
                                                                General Overview
provisions of the statute thus adopted, whether it be a
                                                                Tax Law > State & Local Taxes > Sales Tax > General
particular act or a general law, which so far modifies
                                                                Overview
them as to subvert the purpose of the statute by which
                                                                [HN16] Section 46 of the California Irrigation District
they were adopted, will be regarded in the same light as a
                                                                Act provides that on filing the certificates of sale with
repeal.
                                                                such county recorder the lien of the assessments vests
                                                                with the purchaser, and is only divested by the payment
Governments > Legislation > Interpretation                      to him, or to the collector for his use, of the purchase
[HN12] The main object of all statutory construction is to      money.
ascertain the legislative will, and, as it is to be assumed
that the legislature intends its acts to have effective
                                                                Governments > State & Territorial Governments >
operation, such amendments will not be construed as
                                                                Property
depriving the adopting statute of all effect, unless there is
                                                                Tax Law > State & Local Taxes > Real Property Tax >
a clear necessity for such construction.
                                                                General Overview
                                                                [HN17] The constitution and laws upon the subject of
Governments > State & Territorial Governments >                 taxing property are to be understood as referring to
Property                                                        private property and persons, and not including public
Tax Law > State & Local Taxes > Real Property Tax >             property of the state, or any subordinate part of the state
Collection > General Overview                                   government. Statutes authorizing liens on or forced sales
Tax Law > State & Local Taxes > Sales Tax > General             of property, generally, will not be held applicable to
Overview                                                        public property, unless the intention to make them so
[HN13] The provisions of Cal. Pol. Code § 3787 are, by          expressly or plainly appears.
Cal. Pol. Code § 3785b, expressly made applicable to
deeds executed by the tax collector conveying lands sold
                                                                Tax Law > State & Local Taxes > Administration &
to the state to purchasers after the five-year period of
                                                                Proceedings > General Overview
redemption. No exceptions are there noted.
                                                                [HN18] An individual must stand upon his legal rights
                                                                and cannot ask for equitable relief against taxes
Governments > Legislation > Interpretation                      authorized by the state.
[HN14] A statute should always be so construed, if
reasonably possible, as to give each part thereof the           HEADNOTES
meaning and effect, which from the act as a whole,
appears to have been intended.                                  CALIFORNIA OFFICIAL REPORTS HEADNOTES

                                                                (1) Taxation--Irrigation Districts--State Agencies. --
Tax Law > State & Local Taxes > Administration &                --An irrigation district is a public agency of the state; and
Proceedings > Assessments                                       the legislature has the power to provide for, and
Tax Law > State & Local Taxes > Administration &                authorize, irrigation districts to carry out an irrigation
Proceedings > Tax Liens                                         project, and to determine how revenues shall be levied
Tax Law > State & Local Taxes > Real Property Tax >             and collected, whether by the state itself or by local
Assessment & Valuation > General Overview                       legislative or administrative agencies.
[HN15] The word "taxes" as used in the 1917 amendment
to Cal. Pol. Code § 3787 refers to the annual assessments       (2) Id.--Tax Deeds--Priority--Legislative Intent. --
                                                                --Where an individual claiming title under a tax deed
                                                                                                                       Page 5
                                          106 Cal. App. 313, *; 289 P. 678, **;
                                            1930 Cal. App. LEXIS 525, ***1

from the county tax collector is seeking to quiet title            The facts are stated in the opinion of the court.
against assessments levied by an agency created and
empowered to levy assessments by authority delegated          COUNSEL:        Farnsworth,     Burke    &    Maddox        for
from the state, his claims must rest on his strict legal      Appellant.
rights, and these depend upon the proper interpretation of
statutory enactments, and the question of priority is one     Herbert C. Kelly for Respondent.
of legislative intent.
                                                              Hankins & Hankins, Griffin & Boone, A. L. Cowell and
(3) Id.--Statutory Construction--Reading Sections             Charles L. Childers, as Amici Curiae.
Together. -- --In giving effect to the plain intent of the
legislature it is necessary to read the various code          JUDGES: BARNARD, J. Marks, Acting P. J., and
sections relating to taxation and tax sales together and in   Beaumont, J., pro tem., concurred.
relation to each other, and they are to be construed, if
reasonably possible, so as to give each part thereof the      OPINION BY: BARNARD
meaning and effect which, from the sections as a whole,
appears to have been intended.                                OPINION

(4) Id.--Tax Deed--Excepted Liens. -- --While an                    [**679] [*314] BARNARD, J. This action is in
assessment is not in all respects the same as a tax, it has   form one of partition, although the plaintiff seeks to quiet
many of the same qualities; and as used in the 1917           his title against the defendants. On June 30, 1924,
amendment to section 3787 of the Political Code, the          plaintiff, with one T. G. Kelly, purchased at a tax sale a
word "taxes" refers to and includes annual assessments of     parcel of land situated within the borders of Terra Bella
irrigation districts, as well as general taxes; and under     Irrigation District, in Tulare County, California. The land
said section a tax deed from the county tax collector is      was sold for delinquent county taxes of the fiscal year
subject to irrigation district assessments.                   1918-19, and said purchasers received a deed from the
                                                              county tax collector of Tulare County. It is admitted
(5) Id.--Existing Liens--Statutory Construction. --           [***2] that all proceedings leading [*315] up to and
--An individual cannot wipe out a part of the taxes or        included within this sale were regular and valid in all
assessments legally levied under authority of the state       respects. Commencing with the year 1918 and up to and
government, unless that result clearly and expressly          including the year 1924, Terra Bella Irrigation District
appears to be authorized by statute, and any doubt has to     had in each and every year levied assessments for district
be resolved in favor of the public institution and against    purposes on said land. No part of these assessments has
the individual.                                               even been paid and at the date of the above-mentioned
                                                              sale, they were all delinquent. From year to year the land
(6) Id.--Quieting Title--Equitable Relief--Legal Rights.      was noticed for sale for these delinquencies, and
-- --In an action by an individual claiming title under a     certificates of sale therefor were delivered to said
tax deed from the county assessor to quiet title as against   Irrigation District in accordance with the Irrigation
the lien of unpaid irrigation district assessments, the       District Act, but no deed has yet been passed. Plaintiff
plaintiff must stand upon his legal rights and cannot ask     commenced this action against the said T. G. Kelly and
for equitable relief against taxes authorized by the state.   numerous other defendants for the partition of a number
                                                              of pieces of land, including the land above referred to,
(7) Id.--Priority--Constitutional Law. -- --The               seeking to quiet his title to the same, and joining the
amendment of 1917 to section 3787 of the Political Code       appellant Irrigation District as a party defendant, as
providing that irrigation district taxes shall be excepted    claiming a lien on the particular parcel referred to. The
from the absolute title to be conveyed by a tax deed from     defendant Terra Bella Irrigation District appeared and set
the county assessor does not give a priority to irrigation    up its lien for the unpaid assessments levied by it, as
district taxes over state taxes, and said section as thus     aforesaid. Defendant Kelly joined with plaintiff against
amended is not unconstitutional as being in violation of      the Terra Bella Irrigation District. [***3] After a trial
article XII, section 6, of the state Constitution.            upon stipulated facts, the trial court adjudged that as
                                                              against the plaintiff and T. G. Kelly, the defendant Terra
SYLLABUS                                                      Bella Irrigation District has no lien upon the land and
                                                                                                                       Page 6
                                        106 Cal. App. 313, *315; 289 P. 678, **679;
                                             1930 Cal. App. LEXIS 525, ***3

entered its interlocutory decree accordingly. The                trust for the public, and subject to the control of the state.
defendant Irrigation District has appealed from that             Its officers are public officers, chosen by the electors of
portion of the decree.                                           the district, and invested with public duties. Its object is
                                                                 for the good of the public, and to promote the prosperity
     The only question herein presented is whether or not        and welfare of the public. 'Where a corporation is
a purchaser of land upon a sale thereof for delinquent           composed exclusively of officers of the government,
county taxes, takes title thereto free from any lien for         having no personal interest in it, or with its concerns, and
delinquent irrigation district taxes or assessments levied       only acting as organs of the state in effecting a great
on the same land.                                                public improvement, it is a public corporation.' (Angell
                                                                 and Ames on Corporations, sec. 32.)"
     [HN1] Section 40 of the Irrigation District Act
provides, "The assessment upon land is a lien against the            Such districts have been held to be public agencies. (
property assessed from and after the first Monday in             Lindsay-Strathmore Irr. Dist. v. Superior Court, 182 Cal.
March for any year." (Henning's Gen. Laws, p. 1255.)             315 [187 P. 1056].) In the case of Whiteman v.
County taxes also become a lien on the first Monday in           Anderson-Cottonwood Irr. Dist., 60 Cal. App. 234 [212
March in each year. (Sec. 3718, Pol. Code.) (1) An               P. 706, 708], the court said:
irrigation district is a public agency of the state. It has
been held that the legislature could, without referring the           "In fact, it has been consistently held by the Supreme
matter to local authority, institute and carry out projects,     Court from the beginning, [***6] that these districts
having purposes similar to those of an irrigation district. (    created under [*317] the elaborate scheme devised for
People v. Sacramento Drainage Dist., 155 Cal. 373 [103           their organization and operation by the legislature are
P. 207].) The legislature has [***4] power to determine          public agencies for the promotion of a public purpose."
how revenues shall be levied and collected, [*316]
whether by the state itself or by local legislative or               The general rule in reference to the relation of state
administrative agencies. The county is an agency of the          taxes to local assessments is thus put in 37 Cyc. 1478.
state for performing certain functions of government. The
                                                                      [HN3] "Where the statute makes the state taxes a
legislature has likewise provided for, and authorized,
                                                                 superior lien to municipal taxes or local assessments, or
irrigation districts to carry out another function of
                                                                 where both classes of taxes are to be collected in the
government. In the case of In re Madera Irr. Dist., 92
                                                                 same manner and by the same proceedings, those of the
Cal. 296 [27 Am. St. Rep. 106, 14 L. R. A. 755, 28 P.
                                                                 latter class will be cut off and their lien extinguished by a
272, 675], [**680] in discussing the nature and powers
                                                                 sale for state taxes in which the local taxes or assessments
of an irrigation district the court said:
                                                                 might have been included. But otherwise the purchaser
     [HN2] "For the purpose of meeting the cost of               will take subject to existing taxes of the inferior class."
acquiring this property, the district is authorized, upon the
                                                                      It is true that [HN4] an irrigation district assessment,
vote of a majority of its electors, to issue its bonds, and
                                                                 although it be an annual charge, has been usually
these bonds and the interest thereon are to be paid by
                                                                 interpreted as an assessment for benefits. ( San Diego v.
revenues derived under the power of taxation, and for
                                                                 Linda Vista Irr. Dist., 108 Cal. 189 [35 L. R. A. 33, 41 P.
which all the real property in the district is to be assessed.
                                                                 291]; In re Madera Irr. Dist., supra; Barber v. Galloway,
Under this power of taxation, -- one of the highest
                                                                 195 Cal. 1 [231 P. 34].) In referring to the method used
attributes of sovereignty, -- the title of the delinquent
                                                                 by irrigation districts in making assessments, the
owner of the real estate assessed, may be divested by
                                                                 Supreme Court has said:
sale, and power is conferred upon the board of directors
to establish equitable by-laws, rules, and regulations for           ". . . this court [***7] . . . basing its decision upon
the distribution and use of [***5] water among the               the very early case of Emery v. San Francisco, 28 Cal.
owners of said lands, and generally to perform all such          345, as approved in the case of In re Madera Irr. Dist., 92
acts as shall be necessary to fully carry out the purpose of     Cal. 296 [27 Am. St. Rep. 106, 14 L. R. A. 755, 28 P.
the act. Here are found the essential elements of a public       272, 675], . . . held that the legislature was authorized to
corporation, none of which pertain to a private                  apportion the amount of money to be raised in order to
corporation. The property held by the corporation is in          meet the expenses of the improvement according to either
                                                                                                                        Page 7
                                         106 Cal. App. 313, *317; 289 P. 678, **680;
                                              1930 Cal. App. LEXIS 525, ***7

the ad valorem or assessment according to benefits plan,           the property free from any other lien basing its decision
or to adopt any principle of apportionment which might             upon the statute as it then existed, which provided that
be devised under the sovereign power of taxation." (               such deed conveys to the grantee the absolute title to the
County of Los Angeles v. Hunt, 198 Cal. 753 [247 P. 897,           land described therein free of all encumbrances except
902].)                                                             the lien for taxes which may have attached subsequent to
                                                                   the sale. This case also held that while it is within the
     In the Municipal Utility Act (Stats. 1921, p. 245), the       power of the legislature to make the lien of taxes
distinction between assessments and taxes is entirely              paramount to all other liens upon the land, so that when a
eliminated. Under that act its so-called assessments               sale is made the purchaser takes title free from all
become taxes and are collected with other taxes. While             encumbrances, whether or not this state has so provided
county taxes are made up of a composite rate for general           is to be determined [***10] only by its statutes, the court
purposes, for road districts, for school districts and for a       saying: "As this matter, the power being conceded,
number of other purposes, irrigation taxes are not                 depends for its determination entirely upon statutory
included. It is true, however, that such assessments are           enactment, adjudications [*319] in sister states will be
levied by an agency created by the state for a public              of little value unless based upon identical laws."
purpose, and under an authority delegated by the state.
While the cases [***8] have referred to the annual                       (2) This case being one where an individual is
[*318] assessments levied by an irrigation district as             seeking to quiet title against assessments levied by an
assessments rather than as taxes, they are in many                 agency created and empowered to levy assessments by
respects more like county taxes than like assessments for          authority delegated from the state, his claims must rest on
street improvements or assessments for the benefit of              his strict legal rights and these depend upon the proper
other particular property. While general county taxes are          interpretation of statutory enactments. The question of
often referred to as state taxes, as a matter of fact, no          priority is one of legislative intent. In Guinn v.
taxes for purely state purposes have been levied on real           McReynolds, 177 Cal. 230 [170 P. 421, 422], the court
estate in California since 1911, but all general taxes have        said:
been levied by authority delegated from the state, either
to the county or some other subdivision or district.                    [HN5] "A lien for unpaid taxes or assessments is
During the same time there has also been apparent a                generally held to be superior to all contract liens, whether
growing tendency, as shown by the statutes adopted by              prior or subsequent in time. But the authorities declare,
the legislature, to treat the taxes or assessments levied          virtually without dissent, that even a tax lien is not
under such delegated authority as equal.                           entitled to rank ahead of a preexisting mortgage or other
                                                                   contract lien, unless the legislative enactment creating the
     The respondent relies upon the decisions in a number          tax lien has given it priority," citing 37 Cyc. 1143, where
of cases from other jurisdictions and in such cases as             the rule is stated thus:
Dougherty v. Henarie, 47 Cal. 9, and California Loan
etc. Co. v. Weis, 118 Cal. 489 [50 P. 697, 699]. In                     "It is competent for the legislature to make taxes a
Dougherty v. Henarie the court held that a deed based              paramount lien on the property [***11] of the taxpayer,
upon a tax sale transferred the title free from all prior          and this has been done in many states, the consequence
liens for taxes or assessments. This [**681] decision              being that a lien for taxes takes precedence of every other
[***9] was based on a statute then existing which                  lien or claim upon the property of whatsoever kind,
provided that the tax deed "shall convey to the grantee            however created, and whether attaching before or after
the absolute title to the lands described in said deed, free       the assessment of taxes. But this preference does not
and clear of all encumbrances, liens, claims, rights, titles       belong to the tax lien unless it is so declared by statute,
and interest of every kind, of any person or persons . . .         and a law, for example, which merely enacts that taxes
excepting only the right and title of the United States or         shall be a lien on real property does not make them a first
of the State of California," and further that "all right, title,   lien."
interest, claim, and possession acquired by any
                                                                        Again in the case of Guinn v. McReynolds the court
individual, corporation, or body politic has been
                                                                   said:
subrogated to the grantee." In California Loan etc. Co. v.
Weis, supra, the court also held that a tax deed conveyed              "In dealing with taxes or assessment liens, as with
                                                                                                                    Page 8
                                       106 Cal. App. 313, *319; 289 P. 678, **681;
                                           1930 Cal. App. LEXIS 525, ***11

others, our decisions have recognized that the question of          "Such deed conveys to the state the absolute title to
priority is one of legislative intent."                        the property described therein, free of all encumbrances,
                                                               except any lien for taxes levied for municipal, or for
     There is no statute making county taxes paramount         irrigation, [**682] reclamation, protection, flood
to irrigation district assessments in the sense here           control, public utility or other district purposes, or for
claimed, unless this results from a proper interpretation of   special assessments which are collected on tax-rolls, and
those sections of the Political Code governing deeds           except any lien or assessment for other amounts which by
given to an individual in pursuance of sales whereby           law are collected upon tax-rolls by or for account of
former owners have been divested of title for nonpayment       municipalities, and except interest and penalties on the
of taxes.                                                      same, and other amounts which would be paid
                                                               municipalities or for their account in the event of
     Prior to 1913 all sales for delinquent state and county   redemption of such property from sales for such taxes,
taxes were made only to the state, the form of such a deed     assessments or other amounts, and except when the land
to the state being provided in section 3785 of the Political   is owned by the United [***14] States or this state . . ."
[***12] Code. In 1913, [HN6] sections 3764 and 3771 of
the Political Code [*320] were amended to provide also               [*321] Section 3785b was amended in 1925 to
for a sale by the tax collector direct to an individual, and   correct the reference therein to section 3771 of the same
it is pursuant to such a sale that the respondent herein       code. Prior to this change in 1925, 3785b had authorized
claims title. In 1913 section 3785b was added to the same      a deed whenever a sale had been made to an individual,
code, providing the form of a deed where real property         "in pursuance of section 3771 of this code." But in 1921
should be sold to an individual instead of to the state, in    the legislature had added 3771a to that code, and the
accordance with the amendments of that year, and also          provision authorizing a sale to an individual, instead of to
providing that such deed should not be delivered until         the state, which had previously been in section 3771, was
redemption had been made of all taxes and penalties of         then placed in the new section 3771a.
any previous tax sale or delinquency. It further provided
as follows:                                                         After the above-mentioned changes in 1913, the
                                                               provisions of section 3787 of the Political Code referred
    "The provisions of sections 3786 and 3787 of this          to the deed provided for in section 3785b, as well as to
code are hereby made applicable to the deed herein             that of section 3785. In Bernhard v. Wall, 184 Cal. 612
provided for."                                                 [194 P. 1040, 1045], the court defines the meaning of the
                                                               phrase "such deed" as used in these sections, as follows:
    [HN7] Section 3786 has not since been amended and
provides that such deed is primary evidence of certain              "It is proper here to explain that [HN9] the phrase
things set forth in that section. Section 3787 provides that   'such deed,' with which both sections 3786 and 3787
such deed is conclusive evidence of certain other              begin, must, in the present condition of the code, be
proceedings, and also provides what title shall pass by the    understood to refer both to the deed authorized by section
deed. In 1913, that portion was amended to provide that        3785 and to that authorized by section 3785b. When the
taxes levied for municipal purposes should be an               code was first enacted, and until the year 1909, the three
additional exception to the clear title passed by such a       sections -- [***15] 3785, 3786 and 3787 -- appeared
deed. In 1917 that portion [***13] of section 3787 was         therein in regular consecutive order, with no intervening
again amended to include irrigation district taxes as an       sections. The phrase 'such deed' in sections 3786 and
additional exception, and then read as follows:                3787 then necessarily referred to section 3785, it being
                                                               then the only section authorizing a tax deed. In 1909
     "Such deed conveys to the state the absolute title to     section 3785a, and in 1913 section 3785b, were
the property described therein, free of all encumbrances,      interpolated between section 3785 and section 3786, thus
except any lien of taxes levied for municipal or irrigation    giving rise to some uncertainty as to the particular deed
district purposes and except when the land is owned by
                                                               or deeds to which the phrase 'such deed' applied. We are
the United States or this state . . ."                         satisfied that it now refers both to section 3785 and
                                                               section 3785b, and applies to the deeds authorized by
     Again in 1927, [HN8] this section was amended so
                                                               both sections."
that that portion thereof reads as follows:
                                                                                                                    Page 9
                                       106 Cal. App. 313, *321; 289 P. 678, **682;
                                           1930 Cal. App. LEXIS 525, ***15

    While the court there mentions only the phrase "such        Sutherland on Statutory Construction, sec. 257.) Under
deed" in the first paragraph of the section, it is perfectly    the same principles, any amendment of these provisions
apparent that the same reasoning applies to the same            of the statute thus adopted, whether it be a particular act
phrase in the second paragraph thereof.                         or a general law, which so far modifies them as to subvert
                                                                the purpose of the statute by which they were adopted,
     Respondent argues that it is a general rule that           [***18] will be regarded in the same light as a repeal.
[HN10] when one statute by reference incorporates               [HN12] The main object of all statutory construction is to
another, the effect is as though the wording of the             ascertain the legislative will, and, as it is to be assumed
incorporated statute had been written at length into the        that the legislature [*323] intends its acts to have
incorporating statute, and that no subsequent amendment         effective operation, such amendments will not be
or repeal of the statute incorporated has any effect upon       construed as depriving the adopting statute of all effect,
the incorporating statute. In support of this he cites          unless there is a clear necessity for such construction."
People v. Whipple [***16] , 47 Cal. 592; Spring [*322]
Valley W. W. v. San Francisco, 22 Cal. 434; Ventura                  In the decisions relied upon by respondent the
County v. Clay, 112 Cal. 65 [44 P. 488]; In re Burke, 190       Supreme Court has, of course, followed the [**683]
Cal. 326 [212 P. 193]; Vallejo v. Reed, 177 Cal. 249 [170       intention of the legislature. In People v. Whipple, the
P. 426]; Ramish v. Hartwell, 126 Cal. 443 [58 P. 920,           incorporating statute in creating an office defined the
921]. He therefore argues that since the amendment to           duties thereof by referring to another statute, and the
section 3787, making irrigation district taxes an               court held that a later repeal of the other statute did not
additional exception to the clear title passed by such          affect the incorporating statute as it, in effect, included
deed, was adopted in 1917, and such a provision was not         the words of the other statute within itself. Ventura Co.
in that section in 1913 when the provisions of said             v. Clay, 112 Cal. 65 [44 P. 488], involves a similar state
section were by the terms of section 3785b made                 of facts. In Spring Valley W. W. v. San Francisco it was
applicable to the deed therein authorized, this ipso facto      held that the amendments made such a complete change
gives priority to state taxes over irrigation district taxes.   that the sections referred to were entirely insufficient to
As we have heretofore noted, this depends upon                  cover the matter in question without the addition of other
legislative intent. In Ramish v. Hartwell, supra, the court     sections. In re Burke expressly reserves an opinion on the
uses the following language:                                    [***19] point now under discussion so far as the facts in
                                                                that case are concerned. In Vallejo v. Reed, an entirely
     [HN11] "It is a rule of statutory construction that the    new section of the number in question had later been
adoption in one statute, for the purpose of carrying its        adopted, which contained no vestige of the original
provisions into effect, of the provisions of another statute    section. We think that these cases are not controlling in
by reference thereto, does not include subsequent               the matter before us, and that the instant case comes
modifications of these provisions in the statute referred       rather under both of the exceptions mentioned in Ramish
to, unless a clear intent to do so [***17] is expressed.        v. Hartwell.
This rule is subject to a qualified exception in cases of the
adoption into a special act of the provisions of law then in          Since sections 3786 and 3787 contained in 1913, and
force by virtue of general laws. In such cases, subsequent      still contain, all of the statutory provisions defining the
modifications of the general law will be deemed to be           effect of the deed in question and what title shall pass
within the intent of such adoption, so far as they are          thereby, including all of the general laws on that
consistent with the purposes of the particular act. (See        particular subject, it would seem to come under one of
Kirk v. Rhoads, 46 Cal. 398.) A repeal of the adopted           the exceptions noted. Also, a careful reading of all of the
statute will not take from the adopting statute the             sections involved seems to disclose a clear intent on the
operative force of these provisions, so far as they may be      part of the legislature to make amendments of section
necessary to carry the later statute into effect, but these     3787 apply to section 3787b. Prior to 1913, section 3787
provisions will be regarded as if they had been originally      referred to the deed to the state mentioned in section
incorporated therein at length. ( Spring Valley W. W. v.        3785. An entirely new plan for disposing of land upon
San Francisco, 22 Cal. 434; People v. Clunie, 70 Cal.           which taxes had remained unpaid for five years was
504 [11 P. 775]; Collins v. Blake, 79 Me. 218 [9 A. 358];       introduced by the amendments of 1913, and section
Darmstaetter v. Maloney, 45 Mich. 621 [8 N.W. 574];             3785b was interpolated for the purpose of providing for
                                                                                                                    Page 10
                                      106 Cal. App. 313, *323; 289 P. 678, **683;
                                          1930 Cal. App. LEXIS 525, ***19

the giving of a deed [***20] in accordance with such          applies to his case as a separate law. Aside from section
new plan. The fact that it made applicable to the new         3787 there is no statute providing what [*325] such a
deed therein provided for, all of the statutory provisions    deed as is relied on by respondent shall convey to him. In
covering the title that should be conveyed thereby and the    the absence of statutes providing otherwise, respondent's
effect thereof, which had [*324] applied and which            deed would be subject to all existing liens which would
continued to apply to the other and older plan of deed to     include the irrigation district assessment liens here in
the state, which provisions were all set forth in sections    question. Respondent is forced to rely upon section 3787
3786 and 3787, is a strong indication that it was the         to place his title above other encumbrances. He does, in
intention of the legislature to make the deed to an           fact, place implicit reliance upon it, insisting, however,
individual, in respect to the title conveyed, a counterpart   that he is entitled to stand upon it as it existed in 1913. If,
of the deed to the state. No good reason appears why the      however, that section applied to his deed in 1924, it
two deeds should be different, nor why the one to an          applied as it stood in 1924, and his deed was subject to
individual should convey more than the one to the state,      taxes levied for irrigation district purposes. Irrespective
and a reading of the code sections indicates that such was    of whether this amendment was included in section
not the legislative intent. Having in mind the purpose to     3785b by legislative intent, no reason appears why it is
be accomplished, and the fact that a new deed was being       not, of itself, an additional qualification of the effect of
provided for, that otherwise followed the plan of the older   respondent's deed. There is nothing in section 3785b, as it
deed, the language used, "The provisions of sections          stood in 1913, including its reference [***23] to section
3786 and 3787 of the code are hereby made applicable to       3787, which forbids the adoption of new qualifications of
the deed herein provided for" lends some support to this      the same deed. Section 3787, as it stood in 1924, applied
view. It must also be borne in mind that the amendment        to the deed relied on by respondent just as much as if the
of 1917 made no change in the general purpose [***21]         1917 amendment thereto had been put into section 3785b,
of section 3787, but merely included another item of the      or adopted as an additional section of the code.
same general nature. It is also most significant that when
in 1925 it became necessary for the legislature to amend            [**684] The fallacy of such an interpretation of
section 3785b, in order to correct a reference therein to     these various statutes as is insisted upon by respondent, is
section 3771 of the Political Code, as hereinbefore           seen from the fact that to take the exact language used,
referred to, although section 3787 had in the meantime        without regard to the real meaning and intent of the
been amended by the insertion of the clause about             legislature, and without allowing for obvious errors in
irrigation district taxes, the provision now under            changing certain sections without correcting co-related
consideration was not changed. It would, therefore, seem      sections, would necessarily result in the holding that
that it was within the intention of the legislature in        respondent has no deed at all, because he relies upon a
adopting section 3785b in 1913, to include such an            deed given in accordance with section 3785b of the
amendment to 3787 as followed in 1917.                        Political Code, and insists that he is entitled to rely on
                                                              that section absolutely as it stood in 1913, unaffected by
     In the case of Gottstein v. Holmes, 89 Cal. App. 145     later amendments of any other sections and governed by
[264 P. 310, 311], decided in 1928, in passing upon a tax     the strict language of that section alone. But he acquired
sale made in 1923 when the law was the same as it was         his deed under a sale made in 1924. At that time section
when the sale here in question was made in 1924, the          3785b provided that when property had been sold to a
court said: [HN13] "The provisions of section 3787 are,       purchaser at delinquent tax sale, other than the state of
by section 3785b, expressly made applicable to deeds          California, in pursuance [***24] to section 3771 of that
executed by the tax collector conveying lands sold to the     code, a deed should be issued in the form set forth in said
state to purchasers after the five-year period of             section. But at that time section 3771 of this code did not
redemption." No exceptions are there noted.                   provide for or authorize or contemplate any deed. In 1921
                                                              the law had been changed and the provision authorizing
      Even if it should be held that the amendment of         such a deed had been moved from section 3771 to section
section 3787 in 1917 did [***22] not become a part of         3771a of that code.
section 3785b, through the reference provision therein,
still section 3787 as amended in 1917, was in full force            [*326] (3) In giving effect to the plain intent of the
and effect at the time respondent's rights arose and          legislature it is necessary to read the various sections
                                                                                                                   Page 11
                                       106 Cal. App. 313, *326; 289 P. 678, **684;
                                           1930 Cal. App. LEXIS 525, ***24

together and in relation to each other. [HN14] "A statute      narrow a construction of the language of the section. The
should always be so construed, if reasonably possible, as      source of all power to tax within the state, whether by the
to give each part thereof the meaning and effect, which        state, the city, the town, or the county, is the legislature.
from the act as a whole, appears to have been intended." (     The legislature has the right to provide for the protection
In re Reineger, 184 Cal. 97 [193 P. 81, 83].) (4) There        of all such taxes. The policy of the law is to insure the
can be no question that [HN15] the word "taxes" as used        collection of all taxes. We must assume that the
in the 1917 amendment to section 3787 refers to the            legislature intended no conflict between the systems of
annual assessments of irrigation districts. The word           taxation provided by it for the several political divisions
includes both general taxes and special assessments. ( Los     above referred to. It could not have intended that a sale
Angeles County F. C. Dist. v. Hamilton, 177 Cal. 119           for taxes by one division should cut off and nullify sales
[169 P. 1028].) While an assessment is not in all respects     made by other divisions for other taxes. The more
the same as a tax, it has many of the same qualities of a      reasonable [***27] construction of this section is one
tax and an irrigation district assessment has been             that preserves all liens for taxes, whether state, county,
specifically given a lien [***25] on the real property         town or city. All of these political subdivisions represent
within the district, and the provisions of section 3787 of     the people of the state, and their taxes are all claims of
the Political Code make such a deed as is relied on by the     the people of the state. This construction results in effect
respondent, subject to irrigation district assessments.        in the principle that no individual can secure a perfect
                                                               title to real property, purchased upon a tax sale, without
     An additional reason why the irrigation district          paying all taxes thereon imposed by any political
assessment in question has not been wiped out by the tax       subdivision of the state. This is a reasonable and salutary
sale referred to is found in another express provision         doctrine."
adopted by the state legislature. In speaking of such
assessments, [HN16] section 46 of the California                   In Webster v. Board of Regents, 163 Cal. 705 [126 P.
Irrigation District Act says:                                  974, 976], in referring to a tax sale as against a mortgage
                                                               held by the state the court said:
       ". . . on filing the certificates (of sale) with such
County Recorder the lien of the assessments vests with              "The rule applicable thereto is thus expressed in
the purchaser, and is only divested by the payment to          People v. Doe, 36 Cal. 220: [HN17] 'The Constitution
him, or to the collector for his use, of the purchase money    and laws upon the subject of taxing property, are,
. . ."                                                         therefore, to be understood as referring to private
                                                               property and persons, and not including public property
     While, as has been pointed out, the decisions of other    of the state, or any subordinate part of the state
states are of little value unless based upon similar           government.' (See, also, People v. McCreery, 34 Cal.
statutes, we desire to call attention to a decision from the   432; Low v. Lewis, 46 Cal. 549; Doyle v. Austin, 47 Cal.
state of New York. The New York statute provided that a        353; Smith v. Santa Monica, 162 Cal. 221 [121 P. 920].)
conveyance upon a sale of land for a state tax vested in       The general [***28] rule applied in all such cases is that
the grantee an absolute estate in fee, subject, however, to    statutes authorizing liens on or forced sales of property,
all of the claims which the people of the state had            [**685] generally, will not be held applicable to public
thereupon for taxes or other liens or encumbrances. We         property, unless the intention to make them so expressly
take it this statute is not essentially [***26] dissimilar     or plainly appears."
from our own in the respect under discussion, since an
irrigation district is a public agency deriving its power to         (5) In the absence of statutory provisions to the
tax from the state itself. In Rochester v. Kapell, 86 A.D.     contrary, the same reasoning would apply to an attempt
224 [83 N.Y.S. 640], affirmed in 177 N.Y. 533 [69 N.E.         upon the part of an individual to wipe out a part of the
1121], the court said:                                         taxes or assessments legally levied under authority of the
                                                               state government. We think this cannot be done unless
     "The tax for the nonpayment of which the sale to          that [*328] result clearly and expressly appears to be
appellant was made included a state tax to be collected by     authorized by statute. Any doubt would necessarily have
the [*327] county, and it is claimed that the only tax         to be resolved in favor of the public institution and
liens which are preserved under the language of this           against the individual.
section, are pure state taxes. This, we apprehend, is too
                                                                                                                   Page 12
                                       106 Cal. App. 313, *328; 289 P. 678, **685;
                                           1930 Cal. App. LEXIS 525, ***28

 (6) In such an action as the one at bar, [HN18] an             of California. No such priority is thus given. And no
individual must stand upon his legal rights and cannot ask      power of taxation has been thereby surrendered or
for equitable relief against taxes authorized by the state. (   suspended by any grant or contract. Any such powers as
Couts v. Cornell, 147 Cal. 560 [109 Am. St. Rep. 168, 82        have been delegated to irrigation districts by the
P. 194]; Esterbrook v. O'Brien, 98 Cal. 671 [33 P. 765].)       legislature may be at any time changed or withdrawn.
In Imperial Land Co. v. Imperial Irr. Dist., 173 Cal. 660
[161 P. 113, 116], the court said:                                    [*329] The respondent argues in reference to the
                                                                two sorts of taxes here involved that a sale under one
     "The complaint contained no offer to pay the amount        must of necessity extinguish the other. This does not
due. 'It is now firmly settled by our decisions that [***29]    necessarily follow, and we think that the legislature
where a property owner applies for equitable relief             intended to protect the interests of each of these agencies
against the public authorities, as, for example, to restrain    of the state government. The question before us is not as
proceedings for the collection or enforcement of taxes          to which party would get title if at the same time the land
assessed against it, or to enjoin the execution of a tax        was sold to one for delinquent county taxes, and to
deed, or to cancel a lien or charge for taxes, of record        another for delinquent irrigation district assessments. The
against his land, and it appears that all or some part of the   only question here involved is as to whether one who has
tax charged is justly and equitably due from plaintiff, or      purchased land at a general tax sale takes the title thereto
chargeable upon the land, he must, as a condition of            free from the lien of any irrigation district assessments
obtaining such relief, first pay or offer to pay the amount     [***31] which have theretofore been levied against it.
justly due, or he must be required to do so before the          This being entirely a matter of legislative enactment,
relief to which he shows himself entitled is given.' (Citing    under the statutes controlling in this case, we are of the
cases.) The principle has been applied to an action to          opinion that he does not.
enjoin a sale of land for delinquent assessments of an
irrigation district organized under the Wright Act, in              For the reasons given it follows that the portion of
force prior to the enactment of the statute here involved."     the interlocutory decree appealed from should be
                                                                reversed, and it is so ordered.
      (7) It is further urged that the amendment of 1917
to section 3787 of the Political Code providing that                Marks, Acting P. J., and Beaumont, J., pro tem.,
irrigation district taxes shall be excepted from the            concurred.
absolute title to be conveyed by the sort of deed here in
                                                                     A petition for a rehearing of this cause was denied by
question, is unconstitutional. The only point raised in
                                                                the District Court of Appeal on June 30, 1930, and a
addition to those which have been frequently passed upon
                                                                petition by respondent to have the cause heard in the
by our courts, in [***30] connection with irrigation
                                                                Supreme Court, after judgment in the District Court of
district assessments, is the contention that if this
                                                                Appeal, was denied by the Supreme Court on August 7,
amendment were allowed to stand it would give priority
                                                                1930.
to irrigation assessments over state taxes, and thereby be
in violation of article XIII, section 6, of the Constitution
                                                                                                                 Page 1

                        The TRUSTEES OF DARTMOUTH COLLEGE v. WOODWARD.

                                  SUPREME COURT OF THE UNITED STATES

                           17 U.S. 518; 4 L. Ed. 629; 1819 U.S. LEXIS 330; 4 Wheat. 518

                                             February 25, 1819, Decided

PRIOR HISTORY:           [***1] ERROR to the Superior        New-Hampshire in New-England in America, that the
Court of the State of New-Hampshire.                         Reverend Eleazar Wheelock, of Lebanon, in the colony
                                                             of Connecticut, in New-England aforesaid, now Doctor in
     This was an action of trover brought in the State       Divinity, did, no or about the year of our Lord one
Court, in which the plaintiffs in error declared for two     thousand seven hundred and fifty-four, at his own
books of records, purporting to contain the records of all   expense, on his own estate and plantation, set on foot an
the doings and proceedings of the trustees of Dartmouth      Indian Charity School, and for several years, through the
College, from the establishment of the corporation until     assistance of well disposed persons in America, clothed,
the 7th day of October, 1816; the original charter, or       maintained and educated a number of the children of the
letters patent, constituting the college; the common seal;   Indian natives, with a view to their carrying the gospel in
and four volumes or books of account, purporting to          their own language, and spreading the knowledge of the
contain the charges and accounts in favour of the college.   great Redeemer, among their savage tribes, and hath
The defendant pleaded the general issue, and at the trial    actually employed a number of them as missionaries and
the following special verdict was found:                     school masters in the wilderness for that purpose: and by
                                                             the blessing of God upon the endeavours of said
     "The said jurors, upon their oath, say, that his        Wheelock, the design became reputable among the
Majesty George the Third, King of Great Britain, &c.         Indians, insomuch that a larger number desired the
issued his letters patent, under the public seal of the      education of their children in said school, and were also
Province, now State, of New-Hampshire, bearing date the      disposed to receive missionaries and school masters in
13th day of December, in the 10th year of his reign, and     the wilderness, [***3] more than could be supported by
in the year of our Lord, one thousand seven hundred and      the charitable contributions in these American colonies.
sixty-nine, in the words following:
                                                                  Whereupon, the said Eleazar Wheelock thought it
     GEORGE the THIRD, by the grace of GOD, of               expedient, that endeavours should be used to raise
Great Britain, France, and Ireland, KING, Defender of        contributions from well disposed persons in England, for
the Faith, and so forth.                                     the carrying on and extending said undertaking; and for
                                                             that purpose the said Eleazar Wheelock requested the
    To all to whom these presents shall come . . .
                                                             Rev. Nathaniel Whitaker, now doctor in divinity, to go
     [***2] GREETING:                                        over to England for that purpose, and sent over with him
                                                             the Rev. Samson Occom, and Indian minister, who had
    WHEREAS is hath been represented to our trusty           been educated by the said Wheelock. And to enable the
and well beloved John Wentworth, Esq. Governor and           said Whitaker to the more successful performance of said
commander in chief, in and over our Province of              work, on which he was sent, said Wheelock gave him a
                                                                                                                 Page 2
                                          17 U.S. 518, *; 4 L. Ed. 629, **;
                                      1819 U.S. LEXIS 330, ***3; 4 Wheat. 518

full power of attorney, by which said Whitaker solicited     by the liberal contributions of many noblemen and
those worthy and generous contributors to the charity,       gentlemen in England, and especially by the
viz. The Right Honourable William, Earl of Dartmouth,        consideration, that such a situation would be as
the Honourable Sir Sydney Stafford Smythe, Knight, one       convenient as any for carrying on the great design among
of the Barons of his Majesty's Court of Exchequer, John      the Indians; and also, considering, that without the least
Thornton, of Clapham, in the county of Surrey, Esquire,      impediment to the said design, the same school may be
Samuel Roffey, of Lincoln's Innfields, in the county of      enlarged and improved to promote learning among the
Middlesex, Esquire, Charles Hardy, of the parish of Saint    English, and be a means to supply a great number of
Mary-le-bonne, in said county, Esquire, Daniel West, of      churches and congregations, which are likely soon to be
Christ's church, [***4] Spitalfields, in the county          formed [***6] in that new country, with a learned and
aforesaid, Esquire, Samuel Savage, of the same place,        orthodox ministry; they, the said proprietors, have
Gentleman, Josiah Roberts, of the parish of Saint            promised large tracts of land, for the uses aforesaid,
Edmund, the King, Lombard Street, London, Gentleman,         provided the school shall be settled in the western part of
and Robert Keen, of the parish of Saint Batolph Aldgate,     our said province. And they, the said right honourable,
London, Gentleman, to receive the several sums of            honourable, and worthy trustees, before mentioned,
money which should be contributed, and to be trustees for    having maturely considered the reasons and arguments, in
the contributors to such charity, which they cheerfully      favour of the several places proposed, have given the
agreed to.                                                   preference to the western part of our said province, lying
                                                             on Connecticut river, as a situation most convenient for
    Whereupon, the said Whitaker did, by virtue of said      said school.
power of attorney, constitute and appoint the said Earl of
Dartmouth, Sir Sydney Stafford Smythe, John Thornton,             And the said Wheelock has further represented a
Samuel Roffey, Charles Hardy, and Daniel West,               necessity of a legal incorporation, in order to the safety
Esquires, and Samuel Savage, Josiah Roberts, and Robert      and well being of said seminary, and its being capable of
Keen, Gentlemen, to be trustees of the money which had       the tenure and disposal of lands and bequests for the use
then been contributed, and which should, by his means,       of the same.
be contributed for said purpose; which trust they have
accepted, as by their engrossed declaration of the same,          And the said Wheelock has also represented, that for
under their hands and seals sell executed, fully appears,    many weighty reasons, it will be expedient, at least in the
and the same has also been ratified, by a deed of trust,     infancy of said institution, or till it can be accommodated
well executed, by the said Wheelock.                         in that new country, and he and his friends be able to
                                                             remove and settle by and round about it, that the
     And the said Wheelock further represents, that he       gentlemen, whom he has already nominated in his last
has, by power of attorney, for many weighty reasons,         will, (which he has transmitted to the aforesaid gentlemen
given full power to the said trustees, [***5] to fix upon    of the trust in England,) [***7] to be trustees in
and determine the place for said school, most subservient    America, should be of the corporation now proposed.
to the great end in view; and to enable them                 And, also, as there are already large collections for said
understandingly to give the preference, the said             school, in the hands of the aforesaid gentlemen of the
Wheelock has laid before the said trustees, the several      trust in England, and all reason to believe, from their
offers which have been generously made in the several        singular wisdom, piety, and zeal to promote the
governments in America, to encourage and invite the          Redeemer's cause, (which has already procured for them
settlement of said school among them, for their own          the utmost confidence of the kingdom,) we may expect
private emolument, and the increase of learning in their     they will appoint successors in time to come, who will be
respective places, as well as for the furtherance of the     men of the same spirit, whereby great good may and will
general design in view.                                      accrue many ways to the institution, and much be done
                                                             by their example and influence to encourage and facilitate
    And whereas a large number of the proprietors of         the whole design in view; for which reason, said
lands in the western part of this our province of            Wheelock desires, that the trustees aforesaid may be
New-Hampshire, animated and excited thereto, by the          vested with all that power therein, which can consist with
generous example of his excellency their governor, and       their distance from the same.
                                                                                                                     Page 3
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***7; 4 Wheat. 518

     Know ye, therefore, That We, considering the               trustees consisting, and hereafter forever to consist, of
premises, and being willing to encourage the laudable           twelve, and no more,) to be trustees of said Dartmouth
and charitable design of spreading christian knowledge          College, in this our province of New-Hampshire.
among the savages of our American wilderness, and also
that the best means of education be established in our                [***10] And we do further, of our special grace,
province of New-Hampshire, for the benefit of said              certain knowledge, and mere motion, for us, our heirs and
province, do, of our special grace, certain knowledge, and      successors, will, give, grant, and appoint, that the said
mere motion, [***8] by and with the advice of our               trustees and their successors shall forever hereafter be, in
counsel for said province, by these presents, will, ordain,     deed, act, and name, a body corporate and politic, and
grant, and constitute, that there be a college erected in our   that they, the said body corporate and politic, shall be
said province of New-Hampshire, by the name of                  known and distinguished, in all deeds, grants, bargains,
Dartmouth College, for the education and instruction of         sales, writings, evidences, or otherwise howsoever, and in
youth of the Indian tribes in this land, in reading, writing,   all Courts forever hereafter plead and be impleaded by
and all parts of learning, which shall appear necessary         the name of The Trustees of Dartmouth College; and that
and expedient, for civilizing and christianizing children       the said corporation, by the name aforesaid, shall be able,
of pagans, as well as in all liberal arts and sciences, and     and in law capable, for the use of said Dartmouth
also of English youth and any others. And the trustees of       College, to have, get, acquire, purchase, receive, hold,
said college may and shall be one body corporate and            possess, and enjoy, tenements, hereditaments,
politic, in deed, action, and name, and shall be called,        jurisdications, and franchises, for themselves and their
named, and distinguished, by the name of the Trustees of        successors, in fee simple, or otherwise howsoever, and to
Dartmouth College.                                              purchase, receive, or build, any house or houses, or any
                                                                other buildings, as they shall think needful and
     And further, we have willed, given, granted,               convenient, for the use of said Dartmouth College, and in
constituted, and ordained, and by this our present charter,     such town in the western part of our said province of
of our special grace, certain knowledge, and mere               New-Hampshire, as shall, by said trustees, or the major
motion, with the advice aforesaid, do, for us, our heirs        part of them, be agreed on; their said agreement [***11]
and successors forever, will, give, grant, constitute, and      to be evidenced by an instrument in writing, under their
ordain, that there shall be in the said Dartmouth College,      hands, ascertaining the same -- And also to receive and
from henceforth and forever a body politic, consisting of       dispose of any lands, goods, chattels, and other things, of
Trustees of said Dartmouth College. And for the more            what nature soever, for the use aforesaid -- And also to
full and perfect erection [***9] of said corporation and        have, accept, and receive any rents, profits, annuities,
body politic, consisting of trustees of Dartmouth College,      gifts, legacies, donations, or bequests of any kind
we, of our special grace, certain knowledge, and mere           whatsoever, for the use aforesaid; so, nevertheless, that
motion, do, by these presents, for us, our heirs and            the yearly value of the premises do not exceed the sum of
successors, make, ordain, constitute, and appoint our           six thousand pounds sterling; and therewith, or otherwise,
trusty and well beloved John Wentworth, Esq. governor           to support and pay, as the said trustees, or the major part
of our said province, and the governor of our said              of such of them as are regularly convened for the
province of New-Hampshire for the time being, and our           purpose, shall agree, the President, Tutors, and other
trusty and well beloved Theodore Atkinson, Esq. now             officers and ministers of said Dartmouth College; and
president of our council of our said province, George           also to pay all such missionaries and school masters as
Jaffrey and Daniel Peirce, Esqrs. both of our said council,     shall be authorized, appointed, and employed by them,
and Peter Gilman, Esq. now speaker of our house of              for civilizing, and christianizing, and instructing the
representatives in said province, and William Pitkin, Esq.      Indian natives of this land, their several allowances; and
one of the assistants of our colony of Connecticut, and         also their respective annual salaries or allowances, and all
our said trusty and well beloved Eleazar Wheelock, of           such necessary and contingent charges, as from time to
Lebanon, doctor in divinity, Benjamin Pomroy, of                time shall arise and accrue, relating to the said Dartmouth
Hebron, James Lockwood, of Weathersfield, Timothy               College: And also, to bargain, sell, let, or assign, lands,
Pitkin and John Smalley, of Farmington, and William             tenements, [***12] or hereditaments, goods or chattels,
Patten, of Hartford, all of our said colony of Connecticut,     and all other things whatsoever, by the name aforesaid, in
ministers of the gospel, (the whole number of said              as full and ample a manner, to all intents and purposes, as
                                                                                                                      Page 4
                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***12; 4 Wheat. 518

a natural person, or other body politic or corporate, is         the execution of their offices or trusts, or within one year
able to do by the laws of our realm of Great-Birtain, or of      after, take the oaths and subscribe the declaration
said province of New-Hampshire.                                  provided by an act of Parliament made in the first year of
                                                                 King George the First, entitled, "An act for the further
     And further, of our special grace, certain knowledge,       security of his Majesty's person and government, and the
and mere motion, to the intent that our said corporation,        succession of the crown in the heirs of the late Princess
and body politic, may answer the end of their erection           Sophia, being protestants, and for the extinguishing the
and constitution, and may have perpetual succession and          hopes of the pretended Prince of Wales, and his open and
continuance forever, we do, for us, our heirs and                secret abettors;" that is to say, the President, before the
successors, will, give, and grant, unto the Trustees of          Governor of our said Province for the time being, or by
Dartmouth College, and to their successors forever, that         one by him empowered to that service, or by the
there shall be, once a year, and every year, a meeting of        president of our said council, and the trustees, professors,
said trustees, held at said Dartmouth College, at such           tutors, and other officers, before the president of said
time as by said trustees, or the major part of them, at any      college for the time being, who is hereby empowered to
legal meeting of said trustees, shall be agreed on; the first    administer the same; [***15] an entry of all which shall
meeting to be called by the said Eleazar Wheelock, as            be made in the records of said college.
soon as conveniently may be, within one year next after
the enrollment of these our letters patent, at such time and          And we do, for us, our heirs, and successors, hereby
place as he shall judge proper. And the said trustees, or        will, give, and grant, full power and authority to the
the major part of any seven or more of them, [***13]             president hereafter by us named, and to his successors, or,
shall then determine on the time for holding the annual          in case of his failure, to any three or more of the said
meeting aforesaid, which may be altered as they shall            trustees, to appoint other occasional meetings, from time
hereafter find most convenient. And we farther order and         to time, of the said seven trustees, or any greater number
direct, that the said Eleazar Wheelock shall notify the          of them, to transact any matter or thing necessary to be
time for holding said first meeting, to be called as             done before the next annual meeting, and to order notice
aforesaid, by sending a letter to each of said trustees, and     to the said seven, or any greater number of them, of the
causing an advertisement thereof to be printed in the            times and places of meeting for the service aforesaid, by
New-Hampshire Gazette, and in some public newspaper              a letter under his or their hands, of the same, one month
printed in the colony of Connecticut. But in case of the         before said meeting -- Provided always, that no standing
death or incapacity of the said Wheelock, then such              rule or order be made or altered, for the regulation of said
meeting to be notified in manner aforesaid, by the               college, nor any president or professor be chosen or
governor or commander in chief of our said province for          displaced, nor any other matter or thing transacted or
the time being. And we do also, for us, our heirs and            done, which shall continue in force after the then next
successors, hereby will, give, and grant, unto the said          annual meeting of the said trustees, as aforesaid.
Trustees of Dartmouth College, aforesaid, and to their
successors forever, that when any seven or more of the                And, further, we do, by these presents, for us, our
said trustees, or their successors, are convened and met         heirs and successors, create, make, constitute, nominate,
together, for the service of said Dartmouth College, at          and appoint our trusty and well beloved Eleazar
any time or times, such seven or more shall be capable to        Wheelock, [***16] Doctor in Divinity, the founder of
act as fully and amply, to all intents and purposes, as if all   said college, to be President of said Dartmouth College,
the trustees of said College were personally present -- and      and to have the immediate care of the education and
all affairs and actions [***14] whatsoever, under the care       government of such students as shall be admitted into
of said trustees, shall be determined by the majority or         said Dartmouth College for instruction and education;
greater number of those seven or more trustees so                and do will, give, and grant, to him, in said office, full
convened and met together.                                       power, authority, and right, to nominate, appoint,
                                                                 constitute, and ordain, by his last will, such suitable and
    And we do further will, ordain, and direct, that the         meet person or persons as be shall choose to succeed him
president, trustees, professors, tutors, and all such officers   in the presidency of said Dartmouth College; and the
as shall be appointed for the public instruction and             person so appointed, by his last will, to continue in office,
government of said college, shall, before they undertake         vested with all the powers, prinvileges, jurisdiction, and
                                                                                                                      Page 5
                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***16; 4 Wheat. 518

authority, of a President of said Dartmouth College; that       pleasure of said trustees, as fully and freely as any like
is to say, so long and until such appointment by said last      officers in any of our universities, colleges, or seminaries
will shall be disapproved by the Trustees of said               of learning in our realm of Great-Britain, lawfully may or
Dartmouth College.                                              ought to do. And also, that the said trustees and [***19]
                                                                their successors, or the major part of any seven or more
     And we do also, for us, our heirs, and successors,         of them, which shall convene for that purpose as is above
will, give, and grant to the said trustees of said Dartmouth    directed, as often as one or more of said trustees shall die,
College, and to their successors forever, or any seven or       or by removal or otherwise shall, according to their
more of them convened as aforesaid, that in the case of         judgment, become unfit or incapable to serve the interests
the ceasing or failure of a president by any means              of said College, do, as soon as may be after the death,
whatsoever, that the said trustees do elect, nominate, and      removal, or such unfitness or incapacity of such trustee or
appoint such qualified person [***17] as they, or the           trustees, elect and appoint such trustee or trustees as shall
major part of any seven or more of them, convened for           supply the place of him or them so dying, or becoming
that purpose as above directed, shall think fit, to be          incapable to serve the interests of said College; and every
president of said Dartmouth College, and to have the care       trustee so elected and appointed shall, by virtue of these
of the education and government of the students as              presents and such election and appointment, be vested
aforesaid; and in case of the ceasing of a president as         with all the powers and privileges which any of the other
aforesaid, the senior professor or tutor, being one of the      trustees of said College are hereby vested with. And we
trustees, shall exercise the office of a president, until the   do further will, ordain, and direct, that from and after the
trustees shall make choice of, and appoint, a president as      expiration of two years from the enrolment of these
aforesaid; and such professor or tutor, or any three or         presents, such vacancy or vacancies as may or shall
more of the trustees, shall immediately appoint a meeting       happen, by death or otherwise, in the aforesaid number of
of the body of the trustees for the purpose aforesaid. And      trustees, shall be filled up by election as aforesaid, so that
also we do will, give, and grant to the said trustees           when such vacancies shall be filled up unto the complete
convened as aforesaid, that they elect, nominate, and           number of twelve trustees, eight of the aforesaid [***20]
appoint so many tutors and professors to assist the             whole number of the body of trustees shall be resident,
president in the education and government of the students       and respectable freeholders of our said Province of
belonging thereto, as they the said trustees shall, from        New-Hampshire, and seven of said whole number shall
time to time, think needful and serviceable to the interests    be laymen.
of said Dartmouth College. And also, that the said
trustees or their successors, or the major part of any seven         And we do further, of our special grace, certain
or more of them convened for that purpose as above              knowledge, and mere motion, will, give, and grant, unto
directed, shall at any time displace and discharge from         the said Trustees of Darmouth College, that they, and
[***18] the service of said Dartmouth College any or all        their successors, or the major part of any seven of them
such officers, and elect others in their room and stead as      which shall convene for that purpose as is above directed,
before directed. And also that the said trustees, or their      may make, and they are hereby fully impowered, from
successors, or the major part of any seven of them which        time to time, fully and lawfully to make and establish
shall convene for that purpose as above directed, do, from      such ordinances, orders, and laws, as may tend to the
time to time, as occasion shall require, elect, constitute,     good and wholesome government of the said college, and
and appoint a treasurer, a clerk, an usher, and a steward       all the students and the several officers and ministers
for the said Dartmouth College, and appoint to them and         thereof, and to the public benefit of the same, not
each of them their respective businesses and trust; and         repugnant to the laws and statutes of our realm of Great
displace and discharge from the service of said College,        Britain, or of this our province of New-Hampshire, and
such treasurer, clerk, usher or steward, and to elect others    not excluding any person of any religious denomination
in their room and stead; which officers so elected, as          whatsoever, from free and equal liberty and advantage of
before directed, we do for us, our heirs and successors, by     education, or from any of the liberties and privileges or
these presents, constitute and establish in their respective    immunities of the said college, on account of his or their
offices, and do give to each and every of them full power       speculative sentiments in religion, and of his or their
and authority to exercise the same in said Dartmouth            being of a religious profession [***21] different from the
College, according to the directions, and during the            said trustees of the said Dartmouth College. And such
                                                                                                                   Page 6
                                           17 U.S. 518, *; 4 L. Ed. 629, **;
                                      1819 U.S. LEXIS 330, ***21; 4 Wheat. 518

ordinance, orders, and laws, which shall as aforesid be       college, not herein particularly named or mentioned;
made, we do for us, our heirs and successors, by these        which officers and ministers we do hereby impower to
presents ratify, allow of, and confirm, as good and           execute their offices and trusts, as fully and freely as any
effectual to oblige and bind all the students, and the        of the officers and ministers in our universities or
several officers and ministers of the said college. And we    colleges in our realm of Great Britain lawfully may or
do hereby authorize and impower the said Trustees of          ought to do.
Dartmouth College, and the president, tutors, and
professors, by them elected and appointed as aforesaid, to         And further, that the generous contributors to the
put such ordinances, orders, and laws, in execution, to all   support of this design of spreading the knowledge of the
proper intents and purposes.                                  only true God and Saviour among the American savages,
                                                              may, from time to time, be satisfied that their liberalities
     And we do further, of our special grace, certain         are faithfully disposed of, in the best manner, for that
knowledge, and mere motion, will, give, and grant unto        purpose, and that others may, in future time, be
the said Trustees of said Dartmouth College, for the          encouraged in the exercise of the like liberality for
encouragement of learning, and animating the students of      promoting the same pious design, it shall be the duty of
said college to diligence and industry, and a laudable        the President of said Dartmouth College, and of his
progress in literature, that they, and their successors, or   successors, annually, or as often as he shall be thereunto
the major part of any seven or more of them, convened         desired or required, to transmit to the right honourable,
for that purpose as above directed, do, by the president of   honourable, and worthy gentlemen of the trust in England
said college, for the time being, or any other deputed by     before mentioned, a faithful account of the improvements
them, give, and grant any such degree or degrees to any       and disbursements [***24] of the several sums he shall
of the students of the said college, or [***22] any others    receive from the donations and bequests made in
by them thought worthy thereof, as are usually granted in     England, through the hands of said trustees, and also
either of the universities, or any other college in our       advise them of the general plans laid, and prospects
realm of Great Britain; and that they sign and seal           exhibited, as well as a faithful account of all remarkable
diplomas or certificates of such graduations, to be kept by   occurrences, in order, if they shall think expedient, that
the graduates as perpetual memorials and testimonials         they may be published. And this to continue so long as
thereof.                                                      they shall perpetuate their board of trust, and there shall
                                                              be any of the Indian natives remaining to be proper
    And we do further, of our special grace, certain          objects of that charity.And, lastly, our express will and
knowledge, and mere motion, by these presents, for us,        pleasure is, and we do, by these presents, for us, our heirs
our heirs and successors, give and grant unto the Trustees    and successors, give and grant unto the said Trustees of
of said Dartmouth College, and to their successors, that      Dartmouth College, and to their successors forever, that
they and their successors shall have a common seal,           these our letters patent, on the enrolment thereof in the
under which they may pass all diplomas or certificates of     Secretary's office of our Province of New-Hampshire
degrees, and all other affairs and business of, and           aforesaid, shall be good and effectual in the law, to all
concerning the said college; which shall be engraven in       intents and purposes, against us, our heirs and successors,
such a form, and with such an inscription as shall be         without any other license, grant, or confirmation from us,
devised by the said trustees, for the time being, or by the   our heirs and successors, hereafter by the said trustees to
major part of any seven or more of them convened for the      be had and obtained, notwithstanding the not writing or
service of the said college as is above directed.             misrecital, not naming or misnaming the aforesaid
                                                              offices, franchises, privileges, immunities, [***25] or
    And we do further, for us, our heirs and sucessors,       other the premises, or any of them, and notwithstanding a
give and grant unto the said trustees of the said             writ of ad quod damnum hath not issued forth to inquire
Dartmouth College, and their successors, or to the major      of the premises, or any of them, before the ensealing
part of any seven or more of them convened for the            hereof, any statute, act, ordinance, or provision, or any
service of the said college, [***23] full power and           other matter or thing, to the contrary notwithstanding. To
authority, from time to time, to nominate and appoint all     have and to hold all and singular the privileges,
other officers and ministers, which they shall think          advantages, liberties, immunities, and all other the
convenient and necessary for the service of the said          premises herein and hereby granted, or which are meant,
                                                                                                                     Page 7
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                       1819 U.S. LEXIS 330, ***25; 4 Wheat. 518

mentioned, or intended to be herein and hereby given and       tenements, hereditaments, goods, chattels, and moneys,
granted unto them, the said Trustees of Dartmouth              acquired in manner aforesaid, the yearly income of the
College, and to their successors forever. In testimony         same, not exceeding the sum of 26,666 dollars, for the
whereof, we have caused these our letters to be made           use of said Dartmouth College, as specified in said letters
patent, and the public Seal of our said Province of            patent.
New-Hampshire to be hereunto affixed.Witness our
trusty and well beloved John Wentworth, Esquire,                    And the said jurors, upon their oath, further say, that
Governor and Commander in Chief in and over our said           part of the said lands, so acquired and holden by the said
Province, &c. this thirteenth day of December, in the          trustees as aforesaid, were granted by (and are situate in)
tenth year of our reign, and in the year of our Lord one       the State of Vermont, A.D. 1785, and are of great value;
thousand seven hundred and sixty-nine.                         and other part of said lands, so acquired and holden as
                                                               aforesaid, were granted by (and are situate in) the State of
     N.B. The words " and such professor, or tutor, or         New-Hampshire, in the years 1789, and 1807, and are of
any three or more of the trustees, shall immediately           great value.
appoint a meeting of the body of the trustees, for the
purpose aforesaid," between [***26] the first and second            And the said jurors, upon their oath, further say,
lines, also the words "or more," between the                   [***28] that the said Trusteees of Dartmouth College, so
twenty-seventh and twenty-eighth lines, also the words         constituted as aforesaid, on the same 27th day of June,
"or more," between the twenty-eighth and twenty-ninth          A.D. 1816, were possessed of the goods and chattels in
lines, and also the words "to all intents and purposes,"       the declaration of the said trustees specified, and at the
between the thirty-seventh and thirty-eighth line of this      place therein mentioned, as of their own proper goods
sheet, were respectively interlined before signing and         and chattels, and continued so possessed until, and at the
sealing.                                                       time of the demand and refusal of the same as hereinafter
                                                               mentioned, unless devested thereof, and their title thereto
     And the said jurors, upon their oath, further say, that   defeated, and rendered invalid, by the provisions of the
afterwards, upon the eighteenth day of the same                act of the State of New-Hampshire, made and passed on
December, the said letters patent were duly enrolled and       the same 27th day of June, A.D. 1816, and the doings
recorded in the Secretary's office of said Province, now       under the same, as hereinafter mentioned and recited.
State, of New-Hampshire -- And afterwards, and within
one year from the issuing of the same letters patent, all           And the said jurors, upon their oath, further say, that
the persons named as trustees in the same accepted the         on the 27th day of June, A.D. 1816, the legislature of said
said letters patent, and assented thereunto, and the           State of New-Hampshire made and passed a certain act,
corporation therein and thereby created and erected was        entitled, "An act to amend the charter, and enlarge and
duly organized, and has, until the passing of the act of the   improve the corporation of Dartmouth College," in the
legislature of the State of New-Hampshire, of the 27th of      words following: --
June, A.D. 1816, and ever since, (unless prevented by
                                                                   An act to amend the charter, and enlarge and
said act and the doings under the same,) continued to be a
                                                               improve the Corporation of Dartmouth College.
corporation.
                                                                    WHEREAS knowledge and learing generally
     And the said jurors, upon their oath, further say, that
                                                               diffused through a community, are essential to the
immediately after its erection and organization as [***27]
                                                               preservation of a free government, and extending [***29]
aforesaid, the said corporation had, took, acquired, and
                                                               the opportunities and advantages of education is highly
received, by gift, donation, devise, and otherwise, lands,
                                                               conducive to promote this end, and by the constitution it
goods, chattels, and moneys of great value; and from time
                                                               is made the duty of the legislators and magistrates, to
to tiem since have had, taken, received, and acquired, in
                                                               cherish the interests of literature, and the sciences, and all
manner aforesaid, and otherwise, lands, goods, chattels,
                                                               seminaries established for their advancement -- and as the
and moneys of great value; and on the same 27th day of
                                                               college of the State may, in the opinion of the legislature,
June, A.D. 1816, the said corporation, erected and
                                                               be rendered more extensively useful; Therefore,
organized as aforesaid, had, held, and enjoyed, and ever
since have had, held, and enjoyed, divers lands,                   SECT. 1. Be it enacted by the senate and house of
                                                                                                                    Page 8
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                       1819 U.S. LEXIS 330, ***29; 4 Wheat. 518

representatives, in general court convened, That the           negative of the board of overseers be expressed,
corporation, heretofore called and known by the name of        according to the provisions f this act.
the Trustees of Dartmouth College, shall ever hereafter
he called and known by the name of the Trustees of                  SECT. 3. Be it further enacted, That there shall be a
Dartmouth University. -- And the whole number of said          treasurer of said corporation, who shall be duly sworn,
trustees shall be twenty-one, a majority of whom shall         and who, before he enters upon the duties of his office,
from a quorum for the transaction of business. -- And          shall give bonds, with sureties, to the satisfaction of the
they and their successors in that capacity, as hereby          corporation, for the faithful performance thereof; and also
constituted, shall respectively forever have, hold, use,       a secretary to each of the boards of trustees and
exercise and enjoy all the powers, authorities, rights,        overseers, to be elected by the said boards [***32]
property, liberties, privileges and immunities which have      respectively, who shall keep a just and true record of the
hitherto been possessed, enjoyed and used by the               proceedings of the board for which he was chosen. And
Trustees of Dartmouth College -- except so far as the          it shall furthermore be the duty of the secretary of the
same may be varied or limited by the provisions [***30]        board of trustees to furnish, as soon as may be, to the said
of this act. And they shall have power to determine the        board of overseers, copies of the records of such votes
times and places of their meetings, and manner of              and proceedings, as by the provisions of this act are made
notifying the saem; to organize colleges in the university;    subject to their revision and control.
to establish an institute and elect fellows and members
                                                                    SECT. 4. Be it further enacted, That the president of
proper, and determine their duties and compensation, and
                                                               Dartmouth University, and his successors in office, shall
also to displace them; to delegate the power of supplying
                                                               have the superintendence of the government and
vacancies in any of the offices of the university, for any
                                                               instruction of the students, and may preside at all
term of time not extending beyond their next meeting: to
                                                               meetings of the trustees, and do and execute all the duties
pass ordinances for the government of the students, with
                                                               devolving by usage on the president of a university. He
reasonable penalties, not inconsistent with the
                                                               shall render annually to the governor of this state an
constitution and laws of this State; to prescribe the course
                                                               account of the number of students, and of the state of the
of education, and confer degrees; and to arrange, invest,
                                                               funds of the university; and likewise copies of all
and employ the funds of the university.
                                                               important votes and proceedings of the corporation and
     SECT. 2. And be it further enacted, That there shall      overseers, which shall be made out by the secretaries of
be a board of overseers, who shall have perpetual              the respective boards.
succession, and whose number shall be twenty-five,
                                                                    SECT. 5. Be it further enacted, That the president
fifteen of whom shall constitute a quorum for the
                                                               and professors of the university shall be nominated by the
transaction of business. The president of the senate, and
                                                               trustees, and approved by the overseers: and shall be
the speaker of the house of representatives of
                                                               liable to be suspended [***33] or removed from office in
New-Hampshire, the governor and lieutant governor of
                                                               manner as before provided. And each of the two boards
Vermont, for the time being, shall be members of said
                                                               of trustees and overseers shall have power to suspend and
board, ex officio. The board of overseers shall have
                                                               remove any member of their respective boards.
power to [***31] determine the times and places of their
meetings, and manner of notifying the same; to inspect              SECT. 6. Be it further enacted, That the governor
and confirm, or disapprove and negative, such votes and        and council are hereby authorized to fill all vacancies in
proceedins of the board of trustees as shall relate to the     the board of overseers, whether the same be original
appointment and removal of president, professors, and          vacancies, or are occasioned by the death, resignation or
other permanent officers of the university, and determine      removal of any member. And the governor and council
their salries; to the establishment of colleges and            in like manner shall, by appointments, as soon as may be,
professorships, and the erection of new college buildings.     complete the present board of trustees to the number of
Provided always, that the said negative shall be expressed     twenty-one, as provided for by this act, and shall have
within sixty days from the time of said overseers being        power also to fill all vacancies that may occur previous
furnished with copies of such acts. -- Provided also, that     to, or during the first meeting of the said board of
all votes and proceedings of the board of trustees shall be    trustees. But the president of said university for the time
valid and effectual, to all intents and purposes, until such   being, shall, nevertheless, be a member of said board of
                                                                                                                     Page 9
                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***33; 4 Wheat. 518

trustees ex officio. And the governor and council shall         thereto, or in amendment thereof, but have continued to
have power to inspect the doings and proceedings of the         act, and still claim the right of acting, under the said
corporation, and of all the officers of the university,         letters patent.
whenever they deem it expedient -- and they are hereby
required to make such inspection, and report the same to             And the said jurors, upon their oath, further say, that,
the legislature of this State, as often as once in every five   on the seventh day of October, A.D. 1816, and before the
[***34] years. And the governor is hereby authorized            commencement of this suit, the said Trustees of
and requested to summon the first meeting of the said           Dartmouth College demanded [***36] of the said
trustees and overseers, to be held at Hanover, on the 26th      William H. Woodward the property, goods, and chattels
day of August next.                                             in the said declaration specified, and requested the said
                                                                William H. Woodward, who then had the same in his
     SECT. 7. Be it further enacted, That the president         hands and possession, to deliver the same to them, which
and professors of the university, before entering upon the      the said William H. Woodward then and there refused to
duties of their offices, shall take the oath to support the     do, and has ever since neglected and refused to do, but
constitution of the United States and of this State;            converted the same to his own use, if the said Trustees of
certificates of which shall be in the office of the Secretary   Dartmouth College could, after the passing of the said act
of this State, within sixty days from their entering on         of the 27th day of June, lawfully demand the same, and if
their offices respectively.                                     the said William H. Woodward was not, by law,
                                                                authorized to retain the same in his possession after such
     SECT. 8. Be it further enacted, That perfect freedom       demand.
of religious opinion shall be enjoyed by all the officers
and students of the university; and no officer or student            And the said jurors, upon their oath, further say, that
shall be deprived of any honours, privileges, or benefits       on the 18th day of December, A.D. 1816, the legislature
of the institution, on account of his religious creed or        of said State of New-Hampshire made and passed a
belief.The theological colleges which may be established        certain other act, entitled, "An act in addition to, and in
in the university shall be founded on the same principles       amendment of, an act, entitled, An act to amend the
of religious freedom; and any man, or body of men, shall        charter, and enlarge and improve the corporation of
have a right to endow colleges or professorships of any         Dartmouth College," in the words following:
sect of the protestant christian religion: And the trustees
shall be held and obliged to appoint professors of                   An act in addition to, and in amendment of, an act,
learning and piety of such [***35] sects according to the       entitled, "An act to amend the charter, and enlarge and
will of the donors.                                             improve the Corporation of Dartmouth College."

    Approved, June 27th, 1816.                                       WHEREAS the meetings of the Trustees and
                                                                Overseers [***37] of Dartmouth University, which were
     And the said jurors, upon their oath, further say, that,   summoned agreeably to the provisions of said act, failed
at the annual meeting of the Trustees of Dartmouth              of being duly holden, in consequence of a quorum of
College, constituted agreeably to the letters patent            neither said trustees nor overseers attending at the ime
aforesaid, and in no other way or manner, holden at said        and place appointed, whereby the proceedings of said
college, on the 28th day of August, A.D. 1816, the said         corporation have hitherto been, and still are delayed:
trustees voted and resolved, and caused the said vote and
resolve to be entered on their records, that they do not             SECTION 1. Be it enacted by the senate and house
accept the provisions of the said act of the legislature of     of representatives, in general Court convened, That the
New-Hampshire of the 27th of June, 1816, above recited,         governor be, and he is hereby authorized and requested to
but do, by the said vote and resolve, expressly refuse to       summon a meeting of the Trustees of Dartmouth
accept or act under the same.                                   University, at such time and place as he may deem
                                                                expedient. And the said trustees, at such meeting, may
    And the said jurors, upon their oath, further say, that     do and transact any matter or thing, within the limits of
the said Trustees of Dartmouth College have never               their jurisdiction and power, as such trustees, to every
accepted, assented to, or acted under the said act of the       intent and purpose, and as fully and completely as if the
27th of June, A.D. 1816, or any act passed in addition          same were transacted at any annual, or other meeting.
                                                                                                                   Page 10
                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***37; 4 Wheat. 518

And the governor, with advice of council, is authorized to      improve the corporation of Dartmouth College."
fill all vacancies that have happened, or may happen in
the board of said trustees, previous to their next annual            Be it enacted by the senate and house of
meeting. And the governor is hereby authorized to               representatives in general Court convened, That if any
summon a meeting of the overseers of said university, at        person or persons shall assume the office of president,
such time and place as he may consider proper. An               trustee, professor, secretary, treasurer, [***40] librarian,
provided a less [***38] number than a quorum of said            or other officer of Dartmouth University; or by any name,
board of overseers convene at the time and place                or under any pretext, shall, directly or indirectly, take
appointed for such meeting of their board, they shall have      upon himself or themselves the discharge of any of the
power to adjourn, from time to time, until a quorum shall       duties of either of those offices, except it be pursuant to,
have convened.                                                  and in conformity with, the provisions of an act, entitled,
                                                                "an act to amend the charter and enlarge and improve the
     SECTION 2. And be it further enacted, That so              corporation of Dartmouth College," or, of the "act, in
much of the act, to which this is an addition, as makes         addition to and in amendment of an act, entitled, an act to
necessary any particular number of trustees or overseers        amend the charter and enlarge and improve the
of said University, to constitute a quorum for the              corporation of Dartmouth College," or shall in any way,
transaction of business, be, and the same hereby is             directly or indirectly, wilfully impede or hinder any such
repealed; and that hereafter nine of said trustees,             officer or officers already existing, or hereafter to be
convened agreeably to the provisions of this act, or to         appointed agreeably to the provisions of the acts
those of that to which this is an addition, shall be a          aforesaid, in the free and entire discharge of the duties of
quorum for transacting business; and that in the board of       their respective offices, conformably to the provisions of
trustees six votes at least shall be necessary for the          said acts, the person or persons so offending shall for
passage of any act or resolution. And provided also, that       each offence forfeit and pay the sum of five hundred
any smaller number than nine of said trustees, convened         dollars, to be recovered by any person who shall sue
at the time and place appointed for any meeting of their        therefore, one half thereof to the use of the prosecutor,
board, according to the provisions of this act, or that to      and the other half to the use of said University.
which this is an addition, shall have power to adjourn
from time to time, until a quorum shall have convened.               And be it further enacted, That the person or persons
                                                                who sustained [***41] the offices of secretary and
     SECTION 3. And be it further enacted, That each            treasurer of the trustees of Dartmouth College, next
member of said board of trustees, already appointed or          before the passage of the act, entitled, "an act to amend
chosen, [***39] or hereafter to be appointed or chosen,         the charter and enlarge and improve the corporation of
shall, before entering on the duties of his office, make        Dartmouth College," shall continue to hold and discharge
and subscribe an oath for the faithful discharge of the         the duties of those offices, as secretary and treasurer of
duties aforesaid; which oath shall be returned to, and filed    the Trustees of Dartmouth University, until another
in the office of the secretary of state, previous to the next   person or persons be appointed, in his or their stead, by
regular meeting of said board, after said member enters         the trustees of said University. And that the treasurer of
on the duties of his office, as aforesaid.                      said University, so existing, shall in his office have the
                                                                care, management, direction, and superintendance of the
    Approved, December 18, 1816.                                property of said corporation, whether real or personal,
                                                                until a quorum of said trustees shall have convened in a
     And the said jurors, upon their oath, further say, that    regular meeting.
on the 26th day of December, A.D. 1816, the legislature
of said State of New-Hampshire made and passed a                    Approved, December 26, 1816.
certain other act, entitled, "An act in addition to an act,
entitled, an act in addition to, and in amendment of, an             And the said jurors, upon their oath, further say, that
act, entitled, an act to amend the charter and enlarge and      the said William H. Woodward, before the said 27th day
improve the corporation of Dartmouth College," in the           of June, had been duly appointed by the said Trustees of
words following: -- An act in addition to an act, entitled,     Dartmouth College, secretary and treasurer of the said
"an act in addition to, and in amendment of, an act,            corporation, and was duly qualified t exercise, and did
entitled, an act to amend the charter and enlarge and           exercise the said offices, and perform the duties of the
                                                                                                                  Page 11
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                       1819 U.S. LEXIS 330, ***41; 4 Wheat. 518

same; and as such secretary and treasurer, rightfully had,     Woodward hath above in pleading alleged. [***44] But
while he so continued sucretary and treasurer as [***42]       if upon the whole matter aforesaid, it shall seem to the
aforesaid, the custody and keeping of the several goods,       Court here, that the said acts last mentioned are not valid
chattels, and property, in said declaration specified.         in law, and are not binding on the said trustees of
                                                               Dartmouth College without acceptance thereof, and
     And the said jurors, upon their oath, further say, that   assent thereto, by them, so as render them incapable of
the said William H. Woodward was removed by said               maintaining this action, and that the said acts are
Trustees of Dartmouth College (if the said trustees could,     repugnant to the constitution of the United States and
by law, do the said acts) from said office of secretary, on    void, then the said jurors, upon their oath, say that the
the 27th day of August, A.D. 1816, and from said office        said William H. Woodward is guilty of the premises
of treasurer, on the 27th day of September then next           above laid to his charge, by the declaration aforesaid, and
following, of which said removals he, the said William H.      in that case, they assess the damages of them, the said
Woodward, had due notice on each of said days last             trustees of Dartmouth College, by occasion thereof, at
mentioned.                                                     twenty thousand dollars.

     And the said jurors, upon their oath, further say, that        Judgment having been afterwards rendered upon the
the corporation, called the Trustees of Dartmouth              said special verdict by the Superior Court of the State of
University, was duly organized on the fourth day of            New-Hampshire, being the highest Court of law or equity
February, A.D. 1817, pursuant to, and under the said           of said State, for the plaintiff below, the cause was
recited acts of the 27th day of June, and of the 18th and      brought before this Court by writ of error.
26th days of December, A.D. 1816; and the said William
H. Woodward was, on the said fourth day of February,           CASE SUMMARY:
A.D. 1817, duly appointed by the said Trustees of
Dartmouth University, secretary and treasurer of the said
Trustees of Dartmouth University, and then and there           PROCEDURAL POSTURE: Plaintiffs, the trustees of a
accepted both said offices.                                    college, brought action in trover in the state court for the
                                                               book of records, corporate seal, and other corporate
     And the said jurors, upon their oath, further say, that   property, to which plaintiffs alleged they were entitled.
this suit [***43] was commenced on the eighth day of           The state court, in a special verdict, found for defendant,
February, A.D. 1817.                                           if certain acts of the legislature were valid. Plaintiffs
                                                               sought review from a decision of the Superior Court of
     But whether upon the whole matter aforesaid, by the       the State of New Hampshire, which rendered judgment
jurors aforesaid, in manner and form aforesaid found, the      for defendant.
said acts of the 27th of June, 18th and 26th of December,
A.D. 1816, are valid in law, and binding on the said           OVERVIEW: Plaintiffs, the trustees of a college,
trustees of Dartmouth College, without acceptance              brought an action in trover against defendant for
thereof and assent thereunto by them, so as to render the      corporate property to which plaintiffs alleged they were
plaintiffs incapable of maintaining this action, or whether    entitled. Defendant claimed under three acts of the
the same acts are repugnant to the constitution of the         legislature of New Hampshire, one of which amended the
United States, and so void, the said jurors are wholly         charter of the college and increased the number of
ignorant, and pray the advice of the Court upon the            trustees to 21, that such acts gave over the appointment of
premises. And if upon the said matter, it shall seem to        the additional members to the executive of the state, and
the Court here, that the said acts last mentioned are valid    created a board of overseers, with the power to inspect
in law, and binding on said trustees of Dartmouth              and control the most important acts of the trustees.
College, without acceptance thereof, and assent thereto,       Plaintiffs refused to accept this amended charter, and
by them, so as to render the plaintiffs incapable of           brought suit for the corporate property. On appeal, the
maintaining this action, and are not repugnant to the          Supreme Court stated that the circumstances of the case
constitution of the United States, then the said jurors,       constituted a contract, as an application was made to the
upon their oath, say, that the said William H. Woodward        crown for a charter to incorporate a religious and literary
is not guility of the premises above laid to his charge, by    institution. The donors, the trustees, and the crown were
the declaration aforesaid, as the said William H.
                                                                                                                   Page 12
                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***44; 4 Wheat. 518

the original parties to the contract, which was one made        the objects about which the Constitution is solicitous, and
on valuable consideration. The court held that the              to which its protection is extended.
obligation of the contract could not be impaired without
violating the Constitution. As the acts of the legislature
                                                                Business & Corporate Law > Corporations > Formation
were repugnant to the Constitution, the Court reversed
                                                                > Corporate Existence, Powers & Purpose > General
the judgment of the state court below.
                                                                Overview
OUTCOME: The Court reversed the decision of the                 Business & Corporate Law > Nonprofit Corporations &
state court on the grounds that the legislative acts            Organizations > General Overview
impaired contractual obligations.                               Education Law > Administration & Operation > Boards
                                                                of Postsecondary Schools > Authority
CORE TERMS: charter, charity, franchise, founder,               [HN4] Almost all eleemosynary corporations, those
vested, eleemosynary, donor, incorporation, founded,            which are created for the promotion of religion, of
appoint, donation, governor, youth, visitatorial,               charity, or of education, are of the same character. In
appointed, declare, grantee, charitable, appointment,           every literary or charitable institution, unless the objects
impairing,     valuable     consideration, hereditament,        of the bounty be themselves incorporated, the whole legal
endowment, marriage, impair, bounty, endowed,                   interest is in trustees, and can be asserted only by them.
beneficial interest, corporator, repugnant
                                                                Constitutional Law > Congressional Duties & Powers >
LexisNexis(R) Headnotes                                         Contracts Clause > General Overview
                                                                [HN5] The legislature of a state shall pass no act
                                                                impairing the obligation of contracts.

Business & Corporate Law > Corporations > Formation
                                                                Constitutional Law > Substantive Due Process > Scope
> Corporate Existence, Powers & Purpose > General
                                                                of Protection
Overview
                                                                [HN6] In private eleemosynary institutions, the body
[HN1] A corporation is an artificial being, invisible,
                                                                corporate, as possessing the whole legal and equitable
intangible, and existing only in contemplation of law.
                                                                interest, and completely representing the donors, for the
Being the mere creature of law, it possesses only those
                                                                purpose of executing the trust, has rights which are
properties which the charter of its creation confers upon
                                                                protected by the constitution.
it, either expressly, or as incidental to its very existence.
                                                                LAWYERS' EDITION HEADNOTES:
Business & Corporate Law > Corporations > Formation
> Corporate Existence, Powers & Purpose > General
                                                                     The charter granted by the British crown to the
Overview
                                                                trustees of Dartmouth College, in New Hampshire, in the
Education Law > Faculty & Staff > Compensation >
                                                                year 1769, is a contract within the meaning of that clause
Payment
                                                                of the constitution of the United States, art. 1, s. 10,
[HN2] There can be no reason for implying in a charter,
                                                                which declares that no state shall make any law impairing
given for a valuable consideration, a power which is not
                                                                the obligation of contracts. The charter was not dissolved
only not expressed, but is in direct contradiction to its
                                                                by the revolution.
express stipulations.
                                                                     An act of the state legislature of New Hampshire,
Constitutional Law > Congressional Duties & Powers >            altering the charter, without the consent of the
Contracts Clause > General Overview                             corporation, in a material respect, is an act impairing the
Contracts Law > Consideration > Enforcement of                  obligation of the charter, and is unconstitutional and void.
Promises > General Overview
                                                                    Under its charter, Dartmouth College was a private
[HN3] Contracts, the parties to which have a vested
                                                                and not a public corporation. That a corporation is
beneficial interest, and those only, it has been said, are
                                                                established for purposes of general charity, or for
                                                                                                                   Page 13
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                       1819 U.S. LEXIS 330, ***44; 4 Wheat. 518

education generally, does not, per se, make it a public        corporation, and with power to hold and dispose of lands
corporation, liable to the control of the legislature.         and goods, for the use of the College, with all the
                                                               ordinary powers of corporations. They are in their
SYLLABUS                                                       discretion to apply the funds and property of the College
                                                               to the support of the president, tutors, ministers, and other
     The charter granted by the British crown to the           officers of the College, and such missionaries and
trustees of Dartmouth College, in New-Hampshire, in the        schoolmasters as they may see fit to employ among
year 1769, is a contract within the meaning of that clause     [***47] the Indians. There are to be twelve trustees
of the constitution of the United States, (art. 1. s. 10.)     forever, and no more; and they are to have the right of
which declares that [***45] no State shall make any law        filling vacancies occuring in their own body. The Rev.
impairing the obligation of contracts. The charter was         Mr. Wheelock is declared to be the FOUNDER of the
not dissolved by the revolution.                               College, and is, by the charter, appointed first president,
                                                               with power to appoint a successor, by his last will. All
     An act of the State legislature of New-Hampshire,
                                                               proper powers of government, superintendence, and
altering the charter, without the consent of the
                                                               visitation, are vested in the trustees. They are to appoint
corporation, in a material respect, is an act impairing the
                                                               and remove all officers at their discretion; to fix their
obligation of the charter, and is unconstitutional and void.
                                                               salaries, and assign their duties; and to make all
    Under its charter, Dartmouth College was a private         ordinances, orders, and laws, for the government of the
and not a public corporation. That a corporation is            students. And to the end that the persons who had acted
established for purposes of general charity, or for            as depositaries of the contributions in England, and who
education generally, does not, per se, make it a public        had also been contributors themselves, might be satisfied
corporation, liable to the control of the legislature.         of the good use of their contributions, the president was
                                                               annually, or when required, to transmit to them an
COUNSEL: Mr. Webster, for the plaintiffs in error. The         account of the progress of the institution, and the
general question is, whether the acts of the 27th of June,     disbursements of its funds, so along as they should
and of the 18th and 26th of December, 1816, are valid          continue to act in that trust. These letters patent are to be
and binding on the rights of the plaintiffs, without their     good and effectual in law, against the king, his heirs and
acceptance or assent.                                          successors forever, without further grant or confirmation;
                                                               and the trustees are to hold all [***48] and singular these
The substance of the facts recited in the preamble to the      privileges, advantages, liberties, and immunities, to them
charter is, that Dr. Wheelock had founded a CHARITY,           and to their successors forever. No funds are given to the
on funds owned and procured by himself; that he was, at        college by this charter. A corporate existence and
that time, the sole dispenser and sole administrator, as       capacity are given to the trustees, with the privileges and
well as the legal owner of these funds; that he had made       immunities which have been mentioned, to enable the
his will, devising this property in trust to continue the      founder and his associates the better to manage the funds
existence [***46] and uses of the school, and appointed        which they themselves had contributed, and such others
trustees; that, in this state of things, he had been invited   as they might afterwards obtain.
to fix his school permanently in New-Hampshire, and to
extend the design of it to the education of the youth of       After the institution, thus created and constituted, had
that province; that, before he removed his school, or          existed, uninterruptedly and usefully, nearly fifty years,
accepted this invitation, which his friends in England had     the legislature of New-Hampshire passed the acts in
advised him to accept, he applied for a charter, to be         question. The first act makes the twelve trustees under
granted, not to whomsoever the king or government of           the charter, and nine other individuals to be appointed by
the province should please, but to such persons as he          the governor and council, a corporation, by a new name;
named and appointed, viz. the persons whom he had              and to this new corporation transfers all the property,
already appointed to be the future trustees of his charity     rights, powers, liberties, and privileges of the old
by his will. The Charter, or letters patent, then proceed to   corporation; with further power to establish NEW
create such a corporation, and to appoint twelve persons       COLLEGES AND AN INSTITUTE, and to apply all or
to constitute it, by the name of the "Trustees of              any part of the funds to these purposes, subject to the
Dartmouth College;" to have perpetual existence, as such       power and control of a board of twenty-five overseers, to
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                                        1819 U.S. LEXIS 330, ***48; 4 Wheat. 518

be appointed by the governor and council. The second             the corporation.They affect the rights of the whole body,
act makes further provisions for executing [***49] the           as a corporation, and the rights of the individuals who
objects of the first, and the last act authorizes the            compose it. They revoke corporate powers and
defendant, the treasurer of the plaintiffs, to retain and        franchises. They alienate and transfer the property of the
hold their property, against their will.                         College to others. By the charter, the trustees had a right
                                                                 to fill vacancies in their own number. This is now taken
If these acts are valid, the old corporation is abolished,       away. They were to consist of twelve, and by express
and a new one created. The first act does, in fact, if it can    provision, of no more. This is altered. They and their
have effect, create a new corporation, and transfer to it all    successors, appointed by themselves, where forever to
the property and franchises of the old. The two                  hold the property. The legislature has found successors
corporations are not the same, in any thing which                for them, before their seats are vacant. The powers and
essentially belongs to the existence of a corporation.           privileges, which the twelve were to exercise exclusively,
They have different names, and different powers, rights          are now to be exercised by others. By one of the acts,
and duties. Their organization is wholly different. The          they are subjected to heavy penalties, if they exercise
powers of the corporation are not vested in the same, or         their offices, or any of those powers and privileges
similar hands. In one, the trustees are twelve, and no           granted them by charter, and which they had exercised
more. In the other, they are twenty-one. In one, the             for fifty years. They are to be punished for not accepting
power is a single board. In the other, it is divided             the new grant, and taking its [***52] benefits. This, it
between two boards. Although the act professes to                must be confessed, is rather a summary mode of settling a
include the old trustees in the new corporation, yet that        question of constitutional right. Not only are new
was without their assent, and against their remonstrance;        trustees forced into the corporation, but new trusts and
and no person can be compelled to be a member of such a          uses are created. The College is turned into a University.
corporation against his will. It was neither expected nor        Power is given to create new colleges, and to authorize
intended, that they should be members of the new                 any diversion of the funds, which may be agreeable to the
corporation. The act itself treats [***50] the old               new boards, sufficient latitude is given by the undefined
corporation as at an end, and going on the ground that all       power of establishing an Institute. To these new Colleges,
its functions have ceased, it provides for the first meeting     and this Institute, the funds contributed by the founder,
and organization of the new corporation. It expressly            Dr. Wheelock, and by the original donors, the Earl of
provides, also, that the new corporation shall have and          Dartmouth and others, are to be applied, in plain and
hold all the property of the old; a provision which would        manifest disregard of the uses to which they were given.
be quite unnecessary upon any other ground, than that the        The president, one of the old trustees, had a right to his
old corporation was dissolved. But if it could be                office, salary, and emoluments, subject to the twelve
contended, that the effect of these acts was not entirely to     trustees alone. His title to these is now changed, and he
abolish the old corporation, yet it is manifest that they        is made accountable to new masters. So also all the
impair and invade the rights, property, and powers of the        professors and tutors. If the legislature can at pleasure
trustees under the charter, as a corporation, and the legal      make these alterations and changes, in the rights and
rights, privileges, and immunities which belong to them,         privileges of the plaintiffs, it may, with equal propriety,
as individual members of the corporation.The twelve              abolish these rights and privileges altogether. The same
trustees were the sole legal owners of all the property          power which can do any part of this work, [***53] can
acquired under the charter. By the acts others are               accomplish the whole. And, indeed, the argument, on
admitted, against their will, to be joint owners. The            which these acts have been hitherto defended, goes
twelve individuals, who are trustees, were possessed of          altogether on the ground, that this is such a corporation as
all the franchises and immunities conferred by the               the legislature may abolish at pleasure; and that its
charter. By the acts, nine other trustees, and twenty-five       members have no rights, liberties, franchises, property or
overseers, are admitted against their will, to divide these      privileges, which the legislature may not revoke, annul,
franchises and immunities with them. If, either as a             alienate or transfer to others whenever it sees fit.
corporation, [***51] or as individuals, they have any
legal rights, this forcible intrusion of others violates those   It will be contended by the plaintiffs, that these acts are
rights, as manifestly as an entire and complete ouster and       not valid and binding on them without their assent. 1.
diapossession. These acts alter the whole constitution of        Because they are against common right, and the
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                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***53; 4 Wheat. 518

constitution of New-Hampshire. 2. Because they are              somewhere, in some department of government, before
repugnant to the constitution of the United States. I am        the revolution. The British parliament could not have
aware of the limits which bound the jurisdiction of the         annulled or revoked this grant as an act of ordinary
Court in this case; and that on this record nothing ann be      legislation. It is had done it at all, it could only have been
decided, but the single question, whether these acts are        in virtue of that sovereign power, called omnipotent,
repugnant to the constitution of the United States. Yet it      which does not belong to any [***56] legislature in the
may assist in forming an opinion of their true nature and       United States. The legislature of New-Hampshire has the
character, to compare them with those fundamental               same power over this charter, which belonged to the king,
principles, introduced into the State governments for the       who granted it, and no more.By the law of England, the
purpose of limiting the exercise of the legislative power,      power to create corporations is a part of the royal
and which the constitution of New-Hampshire expresses           prerogative. 3 By the revolution, this power may be
with great fullness and [***54] accuracy.                       considered as having devolved on the legislature of the
                                                                States, and it has accordingly been exercised by the
It is not too much to assert, that the legislature of           legislature. But the king cannot abolish a corporation, or
New-Hampshire would not have been competent to pass             new model it, or alter its powers, without its assent. This
the acts in question, and to make them binding on the           is the acknowledged and well-known doctrine of the
plaintiffs without their assent, even if there had been, in     common law. "Whatever might have been the notion in
the constitution of New-Hampshire, or of the United             former times," says Lord Mansfield, "it is most certain
States, no special restriction on their power; because          now, that the corporations of the universities are lay
these acts are not the exercise of a power properly             corporations; and that the crown cannot take away from
legislative. 1 Their object and effect is to take away from     them any rights have been formerly subsisting in them
one, rights, property, and franchises, and to grant them to     under old charters or prescriptive usage." 4 After
another. This is not the exercise of a legislative power.       forfeiture duly found, the king may regrant the
To justify the taking away of vested rights, there must be      franchises; but a grant of franchises already granted, and
a forfeiture; to adjudge upon and declare which, is the         of which no forfeiture has been found, is void. Corporate
proper province of the judiciary. Attainder and                 franchises can only be forfeited by trial and judgment. 5
confiscation are acts of sovereign power, not acts of           In case of a new charter or grant to an existing
legislation. The British parliament, among other                corporation, it may accept [***57] or reject it as it
unlimited powers, claims that of altering and vacating          pleases. 6 It may accept such part of the grant as it
charters; not as an act of ordinary legislation, but of         chooses, and reject the rest. 7 In the very nature of things,
uncontrolled authority. It is theoretically omnipotent.Yet,     a charter cannot be forced upon any body. No one can be
in modern times, it has attempted the exercise of this          compelled to accept a grant; and without acceptance the
power very rarely. In a celebrated instance, those who          grant is necessarily void. 8 It cannot be pretended that the
asserted this power in parliament, vindicated its exercise      legislature, as successor to the king in this part of his
only in a case, in [***55] which it could be shown, 1st.        prerogative, has any power to revoke, vacate, or alter this
That the charter in question was a charter of political         charter. If, therefore, the legislature has not this power
power. 2d. That there was a great and overruling state          by any specific grant contained in the constitution; nor as
necessity, justifying the violation of the charter. 3d. That    included in its ordinary legislative powers; nor by reason
the charter had been abused, and justly forfeited. 2 The        of its succession to the prerogatives of the crown in this
bill affecting this charter did not pass. Its history is well   particular; on what ground would the authority to pass
known. The act which afterwards did pass, passed with           these acts rest, even if there were no special prohibitory
the assent of the corporation. Even in the worst times, this    clauses in the constitution, and the bill of rights?
power of parliament to repeal and rescind charters has not
often been exercised. The illegal proceedings in the reign              1 Calder et ux. v. Bull, 3 Dall. 386.
of Charles II. were under colour of law. Judgments of                   2 Annual Reg. 1784, p. 160. Parlia. Reg. 1783.
forfeiture were obtained in the Courts. Such was the case               Mr. Burke's Speech on Mr. Fox's E. I. Bill.
of the quo warranto against the city of London, and the                 Burke's Works, Vol. III. p. 414, 417. 467, 468.
proceedings by which the charter of Massachusetts was                   486.
vacated. The legislature of New-Hampshire has no more                   3 1 Bl. Com. 472.
power over the rights of the plaintiffs than existed,                   4 3 Burr. 1656.
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        5 3 T.R. 244. King v. Passmore.                          as the legislature sees fit to give, and the grantees to
        6 The King v. Vice Chancellor of Cambridge, 3            accept.
        Burr. 1656. 3 T.R. 240. per Lord Kenyon.
        7 Idem, 1661. and King v. Passmore, ubi supra.                  9 1 Wooddes. 474. 1 Bl. Com.467.
        8 Ellis v. Marshall, 2 Mass. R. 277. 1 Kyd on
                                                                   [***60] The corporation in question is not a civil,
        Corp. 65, 66.
                                                                 although it is a lay corporation. It is an eleemosynary
 [***58] But there are prohibitions in the constitution          corporation. It is a private charity, originally founded
and bill of rights of New-Hampshire, introduced for the          and endowed by an individual, with a charter obtained for
purpose of limiting the legislative power, and of                it at his request, for the better administration of his
protecting the rights and property of the citizens. One          charity. "The eleemosynary sort of corporations are such
prohibition is, "that no person shall be deprived of his         as are constituted for the perpetual distributions of the
property, immunities or privileges, put out of the               free alms or bounty of the founder of them, to such
protection of the law, or deprived of his life, liberty, or      persons as he has directed. Of this are all hospitals for
estate, but by judgment of his peers, or the law of the          the maintenance of the poor, sick, and impotent; and all
land." In the opinion, however, which was given in the           colleges both in our universities and out of them." 10
Court below, it is denied that the trustees, under the           Eleemosynary corporations are for the management of
charter, had any property, immunity, liberty or privilege,       private property, according to the will of the donors.
in this corporation, within the meaning of this prohibition      They are private corporations. A college is as much a
in the bill of rights. It is said, that it is a public           private corporation as a hospital; especially a college
corporation, and public property. That that trustees have        founded as this was, by private bounty. A college is a
no greater interest in it than any other individuals. That it    charity. "The establishment of learning," says Lord
is not private property, which they can sell, or transmit to     Hardwicke, "is a charity, and so considered in the statute
their heirs; and that, therefore, they have no interest in it.   of Elizabeth. A devise to a college, for their benefit, is a
That their office is a public trust like that of the governor,   laudable charity, and deserves encouragement." 11 The
or a judge; and that they have no more concern in the            legal signification of a charity is derived chiefly from the
property of the college, than the governor in the property       statute 43 Eliz. c. 4. [***61] "Those purposes," says Sir.
of the State, or than the judges in the fines which they         W. Grant, "are considered charitable which that statute
impose [***59] on the culprits at their bar. That it is          enumerates." 12 Colleges are enumerated as charities in
nothing to them whether their powers shall be extended           that statute. The government, in these cases, lends its aid
or lessened, any more than it is to the Courts, whether          to perpetuate the beneficent intention of the donor, by
their jurisdiction shall be enlarged or diminished. It is        granting a charter, under which his private charity shall
necessary, therefore, to inquire into the true nature and        continue to be dispensed, after his death. This is done
character of the corporation, which was created by the           either by incorporating the objects of the charity, as, for
charter of 1769.                                                 instance, the scholars in a college, or the poor in a
                                                                 hospital; or by incorporating those who are to be
There are divers sorts of corporations; and it may be            governors, or trustees, of the charity. 13 In cases of the
safely admitted, that the legislature has more power over        first sort, the founder is, by the common law, vistor. In
some, than over others. 9 Some corporations are for              early times it became a maxim, that he who gave the
government and political arrangement; such for example           property might regulate it in future. Cujus est dare, ejus
as cities, counties, and the towns in New England. These         est disponere. This right of visituation descended from
may be changed and modified as public convenience may            the founder to his heir, as a right of property, and
require, due regard being always had to the rights of            precisely as his other property went to his heir; and in
property. Of such corporations, all who live within the          default of heirs, it went to the King, as all other property
limits are of course obliged to be members, and to submit        goes to the King, for the want of heirs. the right of
to the duties which the law imposes on them as such.             visitation arises from the property. It grows out of the
Other civil corporations are for the advancement of trade        endowment. The founder may, if he please, part with it,
and business, such as banks, insurance companies, and            at the time when he establishes the [***62] charity, and
the like. These are created, not by general law, but             may vest it in others. Therefore, if he chooses that
usually by grant. Their constitution is special. It is such      governors, trustees, or overseers, should be appointed in
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                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***62; 4 Wheat. 518

the charter, he may cause it to be done, and his power of       the general words visitator sit) the person so constituted
visitation will be transferred to them, instead of              has all incidental power; but he may be restrained as to
descending to his heirs.The persons thus assigned or            particular instances. The founder may appoint a special
appointed by the founder will be visitors, with all the         visitor for a particular purpose and no further. The
powers of the founder, in exclusion of his heir. 14 The         founder may make a general visitor; and yet appoint an
right of visitation then accrues to them as a matter of         inferior particular power, to be executed without going to
property, by the gift, transfer, or appointment of the          the visitor in the first instance." 21 And even if the king
founder. This is a private right which they can assert in       be founder, if he grant a charter incorporating trustees
all legal modes, and in which they have the same                and governors, they are visitors, and the king cannot visit.
protection of the law as in all other rights. As visitors,      22 A subsequent donation, or engrafted fellowship, falls
they may make rules, ordinances, and statutes, and alter        under the same general visitatorial power, if not
and repeal them, as far as permitted so to do by the            otherwise specially provided. 23 In New-England, and
charter. 15 Although the charter proceeds from the crown,       perhaps throughout [***65] the United States,
or the government, it is considered as the will of the          eleemosynary corporations have been generally
donor. It is obtained at his request. He imposes it as the      established in the latter mode, that is, by incorporating
rule which is to prevail in the dispensation of his bounty      governors or trustees, and vesting in them the right of
in all future times. The king, or government, which             visitation. Small variations may have been in some
grants the charter, is not thereby the founder, but he who      instances adopted; as in the case of Harvard College,
furnishes the funds. The gift of the revenues is the            where some power of inspection is given to the overseers,
foundation. [***63] 16 The leading case on this subject         but not, strictly speaking, a visitatorial power, which still
is Phillips v. Bury. 17 This was an ejectment brought to        belongs, it is apprehended, to the fellows, or members of
recover the rectory house, &c. of Exeter College, in            the corporation. In general, there are many donors. A
Oxford. Thie question was, whether the plaintiff or             charter is obtained, comprising them all, or some of them,
defendant was legal rector. Exeter College was founded          and such others as they choose to include, with the right
by an individual, and incorporated by a charter granted by      of appointing their successors. They are thus the visitors
Queen Elizabeth. The controversy turned upon the power          of their own charity, and appoint others, such as they may
of the visitor, and, in the discussion of the cause, the        see fit, to exercise the same office in time to come. All
nature of College charters and corporations was very            such corporations are private. The case before the Court
fully considered; and it was determined that the college        is clearly that of an eleemosynary corporation. It is, in
was a private corporation, and that the founder had a right     the strictest legal sense, a private charity. In King v. St.
to appoint a visitor, and give him such power as he             Catherine's Hall, 24 that college is called a private
thought fit. 18 The learned Bishop Stilling-fleet's             eleemosynary lay corporation. It was endowed by a
argument in the same cause, as a member of the House of         private founder, and incorporated by letters patent. And
Lords, when it was there heard, exhibits very clearly the       in the same manner was Dartmouth College founded
nature of colleges and similar corporations. 19 These           [***66] and incorporated. Dr. Wheelock is declared by
opinions received the sanction of the House of Lords, and       the charter to be its founder. It was established by him,
they seem to be settled and undoubted law. Where there          on funds contributed and collected by himself. As such
is a charter, vesting proper powers of government in            founder, he had a right of visitation, which he assigned to
trustees, or governors, they are visitors; and there is no      the trustees, and they received it by his consent and
control in any body else; except only that the Courts of        appointment, and held it under the charter. 25 He
Equity or of law will interfere so far as to [***64]            appointed these trustees visitors, and in that respect to
preserve the revenues and prevent the perversion of the         take place of his heir; as he might have appointed
funds, and to keep the visitors within their prescribed         devisees to take his estate, instead of his heir. Little,
bounds. 20 "The foundations of colleges," says Lord             probably, did he think, at that time, that the legislature
Mansfield, "are to be considered in two views, viz. as          would ever take away this property and these privileges,
they are corporations, and as they are eleemosynary. As         and give them to others. Little did he suppose, that this
eleemosynary, they are the creatures of the founder; he         charter secured to him and his successors no legal rights.
may delegate his power, either generally or specially; he       Little did the other donors think so. If they had, the
may prescribe particular modes and manners, as to the           college would have been, what the university is now, a
exercise of part of it. If he makes a general visitor, (as by   thing upon paper, existing only in name. The numerous
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                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***66; 4 Wheat. 518

academies in New-England have been established                   in this charter. But they are terms of legal signification,
substantially in the same manner. They hold their                and very properly used in the charter. They are
property by the same tenure, and no other. Nor has               equivalent with franchises. Blackstone says that franchise
Harvard College any surer title than Dartmouth College.          and liberty are used as synonymous terms. And after
It may, to-day, have more friends; but to-morrow it may          enumerating other liberties and franchises, he says, "it is
have more enemies. Its legal rights are [***67] the              likwise a franchise for a number of persons to be
same. so also of Yale College; and indeed of all the             incorporated and subsist as a body politic, with a power
others. When the legislature gives to these institutions, it     to maintain perpetual succession, and do other corporate
may, and does, accompany its grants with such conditions         acts; and each individual member of such corporation is
as it pleases. The grant of lands by the legislature of          also said to have a franchise or freedom." 26 Liberties is
New-Hampshire to Dartmouth College, in 1789, was                 the term used in magna charta, as including franchises,
accompanied with various conditions. When donations              privileges, immunities, and all the rights which belong to
are made, by the legislature, or others, to a charity            that class. Professor Sullivan says, the term signifies the
already existing, without any condition, or the                  "privileges that some of the subjects, whether single
specification of any new use, the donation follows the           persons or bodies corporate, have above others by the
nature of the charity. Hence the doctrine, that all              lawful grant of the king; as the chattels of felons or
eleemosynary corporations are private bodies. They are           outlaws, and the lands and privileges of corporations." 27
founded by private persons, and on private property. The         The privilege, then, of being a member of a corporation,
public cannot be charitable in these institutions. It is not     under a lawful grant, and of exercising the rights and
the money of the public, but of private persons, which is        powers of such member, is such a privilege, liberty, or
dispensed. It may be public, that is general, in its uses        franchise, [***70] as has been the object of legal
and advantages; and the State may very laudably add              protection, and the subject of a legal interest, from the
contributions of its own to the funds; but it is still private   time of magna charta to the present moment. The
in the tenure of the property, and in the right of               plaintiffs have such an interest in this corporation,
administering the funds. If the doctrine laid down by            individually, as they could assert and maintain in a court
Lord Holt, and the House of Lords, in Phillips v. Bury,          of law, not as agents of the public, but in their own right.
and recognized and established in all the other cases, be        Each trustee has a franchise, and if he be disturbed in the
correct, the property of this [***68] college was private        enjoyment of it, he would have redress, on appealing to
property; it was vested in the trustees by the charter, and      the law, as promptly as for any other injury. If the other
to be administered by them, according to the will of the         trustees should conspire against any one of them, to
founder and donors, as expressed in the charter. They            prevent his equal right and voice in the appointment of a
were also visitors of the charity, in the most ample sense.      president or professor, or in the passing of any statute or
They had, therefore, as they contend, privileges, property,      ordinance of the college, he would be entitled to his
and immunities, within the true meaning of the bill of           action, for depriving him of his franchise. It maks no
rights. They had rights, and still have them, which they         difference, that this property is to be holden and
can assert against the legislature, as well as against other     administered, and these franchises exercised, for the
wrongdoers. It makes no difference, that the estate is           purpose of diffusing learning. No principle and no case
holden for certain trusts. The legal estate is still theirs.     establishes any such distinction. The public may be
They have a right in the property, and they have a right of      benefited by the use of this property. But this does not
visiting and superintending the trust; and this is an object     change the nature of the property, or the rights of the
of legal protection, as much as any other right. The             owners. The object of the charter may be public good; so
charter declares, that the powers conferred on the               it is in all other corporations; and this [***71] would as
trustees, are "privileges, advantages, liberties, and            well justify the resumption or violation of the grant in
immunities;" and that they shall be forever holden by            any other case as in this. In the case of an advowson, the
them and their successors. The New-Hampshire bill of             use is public, and the right cannot be turned to any private
rights declares, that no one shall be deprived of his            benefit or emolument. It is, nevertheless a legal private
"property, privileges, or immunities," but by judgment of        right, and the property of the owner, as emphatically as
his peers, or the law of the land. The argument on the           his freehold. The rights and privileges of trustees,
other side is, that although these terms [***69] may             visitors, or governors of incorporated colleges, stand on
mean something in the bill of rights, they mean nothing          the same foundation. They are so considered, both by
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Lord Holt and Lord Hardwicke. 28 To contend that the             sacred, till forfeited for just cause. That all property, of
rights of the plaintiffs may be taken away, because they         which the use may be beneficial to the public, belongs
derive from them no pecuniary benefit, or private                therefore to the public, is quite a new doctrine. It has no
emolument, or because they cannot be transmitted to their        precedent, and is supported by no known principle. Dr.
heirs, or would not be assets to pay their debts, is taking      Wheelock might have answered his purposes, in this case,
an extremely narrow view of the subject. According to            by executing [***74] a private deed of trust. He might
this notion, the case would be different, if, in the charter,    have conveyed his property to trustees, for precisely such
they had stipulated for a commission on the disbursement         uses as are described in this charter. Indeed it appears
of the funds; and they have ceased to have any interest in       that he had contemplated the establishing of his school in
the property, because they have undertaken to administer         that manner, and had made his will, and devised the
it gratuitously. It cannot be necessary to say much in           property to the same persons who were afterwards
refutation of the idea, that there cannot be a legal interest,   appointed trustees in the charter. Many literary and other
or ownership, in any thing which does not yield [***72]          charitable institutions are founded in that manner, and the
a pecuniary profit; as if the law regarded no rights but the     trust is renewed, and conferred on other persons, from
rights of money, and of visible tangible property. Of            time to time, as occasion may require. In such a case, no
what nature are all rights of suffrage? No elector has a         lawyer would or could say, that the legislature might
particular personal interest; but each has a legal right, to     devest the trustees constituted by deed or will, seize upon
be exercised at his own discretion, and it cannot be taken       the property, and give it to other persons, for other
away from him. The exercise of this right directly and           purposes. And does the granting of a charter, which is
very materially affects the public; much more so than the        only done to perpetuate the trust in a more convenient
exercise of the privileges of a trustee of this college.         manner, make any difference? Does or can this change
Consequences of the utmost magnitude may sometimes               the nature of the charity, and turn it into a public, political
depend on the exercise of the right of suffrage by one or a      corporation? Happily we are not without authority on this
few electors. Nobody was ever yet heard to contend,              point. It has been considered and adjudged. Lord
however, that on that account the public might take away         Hardwicke says, in so many words, "The charter of the
the right or impair it. This notion appears to be borrowed       crown cannot make a CHARITY more or less public, but
from no better source than the repudiated doctrine of the        only more permanent than it would otherwise [***75]
three judges in the Aylesbury case. 29 That was an action        be." 30 The granting of the corporation is but making the
against a returning officer, for refusing the plaintiff's        trust perpetual, and does not alter the nature of the
vote, in the election of a member of parliament. Three of        charity. The very object sought in obtaining such charter,
the judges of the king's bench held, that the action could       and in giving property to such a corporation, is to make
not be maintained, because, among other objections, "it          and keep it private property, and to clothe it with all the
was not any matter of profit, either in presenti or in           security and inviolability of private property. The intent
futuro." It would not enrich the plaintiff, in presenti,         is, that there shall be a legal private ownership, and that
[***73] nor would it, in futuro, go to his heirs, or answer      the legal owners shall maintain and protect the property,
to pay his debts. But Lord Holt and the house of lords           for the benefit of those for whose use it was designed.
were of another opinion. The judgment of the three               Who ever endowed the public? Who ever appointed a
judges was reversed, and the doctrine they held, having          legislature to administer his charity? Or who ever heard,
been exploded for a century, seems now for the first time        before, that a gift to a College, or Hospital, or an Asylum,
to be revived. Individuals have a right to use their own         was, in reality, nothing but a gift to the State? The State
property for purposes of benevolence, either towards the         of Vermont is a principal donor to Dartmouth College.
public, or towards other individuals. They have a right to       The lands given lie in that State. This appears in the
exercise this benevolence in such lawful manner as they          special verdict. Is Vermont to be considered as having
may choose; and when the government has induced and              intended a gift to the State of New-Hampshire in this
excited it, by contracting to give perpetuity to the             case; as it has been said is to be the reasonable
stipulated manner of exercising it, to rescind this contract,    construction of all donations to the College? The
and seize on the property, is not law, but violence.             legislature of New-Hampshire affects to represent the
Whether the State will grant these franchises, and under         public, and therefore claims a right to control all property
what conditions it will grant them, it decides for itself.       destined [***76] to public use. What hinders Vermont
But when once granted, the constitution holds them to be         from considering herself equally the representative of the
                                                                                                                   Page 20
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                       1819 U.S. LEXIS 330, ***76; 4 Wheat. 518

public, and from resuming her grants, at her own                      Holt, 715. 1 Show. 360. 4 Mod. 106. Skinn. 447.
pleasure? Her right to do so is less doubtful than the                18 Lord Holt's judgment, copied from his own
power of New-Hampshire to pass the laws in question.                  manuscript, is in 2 T.R. 346.
In University v. Foy, 31 the Supreme Court of                         19 1 Burns' Eccles. Law, 443.
North-Carolina pronounced unconstitutional and void, a                20 Green v. Rutherforth, 1 Ves. 472. Attorney
law repealing a grant to the University of North-Carolina;            General v. Foundling Hospital, 2 Ves. jr. 47. Kyd
although that University was originally erected and                   on Corp. 195. Coop. Eq. Pl. 292.
endowed by a statute of the State. That case was a grant              21 St. John's College, Cambridge v. Todington,
of lands, and the Court decided that it could not be                  1 Burr. 200.
resumed. This is the grant of a power and capacity to                 22 Attorney General v. Middleton, 2 Ves. 328.
hold lands. Where is the difference of the cases, upon                23 Green v. Rutherforth, ubi supra. St. John's
principle? In Terret v. Taylor, 32 this Court decided, that           College v. Todington, ubi supra.
a legislative grant or confirmation of lands for the                  24 4 Term Rep. 233.
purposes of moral and religious instruction could no more             25 Bl. Com. ub. supr.
be rescinded than other grants. The nature of the use was             26 2 Bl. Com. 37.
not holden to make any difference. A grant to a parish or             27 Sull. 41st Lec.
church, for the purposes which have been mentioned,                   28 Phillips v. Bury. Green v. Rutherforth, ubi
cannot be distinguished, in respect to the title it confers,          supra. Vide also 2 Blackf. 21.
from a grant to a College for the promotion of piety and              29 Ashby v. White, 2 Ld. Raym. 938.
learning. To the same purpose may be cited, the case                  30 Attorney General v. Pearce, 2 Atk. 87.
[***77] of Paylett v. Clark. The State of Vermont, by                 31 2 Heywood's R.
statute, in 1794, granted to the respective towns in that             32 9 Cranch, 43.
State, certain glebe lands lying within those towns, for              33 9 Cranch, 292.
the sole use and support of religious worship. In 1799, an
act was passed to repeal the act of 1794; but this Court        [***78] I hope enough has been said to show, that the
declared, that the act of 1794, "so far as it granted the      trustees possessed vested liberties, privileges, and
glebes to the towns, could not afterwards be repealed by       immunities, under this charter; and that such liberties,
the legislature, so as to devest the rights of the towns       privileges, and immunities, being once lawfully obtained
under the grant. 33 It will be for the other side to show,     and vested, are as inviolable as any vested rights of
that the nature of the use decides the question, whether       property whatever. Rights to do certain acts, such, for
the legislature has power to resume its grants. It will be     instance, as the visitation and super-intendence of a
for those who maintain such a doctrine, to show the            college, and the appointment of its officers, may surely
principles and cases upon which it rests. It will be for       be vested rights, to all legal intents, as completely as the
them also, to fix the limits and boundaries of their           right to possess property. A late learned Judge of this
doctrine, and to show what are, and what are not, such         Court has said, "when I say, that a right is vested in a
uses as to give the legislature this power of resumption       citizen, I mean, that he has the power to do certain
and revocation. And to furnish an answer to the                actions, or to possess certain things, according to the law
cases-cited, it will be for them further to show, that a       of the land. 34
grant for the use and support of religious worship, stands
                                                                      34 3 Dal. 394.
on other ground than a grant for the promotion of piety
and learning.                                                  If such be the true nature of the plaintiff's interests under
                                                               this charter, what are the articles in the New-Hampshire
       10   1 Bl. Com. 471.
                                                               bill of rights which these acts infringe?
       11   1 Ves. 537.
       12   9 Ves. 405.                                        They infringe the second article; which says, that the
       13   1 Wooddes. 474.                                    citizens of the State have a right to hold and possess
       14   1 Bl. Com. 471.                                    property. The plaintiffs had a legal property in this
       15   2 T.R. 350, 351.                                   charter; and they had acquired property under it. The acts
       16   1 Bl. Com. 480.                                    deprive them of both. They impair and take away the
       17   Reported in 1 Lord Raymond, 5.Comb. 265.           [***79] charter; and they appropriate the property to
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                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***79; 4 Wheat. 518

new uses, against their consent. The plaintiffs cannot           not to be doubted." In my humble opinion, this surrenders
now hold the property acquired by themselves, and which          the point. To resist the effect of this admission, however,
this article says, they have a right to hold. They infringe      the learned judges add, "But how a privilege can be
the twentieth article. By that article it is declared, that in   protected from the operation of the law of the land, by a
questions of property, there is a right to trial. The            clause in the constitution, declaring that it shall not be
plaintiffs are devested, without trial or judgment. They         taken away but by the law of the land, is not very easily
infringe the twenty-third article. In is therein declared,       understood." This answer goes on the ground, that the
that no retrospective laws shall be passed. This article         acts in question are laws of the land, within the meaning
bears directly on the case. These acts must be deemed            of the constitution. If they be so, the argument drawn
retrospective, within the settled construction of that term.     from this article is fully answered. If they be not so, it
What a retrospective law is, has been decided, on the            being admitted that the plaintiffs' rights are "privileges,"
construction of this very article, in the Circuit Court for      within the meaning of the article, the argument is not
the first circuit. The learned Judge of that circuit, says,      answered, and the article is [***82] infringed by the acts.
"every statute which takes away, or impairs, vested              Are then these acts of the legislature, which affect only
rights, acquired under existing laws, must be deemed             particular persons and their particular privileges, laws of
retrospective." 35 That all such laws are retrospective,         the land? Let this question be answered by the text of
was decided also in the case of Dash v. Van Kleek, 36            Blackstone: "And first, it (i.e. law) is a rule: not a
where a most learned Judge quotes this article from the          transient sudden order from a superior, to, or concerning,
constitution of New-Hampshire, with manifest                     a particular person; but something permanent, uniform,
approbation, as a plain and clear expression of those            and universal. Therefore, a particular act of the
fundamental and unalterable [***80] principles of                legislature to confiscate the goods of Titius, or to attaint
justice, which must lie at the foundation of every free and      him of high treason, does not enter into the idea of a
just system of laws. Can any man deny, that the plaintiffs       municipal law: for the operation of this act is spent upon
had rights, under the charter, which were legally vested,        Titius only, and has no relation to the community in
and that by these acts, those rights are impaired. 37 These      general; it is rather a sentence than a law." 38 Lord Coke
acts infringe also, the thirty-seventh article of the            is equally decisive and emphatic. Citing and commenting
constitution of New-Hampshire; which says, that the              on the celebrated 29th chap. of Magna Charta, he says,
powers of government shall be kept separate. By these            "no man shall be disseized, &c. unless it be by the lawful
acts, the legislature assumes to exercise a judicial power.      judgment, that is, verdict of equals, or by the law of the
It declares a forfeiture, and resumes franchises, once           land, that is, (to speak it once for all,) by the due course
granted, without trial or hearing. If the constitution be        and process of law." 39 Have the plaintiffs lost their
not altogether waste paper, it has restrained the power of       franchises by "due course and process of law?" On the
the legislature in these particulars. If it has any meaning,     contrary, are not these acts "particular acts of the
it is, that the legislature shall pass no act directly and       legislature, which have no relation to the [***83]
manifestly impairing private property, and private               community in general, and which are rather sentences
privileges. It shall not judge, by act. It shall not decide,     than laws?" By the law of the land is most clearly
by act. It shall not deprive, by act. But it shall leave all     intended the general law; a law, which hears before it
these things to be tried and adjudged by the law of the          condemns; which proceeds upon inquiry, and renders
land. The fifteenth article has been referred to before. It      judgment only after trial. The meaning is, that every
declares, that no one shall be "deprived of his property,        citizen shall hold his life, liberty, property, and
immunities, or privileges, but by the judgment of his            immunities, under the protection of the general rules
peers, or the law of the land." [***81] Notwithstanding          which govern society. Every thing which may pass under
the light in which the learned Judges in New-Hampshire           the form of an enactment, is not, therefore, to be
viewed the rights of the plaintiffs under the charter, and       considered the law of the land. If this were so, acts of
which has been before adverted to, it is found to be             attainder, bills of pains and penalties, acts of confiscation,
admitted, in their opinion, that those rights are privileges     acts reversing judgments, and acts directly transferring
within the meaning of this fifteenth article of the bill of      one man's estate to another, legislative judgments,
rights. Having quoted that article, they say: "that the          decrees, and forfeitures, in all possible forms, would be
right to manage the affairs of this college is a privilege,      the law of the land. Such a strange construction would
within the meaning of this clause of the bill of rights, is      render constitutional provisions of the highest importance
                                                                                                                        Page 22
                                              17 U.S. 518, *; 4 L. Ed. 629, **;
                                         1819 U.S. LEXIS 330, ***83; 4 Wheat. 518

completely inoperative and void. It would tend directly                   constitutiones futuris certum est dare formam
to establish the union of all powers in the legislature.                  negotiis, non ad facta praeterita revocari, nisi
There would be no general permanent law for courts to                     nominatim, et de praeterito tempore, et adhuc
administer, or for men to live under. The administration                  pendentibus negotiis coutum sit. (Cod. 1. 14. 7.)
of justice would be an empty form, an idle ceremony.                      This passage, according to the best interpretation
Judges would sit to execute legislative [***84]                           of the civilians, relates not merely to future suits,
judgments and decrees; not to declare the law, or to                      but to future as contradistinguished from past
administer the justice of the country. "Is that the law of                contracts and vested rights.(Perezii Praelec. t.) It
the land," said Mr. Burke, "upon which, if a man go to                    is, indeed, admitted, that the prince may anact a
Westminster-Hall, and ask counsel by what title or tenure                 retrospective law, provided it be done expressly;
he holds his privilege or estate according to the law of the              for the will of the prince, under the despotism of
land, he should be told, that the law of the land is not yet              the Roman emperors, was paramount to every
known; that no decision or decree has been made in his                    obligation.Great latitude was anciently allowed to
case; that when a decree shall be passed, he will then                    legislative expositions of statutes; for the
know what the law of the land is? Will this be said to be                 separation of the judicial, from the legislative
the law of the land, by any lawyer who has a rag of a                     power, was not then distinctly known or
gown left upon his back, or a wig with one tie upon his                   prescribed. The prince was in the habit of
head?" That the power of electing and appointing the                      interpreting his own laws for particular occasions.
officers of this college is not only a right of the trustees as           This was called the interlocutio principis; and
a corporation generally, and in the aggregate, but that                   this, according to Huber's definition, was, quando
each individual trustee has also his own individual                       principes inter partes loquuntur, et jus dicunt.
franchise in such right of election and appointment, is                   (Praelec. Juris. Rom. Vol. 2. 545.) No correct
according to the language of all the authorities. Lord                    civilian, and especially no proud admirer of the
Holt says, "it is agreeable to reason and the rules of law,               ancient republic, (if any such then existed,) could
that a franchise should be vested in the corporation                      have reflected on this interference with private
aggregate, and yet the benefit of it to redound to the                    rights, and pending suits, without disgust and
particular members, and to be enjoyed by them in their                    indignation; and we are rather surprised to find,
private capacity. [***85] Where the privilege of election                 that under the violent and irregular genius of the
is used by particular persons, it is a particular right,                  Roman government, the principle before us
vested in every particular man. 40                                        should have been acknowledged and obeyed to
                                                                          the extent in which we find it. The fact shows,
        35 Society v. Wheeler, 2 Gal. 103.                                that it must be founded in the clearest justice. Our
        36 7 Johns. R. 477.                                               case is happily very different from that of the
        37 "It is a principle in the English law, as ancient              subjects of Justinian. With us, the power of the
        as the law itself," says Chief Justice Kent, in the               law-giver is limited and defend; the judicial is
        case last cited, "that a statute, even of its                     regarded as a distinct independent power; private
        omnipotent parliament, is not to have a                           rights have been better understood, and more
        retrospective effect. Nova constitutio futuris                    exalted in public estimation, as well as secured by
        formam imponere debet, et non prateritis.                         provisions dictated by the spirit of freedom, and
        (Braction, lib. 4, fol. 228. 2 Inst. 292.) The                    unknown to the civil law. Our constitutions do
        maxim in Bracton was probably taken from the                      not admit the power assumed by the Roman
        civil law, for we find in that system the same                    prince; and the principle we are considering, is
        principle, that the law-giver cannot alter his mind               now to be regarded as sacred."
        to the prejudice of a vested right. Nemo potest                   38 1 Bl. Com9 44.
        mutare consilium suum in alterius injuriam. (Dig.                 39 Co. Ins. 46.
        50. 17. 75.) This maxim of Papinian is general in                 40 2 Lord Raym. 952.
        its terms; but Dr. Taylor (Elements of the Civil
        Law, 168.) applies it directly as a restriction upon       [***86] It is also to be considered, that the president and
        the law-giver; and a declaration in the code leaves       professors of this college have rights to be affected by
        no doubt as to the sense of the civil law. Leges at       these acts. Their interest is similar to that of fellors in the
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                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***86; 4 Wheat. 518

English colleges; because they derive their living wholly,       a person of his nomination; and in as much as this was
or in part, from the founder's bounty. The president is          directly against the charter and constitution of the
one of the trustees, or corporators. The professors are not      college, he was pleased to add a non obstante clause of
necessarily members of the corporation; but they are             sufficiently comprehensive import. The fellows were
appointed by the trustees, are removable only by them,           commanded to admit the person mentioned in the
and have fixed salaries, payable out of the general funds        mandate, "any statute, custom or constitution to the
of the college. Both president and professors have               contrary notwithstanding, wherewith we are graciously
freeholds in their offices; subject only to be removed, by       pleased to dispense, in this behalf." The fellows refused
the trustees, as their legal visitors, for good cause. All the   obedience to this mandate, and Dr. Hough, a man of
authorities speak of fellowships in colleges as freeholds,       independence and character, was chosen president by the
notwithstanding the fellows may be liable to be                  fellows, according to the charter and statutes. The king
suspended or removed, for misbehaviour, by their                 then assumed the power, in virtue of his prerogative,
constituted visitors. Nothing could have been less               [***89] to send down certain commissioners to turn him
expected, in this age, than that there should have been an       out; which was done accordingly; and Parker, a creature
attempt, by acts of the legislature, to take away these          suited to the times put in his place. And because the
college livings, the inadequate, but the only support of         president, who was rightfully and legally elected, would
literary men, who have devoted their lives to the                not deliver the keys, the doors were broken open. "The
instruction of youth. The president and professors were          nation, as well as the university," says Bishop Burnet, 41
appointed by the twelve [***87] trustees. They were              "looked on all these proceedings with just indignation. It
accountable to nobody else, and could be removed by              was thought an open piece of robbery and burglary, when
nobody else. They accepted their offices on this tenure.         men, authorized by no legal commission, came and
Yet the legislature has appointed other persons, with            forcibly turned men out of their possession and freehold."
power to remove these officers, and to deprive them of           Mr. Hume, although a man of different themper, and of
their livings; and those other persons have exercised that       other sentiments, in some respects, than Dr. Burnet,
power. No description of private property has been               speaks of this arbitrary attempt of prerogative, in terms
regarded as more sacred than college livings. They are           not less decisive. "The president, and all the fellows,"
the estates and freeholds of a most deserving class of           says he, "except two, who complied, were expelled the
men; of scholars who have consented to forego the                college; and Parker was put in possession of the office.
advantages of professional and public employments, and           This act of violence, of all those which were committed
to devote themselves to science and literature, and the          during the reign of James, is perhaps the most illegal and
instruction of youth, in the quiet retreats of academic life.    arbitrary. When the dispensing power was the most
Whether, to dispossess and oust them; to deprive them of         strenuously insisted on by court lawsyers, it had still been
their office, and turn them out of their livings; to do this,    allowed, that the statutes which regard private property
not by the power of their legal visitors, or governors, but      could not legally be infringed [***90] by that
by acts of the legislature; and to do it without forfeiture,     prerogative. Yet, in this instance, it appeared that even
and without fault; whether all this be not in the highest        these were not now secure from invasion. The privileges
degree an indefensible and arbitrary proceeding, is a            of a college are attacked; men are illegally dispossessed
question, of which there would seem to be but one side fit       of their property for adhering to their duty, to their oaths,
for a lawyer or a scholar to espouse. Of all the attempts        and to their religion." This measure king James lived to
of James II. to overturn the law, and the rights [***88] of      repent, after repentance was too late. When the charter of
his subjects, none was esteemed more arbitrary or                London was restored, and other measures of violence
tyranical, than his attack on Magdalen College, Oxford:          retracted, to avert the impending revolution, the expelled
And, yet, that attempt was nothing but to put one                president and fellows of Magdalen college were permited
president and put in another. The president of that              to resume their rights. It is evident that this this was
college, according to the charter and statutes, is to be         regarded as an arbitrary interference with private
chosen by the fellows, who are the corporators. There            property. Yet private property was no otherwise attacked,
being a vacancy, the king chose to take the appointment          than as a person was appointed to administer and enjoy
out of the hands of the fellows, the legal electors of a         the revenues of a college, in a manner and by persons not
president, into his own hands. He therefore sent down his        authorized by the constitution of the college. A majority
mandate commanding the fellows to admit, for president,          of the members of the corporation would not comply with
                                                                                                                    Page 24
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                       1819 U.S. LEXIS 330, ***90; 4 Wheat. 518

the king's wishes. A minority would. The object was,                   41 Hist. of his own times, vol. 3. p. 119.
therefore, to make this minority, a majority. To this end,             42     Vide a full account of this case in State
the king's commissioners were directed to interfere in the             Trials, 4 Ed. vol. 4. p. 262.
case, and they united with the two complying fellows,
and expelled the rest; and thus effected a change [***91]      If the view which has been taken of this question be at all
in the government of the college. The language in which        correct, this was an eleemosynary corporation; a private
Mr. Hume, and all other writers, speak of this abortive        charity. The property was private property. The trustees
attempt of oppression, shows that colleges were esteemed       were visitors, and their right to hold the charter,
to be, as they truly are, private corporations, and the        administer the funds, and visit and govern the college,
property and privileges which belong to them, private          was a franchise and privilege, solemnly granted to them.
property, and private privileges. Court lawyers were           The use being public, in no way diminishes their legal
found to justify the king in dispensing with the laws; that    estate in the property, or their title to the franchise. There
is, in assuming and exercising a Legislative authority.        is no principle, nor any case, which declares that a gift to
But no lawyer, not even a court lawyer, in the reign of        such a corporation is a gift to the public. The acts in
king James the second, as far as appears, was found to         question violate property. They take away privileges,
say, that even by this high authority, he could infringe the   immunities, and franchises. They deny to the trustees the
franchises of the fellows of a college, and take away their    protection of the law; and they are retrospective in their
livings. Mr. Hume gives the reason; it is, that such           operation. In all which respects, they are against the
franchises were regarded, in a most emphatic sense, as         constitution of New-Hampshire.
private property. 42 If it could be made to appear, that the
                                                               2. The plaintiffs contend, in the second place, that the
trustees and the president and professors held their offices
                                                               acts in question are repugnant to the 10th section of the
and franchises during the pleasure of the legislature, and
                                                               1st article of the constitution of [***94] the United
that the property holden belonged to the State, then
                                                               States. The material words of that section are: "no State
indeed the legislature have done no more than they had a
                                                               shall pass any bill of attainder, ex post facto law, or law
right to do. But this is not so. The charter is a charter of
                                                               impairing the obligation of contracts."
privileges and immunities; and these are holden by the
[***92] trustees expressly against the State forever. It is    The object of these most important provisions in the
admitted, that the State, by its Courts of law, can enforce    national constitution has often been discussed, both here
the will of the donor, and compel a faithful execution of      and elsewhere.It is exhibited with great clearness and
the trust. The plaintiffs claim no exemption from legal        force by one of the distinguished persons who framed
responsibility. They hold themselves at all times              that instrument. "Bills of attainder, ex post facto laws,
answerable to the law of the land, for their conduct in the    and laws impairing the obligation of contracts, are
trust committed to them. They ask only to hold the             contrary to the first principles of the social compact, and
property of which they are owners, and the franchises          to every principle of sound legislation. The two former
which belong to them, until they shall be found by due         are expressly prohibited by the declarations prefixed to
course and process of law to have forfeited them. It can       some of the State constitutions, and all of them are
make no difference, whether the legislature exercise the       prohibited by the spirit and scope of these fundamental
power it has assumed, by removing the trustees and the         charters. Our own experience has taught us, nevertheless,
president and professors, directly, and by name, or by         that additional fences against these dangers ought not to
appointing others to expel them. The principle is the          be omitted. Very properly, therefore, have the
same, and, in point of fact, the result has been the same.     Convention added this constitutional bulwark in favour of
If the entire franchise cannot be taken away, neither can it   personal security and private rights; and I am much
be essentially impaired. If the trustees are legal owners      deceived if they have not, in so doing, as faithfully
of the property, they are sole owners. If they are visitors,   consulted the genuine sentiments as the undoubted
they are sole visitors. No one will be found to say, that if   interests of their constituents. The [***95] sober people
the legislature may do what it has done, it may not do any
                                                               of America are weary of the fluctuating policy which has
thing and every thing which it may choose to do, relative      directed the public councils. They have seen with regret,
[***93] to the property of the corporation, and the            and with indignation, that sudden changes, and legislative
privileges of its members and officers.                        interferences, in cases affecting personal rights, become
                                                                                                                   Page 25
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                       1819 U.S. LEXIS 330, ***95; 4 Wheat. 518

jobs in the hands of enterprising and influential              contracts; and that parties are necessary to give them
speculators; and snares to the more industrious and less       force and validity. In King v. Dr. Askew, 50 it is said,
informed part of the community. They have seen, too,           "The crown cannot oblige a man to be a corporator
that one legislative interference is but the link of a long    without his consent; he shall not be subject to the
chain of repetitions; every subsequent interference being      inconveniences of it, without accepting it and assenting to
naturally produced by the effects of the preceding." 43 It     it." These terms, "acceptance," and "assent," are the very
has already been decided in this Court, that a grant is a      language of contract. In Ellis v. Marshall, 51 it was
contract, within the meaning of this provision; and that a     expressly adjudged, that the naming of the defendant,
grant by a State is also a contract as much as the grant of    among others, in an act of incorporation did not, of itself,
an individual. 44 It has also been decided, that a grant by    make him [***98] a corporator; and that his assent was
a State before the revolution, is as much to be protected      necessary to that end. The Court speak of the act of
as a grant since. 45 But the case of Terret v. Taylor,         incorporation as a grant, and observe, "that a man may
before cited, is of all others most pertinent to the present   refuse a grant, whether from the government or an
argument. Indeed, the judgment of the Court in that case       individual, seems to be a principle too clear to require the
seems to leave little to be argued or decided in this. 46      support of authorities." But Mr. Justice Buller, in King v.
This Court, then, does not admit the doctrine, that a          Passmore, furnishes, if possible, a still more direct and
legislature can repeal statutes [***96] creating private       explicit authority. Speaking of a corporation for
corporations. If it cannot repeal them altogether, of          government, he says, "I do not know how to reason on
course it cannot repeal any part of them, or impair them,      this point better than in the manner urged by one of the
or essentially alter them, without the consent of the          relator's counsel, who considered the grant of
corporators. If, therefore, it has been shown that this        incorporation to be a compact between the crown and a
college is to be regarded as a private charity, this case is   certain number of the subjects, the latter of whom
embraced within the very terms of that decision. A grant       undertake, in consideration of the privileges which are
of corporate powers and privileges is as much a contract       bestowed, to exert themselves for the good government
as a grant of land. What proves all charters of this sort to   of the place." This language applies, with peculiar
be contracts, is, that they must be accepted, to give them     propriety and force, to the case before the Court. It was
force and effect. If they are not accepted they are void.      in consequence of the "privileges bestowed," that Dr.
And in the case of an existing corporation, if a new           Wheelock and his associates, undertook to exert
charter is given it, it may even accept part, and reject the   themselves for the instruction and education of youth in
rest. In Rex v. Vice Chancellor of Cambridge, 47 Lord          this college; and it was on the same consideration that the
Mansfield says, "there is a vast deal of difference            founder endowed it with his property. And because
between a new charter granted to a new corporation,            charters of incorporation [***99] are of the nature of
(who must take it as it is given,) and a new charter given     contracts, they cannot be altered or varied, but by consent
to a corporation already in being, and acting either under     of the original parties. If a charter be granted by the king,
a former charter, or under prescriptive usage. The latter,     it may be altered by a new charter granted by the king,
a corporation already existing, are not obliged to accept      and accepted by the corporators But if the first charter be
the new charter in toto, and to receive either all or none     granted by parliament, the consent of parliament must be
of it; they may act partly under [***97] it, and partly        obtained to any alteration.In King v. Miller, 52 Lord
under their old charter or prescription. The validity of       Kenyon says, "Where a corporation takes its rise from the
these new charters must turn upon the acceptance of            king's charter, the king by granting, and the corporation
them." In the same case, Mr. Justice Wilmot says, "It is       by accepting, another charter, may alter it, because it is
the concurrence and acceptance of the university that          done with the consent of all the parties who are
gives the force to the charter of the crown." In the King v.   competent to consent to the alteration. 53 There are, in
Passmore, 48 Lord Kenyon observes, "some things are            this case, all the essential constituent parts of a contract.
clear: when a corporation exists, capable of discharging       There is something to be contracted about; there are
its functions, the crown cannot obtrude another charter        parties, and there are plain terms in which the agreement
upon them; they may either accept or reject it." 49 In all     of the parties, on the subject of the contract, is expressed.
cases relative to charters, the acceptance of them is          There are mutual considerations and inducements. The
uniformly alleged in the pleadings. This shows the             charter recites, that the founder, on his part, has agreed to
general understanding of the law, that they are grants, or     establish his seminary in New-Hampshire, and to enlarge
                                                                                                             Page 26
                                           17 U.S. 518, *; 4 L. Ed. 629, **;
                                      1819 U.S. LEXIS 330, ***99; 4 Wheat. 518

it, beyond its original design, among other things, for the       sovereignties, it is not to be disguised, that the
benefit of that province; and thereupon a charter is given        framers of the constitution viewed, with some
to him and his associates, [***100] designated by                 apprehension, the violent acts which might grow
himself, promising and assuring to them, under the                out of the feelings of the moment; and that the
plighted faith of the State, the right of governing the           people of the United States, in adopting that
college, and administering its concerns, in the manner            instrument, have manifested a determination to
provided in the charter. There is a complete and perfect          shield themselves, and their property, from the
grant to them of all the power of superintendance,                effects of those sudden and strong passions to
visitation, and government. Is not this a contract? If            which men are exposed. The restrictions on the
lands or money had been granted to him and his                    legislative power of the States, are obviously
associates, for the same purposes, such grant could not be        founded in this sentiment; and the constitution of
rescinded. And is there any difference, in legal                  the United States contains what may be deemed a
contemplation, between a grant of corporate franchises,           bill of rights, for the people of each State."
and a grant of tangible property? No such difference is           45 New-Jersey v. Wilson, 7 Cranch, 164.
recognized in any decided case, nor does it exist in the          46      "A private corporation," says the Court,
common apprehension of mankind.                                   "created by the legislature, may lose its franchises
                                                                  by a misuser or a nonuser of them; and they may
       43 Letters of Publius, or The Federalist, (No.             be resumed by the government under a judicial
       44., by Mr. MADISON.)                                      judgment upon a quo warranto to ascertain and
       44 In Fletcher v. Peck, 6 Cranch 87. this Court            enforce the forfeiture. This is the common law of
       says, "a contract is a compact between two or              the land, and is a tacit condition annexed to the
       more parties, and is either executory or executed.         creation of every such corporation. Upon a
       An executory contract is one in which a party              change of government, too, it may be admitted
       binds himself to do, or not to do, a particular            that such exclusive privileges attached to a private
       thing; such was the law under which the                    corporation as are inconsistent with the new
       conveyance was made by the government. A                   government, may be abolished. In respect, also,
       contract executed is one in which the object of            to public corporations which exist only for public
       contract is performed; and this, says Blackstone,          purposes, such as counties, towns, cities, &c. the
       differs in nothing from a grant. The contract              legislature may, under proper limitations, have a
       between Georgia and the purchasers was executed            right to change modify, enlarge, or restrain them,
       by the grant. A contract executed, as well as one          securing, however, the property for the use of
       which is executory, contains obligations binding           those for whom and at whose expense it was
       on the parties. A grant, in its own nature,                originally purchased. But that the legislature can
       amounts to an extinguishment of the right of the           repeal statutes creating private corporations, or
       grantor, and implies a contract not to reassert that       confirming to them property already acquired
       right. If under a fair construction of the                 under the faith of previous laws, and by such
       constitution, grants are comprehended under the            repeal can vest the property of such corporations
       term contracts, is a grant from the State excluded         exclusively in the State, or dispose of the same to
       from the operation of the provision? Is the clause         such purposes as they please, without the consent
       to be considered as inhibiting the State from              or default of the corporators, we are not prepared
       impairing the obligation of contracts between two          to admit; and we think ourselves standing upon
       individuals, but as excluding from that inhibition         the principles of natural justice, upon the
       contracts made with itself? The words themselves           fundamental laws of every free government, upon
       contain no such distinction. They are general, and         the spirit and letter of the constitution of the
       are applicable to contracts of every description. If       United States, and upon the decisions of most
       contracts made with the State are to be exempted           respectable judicial tribunals, in resisting such a
       from their operation, the exception must arise             doctrine."
       from the character of the contracting party, not           47 3 Burr. 1656.
       from the words which are employed. Whatever                48 3 T.R. 240.
       respect might have been felt for the State                 49 Vide also, 1 Kyd. on Cor. 65.
                                                                                                                      Page 27
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                       1819 U.S. LEXIS 330, ***100; 4 Wheat. 518

       50 4 Burr. 2200.                                         youth of modern times. Dartmouth College was
       51 2 Mass. R. 279.                                       established under a charter [***103] granted by the
       52 6 T.R. 277.                                           provincial government; but a better constitution for a
       53 Vide also, 2 Bro. Ch. R. 662. Ex parte Bolton         college, or one more adapted to the condition of things
       School.                                                  under the present government, in all material respect,
                                                                could not now be framed. Nothing in it was found to
 [***101] It is therefore contended, that this case falls       need alteration at the revolution. The wise men of that
within the true meaning of this provision of the                day saw in it one of the best hopes of future times, and
constitution, as expounded in the decisions of this Court;      commended it, as it was, with parental care, to the
that the charter of 1769, is a contract, a stipulation, or      protection and guardianship of the government of the
agreement; mutual in its considerations, express and            State. A charter of more liberal sentiments, of wiser
formal in its terms, and of a most binding and solemn           provisions, drawn with more care, or in a better spirit,
nature. That the acts in question impair this contract, has     could not be expected at any time, or from any source.
already been sufficiently shown. They repeal and                The college needed no change in its organization or
abrogate its most essential parts.                              government. That which it did need was the kindness,
                                                                the patronage, the bounty of the legislature; not a mock
Much has heretofore been said on the necessity of               elevation to the character of a university, without the
admitting such a power in the legislature as has been           solid benefit of a shilling's donation to sustain the
assumed in this case. Many cases of possible evil have          character; not the swelling and empty authority of
been imagined, which might otherwise be without                 establishing institutes and other colleges. This
remedy. Abuses, it is contended, might arise in the             unsubstantial pageantry would seem to have been in
management of such institutions, which the ordinary             derision of the scanty endowment and limited means of
courts of law would be unable to correct. But this is only      an unobtrusive, but useful and growing seminary. Least
another instance of that habit of supposing extreme cases,      of all was there a necessity, or pretence of [***104]
and then of reasoning from them, which is the constant          necessity, to infringe its legal rights, violate its franchises
refuge of those who are obliged to defend a cause which,        and privileges, and pour upon it these overwhelming
upon its merits, is indefensible. It would be sufficient to     streams of litigation. But this argument, from necessity,
say, in answer, that it is not pretended, that there was here   would equally apply in all other cases. If it be well
any such case of necessity. But a still more satisfactory       founded, it would prove, that whenever any
answer [***102] is, that the apprehension of danger is          inconvenience or evil should be experienced from the
groundless, and, therefore, the whole argument fails.           restrictions imposed on the legislature by the constitution,
Experience has not taught us that there is danger of great      these restrictions ought to be disregarded. It is enough to
evils of of great inconvenience from this source.               say, that the people have thought otherwise. They have,
Hitherto, neither in our own country nor elsewhere, have        most wisely, chosen to take the risk of occasional
such cases of necessity occurred. The judicial                  inconvenience from the want of power, in order that there
establishements of the State are presumed to be                 might be a settled limit ot is exercise, and a permanent
competent to prevent abuses and violations of trust, in         security against its abuse. They have imposed
cases of this kind, as well as in all others. It they be not,   prohibitions and restraints; and they have not rendered
they are imperfect, and their amendment would be a most         these altogether vain and nugatory by conferring the
proper subject for legislative wisdom. Under the                power of dispensation. If inconvenience should arise,
government and protection of the general laws of the            which the legislature cannot remedy under the power
land, those institutions have always been found safe, as        conferred upon it, it is not answerable for such
well as useful. They go on with the progress of society,        inconvenience. That which it cannot do within the limits
accommodating themselves easily, without sudden                 prescribed to it, it cannot do at all. No legislature in this
change or violence, to the alterations which take place in      country is able, and may the time never come when it
its condition; and in the knowledge, the habits, and            shall be able, to apply to itself the memorable [***105]
pursuits of men.The English colleges were founded in            expression of a Roman pontiff; "Licet hoc DE JURE non
Catholic ages.Their religion was reformed with the              possumus, volumus tamen DE PLENITUDINE
general reformation of the nation; and they are suited          POTESTATIS."
perfectly well to the purpose of educating the protestant
                                                                                                                    Page 28
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                       1819 U.S. LEXIS 330, ***105; 4 Wheat. 518

The case before the Court is not of ordinary importance,        alone gives the Court jurisdiction in this case, did not
nor of every day occurrence. It affects not this college        extend to grants of political power; to contracts
only, but every college, and all the literary institutions of   concerning the internal government and police of a
the country. They have flourished, hitherto, and have           sovereign State. Nor does it extend to contracts which
become in a high degree respectable and useful to the           relate merely to matters of civil institution, even of a
community. They have all a common principle of                  private nature. Thus marriage is a contract, and a private
existence, the inviolability of their charters. It will be a    contract; but relating merely to a matter of civil
dangerous, a most dangerous experiment, to hold these           institution, which every society has an inherent right to
institutions subject to the rise and fall of popular parties,   regulate as its own wisdom may dictate, it cannot be
and the fluctuations of political opinions. If the franchise    considered as within the spirit of this prohibitory clause.
may be at any time taken away, or impaired, the property        Divorces unquestionably impair the obligation of the
also may be taken away, or its use perverted. Benefactors       nuptial contract; they change the relations of the marriage
will have no certainty of effecting the object of their         state, without the consent of both the parties, and thus
bounty; and learned men will be deterred from devoting          come clearly within the letter of the prohibition. But
themselves to the service of such institutions, from the        surely, no one will contend, that there is locked up in this
precarious title of their offices. Colleges and halls will be   mystical clause of the constitution [***108] a
deserted by all better spirits, and become a theatre for the    prohibition to the States to grant divorces, a power
contention of politics. Party and faction will be cherished     peculiarly appropriate to domestic legislation, and which
in the places consecrated to piety and learning. These          has been exercised in every age and nation where
[***106] consequences are neither remote nor possible           civilization has produced that corruption of manners,
only. Ther are certain and immediate.                           which, unfortunately, requires this remedy. Still less can
                                                                a contract concerning a public office to be exercised, or
When the Court in North-Carolina declared the law of the        duty to be performed, be included within this prohibition.
State, which repealed a grant to its university,                The Convention who framed the constitution, did not
unconstitutional and void, the legislature had the candour      intend to interfere in the exercise of the political powers
and the wisdom to repeal the law.This example, so               reserved to the State governments. That was left to be
honourable to the State which exhibited it, is most fit to      regulated by their own local laws and constitutions; with
be followed on this occasion. And there is good reason to       this exception only, that the Union should guarantee to
hope, that a State which has hitherto been so much              each State a republican from of government, and defend
distinguished for tempeperate councils, cautious                it against domestic insurrection and rebellion. Beyond
legislation, and regard to law, will not fail to adopt a        this, the authorities of the Union have no right to interfere
course which will accord with her highest and best              in the exercise of the powers reserved to the State. They
interest, and, in no small degree, elevate her reputation.      are sovereign and independent in their own sphere. If, for
It was for many obvious reasons most anxiously desired,         example, the legislature of a particular State should
that the question of the power of the legislature over this     attempt to deprive the judges of its Courts (who, by the
charter should have been finally decided in the State           State constitution, held their places during good
Court. An earnest hope was entertained that the judges of       behaviour) of their offices without a trial by
that Court might have viewed the case in a light                impeachment; or should arbitrarily [***109] and
favourable to the rights of the trustees. That hope has         capriciously increase the number of the judges so as to
failed. It is here that those rights are now to be              give the preponderancy in judicature to the prevailing
maintained, or they are prostrated forever. Omnia alia          political faction, would it be pretended that the minority
perfugia bonorum, subsidia, consilia, auxilia, jura             could resist such a law, upon the ground of its impairing
ceciderunt. Quem enim [***107] alium appellem?                  the obligation of a contract? Must not the remedy, if any
quem obtestor? quem implorem? Nisi hoc loco, nisi apud          where existing, be found in the interposition of some
vos, nisi per vos, judices, salutem nostram, quae spe           State authority to enforce the provisions of the State
exigua extremaque pendet, temerimus; nihil est praeterea        constitution? The education of youth, and the
quo confugere possimus.                                         encouragement of the arts and sciences, is one of the
                                                                most important objects of civil government. 54 By our
Mr. Homes, for the defendant in error, argued, that the         constitutions, it is left exclusively to the States, with the
prohibition in the constitution of the United States, which     exception of copy rights and patents. It was in the
                                                                                                                       Page 29
                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***109; 4 Wheat. 518

exercise of this duty of government, that this charter was       legislative wisdom, instructed by the lights of the age.
originally granted to Dartmouth College. Even when first
granted under the colonial government, it was subject to                 54 Vattel, L. 1. c. 11. s. 112, 113.
the notorious authority of the British parliament over all               55 1 Bl. Com. 485.
charters containing grants of political power. It might
                                                                 The conclusion then is, that this charter is not such a
have been revoked or modified by act of parliament. 55
                                                                 contract as is [***112] contemplated by the constitution
The revolution, which separated the colony from the
                                                                 of the United States; that it is not a contract of a private
parent country, dissolved all connexion between this
                                                                 nature, concerning property or other private interests: but
corporation and the crown of Great Britain. But it did not
                                                                 that it is a grant of a public nature, for public purposes,
destroy that supreme [***110] authority which every
                                                                 relative to the internal government and police of a State,
political society has over its public institutions. That still
                                                                 and, therefore, liable to he revoked or modified by the
remained, and was transferred to the people of
                                                                 supreme power of that State.
New-Hampshire. They have not relinquished it to the
government of the United States, or to any department of         Supposing, however, this to be a contract such as was
that government. Neither does the constitution of                meant to be included in the constitutional prohibition, is
New-Hampshire confirm the charter of Dartmouth                   its obligation impaired by these acts of the legislature of
College, so as to give it the immutability of the                New-Hampshire?
fundamental law. On the contrary, the constitution of the
State admonishes the legislature of the duty of                  The title of the acts of the 27th of June, and the 18th of
encouraging science and literature, and thus seems to            December, 1816, shows that the legislative will and
suppose its power of control over the scientific and             intention was to amend the charter, and enlarge and
literary institutions of the State. The legislature had,         improve the corporation. If by a technical fiction the
therefore, a right to modify this trust, the original object     grant of the charter can be considered as a contract
of which, was the education of the Indian and English            between the king (or the State) and the corporators, the
youth of the province. It is not necessary to contend, that      obligation of that contract is not impaired; but is rather
it had the right of wholly diverting the fund from the           engorced, by these acts, which continue the same
original object of its pious and benevolent founders. Still      corporation, for the same objects, under a new name. It is
it must be insisted, that a regal grant, with a regal and        well settled, that a mere change of the name of a
colonial policy, necessarily became subject to the               corporation will not affect its identity. An addition to the
modification of a republican legislature, whose right, and       number of the colleges, the creation of new [***113]
whose duty it was, to adapt the education of the youth of        fellowships, or an increase of the number of the trustees,
the country to the [***111] change in its political              do not impair the franchises of the corporate body. Nor is
institutions. It is a corollary from the right of                the franchise of any individual corporator impaired. In
self-government. The ordinary remedies which are                 the words of Mr. Justice Ashurst, in the case of the King
furnished in the Court for a misuser of the corporate            v. Passmore, 56 "the members of the old body have no
franchises, are not adapted to the great exigencies of a         injury or injustice to complain of, for they are all
revolution in government. They pre-suppose a                     included in the new charter of incorporation; and if any of
permanently established order of things, and are intended        them do not become members of the new incorporation,
only to correct occasional deviations, and minor                 but refuse to accept, it is their own fault." What rights
mischiefs. But neither a reformation in religion, nor a          which are secured by this alleged contract are invaded by
revolution in government, can be accomplished or                 the acts of the legislature? Is it the right of property, or of
confirmed by a writ of quo warranto or mandamus. We              privileges? It is not the former, because the corporate
do not say, that the corporation has forfeited its charter       body is not deprived of the least portion of its property.
for misuser; but that it has become unfit for use by a           If it be the personal privileges of the corporators that are
change of circumstances. Nor does the lapse of time              attacked, these must be either a common and universal
from 1776 to 1816, infer an acquiescence on the part of          privilege, such as the right of suffrage, for interrupting
the legislature, or a renunciation of its right to abolish or    the exercise of which an action would lie; or they must be
reform an institution, which being of a public nature,           monopolies and exclusive privileges, which are always
cannot hold its privileges by prescription. Our argument         subject to be regulated and modified by the supreme
is, that it is, at all times, liable to be new modelled by the   power of the State. Where a private proprietary interest
                                                                                                                     Page 30
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                       1819 U.S. LEXIS 330, ***113; 4 Wheat. 518

is coupled with the exercise of political power or a            should be such that the judge feels a clear and strong
[***114] public trust, the charters of corporations have        conviction of their incompatibility with each other." 59 In
frequently been amended by legislative authority. 57 In         Calder et ux. v. Bull et ux. 60 Mr. Justice Chace
charters creating artificial persons for purposes               expressed himself with his usual emphatic energy, and
exclusively private, and not interfering with the common        said, "I will not decide any law to be void, but in a very
rights of the citizens, it may be admitted that the             clear case." Is it, then, a very clear case that these acts of
legislature cannot interfere to amend without the consent       New-Hampshire are repugnant to the constitution of the
of the grantees. The grant of such a charter might              United States?
perhaps be considered as analogous to a contract between
the State and private individuals, affecting their private              58 Calder et ux. v. Bull et ux. 3 Dall. 392, 394,
rights, and might thus be regarded as within the spirit of              395. Fletcher v. Peck, 6 Cranch, 87. New-Jersey
the constitutional prohibition. But this charter is merely a            v. Wilson, 7 Cranch, 164. Terret v. Taylor, 9
mode of exercising one of the great powers of civil                     Cranch, 43.
government. Its amendment, or even repeal, can no more                  59 6 Cranch, 128.
be considered as the breach of a contract, than the                     60 3 Dall. 395.
amendment or repeal of any other law. Such repeal or
                                                                1. Are they bills of attainder? The elementary writers
amendment is an ordinary act of public legislation, and
                                                                inform us, that an attainder is "the stain or corruption of
not an act impairing the obligation of a contract between
                                                                the blood of a criminal capitally condemned." 61 True it
the government and private citizens, under which
                                                                is, that the Chief Justice says, in Flctcher v. Peck, 62 that
personal immunities or proprietary interests are vested in
                                                                a bill of attainder may affect the life of an individual, or
them.
                                                                may confiscate his estate, or both. But the cause did not
       56 3 T.R. 244.                                           turn upon this point, and the Chief Justice was not called
       57 Gray v. The Portland Bank, 3 Mass. R. 364.            upon to weigh with critical accuracy his expressions in
       The Commonwealth v. Bird, 12 Mass. R. 443.               this part of the case. In England, most certainly, the first
                                                                idea presented is that of corruption of blood, and
The Attorney-General, on the same [***115] side,                [***117] consequent forfeiture of the entire property of
stated, that the only question properly before the Court        the criminal, as the regular and inevitable consequences
was, whether the several acts of the legislature of             of a capital conviction at common law. Statutes
New-Hampshire, mentioned in the special verdict, are            sometimes pardon the attainder, and merely forfeit the
repugnant to that clause of the constitution of the United      estate. But this forfeiture is always complete and entire.
States, which provides, that no State shall "pass any bill      In the present case, however, it cannot be pretended that
of attainder, ex post facto law, or law impairing the           any part of the estate of the trustees is forfeited, and, if a
obligation of contracts."                                       part, certainly not the whole.

Beside its intrinsic difficulty, the extreme delicacy of this           61 4 Bl. Com. 380.
question is evinced by the sentiments expressed by the                  62 6 Cranch, 138.
Court, whenever it has been called to act on such a
question. 58 In the case of Fletcher v. Peck, the Court         2. Are these acts "laws impairing the obligation of
says, "The question whether a law be void for its               contracts?" The mischiefs actually existing at the time the
repugnancy to the constitution, is, at all times, a question    constitution was established, and which were intended to
of much delicacy, which ought seldom, if ever, to be            be remedied by this prohibitory clause, will show the
decided in the affirmative, in a doubtful case. The Court,      nature of the contracts contemplated by its authors. It
when impelled by duty to render such a judgment, would          was the inviolability of private contracts, and private
be unworthy of its station could it be unmindful of the         rights acquired under them, which was intended to be
solemn obligation which that station imposes. But it is         protected; 63 and not contracts which are in their nature
not on slight implication and vague conjecture that the         matters of civil police, nor grants by a State of power,
legislature is to be pronounced to have transcended its         and even property, to individuals, in trust to be
powers, and its acts are to be considered as void. The          administered for purposes merely public."The
opposition between the constitution and the law [***116]        prohibitions not to make any thing but gold and silver
                                                                coin a tender in payment of debts, and not to pass any law
                                                                                                                  Page 31
                                           17 U.S. 518, *; 4 L. Ed. 629, **;
                                      1819 U.S. LEXIS 330, ***117; 4 Wheat. 518

impairing the obligation [***118] of contracts," says Mr.      Wheelock [***120] was a contributor, is not found by
Justice Chace, "were inserted to secure private rights." 64    the special verdict; and not having been such in truth, it
The cases determined in this Court, illustrate the same        cannot be added under the agreement to amend the
construction of this clause of the constitution. Fletcher v.   special verdict. The jury find the charter, and that does
Peck was a case where a State legislature attempted to         not recite that the college was a private foundation by
revoke its grant, so as to devest a beneficial estate in       Doctor Wheelock. On the contrary, the real state of the
lands; a vested estate; an actual conveyance to individuals    case is, that he was the projector; that he had a school on
as their private property. 65 In the case of New-Jersey v.     his own plantation, for the education of Indians; and
Wilson, there was an express contract contained in a           through the assistance of others had been employed for
public treaty of cession with the Indians, by which the        several years in cloathing, maintaining, and educating
privilege of perpetual exemption from taxation was             them. He solicited contributions, and appointed others to
indelibly impressed upon the lands, and could not be           solicit. At the foundation of the college, the institution
taken away without a violation of the public faith             was removed from his estate.The honours paid to him by
solemnly pledged. 66 Therret v. Taylor was also a case of      the charter were the reward of past services, and of the
an attempt to devest an interest in lands actually vested      boldness, as well as piety, of the project. The State has
under an act amounting to a contract. 67 In all those          been a contributor of funds, and this fact is found. It is,
instances, the property was held by the grantees, and          therefore, not a private charity, but a public institution;
those to whom they had conveyed, beneficially, and             subject to be modified, altered, and regulated, by the
under the sanction of contracts, in the ordinary and           supreme power of the State.
popular signification of that term. But this is an attempt
to extend its obvious and natural meaning, and to apply it     This charter is not a contract within the true intent of the
by a species of legal fiction to a class of cases which        constitution. The acts of New-Hampshire, varying in
[***119] have always been supposed to be within the            some degree the forms of the charter, do not impair
control of the sovereign power. Charters to public             [***121] the obligation of a contract.
corporations for purposes of public policy are necessarily
                                                               In a case which is really a case of contract, there is no
subject to the legislative discretion, which may revoke or
                                                               difficulty in ascertaining who are the contracting parties.
modify them as the continually fluctuating exigencies of
                                                               But here they cannot be fixed. Doctor Wheelock can
the society may require. Incorporations for the purposes
                                                               only be said to be a party, on the ground of his
of education and other literary objects, in one age, or
                                                               contributing funds, and thus being the founder and
under one form of government, may become unfit for
                                                               visitor. That ground being removed, he ceases to be a
their office in another age, or under another government.
                                                               party to the contract. Are the other contributors alluded
       63 The Federalist, No. 44. 1 Tucker's Bl. Com.          to in the charter, and enumerated by Belknap in his
       part 1. Alpendix, 312.                                  history of New-Hampshire, are they contracting
       64 Calder et ux. v. Bull et ux. 3 Dall. 390.            parties?They are not, before the Court; and even if they
       65 6 Cranch, 87.                                        were, with whom did they contract? With the King of
       66 7 Cranch, 164.                                       Great Britain? He, too, is not before the Court; and has
       67 9 Cranch, 43.                                        declared, by his Chancellor, in the case of the Attorney
                                                               General v. The City of London, 68 that he has no longer
This charter is said to be a contract between Doctor           any connexion with these corporations in America. Has
Wheelock and the king; a contract founded on a donation        the State of New-Hampshire taken his place? Neither is
of private property by Doctor Wheelock. It is hence            that State before the Court, nor can it be as a party,
infered, that it is a private eleemosynary corporation; and    originally defendant.But suppose this to be a contract
the right of visitation is said to be in the founder and his   between the trustees, and the people of New-Hampshire.
heirs; and that the State can have no right to interfere,      A contract is always for the benefit and advantage of
because it is neither the founder of this charity, nor         some person. This contract cannot be for the benefit of
contributor to it.                                             the trustees. It [***122] is for the use of the people. The
                                                               cestui que use is always the contracting party; the trustee
But if the basis of this argument is removed, what             has nothing to do with stipulating the terms. The people
becomes of the superstructure? The fact that Doctor            then grant powers for their own use. It is a contract with
                                                                                                                      Page 32
                                           17 U.S. 518, *; 4 L. Ed. 629, **;
                                      1819 U.S. LEXIS 330, ***122; 4 Wheat. 518

themselves!                                                    the one, these municipal corporations are saved from the
                                                               tyranny of the crown; and by the other, they are preserved
       68 The Attorney General v. The City of London,          from the infinite perpetuity of inveterate errors. But in
       3 Bro. Ch. Cas. 171. 1 Ves. jun. 243.                   the present case there is no similar qualification of the
                                                               immutability of the charter, which is contended for in the
But if the trustees are parties on one side, what do they      argument on the other side. But in truth, neither the
give, and what do they receive? They give their time and       original principle, nor its qualification, apply to this case;
labour. Every society has a right to the services of its       for there is here no such beneficial interest and individual
members in places of public trust and duty. A town             property as are enjoyed by town corporators.
appoints, under the authority of the State, an overseer of
the poor, or of the highways. He gives, reluctantly, his               69 Peake's N. P. Cas. 154.
labour and services; he receives nothing in return but the             70 Rex v. Passmore, 3 T.R. 244.
privilege of giving his labour and services. Such
appointments to offices of public trust have never been        3.But even admitting it to be a case of contract, its
considered as contracts which the sovereign authority          obligation is not impaired by these legislative acts. What
was not competent to rescind or modify. There can be no        vested right has been devested? None! The former
contract in which the party does not receive some              trustees are [***125] continued. It is true, that new
personal, private, individual benefit. To make this            trustees are added, but this affords no reasonable ground
charter a contract, and a private contract, there must be a    of complaint. The privileges of the House of Lords in
private beneficial interest vested in the party who pays to    England are not impaired by the introduction of new
consideration. What is the private beneficial [***123]         members. The old corporation is not abolished, for the
interest vested in the party in the present case? The right    foundation as now regulated is substantially the same. It
of appointing the president and professors of the college,     is identical in all its essential constituent parts, and all its
and of establishing ordinances for its government, &c.         former rights are preserved and confirmed. 71 The change
But to make these rights an interest which will constitute     of name does not change its original rights and
the end and object of a contract, the exercise of these        franchises. 72 By the revolution which separated this
rights must be for the private individual advantage of the     country from the British empire, all the powers of the
trustees. Here, however, so far from that being the fact, it   British government devolved on the States. The
is solely for the advantage of the public; for the interests   legislature of New-Hampshire then became cloathed with
of piety and learning. It was upon these principles that       all the powers, both of the king and parliament, over
Lord Kenyon determined, in the case of Weller v.               these public institutions. On whom, then, did the title to
Foundling Hospital, 69 that the governor and members of        the property of this college fall? If before the revolution
the corporation were competent witnesses, because they         it was beneficially vested in any private individuals, or
were trustees of a public charity, and had no private          corporate body, I do not contend that the revolution
personal interest. It is not meant to deny that mere right     devested it, and gave it to the State. But it was not before
-- a franchise -- an incorporeal hereditament, may be the      vested beneficially in the trustees.                The use
subject of a contract; but it must always be a direct,         unquestionably        belonged      to    the    people      of
individual, beneficial interest to the party who takes that    New-Hampshire, who were the cestuy que trusts. The
right. The rights of municipal corporators are of this         legal estate was [***126] indeed vested in the trustees
nature. The right of suffrage there belongs beneficially to    before the revolution by virtue of the royal charter of
the individual elector, and is to be exercised for his own     1769. But that charter was destroyed by the revolution,
exclusive advantage. It is in relation to these [***124]       73 and the legal estate, of course, fell upon those who
town corporations that Lord Kenyon speaks, when he             held the equitable estate -- upon the people. If those who
says, hat the king cannot force a new charter upon them.       were trustees, carried on the duties of the trust after the
70 This principle is established for the benefit of all the    revolution, it must have been subject to the power of the
corporators. It is accompanied by another principle,           people. If it be said, that the State gave its implied assent
without which it would never have been adopted: the            to the ters of the old charter, then it must be subject to all
power of proposing amendments at the desire of those for       the terms on which it was granted; and among these, to
whose benefit the charter was granted. These two               the oath of allegiance to the king. But if to avoid this
principles work together for the good of the whole. By         concession, it be said, that the charter must have been so
                                                                                                                     Page 33
                                            17 U.S. 518, *; 4 L. Ed. 629, **;
                                       1819 U.S. LEXIS 330, ***126; 4 Wheat. 518

far modified as to adapt it to the character of the new         youth are not public officers. The argument on the other
government, and to the change in our civil institutions;        side, if it proves any thing, will prove that professors,
that is precisely what we contend for. These civil              masters, preceptors, and tutors, are all political persons
institutions must be modified, and adapted to the               and public officers; and that all education is necessarily
mutations of society and manners. They belong to the            and exclusively the business of the State. The
people, are established for their benefit, and ought to be      confutation of such an argument lies in stating it. The
subject to their authority.                                     trustees of this college perform no duties, and have no
                                                                responsibility in any way connected with the [***129]
       71 See the Mayor of Colchester v. Seaber, 3              civil government of the State. They derive no
       Burr. 1866.                                              compensation for their services from the public treasury.
       72 1 Sand. 344. n. 1. Luttrel's Case, 4 Co. Rep.         They are the gratuitous administrators of a private
       87.                                                      bounty; the trustees of a literary establishment, standing,
       73 Attorney General v. City of London, 3 Bro.            in contemplation of law, on the same foundation as
       Ch. Cas. 171. S. C. 1 Ves. jun. 143.                     hospitals, and other charities. It is true, that a college, in
                                                                a popular sense, is a public institution, because its uses
  [***127] Mr. Hopkinson, in reply, insisted, that the          are public, and its benefits may be enjoyed by all who
whole argument on the other side proceeded on an                choose to enjoy them. But in a legal and technical sense,
assumption which was not warranted, and could not be            they are not public institutions, but private charities.
maintained. The corporation created by this charter is          Corporations may, therefore, be very well said to be for
called a public corporation. Its members are said to be         public use, of which the property and privileges are yet
public officers, and agents of government. They were            private. Indeed, there may be supposed to be an ultimate
officers of the king, it is said, before the revolution, and    reference to the public good, in granting all charters of
they are officers of the State since. But upon what             incorporation; but this does not change the property from
authority is all this taken? What is the acknowledged           private to public. If the property of this corporation be
principle which decides thus of this corporation? Where         public property, that is, property belonging to the State,
are the cases in which such a doctrine has ever prevailed?      when did it become so? It was once private property;
No case, no book of authority, has been, or can be, cited       when was it surrendered to the public? The object in
to this purpose. Every writer on the law of corporations,       obtaining the charter, was not surely to transfer the
all the cases in law and equity, instruct us that colleges      property to the public, but to secure it forever in the
are regarded in law as private eleemosynary corporations,       hands of those [***130] with whom the original owners
especially colleges founded, as this was, by a private          saw fit to entrust it. Whence, then, that right of
founder. If this settled principle be not overthrown, there     ownership and control over this property, which the
is no foundation for the defendant's argument. We               legislature of New-Hampshire has undertaken to
contend that this charter is a contract between the             exercise? The distinction between public, political, or
government and the members of the corporation created           civil corporations, and corporations for the distribution of
by it. It is a contract, because it is a grant of valuable      private charity, is fully explained, and broadly marked, in
rights and privileges; and every grant [***128] implies a       the cases which have been cited, and to which no answer
contract not to resume the thing granted. Public offices        has been given. The hospital of Pennsylvania is quite as
are not created by contract or by charter. They are             much a public corporation, as this college. It has great
provided for by general laws. Judges and magistrates do         funds, most wisely and beneficently administered. Is it to
not hold their offices under charters. These offices are        be supposed, that the legislature might rightfully lay its
created by public laws, for public political purposes, and      hands on this institution, violate its charter, and direct its
filled by appointments made in the exercise of political        funds to any purpose which its pleasure might prescribe?
power. There is nothing like this in the origin of the          The property of this college was private property before
powers of the plaintiffs. Nor is there in their duties, any     the charter; and the charter has wrought no change in the
more than in their origin, any thing which likens them to       nature or title of this property. The school had existed as
public political agents. Their duties are such as they          a charity school, for years before the charter was granted.
themselves have chosen to assume, in relation to a fund         During this time it was manifestly a private charity. The
created by private benefaction, for charitable uses. These      case cited from Atkyns, shows, that a charter does not
duties relate to the instruction of youth: but instructors of   make a charity more public, but only more permanent.
                                                                                                                  Page 34
                                           17 U.S. 518, *; 4 L. Ed. 629, **;
                                      1819 U.S. LEXIS 330, ***130; 4 Wheat. 518

Before he accepted the charter, [***131] the founder of        privileges. The State now claims the right of revoking
this college possessed an absolute right to the property       this grant, without restoring the consideration which it
with which it was endowed, and also the right flowing          received for making the grant. Such a pretence may suit
from that, of administering and applying it to the             despotic power. It may succeed where the authority of
purposes of the charity by him established. By taking the      the legislature is limited by no rule, and bounded only by
charter, he assented that the right to the property, and the   its will. It may prevail in those systems in which
power of administering it, should go to the corporation of     injustice is not always unlawful, and where neither the
which he and others were members. The beneficial               fundamental constitution of the government sets any
purpose to which the property was to be used, was the          limits to power, nor any just sentiment or moral feeling
consideration on the part of the government for granting       affords a practical restraint against a power which in its
the charter. The perpetuity which it was calculated to         theory is unlimited. But it cannot prevail in the United
give to the charity, was the founder's inducement to           States, where power is restrained by constitutional
solicit it. By this charter, the public faith is solemnly      barriers, and where no legislature is, even in theory,
pledged, that the arrangement thus made shall be               invested with all sovereign powers. Suppose Dr.
perpetual. In consideration that the founder would devote      Wheelock had chosen to establish and perpetuate this
his property to the purposes beneficial to the public, the     charity by his last will, [***134] or by a deed, in which
government has solemnly covenanted with him to secure          he had given the property, appointed the trustees,
the administration of that property in the hands of trustees   provided for their succession, and prescribed their duties.
appointed in the charter. And yet the argument now is,         Could the legislature of New-Hampshire have broken in
that because he so devoted his property to uses beneficial     upon this gift, changed its parties, assumed the
to the public, the government may, for that reason,            appointment of the trustees, abolished its stipulations and
assume the control of it, and take it out of those hands to    regulations, or imposed others? This will hardly be
which [***132] it was confided by the charter. In other        pretended, even in this bold and hardy argument -- and
words, because the founder has strictly performed the          why not? Because the gift, with all its restrictions and
contract on his part, the government, on its part, is at       provisions, would be under the general and implied
liberty to violate it. This argument is equally unsound in     protection of the law. How is it in our case? Why, in
morality and in law. The founder proposed to appropriate       addition to the general and implied protection afforded to
his property, and to render his services, upon condition of    all rights and all property, it has an express, specific,
receiving a charter which should secure to him and his         covenanted assurance of protection and inviolability,
associates certain privileges and immunities. He               given on good and sufficient considerations, in the usual
undertook the discharge of certain duties, in consideration    manner of contracts between individuals. There can be
of obtaining certain rights. There are rights and duties on    no doubt that, in contemplation of law, a charter, such as
both sides. On the part of the founder, there is the duty of   this, is a contract. It takes effect only with the assent of
appropriating the property, and of rendering the services      those to whom it is granted. Laws enjoin duties, without
imposed on him by the charter, and the right of having         or against the will of those who are to perform them. But
secured to him and his associates the administration of        the duties of the trustees, under this charter, and binding
the charity, according to the terms of the charter, forever.   upon them only because they have accepted the charter,
On the part of the government, there is the duty of            [***135] and assented to its terms.
maintaining and protecting all the rights and privileges
conferred by the charter, and the right of insisting on the    But taking this to be a contract, the argument of the
compliance of the trustees with the obligations                defendant is, that it is not such a contract as the
undertaken by them, and of enforcing that compliance by        constitution of the United States protects. But why not?
all due and regular means. There is a plain, manifest,         The constitution speaks of contracts, and ought to include
reasonable stipulation, [***133] mixed up of rights and        all contracts for property or valuable privileges. There is
duties, which cannot be separated but by the hand of           no distinction or discrimination made by the constitution
injustice and violence. Yet the attempt now is to break        itself, which will exclude this case from its protection.
the mutuality of this stipulation; to hold the founder's       The decisions which have already been made in this
property, and yet take away that which was given him as        Court are a complete answer to the defendant's argument.
the consideration upon which he parted with his property.
                                                               The Attorney General has insisted, that Dr. Wheelock
The charter was a grant of valuable powers and
                                                                                                                      Page 35
                                             17 U.S. 518, *; 4 L. Ed. 629, **;
                                        1819 U.S. LEXIS 330, ***135; 4 Wheat. 518

was not the founder of this college; that other donors           institution. Such would not be the legal consequence. If
have better title to that character; and that, therefore, the    the grant be of privileges and immunities, which are to be
plaintiff's argument, so far as it rests on the supposed fact    esteemed objects of value, it cannot be revoked. But this
of Dr. Wheelock's being the founder, fails. The first            case is much stronger than that. Nothing [***138] is
answer to this is, that the charter itself declares Dr.          plainer, than that Dr. Wheelock, from the recitals of this
Wheelock to be the founder, in express terms. It also            charter, was the founder of this institution. It is true, that
recites facts, which would show him to be the founder,           others contributed; but it is to be remembered, that they
and on which the law would invest him with that                  contributed to Dr. Wheelock, and to the funds while
character, if the charter itself had not declared him so.        under his private administration and control, and before
But if all this were otherwise, it would not help the            the idea of a charter had been suggested. These
defendant's argument. The foundation was still [***136]          contributions were obtained on his solicitation, and
private; and whether Dr. Wheelock, or Lord Dartmouth,            confided to his trust.
or any other person, possessed the greatest share of merit
in establishing the college, the result is the same, so far as           74 2 Ves. 78.
it bears on the present question. Whoever was founder,
                                                                 If we have satisfied the Court that this charter must be
the visitatorial power was assigned to the trustees, by the
                                                                 regarded as a contract, and such a contract as is protected
charter; and it, therefore, is of no importance whether the
                                                                 by the constitution of the United States, it will hardly be
founder was one individual or another. It is narrowing
                                                                 seriously denied, that the acts of the legislature of
the ground of our argument to suppose, that we rest it on
                                                                 New-Hampshire impair this contract. They impair the
the particular fact of Dr. Wheelock's being founder;
                                                                 rights of the corporation as an aggregate body, and the
although the fact is fully established by the charter itself.
                                                                 rights and privileges of individual members. New duties
Our argument is, that this is a private corporation; that the
                                                                 are imposed on the corporation; the funds are directed to
founder of the charity, before the charter, had a right of
                                                                 new purposes; a controlling power over all the
visiting and governing it, a right growing out of the
                                                                 proceedings of the trustees, is vested in a board of
property of the endowment; that by the charter, this
                                                                 overseers unknown to the charter. Nine new trustees are
visitatorial power is vested in the trustees, as assignees of
                                                                 added to the original number, in direct hostility with the
the founder; and that it is a privilege, right, and
                                                                 provision of the charter. There are radical and essential
immunity, originally springing from property, and which
                                                                 alterations, which go to alter [***139] the whole
the law regards and protects, as much as it regards and
                                                                 organization and frame of the corporation.
protects property and privileges of any other description.
By the charter, all proper powers of government are given        If we are right in the view which we have taken of this
to the trustees, and this makes them visitors; [***137]          case, the result is, that before, and at the time of, the
and from the time of the acceptance of the charter, no           granting of this charter, Dr. Wheelock had a legal interest
visitatorial power remained in the founder or his heirs.         in the funds with which the institution was founded; that
This is the clear doctrine of the case of Green v.               he made a contract with the then existing government of
Rutherforth, which has been cited, and which is                  the State, in relation to that interest, by which he devoted,
supported by all the other cases. Indeed we need not stop        to uses beneficial to the public, the funds which he had
here in the argument. We might go farther, and                   collected, in consideration of the stipulations and
countend, that if there were no private founder, the             covenants, on the part of the government, contained in
trustees would possess the visitatorial power. Where             the charter; and that these stipulations are violated, and
there are charters, vesting the usual and proper powers of       the contract impaired, by the acts of the legislature of
government in the trustees, they thereby become the              New-Hampshire.
visitors, and the founder retains no visitatorial power,
although that founder be the king. 74 Even then, if this         OPINION BY: MARSHALL
college had originated with the government, and had been
founded by it; still, if the government had given a charter      OPINION
to trustes, and conferred on them the powers of visitation,
and control, which this charter contains, it would by no               [*624] [**656] The opinion of the Court was
means follow, that the government might revoke the               delivered by Mr. Chief Justice MARSHALL.
grant, merely because it had itself established the
                                                                                                                  Page 36
                                        17 U.S. 518, *624; 4 L. Ed. 629, **656;
                                      1819 U.S. LEXIS 330, ***139; 4 Wheat. 518

     This is an action of trover, brought by the Trustees of   may be created in their own body.
Dartmouth College against William H. Woodward, in the
State Court of New Hampshire, for the book of records,              The defendant claims under three acts of the
corporate seal, and other corporate property, to whcih the     legislature of New-Hampshire, the most material of
plaintiffs allege themselves to be entitled.                   which was passed on the 27th of June, 1816, and is
                                                               entitled, "an act to amend the charter, [***142] and
     A special verdict, after setting out the rights of the    enlarge and improve the corporation of Dartmouth
parties, finds for the defendant, if certain acts of the       College." Among other alterations in the charter, this act
legislature [***140] of New-Hampshire, passed on the           increases the number of trustees to twenty-one, gives the
27th of June, and on the 18th of December, 1816, be            appointment of the additional members to the executive
valid, and binding on the trustees without their assent,       of the State, and creates a board of overseers, with power
and not repugnant to the constitution of the United States;    to inspect and control the most important acts of the
otherwise, it finds for the plaintiffs.                        trustees. This board consists of twenty-five persons. The
                                                               president of the senate, the speaker of the house of
       [*625] The Superior Court of Judicature of              representatives, of New-Hampshire, and the governor and
New-Hampshire rendered a judgment upon this verdict            lieutenant governor of Vermont, for the time being, are to
for the defendant, which judgment has been brought             be members ex officio. The board is to be completed by
before this Court by writ of error. The single question        the governor and council of New-Hampshire, who are
now to be considered is, do the acts to which the verdict      also empowered to fill all vacancies which may occur.
refers violate the constitution of the United States?          The acts of the 18th and 26th of December are
                                                               supplemental to that of the 27th of June, and are
     This Court can be insensible neither to the magnitude     principally intended to carry that act into effect.
nor delicacy of this question. The validity of a legislative
act is to be examined; and the opinion of the highest law          The majority of the trustees of the college have
tribunal of a State is to be revised: an opinion which         refused to accept this amended charter, and have [*627]
carries with it intrinsic evidence of the diligence, of the    brought this suit for the corporate property, which is in
ability, and the integrity, with which it was formed. On       possession of a person holding by virtue of the acts which
more than one occasion, this Court has expressed the           have been stated.
cautious circumspection with which it approaches the
consideration of such questions; and has declared, that, in         It can require no argument to prove, that the
no doubtful case, would it pronounce a legislative act to      circumstances of this case constitute [***143] a contract.
be contrary to the constitution. But the American people       An application is made to the crown for a charter to
have said, [***141] in the constitution of the United          incorporate a religious and literary institution. In the
States, that "no State shall pass any bill of attainder, ex    application, it is stated that large contributions have been
post facto law, or law impairing the obligation of             made for the object, which will be conferred on the
contracts." In the same instrument they have also said,        corporation, as soon as it shall be created. The charter is
"that the judicial power shall extend to all cases in law      granted, and on its faith the property is conveyed.
and equity arising under the constitution." On the judges      [**657] Surely in this transaction every ingredient of a
of this Court, then, is imposed the high and solemn duty       complete and legitimate contract is to be found.
of protecting, from even legislative violation, those
contracts which the constitution of our country has placed         The points for consideration are,
beyond legislative control; and, however irksome the task
                                                                   1. Is this contract protected by the constitution of the
may be, this is a duty from which we dare not shrink.
                                                               United States?
      [*626] The title of the plaintiffs originates in a
                                                                   2. Is it impaired by the acts under which the
charter dated the 13th day December, in the year 1769,
                                                               defendant holds?
incorporating twelve persons therein mentioned, by the
name of "The Trustees of Dartmouth College," granting               1. On the first point it has been argued, that the word
to them and their successors the usual corporate               "contract," in its broadest sense, would comprehend the
privileges and powers, and authorizing the trustees, who       political relations between the government and its
are to govern the college, to fill up all vacancies which
                                                                                                                     Page 37
                                          17 U.S. 518, *627; 4 L. Ed. 629, **657;
                                        1819 U.S. LEXIS 330, ***143; 4 Wheat. 518

citizens, would extend to offices held within a State for        in a court of justice. It never has been understood to
State purposes, and to many of those laws concerning             restrict the general right of the legislature to legislate on
civil institutions, which must change with circumstances,        the subject of divorces. Those acts enable some tribunal,
and be modified by ordinary legislation; which deeply            [***146] not to impair a marriage contract, but to
concern the public, and which, to preserve good                  liberate one of the parties because it has been broken by
government, the public judgment must control. That               the other. When any State legislature shall pass an act
even marriage is a contract, and its obligations are             annulling all marriage contracts, or allowing either party
effected by the laws respecting [***144] divorces. That          to annul it without the consent of the other, it will be time
the clause in the constitution, if construed in its greatest     enough to inquire, whether such an act be constitutional.
latitude, [*628] would prohibit these laws. Taken in its
broad unlimited sense, the clause would be an                          The parties in this case differ less on general
unprofitable and vexatious interference with the internal        principles, less on the true construction of the constitution
concerns of a State, would unnecessarily and unwisely            in the abstract, than on the application of those principles
embarrass its legislation, and render immutable those            to this case, and on the true construction of the charter of
civil institutions, which are established for purposes of        1769. This is the point on which the cause essentially
internal government, and which, to subserve those                depends. If the act of incorporation be a grant of political
purposes, ought to vary with varying circumstances. That         power, if it create a civil institution to be employed in the
as the framers of the constitution could never have              administration of the government, or if the funds of the
intended to insert in that instrument a provision so             college be [*630] public property, or if the State of
unnecessary, so mischievous, and so repugnant to its             New-Hampshire, as a government, be alone interested in
general spirit, the term "contract" must be understood as        its transactions, the subject is one in which the legislature
intended to guard against a power of at least doubtful           of the State may act according to its own judgment,
utility, the abuse of which had been extensively felt; and       unrestrained by any limitation of its power imposed by
to restrain the legislature in future from violating the right   the constitution of the United States.
to property. That anterior to the formation of the
                                                                      But if this be a private eleemosynary institution,
constitution, a course of legislation had prevailed in
                                                                 endowed with a capacity [***147] to take property for
many, if not in all, of the States, which weakened the
                                                                 objects unconnected with government, whose funds are
confidence of man in man, and embarrassed all
                                                                 bestowed by individuals on the faith of the charter; if the
transactions between individuals, by dispensing with a
                                                                 donors have stipulated for the future disposition and
faithful performance of engagements. [***145] To
                                                                 management of those funds in the manner prescribed by
correct this mischief, by restraining the power which
                                                                 themselves; there may be more difficulty in the case,
produced it, the State legislatures were forbidden "to pass
                                                                 although neither the persons who have made these
any law impairing the obligation of contracts," that is, of
                                                                 stipulations, nor those for whose benefit they were made,
contracts respecting property, under which some
                                                                 should be parties to the cause. Those who are no longer
individual could claim a right to something beneficial to
himsel; and that since the clause in the constitution must       interested in the property, may yet retain such an interest
                                                                 in the preservation of their own arrangements, as to have
in construction receive some limitation, it may be
                                                                 a right to insist, that those arrangements shall be held
confined, and ought to be confined, to cases of this
                                                                 sacred. Or, if they have themselves disappeared, it
[*629] description; to cases within the mischief it was
                                                                 becomes a subject of serious and anxious inquiry,
intended to remedy.
                                                                 whether those whom they have legally empowered to
     The general correctness of these observations cannot        represent them forever, may not assert all the rights
be controverted. That the framers of the constitution did        which they possessed, while in being; whether, if they be
not intend to retrain the States in the regulation of their      without personal representatives who may feel injured by
civil institutions, adopted for internal government, and         a violation of the compact, the trustees be not so
that the instrument they have given us, is not to be so          completely their representatives in the eye of the law, as
construed, may be admitted. The provision of the                 to stand in their place, not only as respects the
constitution never has been understood to embrace other          government of the college, but also as respects the
contracts, than those which respect property, or some            maintenance of the college charter.
object of value, and confer rights which may be asserted
                                                                                                                 Page 38
                                        17 U.S. 518, *630; 4 L. Ed. 629, **657;
                                      1819 U.S. LEXIS 330, ***147; 4 Wheat. 518

      [***148] It becomes then the duty of the Court          orders, ordinances, and laws, for the government of the
most [*631] seriously to examine this charter, and to         college, the same not being repugnant to the laws of
ascertain its true character.                                 Great Britain, or of New-Hampshire, and not excluding
                                                              any person on account of his speculative sentiments in
     From the instrument itself, it appears, that about the   religion, or his being of a religious profession different
year 1754, the Rev. Eleazer Wheelock established at his       from that of the trustees.
own expense, and on his own estate, a charity school for
the instruction of Indians in the christian religion. The         This charter was accepted, and the property both real
success of this institution inspired him with the design of   and personal, which had been contributed for the benefit
soliciting contributions in England for carrying on, and      of the college, was conveyed to, and vested in, the
extending, his undertaking.In this pious work he              corporate body.
employed the Rev. Nathaniel Whitaker, who, by virtue of
a power of attorney from Dr. Wheelock, appointed the               From this brief review of the most essential parts of
Earl of Dartmouth and others, trustees of the money,          the charter, it is apparent, that the funds of the college
which had been, and should be, contributed; which             consisted entirely of private donations. It is, perhaps, not
appointment Dr. Wheelock confirmed by a deed of trust         very important, who were the donors. The probability is,
authorizing the trustees to [**658] fix on a site for the     that the Earl of Dartmouth, and the other trustees in
college.They determined to establish the school on            England, were, in fact, the largest [*633] contributors.
Connecticut river, in the western part of New-Hampshire;      Yet the legal conclusion, from the facts recited in the
that situation being supposed favourable for carrying on      charter, would probably be, that Dr. Wheelock was the
the original design among the Indians, and the also for       founder of the college.
promoting learning among the English; and the
                                                                   The origin of the institution was, undoubtedly, the
proprietors in the neighbourhood having made large
                                                              [***151] Indian charity school, established by Dr.
offers of land, on condition, that [***149] the college
                                                              Wheelock, at his own expense. It was at his instance, and
should there be placed. Dr. Wheelock then applied to the
                                                              to enlarge this school, that contributions were solicited in
crown for an act of incorporation; and represented the
                                                              England. The person soliciting these contributions was
expediency of appointing those whom he had, by his last
                                                              his agent; and the trustees, who received the money, were
will, named as trustees in America, to be members of the
                                                              appointed by, and act under, his authority. It is not too
proposed corporation. "In consideration of the premises,"
                                                              much to say, that the funds were obtained by him, in
"for the education and instruction of the youth of the
                                                              trust, to be applied by him to the purposes of his enlarged
Indian tribes," &c. "and also of English youth, and any
                                                              school. The charter of incorporation was granted at his
other," the charter was granted, and the trustees of
                                                              instance. The persons named by him in his last will, as
Dartmouth College were by that name created a body
                                                              the trustees of his charity school, compose a part of the
[*632] corporate, with power, for the use of the said
                                                              corporation, and he is declared to be the founder of the
college, to acquire real and personal property, and to pay
                                                              college, and its president for life. Were the inquiry
the president, tutors, and other officers of the college,
                                                              material, we should feel some hesitation in saying, that
such salaries as they shall allow.
                                                              Dr. Wheelock was not, in law, to be considered as the
     The charter proceeds to appoint Eleazer Wheelock,        founder, 75 of this institution, and as possessing all the
"the founder of said college," president thereof, with        rights appertaining to that character. But be this as it
power by his last will to appoint a successor, who is to      may, Dartmouth College is really endowed by private
continue in office until disapproved by the trustees. In      individuals, who have bestowed their funds for the
case of vacancy, the trustees may appoint a president, and    propagation of the christian religion among the Indians,
in case of the ceasing of a president, the senior professor   and for the promotion of piety and learning generally.
or tutor, being one of the trustees, shall exercise the       From these funds the salaries [***152] of the tutors are
office, until an appointment shall be made. The trustees      drawn; and these salaries lessen the expense of education
have power to appoint and [***150] displace professors,       to the students. It [*634] is then an eleemosynary, 76
tutors, and other officers, and to supply any vacancies       and, as far as respects its funds, a private corporation.
which may be created in their own body, by death,
                                                                     75 1 Bl. Com. 481.
resignation, removal, or disability; and also to make
                                                                     76 1 Bl. Com. 471.
                                                                                                                    Page 39
                                         17 U.S. 518, *634; 4 L. Ed. 629, **658;
                                       1819 U.S. LEXIS 330, ***152; 4 Wheat. 518

     Do its objects stamp on it a different character? Are      Dartmouth College has become a public institution, and
the trustees and professors public officers, invested with      its trustees public officers, exercising powers conferred
any portion of political power, partaking in any degree in      by the public for public objects? Not from the source
the administration of civil government, and performing          whence its funds were drawn; for its foundation is purely
duties which flow from the sovereign authority?                 private and eleemosynary -- Not from the application of
                                                                those funds; for money may be given for education, and
     That education is an object of national concern, and a     the persons receiving it do not, by being employed in the
proper subject of legislation, all admit. That there may be     education of youth, become members of the civil
an institution founded by government, and placed entirely       government. Is it from [*636] the act of incorporation?
under its immediate control, the officers of which would        Let this subject be considered.
be public officers, amenable exclusively to government,
none will deny. But is Dartmouth College such an                      [HN1] A corporation is an artificial being, invisible,
institution? Is education altogether in the hands of            intangible, and existing only in contemplation of law.
government? Does every teacher of youth become a                Being the mere creature of law, it possesses only those
public officer, and do donations for the purpose of             properties which the charter of its creation confers upon
education necessarily become public property, so far that       it, either expressly, or as incidental to its very existence.
the will of the legislature, not the will of the donor,         These are such as are supposed [***155] best calculated
becomes the law of the donation? These questions are of         to effect the object for which it was created. Among the
serious moment to [***153] society, and deserve to be           most important are immortality, and, if the expression
well considered.                                                may be allowed, individuality; properties, by which a
                                                                perpetual succession of many persons are considered as
     Doctor Wheelock, as the keeper of his charity              the same, and may act as a single individual. They
school, instructing the Indians in the art of reading, and in   enable a corporation to manage its own affairs, and to
our holy religion; sustaining them at his own expense,          hold property without the perplexing intricacies, the
and on the voluntary contributions of the charitable,           hazardous and endless necessity, of perpetual
could scarcely be considered as a public officer,               conveyances for the purpose of transmitting it from hand
exercising any portion of those duties which belong to          to hand. It is chiefly for the purpose of clothing bodies of
government; nor could the legislature have [*635]               men, in succession, with these qualities and capacities,
supposed, that his private funds, or those given by others,     that corporations were invented, and are in use. By these
were subject to legislative management, because they            means, a perpetual succession of individuals are capable
were applied to the purposes of education. When,                of acting for the promotion of the particular object, like
afterwards, his school was enlarged, and the liberal            one immortal being. But this being does not share in the
contributions made in England, and in America, enabled          civil government of the country, unless that be the
him to extend his cares to the education of the youth of        purpose for which it was created. Its immortality no
his own country, no change was wrought in his own               more confers on it political power, or a political
character, or in the nature of his duties. Had he employed      character, than immortality would confer such power or
assistant tutors with the funds contributed by others, or       character on a natural person. It is no more a State
had the trustees in England established a school with Dr.       instrument, than a natural person exercising the same
Wheelock at its head, and paid salaries to him and his          powers would be. If, then, [***156] a natural person,
assistants, they would still have been private tutors; and      employed [*637] by individuals in the education of
the fact, that they were employed in the education of           youth, or for the government of a seminary in which
youth, could not have converted them into public officers,      youth is educated, would not become a public officer, or
[***154] concerned in the administration of public              be considered as a member of the civil government, how
duties, or have given the legislature a right to interfere in   is it, that this artificial being, created by law, for the
the management [**659] of the fund. The trustees, in            purpose of being employed by the same individuals for
whose care that fund was placed by the contributors,            the same purposes, should become a part of the civil
would have been permitted to execute their trust                government of the country? Is it because its existence, its
uncontrolled by legislative authority.                          capacities, its powers, are given by law? Because the
                                                                government has given it the power to take and to hold
    Whence, then, can be derived the idea, that                 property in a particular from, and for particular purposes,
                                                                                                                  Page 40
                                        17 U.S. 518, *637; 4 L. Ed. 629, **659;
                                      1819 U.S. LEXIS 330, ***156; 4 Wheat. 518

has the government a consequent right substantially to         incorporating act [*639] change the character of a
change that form, or to vary the purposes to which the         private eleemosynary institution.
property is to be applied? This principle has never been
asserted or recognized, and is supported by no                      We are next led to the inquiry, for whose benefit the
authority.Can it derive aid from reason?                       property given to Dartmouth College was secured? The
                                                               counsel for the defendant have insisted, that the
     The objects for which a corporation is created are        beneficial interest is in the people of New-Hampshire.
universally such as the government wishes to promote.          The charter, after reciting the preliminary measures
They are deemed beneficial to the country; and this            which had been taken, and the [***159] application for
benefit constitutes the consideration, and, in most cases,     an act of incorporation, proceeds thus: "Know ye,
the sole consideration of the grant. In most eleemosynary      therefore, that we, considering the premises, and being
institutions, the object would be [***157] difficult,          willing to encourage the laudable and charitable design of
perhaps unattainable, without the aid of a charter of          spreading christian knowledge among the savages of our
incorporation. Charitable, or public spirited individuals,     American wilderness, and, also, that the best means of
desirous of making permanent appropriations for                education be established, in our province of
charitable or other useful purposes, find it impossible to     New-Hampshire, for the benefit of said province, do, of
effect their design securely, and certainly, without an        our special grace," &c. Do these expressions bestow on
incorporating act. They apply to the government, state         New-Hampshire any exclusive right to the property of the
their beneficent object, and offer to advance the money        college, any exclusive interest in the labours of the
necessary for its accomplishment, [*638] provided the          professors? Or do they merely indicate a willingness that
government will confer on the instrument which is to           New-Hampshire should enjoy those advantages which
execute their designs the capacity to execute them. The        result to all from the establishment of a seminary of
proposition is considered and approved. The benefit to         learning in the [**660] neighbourhood? On this point
the public is considered as an ample compensation for the      we think it impossible to entertain a serious doubt. The
faculty it confers, and the corporation is created. If the     words themselves, unexplained by the context, indicate,
advantages to the public constitute a full compensation        that the "benefit intended for the province" is that which
for the faculty it gives, there can be no reason for           is derived from "establishing the best means of education
exacting a further compensation, by claiming a right to        therein;" that is, from establishing in the province
exercise over this artificial being a power which changes      Dartmouth College, as constituted by the charter. But, if
its nature, and touches the fund, for the security and         these words, considered alone, could admit of doubt, that
application of which it was created. [HN2] There can be        [*640] doubt is [***160] completely removed by an
no reason for implying in a charter, given for a valuable      inspection of the entire instrument.
consideration, a power which is not only not expressed,
but is in direct [***158] contradiction to its express              The particular interests of New-Hampshire never
stipulations.                                                  entered into the mind of the donors, never constituted a
                                                               motive for their donation. The propagation of the
     From the fact, them, that a charter of incorporation      christian religion among the savages, and the
has been granted, nothing can be inferred which changes        dissemination of useful knowledge among the youth of
the character of the institution, or transfers to the          the country, were the avowed and the sole objects of their
government any new power over it. The character of             contributions.     In these, New-Hampshire would
civil institutions does not grow out of their incorporation,   participate; but nothing particular or exclusive was
but out of the manner in which they are formed, and the        intended for her. Even the site of the college was
objects for which they are created. The right to change        selected, not for the sake of New-Hampshire, but because
them is not founded on their being incorporated, but on        it was "most subservient to the great ends in view," and
their being the instruments of government, created for its     because liberal donations of land were offered by the
purposes. The same institutions, created for the same          proprietors, on condition that the institution should be
objects, though not incorporated, would be public              there established. The real advantages from the location
institutions, and, of course, be controllable by the           of the college, are, perhaps, not less considerable to those
legislature. The incorporating act neither gives now           on the west, than to those on the east side of Connecticut
prevents this control. Neither, in reason, can the             river. The clause which constitutes the incorporation, and
                                                                                                                 Page 41
                                        17 U.S. 518, *640; 4 L. Ed. 629, **660;
                                      1819 U.S. LEXIS 330, ***160; 4 Wheat. 518

expresses the objects for which it was made, declares          for this charter, as the instrument which should enable
those objects to be the instruction of the Indians, "and       him, and them, to perpetuate [***163] their beneficent
also of English youth, and any others." So that the objects    intention. It was granted. An artificial, immortal being,
of the contributors, and the incorporating [***161] act,       was created by the crown, capable of receiving and
were the same; the promotion of christianity, and of           distributing forever, according to the will of the donors,
education generally, not the interests of New-Hampshire        the donations which should be made to it. On this being,
particularly.                                                  the contributions which had been collected were
                                                               immediately bestowed. These gifts were made, not
     From this review of the charter, it appears, that         indeed to make a profit for the donors, or their posterity,
Dartmouth College is an eleemosynary institution,              but for something in their opinion of inestimable value;
incorporated for the purpose of perpetuating the               for something which they deemed a full equivalent for
application of the bounty of the donors, to the specified      the money with which it was purchased. The
objects of that bounty; that its trustees or governors         consideration for which they stipulated, is the perpetual
[*641] were originally named by the founder, and               application of the found to its object, in the mode
invested with the power of perpetuating themselves; that       prescribed by themselves. Their descendants may take
they are not public officers, nor is it a civil institution,   no interest in the preservation of this consideration. But
participating in the administration of government; but a       in this respect their descendants are not their
charity school, or a seminary of education, incorporated       representatives. They are represented by the corporation.
for the preservation of its property, and the perpetual        The corporation is the assignee of their rights, stands in
application of that property to the objects of its creation.   their place, and distributes their bounty, as they would
                                                               themselves have distributed it, had they been immortal.
     Yet a question remains to be considered, of more real     So with respect to the students who are to derive learning
difficulty, on which more doubt has been entertained than      from this source. The corporation is a trustee for them
on all that have been discussed. The founders of the           also. Their potential [***164] rights, which, taken
college, at least those whose contributions were in            distributively, [*643] are imperceptible, amount
money, have parted with the property bestowed upon it,         collectively to a most important interest. These are, in
and their representatives have no interest in that             the aggregate, to be exercised, asserted, and protected, by
property.The donors of land are equally without interest,      the corporation. They were as completely out of the
so long as the corporation [***162] shall exist. Could         donors, at the instant of their being vested in the
they be found, they are unaffected by any alteration in its    corporation, and as incapable of being asserted by the
constitution, and probably regardless of its form, or even     students, as at present.
of its existence. The students are fluctuating, and no
individual among our youth has a vested interest in the             According to the theory to the British constitution,
institution, which can be asserted in a Court of justice.      their parliament is omnipotent. To annual corporate
Neither the founders of the college, nor the youth for         rights might give a shock to public opinion, which that
whose benefit it was founded, complain of the alteration       government has chosen to avoid; but its power is not
made in its charter, or think themselves injured by it. The    questioned. Had parliament, immediately after the
trustees alone complain, and the trustees have no              emanation of this charter, and the execution of those
beneficial interest to be protected. Can this be such a        conveyances which followed it, annulled the instrument,
contract, as the constitution intended to withdraw from        so that the living donows would have witnessed the
the power of State legislation? [HN3] Contracts, the           disappointment of their hopes, the perfidy of the
parties to which have a vested beneficial interest, and        transaction would have been universally acknowledged.
those only, it has been said, are the objects about [*642]     Yet then, as now, the donors would have had no interest
which the constitution is solicitous, and to which its         in the property; then, as now, those who might be
protection is extended.                                        students would have had no rights to be violated; then, as
                                                               now, it might be said, that the trustees, in whom the
     The Court has bestowed on this argument the most          rights of all were combined, possessed no private,
diliberate consideration, and the result will be stated. Dr.   individual, beneficial [***165] interest in the property
Wheelock, acting for himself, and for those who, at his        confided to their protection. Yet the contract [**661]
solicitation, had made contributions to his school, applied    would at that time have been deemed sacred by all. What
                                                                                                                    Page 42
                                         17 U.S. 518, *643; 4 L. Ed. 629, **661;
                                       1819 U.S. LEXIS 330, ***165; 4 Wheat. 518

has    since     occurred    to     strip  it   of    its       contemporaneous expounders, which would justify us in
inviolability?Circumstances have not changed it. In             making it. In the absence of all authority of this kind, is
reason, in justice, and in law, it is now what it was in        there, in the nature and reason of the case itself, that
1769.                                                           which would sustain a construction of the constitution,
                                                                not warranted by its words? Are contracts of this
     This is plainly a contract to which the donors, the        description of a character to excite so little interest, that
trustees, and the crown, (to whose rights and obligations       we must exclude them from the provisions of the
New-Hampshire succeeds,) were the original [*644]               constitution, as being unworthy of the attention of those
parties. It is a contract made on a valuable consideration.     who framed the instrument? Or does public policy so
It is a contract for the security and disposition of            imperiously demand their remaining exposed to
property. It is a contract, on the faith of which, real and     legislative alteration, as to compel us, or rather permit us
personal estate has been conveyed to the corporation. It        to say, that these words, which were introduced to give
is then a contract within the letter of the constitution, and   stability to contracts, and which in their plain import
within its spirit also, unless the fact, that the property is   comprehend this contract, must yet be so construed, as to
invested by the donors in trustees for the promotion of         exclude it?
religion and education, for the benefit of persons who are
perpetually changing, though the objects remain the                  [HN4] Almost all eleemosynary corporations, those
same, shall create a particular exception, taking this case     which are created for the promotion of religion, of
out of the prohibition contained in the constitution.           charity, or of education, are of the same character. The
                                                                law of this case is the law of all. In every literary
     It is more than possible, that the preservation of         [***168] or charitable institution, unless the objects of
rights of this description was not particularly [***166] in     the bounty be themselves incorporated, the whole legal
the view of the framers of the constitution, when the           interest is in trustees, and can be asserted only by them.
clause under consideration was introduced into that             The donors, or claimants of the bounty, if [*646] they
instrument. It is probable, that interferences of more          can appear in Court at all, can appear only to complain of
frequent recurrence, to which the temptation was                the trustees. In all other situations, they are identified
stronger, and of which the mischief was more extensive,         with, and personated by, the trustees; and their rights are
constituted the great motive for imposing this restriction      to be defended and maintained by them. Religion,
on the State legislatures. But although a particular and a      Charity, and Education, are, in the law of England,
rare case may not, in itself, be of sufficient magnitude to     legatees or donees, capable of receiving bequests or
induce a rule, yet it must be governed by the rule, when        donations in this form. They appear in Court, and claim
established, unless some plain and strong reason for            or defend by the corporation. Are they of so little
excluding it can be given. It is not enough to say, that        estimation in the United States, that contracts for their
this particular case was not in the mind of the                 benefit must be excluded from the protection of words,
Convention, when the article was framed, nor of the             which in their natural import include them? Or do such
American people, when it was adopted. It is necessary to        contracts so necessarily require new modelling by the
go farther, and to say that, had this particular case been      authority of the legislature, that the ordinary rules of
suggested, the language would have been so varied, as to        construction must be disregarded in order to leave them
exclude it, or it would have been made a special                exposed to legislative alteration?
exception. The [*645] case being within the words of
the rule, must be within its operation likewise, unless              All feel, that these objects are not deemed
there be something in the literal construction so               unimportant in the United States. The interest which this
obviously absurd, or mischievous, or repugnant to the           case has excited, proves that they are not. The framers
general spirit of the instrument, as to justify [***167]        [***169] of the constitution did not deem them
those who expound the constitution in making it an              unworthy of its care and protection. They have, though
exception.                                                      in a different mode, manifested their respect for science,
                                                                by reserving to the government of the Union the power
    On what safe and intelligible ground can this               "to promote the progress of science and useful arts, by
exception stand. There is no expression in the                  securing for limited times, to authors and inventors, the
constitution, no sentiment delivered by its                     exclusive right to their respective writings and
                                                                                                                  Page 43
                                        17 U.S. 518, *646; 4 L. Ed. 629, **661;
                                      1819 U.S. LEXIS 330, ***169; 4 Wheat. 518

discoveries." They have so far withdrawn science, and          government, and the presumption, that, if allowed to
the useful arts, from the action of the State governments.     continue themselves, they now are, and must remain
Why then should they be supposed so regardless of              forever, what they originally were. Hence is inferred the
contracts made for the advancement of literature, as to        necessity of applying to this corporation, and to other
intend to exclude them from provisions, made for the           similar corporations, the correcting and improving hand
security [*647] of ordinary contracts between man and          of the legislature.
man? No reason for making this supposition is
perceived.                                                          It has been urged repeatedly, and certainly with a
                                                               degree of earnestness which attracted attention, that the
     If the insignificance of the object does not require      trustees deriving their power from a regal source, must,
that we should exclude contracts respecting it from the        necessarily, partake of the spirit of their origin; and that
protection of the constitution; neither, as we conceive, is    their first principles, unimproved by that resplendent light
the policy of leaving them subject to legislative alteration   which has been shed around them, must [***172]
so apparent, as to require a forced construction of that       continue to govern the college, and to guide the students.
instrument in order to effect it. These eleemosynary           Before we inquire into the influence which this argument
institutions do not fill the place, which would otherwise      ought to have on the constitutional question, it may not
be occupied by government, but that which [***170]             be amiss to examine the fact on which it rests. The first
would otherwise remain vacant.They are complete                trustees were undoubtedly named in the charter by the
acquisitions to literature. They are donations to              crown; but at whose suggestion were they named? By
education; donations, which any government must be             whom were they [*649] selected? The charter informs
disposed rather to encourage than to discountenance. It        us. Dr. Wheelock had represented, "that, for many
requires no very critical examination of the human mind        weighty reasons, it would be expedient, that the
to enable us to determine, that one great inducement to        gentlemen whom he had already nominated, in his last
these gifts is the conviction felt by the giver, that the      will, to be trustees in America, should be of the
disposition he makes of them is immutable. It is               corporation now proposed." When, afterwards, the
probable, that no man ever was, and that no man ever will      trustees are named in the charter, can it be doubted that
be, the founder of a college, believing at the time, that an   the persons mentioned by Dr. Wheelock in his will were
act of incorporation constitutes no security for the           appointed? Some were probably added by the crown,
institution; believing, that it is immediately to be deemed    with the approbation of Dr. Wheelock. Among these is
a public institution, whose funds are to be governed and       the Doctor himself. If any others were appointed at the
applied, not by the will of the donor, but by the will of      instance of the crown, they are the governor, three
the legislature. All such [**662] gifts are made in the        members of the council, and the speaker of the house of
pleasing, perhaps delusive hope, that the charity will flow    representatives, of the colony of New-Hampshire. The
forever in the channel which the givers have marked out        stations filled by these persons ought to rescue them from
for it. If every man finds in his own bosom strong             any other imputation than too great a dependence on the
evidence of the universality of this sentiment, there can      [***173] crown. If in the revolution that followed, they
be but little reason to imagine, that the framers of our       acted under the influence of this sentiment, they must
constitution were [*648] strangers to it, and that, feeling    have ceased to be trustees; if they took part with their
the necessity and [***171] policy of giving permanence         countrymen, the imputation, which suspicion might
and security to contracts, of withdrawing them from the        excite, would no longer attach to them.The original
influence of legislative bodies, whose fluctuating policy,     trustees, then, or most of them, were named by Dr.
and repeated interferences, produced the most perplexing       Wheelock, and those who were added to his nomination,
and injurious embarrassments, they still deemed it             most probably with his approbation, were among the
necessary to leave these contracts subject to those            most eminent and respectable individuals in
interferences. The motives for such an exception must be       New-Hampshire.
very powerful, to justify the construction which makes it.
                                                                    The only evidence which we possess of the character
     The motives suggested at the bar grow out of the          of Dr. Wheelock is furnished by this charter. The
original appointment of the trustees, which is supposed to     judicious means employed for the accomplishment of his
have been in a spirit hostile to the genius of our             object, and the success which attended his endeavours,
                                                                                                                   Page 44
                                         17 U.S. 518, *649; 4 L. Ed. 629, **662;
                                       1819 U.S. LEXIS 330, ***173; 4 Wheat. 518

would lead to the opinion, that he united a sound               comprehended the transcendent power of parliament, as
understanding to that humanity and [*650] benevolence           well as that of the executive department. It is too clear to
which suggested his undertaking. It surely cannot be            require the support of argument, that all contracts, and
assumed, that his trustees were selected without                rights respecting property, remained unchanged by the
judgment. With as little probability can it be assumed,         revolution. The obligations then, which were created by
that, while the light of science, and of liberal principles,    the charter to Dartmouth College, were the same in the
pervades the whole community, these originally                  new, that they had been in the old government. The
benighted trustees remain in utter darkness, incapable of       power of the government was also the same. A repeal of
participating in the general improvement; that, while the       this charter [***176] at any time prior to the adoption of
human race is rapidly [***174] advancing, they are              the present constitution of the United States, would have
stationary. Reasoning a priori, we should believe, that         been an extraordinary [**663] and unprecedented act of
learned and intelligent men, selected by its patrons for the    power, but one which could have been contested only by
government of a literary institution, would select learned      the restrictions upon the legislature, to be found in the
and intelligent men for their successors; men as well           constitution of the State. But the constitution of the
fitted for the government of a college as those who might       United States has imposed this additional limitation,
be chosen by other means. Should this reasoning ever            [*652] that [HN5] the legislature of a State shall pass no
prove erroneous in a particular case, public opinion, as        act "impairing the obligation of contracts."
has been stated at the bar, would correct the institution.
The mere possibility of the contrary would not justify a            It has been already stated, that the act "to amend the
construction of the constitution, which should exclude          charter, and enlarge and improve the corporation of
these contracts from the protection of a provision whose        Dartmouth College," increase the number of trustees to
terms comprehend them.                                          twenty-one, gives the appointment of the additional
                                                                members to the executive of the State, and creates a
     The opinion of the Court, after mature deliberation,       board of overseers, to consist of twenty-five persons, of
is, that this is a contract, the obligation of which cannot     whom twenty-one are also appointed by the executive of
be impaired, without violating the constitution of the          New-Hampshire, who have power to inspect and control
United States. This opinion appears to us to be equally         the most important acts of the trustees.
supported by reason, and by the former decisions of this
Court.                                                               On the effect of this law, two opinions cannot be
                                                                entertained.Between acting directly, and acting through
     2. We next proceed to the inquiry, whether its             the agency of trustees and overseers, no essential
obligation has been impaired by those acts of the               difference is perceived. The whole power of governing
legislature of New-Hampshire, to which the special              the college is transferred from [***177] trustees
verdict refers.                                                 appointed according to the will of the founder, expressed
                                                                in the charter, to the executive of New-Hampshire. The
      [*651] From the review of this charter, which has         management and application of the funds of this
been taken, it appears, [***175] that the whole power of        eleemosynary institution, which are placed by the donors
governing the college, of appointing and removing tutors,       in the hands of trustees named in the charter, and
of fixing their salaries, of directing the course of study to   empowered to perpetuate themselves, are placed by this
be pursued by the students, and of filling up vacancies         act under the control of the government of the State. The
created in their own body, was vested in the trustees. On       will of the State is substituted for the will of the donors,
the part of the crown it was expressly stipulated, that this    in every essential operation of the college.This is not an
corporation, thus constituted, should continue forever;         immaterial change. The founders of the college
and that the number of trustees should forever consist of       contracted, not merely for the perpetual application of the
twelve, and no more. By this contract the crown was             funds which they gave, to the objects for which those
bound, and could have made no violent alteration in its         funds were given; they contracted also, to secure that
essential terms, without impairing its obligation.              application by the constitution of the corporation. [*653]
                                                                They contracted for a system, which should, as far as
   By the revolution, the duties, as well as the powers,        human foresight can provide, retain forever the
of government devolved on the people of                         government of the literary institution they had formed, in
New-Hampshire. It is admitted, that among the latter was
                                                                                                                     Page 45
                                          17 U.S. 518, *653; 4 L. Ed. 629, **663;
                                        1819 U.S. LEXIS 330, ***177; 4 Wheat. 518

the hands of persons approved by themselves. This                legislature of New-Hampshire, which are stated in the
system is totally changed. The charter of 1769 exists no         special verdict found in this cause, are repugnant to the
longer. It is reorganized; and reorganized in such a             constitution [***180] of the United States; and that the
manner, as to convert a literary institution, moulded            judgment on this special verdict ought to have been for
according to the will of its [***178] founders, and              the plaintiffs. The judgment of the State Court must,
placed under the control of private literary men, into a         therefore, be reversed.
machine entirely subservient to the will of government.
This may be for the advantage of this college in                 CONCUR BY: WASHINGTON; STORY
particular, and may be for the advantage of literature in
general; but it is not according to the will of the donors,      CONCUR
and is subversive of that contract, on the faith of which
their property was given.                                             Mr. Justice WASHINGTON. -- This cause turns
                                                                 upon the validity of certain laws of the State of
     In the view which has been taken of this interesting        New-Hampshire, which have been stated in the case, and
case, the Court has confined itself to the rights possessed      which, it is contended by the counsel for the plaintiffs
by the trustees, as the assignees and representatives of the     [*655] in error, are void, being repugnant to the
donors and founders, for the benefit of religion and             constitution of that State, and also to the constitution of
literature. Yet it is not clear, that the trustees ought to be   the United States. Whether the first objection to these
considered as destitute of such beneficial interest in           laws be well founded or not, is a question with which this
themselves, as the law may respect. In addition to their         Court, in this case, has nothing to do: because it has no
being the legal owners of the property, and to their             jurisdication, as an appellate Court, over the decisions of
having a freehold right in the powers confided to them,          a State Court, except in cases where is drawn in question
the charter itself countenances the idea, that trustees may      the validity of a treaty, or statute of, or an authority
also be tutors with salaries. The first president was one        exercised under, the United States, and the decision is
of the original trustees; and the charter provides, that in      against their validity; or where is drawn in question the
case of vacancy in that office, "the senior professor or         validity of a statute of, or an authority exercised under,
tutor, being one of the trustees, shall exercise the office of   any State, on the ground of their being repugnant to the
president, [***179] until the trustees shall make choice         constitution, treaties, or laws of the United States, and the
[*654] of, and appoint a president." According to the            decision is in favour of their validity; [***181] or where
tenor of the charter, then, the trustees might, without          is drawn in question the construction of any clause of the
impropriety, appoint a president and other professors            constitution, or of a treaty, or statute of, or commission
from their own body. This is a power not entirely                held under, the United States, and the decision is against
unconnected with an interest. Even if the proposition of         the title, right, privilege, or exemption specially set up or
the counsel for the defendant were sustained; if it were         claimed by either party, under such clause of the said
admitted, that those contracts only are protected by the         constitution, treaty, statute, or commission.
constitution, a beneficial interest in which is vested in the
party, who appears in Court to assert that interest; yet it is        The clause in the constitution of the United States
by no means clear, that the trustees of Dartmouth College        which was drawn in question in the Court from which
have no beneficial interest in themselves.                       this transcript has been sent, is that part of the tenth
                                                                 section of the first article, which declares, that "no State
    But the Court has deemed it unnecessary to                   shall pass any bill of attainder, ex post facto law, or any
investigate this particular point, being of opinion, on          law impairing the obligation of contracts." The decision
general principles, that [HN6] in these private                  of the State Court is against the title specially claimed by
eleemosynary institutions, the body corporate, as                the plaintiffs in error, under the above clause, because
possessing the whole legal and equitable interest, and           they contend, [**664] that the laws of New-Hampshire,
completely representing the donors, for the purpose of           above referred to, [*656] impair the obligation of a
executing the trust, has rights which are protected by the       contract, and are, consequently, repugnant to the above
constitution.                                                    clause of the constitution of the United States, and void.

    It results from this opinion, that the acts of the               There are, then, two questions for this court to
                                                                 decide:
                                                                                                                    Page 46
                                         17 U.S. 518, *656; 4 L. Ed. 629, **664;
                                       1819 U.S. LEXIS 330, ***181; 4 Wheat. 518

    1st. Is the charter granted to Dartmouth College on         This [***184] franchise, like other franchises, is an
the 13th of December, 1769, to be considered as a               incorporeal hereditament, issuing out of something real or
[***182] contract? If it be, then, 2dly. Do the laws in         personal, or concerning or annexed to, and exercisable
question impair its obligation?                                 within a thing corporate. To this grant, or this franchise,
                                                                the parties are, the king, and the persons for whose
     1. What is a contract? It may be defined to be a           benefit it is created, or trustees for them.The assent of
transaction between two or more persons, in which each          both is necessary. [*658] The subjects of the grant are
party comes under an obligation to the other, and each          not only privileges and immunities, but property, or,
reciprocally acquires a right to whatever is promised by        which is the same thing, a capacity to acquire and to hold
the other. 77 Under this definition, says Mr. Powell, it is     property in perpetuity. Certain obligations are created
obvious, that every feoffment, gift, grant, agreement,          binding both on the grantor and the grantees. On the part
promise, &c. may be included, because in all there is a         of the former, it amounts to an extinguishment of the
mutual consent of the minds of the parties concerned in         king's prerogative to bestow the same identical franchise
them, upon an agreement between them respecting some            on another corporate body, because it would prejudice his
property or right that is the object of the stipulation. He     prior grant. 80 It implies, therefore, a contract not to
adds, that the ingredients requisite to form a contract, are,   reassert the right to grant the franchise to another, or to
parties, consent, and an obligation to be created or            impair it. There is also an implied contract, that the
dissolved: these must all concur, because the regular           founder of a private charity, or his heirs, or other persons
effect of all contracts is on one side to acquire, and on the   appointed by him for that purpose, shall have the right to
other to part with, some property or rights; or to abridge,     visit, and to govern the corporation, of which he is the
or to restrain natural liberty, by binding the parties to do,   acknowledged founder and patron, and also, that in case
or restraining them from doing, something which before          of its [***185] dissolution, the reversionary right of the
they might have done, or omitted. If a doubt could exist        founder to the property, with which he had endowed it,
that a grant is a contract, the point was decided in the        should be preserved inviolate.
case of Flectcher v. Peck, 78 [*657] [***183] in which
it was laid down, that a contract is either executory or               79 2 Bl. Com. 37.
executed; by the former, a party binds himself to do or                80 2 Bl. Com. 37.
not to do a particular thing; the latter is one in which the
object of the contract is performed, and this differs in             The rights acquired by the other contracting party are
nothing from a grant; but whether executed or executory,        those of having perpetual succession, of suing and being
they both contain obligations binding on the parties, and       sued, of purchasing lands for the benefit of themselves
both are equally within the provisions of the constitution      and their succssors, and of having a common seal, and of
of the United States, which forbids the State governments       making bye-laws. The obligation imposed upon them,
to pass laws impairing the obligation of contracts.             and which forms the consideration of the grant, is that of
                                                                acting up to the end or design for which they were
       77 Powell on Contr. 6.                                   created by their founder. Mr. Justice Buller, in the case of
       78 6 Cranch, 87.                                         the King v. Passmore, 81 says, that the grant of
                                                                incorporation is a compact between the crown and a
     If, then, a grant be a contract, within the meaning of     number of persons, the latter of whom undertake, in
the constitution of the United States, the next inquiry is,     consideration [*659] of the privileges bestowed, to exert
whether the creation of a corporation by charter, be such       themselves for the goods government of the place. If
a grant, as includes an obligation of the nature of a           they fail to perform their part of it, there is an end of the
contract, which no State legislature can pass laws to           compact. The charter of a corporation, says Mr. Justice
impair?                                                         Blackstone, 82 may be forfeited through negligence, or
                                                                abuse of its franchises, in which case the law judges, that
     A corporation is defined by Mr. Justice Blackstone         the body politic has broken the condition that the body
79 to be a franchise. It is, says he, "a franchise for a
                                                                politic has broken [***186] the condition upon which it
number of persons, to be incorporated and exist as a body       was incorporated, and thereupon the corporation is void.
politic, with a power to maintain perpetual succession,
and to do corporate acts, and each individual of such                  81 3 T.R. 246.
corporation is also said to have a franchise, or freedom."
                                                                                                                     Page 47
                                          17 U.S. 518, *659; 4 L. Ed. 629, **664;
                                        1819 U.S. LEXIS 330, ***186; 4 Wheat. 518

        82 2 Bl. Com. 484.                                       their existence and subjection to public control. The one
                                                                 is the mere creature of public institution, created
    It appears to me, upon the whole, that these                 exclusively for the public advantage, without other
principles and authorities prove, incontrovertibly, that a       endowments than such as the king or government may
charter of incorporation is a contract.                          bestow upon it, and having no other founder or visitor
                                                                 than the king or government, the Fundator incipiens.
     2. The next question is, do the acts of the legislature     [*661] The validity and justice of its laws and
of New-Hampshire of the 27th of June, and 18th and 26th          constitution are examinable by the Courts having
of December, 1816, impair this contract, within the true         jurisdiction over them; and they are subject to the general
intent and meaning of the constitution of the United             law of the land. It would seem reasonable, that such a
States?                                                          corporation may be controlled, and its constitution altered
                                                                 and amended by the government, in such manner as the
     Previous to the examination of this question, it will
                                                                 public interest may require.               Such legislative
be proper clearly to mark the distinction between the
                                                                 interferences cannot be said to impair the contract by
different kinds of lay aggregate corporations, in order to
                                                                 which the corporation was formed, because there is in
prevent any implied decision by this Court of any other
                                                                 reality but one party to it, the trustees or governors of the
case, than the one immediately before it.
                                                                 corporation being merely the trustees for the public, the
     We are informed, by the case of Philips v. Bury, 1          cestui que trust of the foundation. These trustees or
Ld. Raym. 5; s.c. 2 T.R. 346, which contains all the             governors have no interest, no privileges or immunities,
doctrine of corporations connected with this point, that         which are violated by such interference, and can have no
there are two kinds of corporations aggregate, viz. such         more [***189] right to complain of them, than an
as are for public government, and such as are for private        ordinary trustee, who is called upon in a Court of Equity
charity. The first are those for the government of a town,       to execute the trust. They accepted the charter for the
city, or the like; and being for public advantage, are           public benefit alone, and there would seem to be no
[*660] to be governed according to the law [**665] of            reason why the government, under proper limitations,
the [***187] land. The validity and justice of the their         should not alter or modify such a grant at pleasure. But
private laws and constitutions are examinable in the             the case of a private corporation is entirely different.
king's Courts. Of these there are no particular founders,        That is the creature of private benefaction for a charity or
and consequently no particular visitor. There are no             private purpose. It is endowed and founded by private
patrons of these corporations. But private and particular        persons, and subject to their control, laws, and visitation,
corporations for charity, founded and endowed by private         and not to the general control of the government; and all
persons, are subject to the private government of those          these powers, rights and privileges, flow from the
who erect them, and are to be visited by them or their           property of the founder in the funds assigned for the
heirs, or such other persons as they may appoint. The            support of the charity.Although the king, by the grant of
only rules for the government of these private                   the charter, is in some sense the founder of all
corporations are the laws and constitutions assigned by          eleemosynary corporations, because without his grant
the founder. This right of government and visitation             they cannot exist; yet the patron or endower is the
arises from the property which the founder had in the            perficient founder, to whom belongs, as of [*662] right,
lands assigned to support the charity; and, as he is the         all the powers and privilege, which have been described.
author of the charity, the law invests him with the              With such a corporation, it is not competent for the
necessary power of inspecting and regulating it. The             legislature to interfere. It is a franchise, or incorporeal
authorities are full to prove, that a college is a private       hereditament, founded upon private property, [***190]
charity, as well as a hospital, and that there is, in reality,   devoted by its patron to a private charity of a peculiar
no difference between them, except in degree; but they           kind, the offspring of his own will and pleasure, to be
are within the same reason, and both eleemosynary.               managed and visited by persons of his own appointment,
                                                                 according to such laws and regulations as he, or the
     These corporations, civil and eleemosynary, which           persons so selected, may ordain.
differ from each other so especially in their nature
[***188] and constitution, may very well differ in                    It has been shown, that the charter is a contract on
matters which concern their rights and privileges, and           the part of the government, that the property with which
                                                                                                                    Page 48
                                         17 U.S. 518, *662; 4 L. Ed. 629, **665;
                                       1819 U.S. LEXIS 330, ***190; 4 Wheat. 518

the charity is endowed, shall be for ever vested in a           securing, however, the property for the use of those for
certain number of persons, and their successors, to             whom, and at whose expense, it was purchased. [**666]
subserve the particular purposes designated by the              But it is denied, that it has power to repeal [*664]
founder, and to be managed in a particular way. If a law        statutes creating private corporations, or confirming to
increases or diminishes the number of the trustees, they        them property already acquired under the faith of
are not the persons which the grantor agreed should be          previous laws; and that it can, by such repeal, vest the
the managers of the fund. If it appropriate the fund            property of such corporations in the State, or dispose of
intended for the support of a particular charity to that of     the same to such purposes as it may please, without the
some other charity, or to an entirely different charity, the    consent or default of the corporators. Such a law, it is
grant is in effect set aside, and a new contract substituted    declared, would be repugnant both to the spirit and the
in its place; thus disappointing completely the intentions      letter of the constitution of the United States.
of the founder, by changing the objects of his bounty.
And can it be seriously contended, that a law, which                   86 9 Cranch, 43.
changes so materially the terms of a contract, does not
                                                                      If these principles, before laid down, be correct, it
impair it? In short, does not every alteration [***191] of
                                                                cannot be denied, that the obligations [***193] of the
a contract, however, unimportant, even though it be
                                                                charter to Dartmouth College are impaired by the laws
manifestly for the interest of the party objecting to it,
                                                                under consideration. The name of the corporation, its
impair its obligation? If the assent of all the parties to be
                                                                constitution and government, and the objects of the
bound by a contract be of its essence, how [*663] is it
                                                                founder, and of the grantor of the charter, are totally
possible that a new contract, substituted for, or engrafted
                                                                changed. By the charter, the property of this founder was
on another, without such assent, should not violate the
                                                                vested in twelve trustees, and no more, to be disposed of
old charter?
                                                                by them, or a majority, for the support of a college, for
      This course of reasoning, which appears to be             the education and instruction of the Indians, and also of
perfectly manifest, is not without authority to support it.     English youth, and others. Under the late acts, the
Mr. Justice Blackstone lays it down, 84 that the same           trustees and visitors are different; and the property and
identical franchise, that has been before granted to one,       franchises of the college are transferred to different and
cannot be bestowed on another; and the reason assigned          new uses, not contemplated by the founder. In short, it is
is, that it would prejudice the former grant. In the King       most obvious, that the effect of these laws is to abolish
v. Passmore, 85 Lord Kenyon says, that an existing              the old corporation, and to create a new one in its stead.
corporation cannot have another charter obtruded upon it        The laws of Virginia, referred to in the case of Terrett v.
by the crown. It may reject it, or accept the whole, or any     Taylor, authorized the overseers of the poor to sell the
part of the new charter. The reason is obvious. A charter       glebes belonging to the Protestant Episcopal Church, and
is a contract, to the validity of which the consent of both     to appropriate the proceeds to other uses. The laws in
parties is essential, and, therefore, it cannot be altered or   question devest the trustees of Dartmouth College of the
added to without such consent.                                  property vested in them [*665] by the founder, and vest
                                                                it in other trustees, for the support of a different [***194]
       84 Bl. Com. 37.                                          institution, called Dartmouth University. In what
       85 3 T.R. 246.                                           respects do they differ? Would the difference have been
                                                                greater in principle, if the law had appropriated the funds
     But the case of Terrett v. Taylor, 86 fully supports the   of the college to the making of turnpike roads, or to any
distinction above [***192] stated, between civil and            other purpose of a public nature? In all respects, in which
private corporations, and is entirely in point. It was          the contract has been altered without the assent of the
decided in that case, that a private corporation, created by    corporation, its obligations have been impaired; and the
the legislature, may lose its franchises by misuser, or         degree can make no difference in the construction of the
non-user, and may be resumed by the government under a          above provision of the constitution.
judicial judgment of forfeiture. In respect to public
corporations which exist only for public purposes, such              It has been insisted in the argument at the bar, that
as towns, cities, &c. the legislature may, under proper         Dartmouth College was a mere civil corporation, created
limitations, change, modify, enlarge, or restrain them,         for a public purpose, the public being deeply interested in
                                                                                                                     Page 49
                                         17 U.S. 518, *665; 4 L. Ed. 629, **666;
                                       1819 U.S. LEXIS 330, ***194; 4 Wheat. 518

the education of its youth; and that, consequently, the         [*667] 1. Whether the original charter of Dartmouth
charter was as much under the control of the government         College is a contract within the prohibitory clause of the
of New-Hampshire, as if the corporation had concerned           constitution of the United States, which declares, that no
the government of a town or city. But it has been shown,        State shall pass any "law impairing the obligation of
that the authorities are all the other way. There is not a      contracts." 2. If so, whether the legislative acts of
case to be found which contradicts the doctrine laid down       New-Hampshire of the 27th of June, and of the 18th and
in the case of Philips v. Bury, viz. that a college founded     27th of December, 1816, or any of them, impair the
by an individual, or individuals, is a private charity,         obligations of that charter.
subject to the government and visitation of the founder,
and not to the unlimited [***195] control of the                     It will be nacessary, however, before we proceed to
government.                                                     discuss these questions, to institute an inquiry into the
                                                                nature, rights, and duties of aggregate corporations at
     It is objected, in this case, that Dr. Wheelock is not     common law; that we may apply the principles, [***197]
the founder of Dartmouth College. Admit he is not.              drawn from this source, to the exposition of this charter,
How would this alter the case? Neither the king, nor the        which was granted emphatically with reference to that
province of New-Hampshire was the founder; and if the           law.
contributions made by the governor of New-Hampshire,
by those persons who [*666] granted lands for the                    An aggregate corporation at common law is a
college, in order to induce its location in a particular part   collection of individuals united into one collective body,
of the State, by the other liberal contributors in England      under a special name, and possessing certain immunities,
and America, bestow upon them claims equal with Dr.             privileges, and capacities in its collective character,
Wheelock, still it would not alter the nature of the            which do not belong to the natural persons composing it.
corporation, and convert it into one for public                 Among other things it possesses the capacity of perpetual
government. It would still be a private eleemosynary            succession, and of acting by the collected vote or will of
corporation, a private charity endowed by a number of           its component members, and of suing and being sued in
persons, instead of a single individual. But the fact is,       all things touching its corporate rights and duties. It is, in
that whoever may mediately have contributed to swell the        short, an artificial person, existing in contemplation of
funds of this charity, they were bestowed at the                law, and endowed with certain powers and franchises
solicitation of Dr. Wheelock, and vested in persons             which, though they must be exercised through the
appointed by him, for the use of a charity, of which he         medium of its natural members, are yet considered as
was the immediate founder, and is so styled in the              subsisting in the corporation itself, as distinctly as if it
charter.                                                        were a real personage. Hence, such a corporation may
                                                                sue and be sued by its own members; and [*668]
     Upon the whole, I am of opinion, that the above acts       [**667] may contract with them in the same manner as
of New-Hampshire, not having received the assent of the         with any strangers. 87 A great variety of these
corporate body of Dartmouth [***196] College, are not           corporations exist in every country governed by the
binding on them, and, consequently, that the judgment of        common law; in some of which the corporate [***198]
the State Court ought to be reversed.                           existence is perpetuated by new elections, made from
                                                                time to time; and in others by a continual accession of
     Mr. Justice JOHNSON concurred, for the reasons             new members, without any corporate act. Some of these
stated by the Chief Justice.                                    corporations are, from the particular purposes to which
                                                                they are devoted, denominated spiritual, and some law;
     Mr. Justice LIVINGSTON concurred, for the reasons          and the latter are again divided into civil and
stated by the Chief Justice, and Justices WASHINGTON            eleemosynary corporations. It is unnecessary, in this
and STORY.                                                      place, to enter into any examination of civil corporations.
                                                                Eleemosynary corporations are such as are constituted for
     Mr. Justice STORY. This is a cause of great
                                                                the perpetual distribution of the free alms and bounty of
importance, and as the very learned discussions, as well
                                                                the founder, in such manner as he has directed; and in this
here, as in the State Court, show, of no inconsiderable
                                                                class are ranked hospitals for the relief of poor and
difficulty. There are two questions, to which the
                                                                impotent persons, and colleges for the promotion of
appellate jurisdiction of this Court properly applies.
                                                                                                                 Page 50
                                        17 U.S. 518, *668; 4 L. Ed. 629, **667;
                                      1819 U.S. LEXIS 330, ***198; 4 Wheat. 518

learning and piety, and the support of persons engaged in     law. 89
literary pursuits. 88
                                                                        89 Phillips v. Bury, 1 Ld. Ray. 5. 9. S.C. 2 T.R.
       87 1 Bl. Com. 469. 475. 1 Kyd Corp. 13. 69.                      346.
       189. 1 Woodes. 471. &c. &c.
       88 1 Bl. Com. 469. 470. 471. 482. 1 Kyd Corp.               It was indeed supposed at the argument, that if the
       25. 1 Woodes. 474. Attorney General v.                 uses of an eleemosynary corporation be for general
       Whorwood, 1 Ves. 534. St John's College v.             charity, this alone would constitute it a public
       Todington, 1 Bl. Rep. 84. S.C. 1 Bur. 200.             corporation. But the law is certainly not so. To be sure,
       Phillips v. Bury, 1 Ld. Raym. 5. S.C. 2 T.R. 346.      in a certain sense, every charity, which is extensive in its
       Porter's Case, 1 Co. 22. b. 23.                        reach, may be called a public charity, in contradistinction
                                                              to a charity embracing but a few definite objects. In this
     Another division of corporations is into public and      sense [***201] the language was unquestionably used by
private.Public [***199] corporations are generally            Lord Hardwicke in the case cited at the argument; 90 and,
esteemed such as exist for public political purposes only,    in this sense, a private corporation may well enough be
such as towns, cities, parishes, and counties; and in many    denominated a public charity. So it would be, if the
respects they are so, although they involve some private      endowment, instead of being vested in a corporation,
interests; but strictly speaking, public corporations         were assigned to a private trustee; yet in such a case no
[*669] are such only as are founded by the government         one would imagine that the trust ceased to be private, or
for public purposes, where the whole interests belong         the funds became public property. That the mere act of
also to the government. If, therefore, the foundation be      incorporation will not change the charity from a private
private, though under the charter of the government, the      to a public one, is most distinctly asserted in the
corporation is private, however extensive the uses may be     authorities. Lord Hardwicke, in the case already alluded
to which it is devoted, either by the bounty of the           to, says, "the charter of the crown cannot make a charity
founder, or the nature and objects of the institution. For    more or less public, but only more permanent than it
instance, a bank created by the government for its own        would otherwise be; but it is the extensiveness, which
uses, whose stock is exclusively owned by the                 will constitute it a public one. A devise to the poor of the
government, is, in the strictest sense, a public              parish is a public charity. Where testators leave it to the
corporation. So a hospital created and endowed by the         discretion of a trustee to choose out the objects, though
government for general charity. But a bank, whose stock       each particular [*671] object may be said to be private,
is owned by private persons, is a private corporation,        yet in the extensiveness of the benefit accruing from
although it is erected by the government, and its objects     them, they may properly be called public charities. A sum
and operations partake of a public nature.The same            to be disposed of by A. B. and his executors, at their
doctrine may be affirmed of insurance, canal, bridge, and     discretion, among poor [***202] house-keepers, is of
turnpike companies. In all these cases, the uses may, in a    this kind." The charity, then, may, in this sense, be
certain [***200] sense, be called public, but the             public, although it may be administered by private
corporations are private; as much so, indeed, as if the       trustees; and, for the same reason, it may thus be public,
franchises were vested in a single person.                    though administered by a private corporation. The fact,
                                                              then, that the charity is public, affords no proof that the
     This reasoning applies in its full force to              corporation is also public; and, consequently, the
eleemosynary corporations. A hospital founded by a            argument, so far as it is built on this foundation, falls to
private benefactor is, in point of law, a private             the ground. If, indeed, the argument were correct, it
corporation, although dedicated by its charter to general     would follow, that almost every hospital and college
charity. So a college, founded and endowed in the same        would be a public corporation; a doctrine utterly
manner, although, being for the promotion of learning         irreconcilable with the whole current of decisions since
and piety, it may extend its charity to scholars from every   the time of Lord Coke. 91
class in the community, and thus acquire the character of
a public institution. This is the unequivocal doctrine of               90 Attorney General v. Pearse, 2 Atk. 87. 1 Bac.
the authorities; and cannot be [*670] shaken but by                     Abr. tit Charitable Uses, E. 589.
undermining the most solid foundations of the common                    91 The case of Sutton's Hospital, 10 Co. 23.
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                                         17 U.S. 518, *671; 4 L. Ed. 629, **667;
                                       1819 U.S. LEXIS 330, ***202; 4 Wheat. 518

     When, then, the argument assumes, that because the         all corporations (says Sir William Blackstone,) in the
charity is public, the corporation is public, it manifestly     strictest and original sense, is the king alone, for he only
confounds the popular, with the strictly legal sense of the     can incorporate a society; and in civil corporations, such
terms. And if it stopped here, it would not be very             as mayor, commonalty, &c. where there are no
material to correct the error. But it is on this foundation,    possessions or endowments [***205] given to the body,
that a superstructure is erected, which is to compel a          ther is no other founder but the king; but in eleemosynary
surrender of the cause. When the corporation is said at         foundations, such as colleges and hospitals, where there
the bar to [***203] be public, it is not merely meant, that     is an endowment of lands, the law distinguishes and maks
the whole community may be the proper objects of the            two species of foundation, the one fundatio incipiens, or
bounty, but that the government have the sole right, as         the incorporation, in which sense the king is the general
trustees of the public interests, to regulate, control, and     founder of all colleges and hospitals; the other fundatio
direct the public interests, to regulate, control, and direct   perficiens, or the dotation of it, in which sense the first
the corporation, and its funds and its franchises, at its       gift of the revenues is the foundation, and he who gives
own good will and pleasure. Now, such [*672] an                 them is, in the law, the founder; and it is in this last sense
authority does not exist in the government, except              we generally call a man the founder of a college or
[**668] where the corporation is in the strictest sense         hospital." 93
public; that is, where its whole interests and franchises
are the exclusive property and domain of the government                 93 1 Bl. Com. 480. 10 Co. 33.
itself. If it had been otherwise, Courts of law would have
                                                                     To all eleemosynary corporations a visitatorial power
been spared many laborious adjudications in respect to
                                                                attaches, as a necessary incident; for these corporations
eleemosynary corporations, and the visitatorial powers
                                                                being composed of individuals, subject to human
over them, from the time of Lord Holt down to the
                                                                infirmities, are liable, as well as private persons, to
present day. 92 Nay, more, private trustees for charitable
                                                                deviate from the end of their institution. The law,
purposes would have been liable to have the property
                                                                therefore, has provided, that there shall somewhere exist
confided to their care taken away from them without any
                                                                a power to visit, inquire into, and correct all irregularities
assent or default on their part, and the administration
                                                                and abuses in such corporations, and to compel the
submitted, not to the control of law and equity, but to the
                                                                original purposes of the charity to be faithfully fulfilled.
arbitrary discretion of the government. Yet, who ever
                                                                94 The nature and extent of this visitatorial [***206]
thought before, that the munificent [***204] gifts of
                                                                power has been expounded [*674] with admirable
private donors for general charity became instantaneously
                                                                fulness and accuracy by Lord Holt in one of his most
the property of the government; and that the trustees
                                                                celebrated judgments. 95 And of common right by the
appointed by the donors, whether corporate or
                                                                dotation the founder and his heirs are the legal visitors,
unincorporated, might be compelled to yield up their
                                                                unless the founder has appointed and assigned another
rights to whomsoever the government might appoint to
                                                                person to be visitor. For the founder may, if he please, at
administer them? If we were to establish such a
principle, it would extinguish all future eleemosynary          the time of the endowment, part with his visitatorial
                                                                power, and the person to whom it is assigned will, in that
endowments; and we should find as little of public
                                                                case, possess it in exclusion of the founder's heirs. 96 This
policy, as we now find of law to sustain it.
                                                                visitatorial power is, therefore, an hereditament founded
       92 Rex v. Bury, 1 Ld. Ray. 5. S.C. Comb. 265.            in property, and valuable in intendment of law; and
       Holt, 715. 1 Show. 360. 4 Mod. 106. Skin. 447.           stands upon the maxim, that he who gives his property,
       and Ld. Holt's opinion from his own MS. in 2             has a right to regulate it in future. It includes also the
       T.R. 346.                                                legal right of patronage, for as Lord Holt justly observes,
                                                                "patronage and visitation are necessary consequents one
    An eleemosynary corporation, then, upon a private           upon another." No technical terms are necessary to assign
foundation, being a private corporation, it is next to be       or vest the visitatorial power; it is sufficient if, from the
considered, what is deemed a foundation, [*673] and             nature of the duties to be performed by particular persons
who is the founder. This cannot be stated with more             under the charter, it can be inferred, that the founder
brevity and exactness than in the language of the elegant       meant to part with it in their favour; and he may divide it
commentator upon the laws of England: "The founder of           among various persons, or subject it to any modifications
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                                         17 U.S. 518, *674; 4 L. Ed. 629, **668;
                                       1819 U.S. LEXIS 330, ***207; 4 Wheat. 518

[***207] or control, by the fundamental statutes of the         officers, correct abuses, and generally superintend the
corporation. But where the appointment is given in              management of the trusts. Where indeed [***209] the
general terms, the whole power vests in the appointee. 97       visitatorial power is vested in the trustees of the charity in
In the construction [*675] of charters too, it is a general     virtue of their incorporation, there can be no amotion of
rule, that if the objects of the charity are incorporated, as   them from their corporate capacity. But they are not,
for instance, the master and fellows of a college, or the       therefore, placed beyond the reach of the law. As
master and poor of a hospital, the visitatorial power, in       managers of the revenues of the corporation, they are
the absence of any special appointment, silently vests in       subject to the general superintending power of the Court
the founder and his heirs. But where trustees or                of Chancery, not as itself possessing a visitatorial power,
governors are incorporated to manage the charity, the           or a right to control the charity, but as possessing a
visitatorial power is deemed to belong to them in their         general jurisdiction in all cases of an abuse of trusts to
corporate character. 98                                         redress grievances, and suppress frauds. 100 And where a
                                                                corporation is a mere trustee of a charity, a Court of
       94 1 Bl. Com. 480.                                       equity will go yet farther; and though it cannot appoint or
       95 Phillips v. Bury, 1 Ld. Ray. 5. S.C. 2 T.R.           remove a corporator, it will yet, in a case of [*677]
       346.                                                     gross fraud, or abuse of trust, take away the trust from the
       96 1 Bl. Com. 482.                                       corporation, and vest it in other hands. 101
       97 Eden v. Foster, 2 P.W. 325. Attorney General
       v. Middleton, 2 Ves. 327. St. Johns College v.                   100 2 Fonb. Eq. B. 2. pt. 2. ch. 1. s. 1. note (a.)
       Todington, 1 Bl. Rep. 84. S.C. 2 Bur. 200.                       Coop. Eq. Pl. 292. 2 Kyd Corp. 195. Green v.
       Attorney General v. Clare College, 3 Atk. 662.                   Rutherforth, 1 Ves. 462. Attorney General v.
       S.C. 1 Ves. 78.                                                  Foundling Hospital, 4 Bro. Ch. 165. S.C. 2 Ves.
       98 Phillips v. Bury, 1 Ld. Ray. 5. S.C. 2 T.R.                   jun. 42. Eden v. Foster, 2 P.W. 325. 1 Woodes.
       346. Green v. Rutherforth, 1 Ves. 472. Attorney                  476. Attorney General v. Price, 3 Atk. 108.
       General v. Middleton, 2 Ves. 327. Case of Sutton                 Attorney General v. Lock, 3 Atk. 164. Attorney
       Hospital, 10 Co. 23. 31.                                         General v. Dixie, 13 Ves. 519. Ex parte Kirkby
                                                                        Ravensworth Hospital, 15 Ves. 304. 314.
     When a private eleemosynary corporation is thus                    Attorney General v. Earl of Clarendon, 17 Ves.
created by the charter of the crown, [***208] it is                     491. 499. Berkhamstead Free School, 2 Ves. &
subject to no other control on the part of the crown, than              Beames, 134. Attorney Geenral v. Corporation of
what is expressly or implicitly reserved by the charter                 Carmarthen, Coop. Rep. 30. Mayor, &c. of
itself. Unless a power be reserved for this purpose, the                Colchester v. Lowten, 1 Ves. & Beames, 226. Rex
crown cannot, in virtue of its prerogative, without the                 v. Watson, 2 T.R. 199. Attorney General v. Utica
consent of the corporation, alter or amend the charter, or              Ins. Co. 2 Johns. Ch. R. 371. Attorney General v.
devest the corporation of any of its franchises, or add to              Middleton, 2 Ves. 327.
them, or add to, or diminish, the number of the trustees,               101      Mayor, &c. of Coventry v. Attorney
or remove any of the members, or change, or control the                 General, 7 Bro. Parl. Cases, 235. Attorney
administration of the charity, or compel the corporation                General v. Earl of Clarendon, 17 Ves. 491. 499.
to receive a new charter. This is the uniform language of
the authorities, and forms one of the most stubborn, and              [***210] Thus much it has been thought proper to
well settled doctrines of the common law. 99                    premise respecting the nature, rights, and duties of
                                                                eleemosynary corporations, growing out of the common
       99 See Rex v. Passmore, 3 T.R. 199. and the              law. We may now proceed to an examination of the
       case there cited.                                        original charter of Dartmouth College.

     But an eleemosynary, like every other corporation, is           It begins by a recital, among other things, that the
subject to the general law of the land.It may forfeit its       Rev. Eleazer Wheelock, of Lebanon, in Connecticut,
corporate franchises, by misuser or nonuser [*676] of           about the year 1754, at his own expense, on his own
them. It is subject to the controling authority of its legal    estate, set on foot an Indian charity school; and by the
visitor, who, unless restrained by the terms of the charter,    assistance of other persons, educated a number of the
may amend and repeal its statutes, remove [**669] its
                                                                                                                   Page 53
                                        17 U.S. 518, *677; 4 L. Ed. 629, **669;
                                      1819 U.S. LEXIS 330, ***210; 4 Wheat. 518

children of the Indians, and employed them as                  erected in New-Hampshire, by the name of Dartmouth
missionaries and schoolmaters among the savage tribes;         College, for the education and instruction of youth of the
that the design became reputable among the Indians, so         Indian tribes, and also of English youth and others; that
that more desired the education of their children at the       the trustees of said college shall be a corporation forever,
school, than the contributions in the American colonies        by the name of the trustees of Dartmouth College: that
would support; that the said Wheelock thought it               the then governor of New-Hampshire, the said Wheelock,
expedient to endeavour to procure contributions in             and ten other persons, [***213] specially named in the
England, and requested the Rev. Nathaniel Whitaker to          charter, shall be trustees of the said college, and that the
go to England as his attorney, to solicit contribution, and    whole number of trustees shall forever thereafter consist
also solicited the Earl of Dartmouth, and others, to           of tweleve, and no more; that the said corporation shall
receive the contributions and become trustees thereof,         have power to sue and to be sued by their corporate
which they cheerfully agreed to, and he constituted them       name, and to acquire and hold for the use of the said
trustees accordingly by a power of attorney, and [***211]      Dartmouth College, lands, tenements, hereditaments, and
they testified their acceptance by a sealed instrument;        franchises; to receive, purchase, and build any houses for
That the said Wheelock also authorized the trustees to fix     the use of said college, in such town in the western part
and determine [*678] upon the place for the said school;       of New-Hampshire, as the trustees, or a major part of
and, to enable them understandingly to give the                them, shall be a written instrument agree on; and to
preference, laid before them, the several offers of the        receive, accept, and dispose of any lands, goods, chattels,
governments in America, inviting the settlement of the         rents, gifts, legacies, &c. &c. not exceeding the yearly
school among them; that a large number of the                  value of 6,000l. It further declares, that the trustees, or a
proprietors of lands, in the western parts of                  major part of them, regularly convened, (for which
New-Hampshire, to aid the design; and considering that         purpose seven shall form a quorum,) shall have authority
the same school might be enlarged and improved to              to appoint and remove the professors, tutors, and other
promote learning among the English, and to supply the          officers of the college, and to pay them, and also such
churches there with an orthodox ministry, promised large       missionaries and schoolmasters as shall be employed by
tracts of land for the uses aforesaid, provided the school     the trustees for instructing the Indians, salaries and
should be settled in the western part of said province; that   [*680] allowances, as well as other corporate expenses,
the trustees thereupon gave a preference to the western        out of the corporate funds. It further declares, [***214]
part of said province, lying on Connecticut river, as a        that, the said trustees, as often as one or more of the
situation most convenient for said school: That the said       trustees shall die, or, by removal or otherwise, shall,
Wheelock further represented the necessity for a legal         according to their judgment, become unfit [**670] or
incorporation, in order to the safety and well-being of        incapable to serve the interests of the college, shall have
said seminary, and its being capable of the tenure and         power to elect and appoint other trustees in their stead, so
diposal of lands and bequests for the use of the same; that    that when the whole number shall be complete of twelve
in the infancy of said institution, certain [***212]           trustees, eight shall be resident freeholders of
gentlemen whom he had already nominated in his last            New-Hampshire, and seven of the whole number,
will (which he had transmitted to the trustees in England)     laymen. It further declares that the trustees shll have
to be trustees in America, should be the corporation now       power from time to time to make and establish rules,
proposed; and lastly, that there were already large            ordinaances, and laws for the government of the college
contributions for said school in the hands of the trustees     not repugnant to the laws of the land, and to confer
in England, and further success might be expected; for         collegiate degrees. It further appoints the said Wheelock,
which reason the said Wheelock desired they might be           whom it denominates "the FOUNDER of the college," to
invested with all that power therein, which could consist      be president of the college, with authority to appoint his
with their distance from the same. The charter, after          successor, who shall be president until disapproved of by
these recitals, declares, that the king, considering the       the trustees. It then concludes with a direction, that it
premises, and being willing to [*679] encourage the            shall be the duty of the president to transmit to the
charitable design, and that the best means of education        trustees in England, so long as they should perpetuate
might be established in New-Hampshire for the benefit          their board, and as there should be Indian natives
thereof, does, of his special grace, certain knowledge, and    remaining to be proper objects of the bounty, an annual
mere motion, ordain and grant, that there be a college         account of all the disbursements from [***215] the
                                                                                                                     Page 54
                                          17 U.S. 518, *680; 4 L. Ed. 629, **670;
                                        1819 U.S. LEXIS 330, ***215; 4 Wheat. 518

donations in England, and of the general plans and               Court laid down its exposition of the word "contract" in
prosperity of the institution.                                   this clause, in the following manner: "A contract is a
                                                                 compact between two or more persons, and is either
      Such are the most material clauses of the charter. It is   executory or executed. An executory contract is one, in
observable, in the first place, that no endowment                which a party binds himself to do or not to do a particular
whatever is given by the crown; and no power is reserved         thing. A contract executed is one in which the object of
to the crown or government in any manner to alter,               the contract is performed; and this, says Blackstone,
amend, or control the charter. It is also apparent, [*681]       differs in nothing from a grant. A contract executed, as
from the very terms of the charter, that Dr. Wheelock is         well as one that is executory, contains obligations binding
recognized as the founder of the college, and that the           on the parties. A grant in its own nature amounts to an
charter is granted upon his application, and that the            extinguishment of the right of the grantor, and implies a
trustees were in fact nominated by him. In the next place        contract not to reassert that right. A party is always
it is apparent, that the objects of the institution are purely   estopped by his own grant," This language is perfectly
charitable, for the distribution of the private contributions    unambiguous, and was used in reference to a grant of
of private benefactors. The charity was, in the sense            land by the Governor of a State under a legislative act. It
already expalined, a public charity, that is, for the general    determines, in the most unequivocal manner, that the
promotion of learning and peity; but in this respect it was      grant of a State is a contract within the clause of [*683]
just as much public before, as after the incorporation. The      the constitution now in question, and that it implies
only effect of the charter was to give permanency to the         [***218] a contract not to reassume the rights granted.
design, by enlarging the sphere of its action, and granting      A fortiori, the doctrine applies to a charter or grant from
a perpetuity of corporate powers and franchises the better       the king.
to secure the administration of the benevolent donations.
As founder, [***216] too, Dr. Wheelock and his heirs                    102 6 Cranch, 87. 136.
would have been completely clothed with the visitatorial
power; but the whole government and control, as well of               But it is objected, that the charter of Dartmouth
the officers as of the revenues of the college, being with       College is not a contract contemplated by the
his consent assigned to the trustees in their corporate          constitution, because no valuable consideration passed to
character, the visitatorial power, which is included in this     the king as an equivalent for the grant, it purporting to be
authority, rightfully devolved on the trustees. As               granted ex mero motu, and further, that no contracts
managers of the property and revenues of the corporation,        merely voluntary are within the prohibitory clause. It
they were amenable to the jurisdiction of the judicial           must be admitted, that mere executory contracts cannot
tribunals of the State; but as visitors, their discretion or     be enforced at law, unless there be a valuable
control, the charter, and liable to no supervision or            consideration to sustain them; and the constitution
control, at least, unless it was fraudulently misapplied.        certainly did not mean to create any new obligations, or
                                                                 give any new efficacy to nude pacts. But it must, on the
     From this summary examination it follows, that              other hand, be also admitted, that the constitution did
Dartmouth College was, under its original charter, a             intend to preserve all the obligatory force of contracts,
private eleemosynary corporation, endowed with [*682]            which they have by the general principles of law. Now,
the usual privileges and franchises of such corporations,        when a contract has once passed, bona, fide, into grant,
and, among others, with a legal perpetuity, and was              neither the king nor any private person, who may be the
exclusively under the government and control of twelve           grantor, can recal the grant of the property, although the
trustees, who were to be elected and appointed, from time        conveyance may have been purely voluntary. A gift,
to time, by the existing board, as vacancies or removals         completely executed, is irrevocable. The property
should occur.                                                    conveyed by it [***219] becomes, as against the donor,
                                                                 the absolute property of the donee; and no subsequent
    We are now led to the consideration of the first             change of intention of the donor can change the rights of
question in the cause, whether this charter [***217] is a        the donee. 103 And a gift by the crown of incorporeal
contract, within the clause of the constitution prohibiting      hereditaments, such as corporate franchises, when
the States from passing any law impairing the obligation         executed, comes completely [*684] within the principle,
of contracts. In the case of Fletcher v. Peck, 102 this          and is, in the strictest sense of the terms, a grant. 104 Was
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                                        1819 U.S. LEXIS 330, ***219; 4 Wheat. 518

it ever imagined that land, voluntarily granted to any            consideration of the premises in the introductory recitals.
person by a State, was liable to be resumed at its own            Now, among these recitals it appears, that Dr. Wheelock
good pleasure" Such a pretension would, under any                 had founded a charity school at his own expense, on his
circumstances, be truly alarming; but in a country like           own estate; that divers contributions had been made in
ours, where thousands of land titles had their origin in          the colonies, by others, for its support; that new
gratuitous grants of the States, it would go far to shake         contributions had been made, and were making, in
the foundations of the best settled [**671] estates. And          England for this purpose, and were in the hands of
a grant of franchises is not, in point of principle,              trustees appointed by Dr. Wheelock to act in his behalf;
distinguishable from a grant of any other property. If,           that Dr. Wheelock had consented to have the school
therefore, this charter were a pure donation, when the            established at such other place as the trustees should
grant was complete, and accepted by the grantees, it              select; that offers had been made by several of the
involved a contract, that the grantees should hold, and the       governments in America, inviting the                  [*686]
grantor should not reassume the grant, as much as if it           establishment of the school among them; that offers of
had been founded on the most valuable consideration.              land had also been made by divers proprietors of lands in
                                                                  the western parts of New-Hampshire, [***222] if the
        103 2 Bl. Com. 441. Jenk. Cent. 104.                      school should be established there; that the trustees had
        104 2 Bl Com. 317. 346. Shep. Touch. ch. 12. p.           finally consented to established it in New-Hampshire;
        227.                                                      and that Dr. Wheelock represented that, to effectuate the
                                                                  purposes of all parties, an incorporation was necessary.
      [***220] But it is not admitted that this charter was       Can it be truly said that these recitals contain no legal
not granted for what the law deems a valuable                     consideration of benefit to the crown, or of forbearance of
consideration. For this purpose it matters not how trifling       benefit on the other side? Is there not an implied contract
the consideration may be; a pepper corn is as good as a           by Dr. Wheelock, if a charter is granted, that the school
thousand dollars. Nor is it necessary that the                    shall be removed from his estate to New-Hampshire?
consideration should be a benefit to the grantor. It is           and that he will relinquish all his control over the funds
sufficient if it import damage or loss, or forbearanc of          collected, and to be collected, in England, under his
benefit, or any act done, or to be done, on the part of the       auspices, and subject to his authority? that he will yield
grantee. It is unnecessary to state cases; they are familiar      up the management of his charity school to the trustees of
to the mind of every lawyer. 105                                  the college?that he will relinquish all the offers made by
                                                                  other American governments, and devote his patronage to
        105 Pillans v. Van Mierop. per Yates, J. 3 Burr.
                                                                  this institution? It will scarcely be denied, that he gave
        1663. Forth v. Statunton, 2 Saund. Rep. 211.
                                                                  up the right any longer to maintain the charity school
        Williams' note 2, and the cases there cited.
                                                                  already established on his own estate; and that the funds
     With these principles in view, let us now examine            collected for its use, and subject to his management, were
[*685] the terms of this charter.It purports, indeed, on its      yielded up by him as an endowment of the college. The
face, to be granted "of the special grace, certain                very language of the charter supposes him to [***223]
knowledge, and mere motion" of the king; but these                be the legal owner of the funds of the charity school, and,
words were introduced for a very different purpose from           in virtue of this endowment, declares him the founder of
that now contended for. It is a general rule of the               the college. It matters not whether the funds were great
common law, (the reverse of that applied in ordinary              or small; Dr. Wheelock had procured them by his own
cases,) that a grant of the king, at the suit of the grantee,     influence, and they were under his control, to be applied
is to be construed most beneficially for the king, and            to the [*687] support of his charity school; and when he
most strictly against the grantee. [***221] Wherefore, it         relinquished this control he relinquished a right founded
is usual to insert in the king's grants a clause, that they are   in property acquired by his labours. Besides; Dr.
made, not a the suit of the grantee, but of the special           Wheelock impliedly agreed to devote his future services
grace, certain knowledge, and mere motion of the king;            to the colleg, when erected, by coming president thereof
and then they receive a more liberal construction. This is        at a period when sacrifices must necessarily be made to
the true object of the clause in question, as we are              accomplish the great design in view. If, indeed, a pepper
informed by the most accurate authorities. 106 But the            corn be, in the eye of the law, of sufficient value to found
charter also, on its face, purports to be granted in              a contract, as upon a valuable consideration, are these
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                                          17 U.S. 518, *687; 4 L. Ed. 629, **671;
                                        1819 U.S. LEXIS 330, ***223; 4 Wheat. 518

implied agreements, and these relinquishments of right            exclusively for the benefit of others, for public charity,
and benefit, to be deemed wholly worthless? It has never          can it be reasonably argued, that these services are less
been doubted, that an agreement not to exercise a trade in        valuable to the government, than if performed for the
a particular place was a sufficient consideration to sustain      private emolument of [*689] the trustees themselves?
a contract for the payment of money. A fortiori, the              In [***226] respect then to the trustees also, there was a
relinquishment of property which a person holds, or               valuable consideration for the charter, the consideration
controls the use of, as a trust, is a sufficient consideration;   of services agreed to be rendered by them in execution of
[***224] for it is parting with a legal right. Even a right       a charity, from which they could receive no private
of patronage (jus patronatus) is of great value in                remuneration.
intendment of law.Nobody doubts, that an advowson is a
valuable hereditament; and yet, in fact, it is but a mere                108 Rex v. Passmore, 3 T.R. 199. 239. 246
trust, or right of nomination to a benefice, which cannot
                                                                       There is yet another view of this part of the case,
be legally sold to the intended incumbent. 107
                                                                  which deserves the most weighy consideration. The
        106 2 Bl. Com. 347. Finch's Law, 100. 10 Rep.             corporation was expressly created for the purpose of
        112. 1 Shep. Abridg. 136. Bull, N.P. 136.                 distributing in perpetuity the charitable donations of
        107 2 Bl. Com. 22. note by Christian.                     private benefactors. By the terms of the charter, the
                                                                  trustees, and their successors, in their corporate capacity,
     In respect to Dr. Wheelock, then, if a consideration         were to receive, hold, and exclusively manage, all the
be necessary to support the charter as a contract, it is to       funds so contributed. The crown, then, upon the face of
be found in the implied stipulations on his prt in the            the charter, pledged its faith that the donations of private
charter itself. He relinquished valuable rights, and              benefactors should be perpetually devoted to their
undertook a laborious office in consideration of the grant        original purposes, without any interference on its own
of the incorporation.                                             part, and should be forever administered by the trustees
                                                                  of the corporation, unless its corporate franchises should
      [*688] This is not all. A charter may be granted            be taken away by due process of law. From the very
upon an executory, as well as an executed or present              nature of the case, therefore, there was an implied
consideration. When it is granted to persons who have             contract on the part of the crown with every benefactor,
not made application for it, until their acceptance thereof,      that if he would give his money, it should [***227] be
the grant is yet in fieri. Upon the acceptance there is an        deemed a charity protected by the charter, and be
implied contract on the part of the grantees, in                  administered by the corporation according to the general
consideration of the charter, that they will perform the          law of the land. As soon, then, as a donation was made to
duties, and exericse the authorities conferred [***225]           the corporation, there was an implied contract springing
by it. This was the doctrine asserted by the late learned         up, and founded on a valuable consideration, that the
Mr. Justice Buller, in a modern case. 108 He there said, "I       crown would not revoke, or alter the charter, or change its
do not know how to reason on this point better [**672]            administration, without the consent of the corporation.
than in the manner urged by one of the relator's counsel,         There was also an implied contract between the
who considered the grant of incorporation to be a                 corporaton itself, and every benefactor [*690] upon a
compact between the crown, and a certain number of the            like consideration, that it would administer his bounty
subjects, the latter of whom undertake, in consideration          according to the terms, and for the objects stipulated in
of the privileges which are bestowed, to exert themselves         the charter.
for the good government of the place," (i.e. the place
incorporated.) It will not be pretended, that if a charter be          In every view of the case, if a consideration were
granted for a bank, and the stockholders pay in their own         necessary (which I utterly deny) to make the charter a
funds, the charter is to be deemed a grant without                valid contract, a valuable consideration did exist, as to the
consideration, and, therefore, revocable at the pleasure of       founder, the trustees and the benefactors. And upon the
the grantor. Yet here, the funds are to be managed, and           soundest legal principles, the charter may be properly
the services performed exclusively for the use and benefit        deemed, according to the various aspects, in which it is
of the stockholders themselves.And where the grantees             viewed, as a several, contract with each of these parties,
are mere trustees to perform services without reward,             in virtue of the foundation, or the endowment of the
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                                         17 U.S. 518, *690; 4 L. Ed. 629, **672;
                                       1819 U.S. LEXIS 330, ***227; 4 Wheat. 518

college, or the acceptance of the charter, or the donations     of being deemed a contract on that account, to consider,
to the charity.                                                 whether they do not at the same time establish, that the
                                                                grant itself is a nullity for precisely the same reason. Yet
     And here we might pause: but there is yet remaining        such a doctrine would strike us all as pregnant with
[***228] another view of the subject, which cannot              absurdity, since it would prove that an act of
consistently be passed over without notice. It seems to be      incorporation could never confer any authorities, or
assumed by the argument of the defendant's counsel, that        rights, or property, on the corporation it created. It may
there is no contract whatsoever, in virtue of the charter,      be admitted, that two parties are necessary to form a
between the crown and the corporation itself.But it             perfect contract; [**673] but it is denied that it is
deserves consideration, whether this assumption can be          necessary, that the assent of both parties must be at the
sustained upon a solid foundation.                              same time. If the legislature were voluntarily to grant
                                                                land in fee to the first child of A. to be hereafter born; as
     If this had been a new charter granted to an existing      soon as such child should be born, the estate would vest
corporation, or a grant of lands to an existing corporation,    in it. Would it be contended, that such grant, when it
there could not have been a doubt, that the grant would         took effect, was revocable, and not an executed contract,
have been an executed contract with the corporation; as         upon the acceptance of the estate? The same question
much so, as if it had been to any private person. But it is     might be asked in a case of a gratuitous grant by the king
supposed, that as this corporation was not then in              or the ligislature to A. for life, and afterwards to the heirs
existence, but was created and its franchises bestowed,         of B., who is then living. Take the case of a bank,
uno flatu, the charter cannot be construed a contract,          incorporated for a limited period, [***231] upon the
because there was no person in rerum natura, with whom          express condition that it shall pay out of its corporate
it might be made. Is this, however, a just and legal view       funds a certain sum, as the consideration for the charter,
of the [*691] subject? If the corporation had no                and after the corporation is organized a payment duly
existence so as to become a contracting party, neither had      made of the sum out of the corporate funds; will it be
it for the purpose of receiving a grant of the franchises.      contended, that there is not a subsisting contract between
The truth is, that there may be a priority of operation of      the government and the corporation, by the matters thus
things in the same grant; and the law distinguishes             arising ex post facto, that the charter shall not be revoked
[***229] and gives such priority, wherever it is                during the stipulated period? Suppose an act declaring
necessary to effectuate the objects of the grant. 109 From      that all persons, who should thereafter pay into the public
the nature of things, the artificial person called a            treasury a stipulated sum, should be tenants in common
corporation, must be created before it can be capable of        of certain [*693] lands belonging to the State in certain
taking any thing. When, therefore, a charter is granted,        proportions; if a person afterwards born, pays the
and it brings the corporation into existence without any        stipulated sum into the treasury, is it less a contract with
act of the natural persons who compose it, and gives such       him, than it would be with a person in esse at the time the
corporation any privileges, franchises, or property, the        act passed? We must admit that there may be future
law deems the corporation to be first brought into              springing contracts in respect to persons not now in esse,
existence, and then clothes it with the granted liberties       or we shall involve ourselves in inextricable difficulties.
and property. When, on the other hand, the corporation is       And if there may be in respect to natural persons, why not
to be brought into existence by some future acts of the         also in respect to artificial persons, created by the law, for
corporators, the franchises remain in abeyance, until such      the very purpose of being clothed with corporate powers?
acts are done, and when the corporation is brought into         I am unable to distinguish between [***232] the case of
life, the franchises instantaneously attach to it. There        a grant of land or of franchises to an existing corporation,
may be, in intendment of law, a priority of time, even in       and a like grant to a corporation brought into life for the
an instant, for this purpose. 110 And if the corporation        very purpose of receiving the grant. As soon as it is in
have an existence before the grant of its other franchises      esse, and the franchises and property become vested and
attaches, what more difficulty is there in deeming the          executed in it, the grant is just as much an executed
grant of these franchises a contract with it, than if granted   contract, as if its prior existence had been established for
by another instrument at a subsequent period? It                a century.
behooves those also, [***230] who hold, that a grant to
a corporation, not then in existence, is incapable [*692]               109     Case of Sutton's Hospital, 10 Co. 23.
                                                                                                                    Page 58
                                         17 U.S. 518, *693; 4 L. Ed. 629, **673;
                                       1819 U.S. LEXIS 330, ***232; 4 Wheat. 518

       Buckland v. Fowcher, cited 10 Co. 27, 28.; and           charitable uses (as many municipal corporations [*695]
       recognized in Attorney General v. Bowyer, 3 Ves.         are,) does the legislature, under our forms of limited
       jun. 714. 726. 727. S. P. Highmore on Mortm.             government, possess the authority to seize upon those
       200, &c.                                                 funds, and appropriate them to other uses, at its own
       110 Ib.                                                  arbitrary pleasure, against the will of the donors and
                                                                donees? From the very nature of our governments, the
    Supposing, however, that in either of the views             public faith is pledged the other way; and that pledge
which have been suggested, the charter of Dartmouth             constitutes a valid compact; and that compact is subject
College is to be deemed a contract, we are yet met with         only to judicial inquiry, construction, and abrogation.
several objections of another nature.                           This Court have already had occiasion, in other causes, to
                                                                express their opinion on this subject; and the there is not
    It is, in the first place, contended, that it is not a      the slightest inclination to retract it. 111
contract within the prohibitory clause of the constitution,
because that clause was never intended to apply to mere                111 Terret v. Taylor, 9 Cranch, 43. Town of
contracts of civil institution, such as the contract of                Pawlet v. Clark, 9 Cranch, 292.
marriage, or to grants of power to State officers, or to
contracts relative to their offices, or to grants of trust to         [***235] As to the case of the contract of marriage,
be exercised for purposes merely public, where the              which the argument supposes not to be within the reach
grantees take no beneficial [***233] interest.                  of the prohibitory clause, because it is matter of civil
                                                                institution, I profess not to feel the weight of the reason
     It is admitted, that the State legislatures have [*694]    assigned for the exception. In a legal sense, all contracts,
power to enlarge, repeal, and limit the authorities of          recognized as valid in any country, may be properly said
public officers in their official capacities, in all cases,     to be matters of civil institution, since they obtain their
where the constitutions of the States respectively do not       obligation and construction jure loci contractus. Titles to
prohibit them; and this, among others, for the very             land, constituting part of the public domain, acquired by
reason, that there is no express or implied contract, that      grants under the provisions of existing laws by private
they shall always, during their continuance in office,          persons, are certainly contracts of civil institution. Yet
exercise such authorities. They are to exercise them only       no one ever supposed, that when acquired bona fide, they
during the good pleasure of the legislature. But when the       were not beyond the reach of legislative revocation. And
legislature makes a contract with a public officer, as in       so, certainly, is the established doctrine of this Court. 112
the case of a stipulated salary for his services, during a      A general law regulating divorces from the contract of
limited period, this, during the limited period, is just as     marriage, like a law regulating [*696] remedies in other
much a contract, within the purview of the constitutional       cases of breaches of contracts, is not necessarily a law
prohibition, as a like contract would be between two            impairing the obligation of such a contract. 113 It may be
private citizens. Will it be contended, that the legislature    the only effectual mode of enforcing the obligations of
of a State can diminish the salary of a judge holding his       the contract on both sides. A law punishing a breach of a
office during good behaviour? Such an authority has             contract, by imposing a forfeiture of the rights [***236]
never yet been asserted to our knowledge. It may also be        acquired under it, or dissolving it because the mutual
admitted, that corporations for mere public government,         obligations were no longer observed, is in no correct
such as towns, cities and counties, may in many respects        sense a law impairing [**674] the obligations of the
be subject to legislative control. But [***234] it will         contract. Could a law, compelling a specific
hardly be contended, that even in respect to such               performance, by giving a new remedy, be justly deemed
corporations, the legislative power is so transcendant, that    an excess of legislative power? Thus far the contract of
it may at its will take away the private property of the        marriage has been considered with reference to general
corporation, or change the uses of its private funds            laws regulating divorces upon breaches of that contract.
acquired under the public faith.Can the legislature             But if the argument means to assert, that the legislative
confiscate to its own use the private funds which a             power to dissolve such a contract, without any breach on
municipal corporation holds under its charter, without          either side, against the wishes of the parties, and without
any default or consent of the corporators? If a municipal       any judicial inquiry to ascertain a breach, I certainly am
corporation be capable of holding devises and legacies to       not prepared to admit such a power, or that its exercise
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                                          17 U.S. 518, *696; 4 L. Ed. 629, **674;
                                        1819 U.S. LEXIS 330, ***236; 4 Wheat. 518

would not entrench upon the prohibition of the                   if the uses are charitable, to secure their regular
constitution. If under the faith of existing laws a contract     administration through the means of equitable tribunals,
of marriage be duly solemnized, or a marriage settlement         in cases where there would otherwise be a failure of
be made, (and marriage is always in law a valuable               justice.
consideration for a contract,) it is not easy to perceive
why a dissolution of its obligations, without any default               114 2 Bl. Com. 21.
or assent of the parties, may not as well fall within the
                                                                      Another objection [***239] growing out of, and
prohibition, as any other contract for a valuable
                                                                 connected with that which we have been considering, is,
consideration. A man has just as [***237] good a right to
                                                                 that no grants are within the constitutional prohibition,
his wife, as to the property acquired under a marriage
                                                                 except such as respect property in the strict sense of the
[*697] contract. He has a legal right to her society and
                                                                 term; that is to say, beneficial interests in lands,
her fortune; and to devest such right without his default,
                                                                 tenements, and hereditaments, &c. &c. which may be
and against his will, would be as flagrant a violation of
                                                                 sold by the grantees for their own benefit: and that grants
the principles of justice, as the confiscation of his own
                                                                 of franchises, immunities, and authorities not valuable to
estate. I leave this case, however, to be settled, when it
                                                                 the parties, as property, are excluded from its purview.
shall arise. I have gone into it, because it was urged with
                                                                 No authority has been cited to sustain this distinction, and
great earnestness upon us, and required a reply. It is
                                                                 no reason is perceived to justify its adoption. There are
sufficient now to say, that as at present advised, the
                                                                 many rights, franchises, and authorities which are
argument, derived from this source, does not press my
                                                                 valuable in contemplation of law, where no beneficial
mind with any new and insurmountable difficulty.
                                                                 interest can accrue to the possessor. A grant of the next
        112 Ib.                                                  presentation to a church, limited to the grantee alone, has
        113 See Holmes v. Lansing, 3 Johns. Cas. 73.             been already mentioned. A power of appointment,
                                                                 reserved in a marriage settlement, either to a party or a
      In respect also to grants and contracts, it would be far   stranger, to appoint uses in favour of third persons,
too narrow a construction of the constitution, to limit the      without compensation, is another instance. [*699] A
prohibitory clause to such only where the parties take for       grant of lands to a trustee to raise portions or pay debts,
their own private benefit. A grant to a private trustee for      is, in law, a valuable grant, and conveys a legal estate.
the benefit of a particular cestui que trust, or for any         Even a power given by will to executors to sell [***240]
special, private or public charity, cannot be the less a         an estate for payment of debts is, by the better opinions
contract because the trustee takes nothing for his own           and authority, coupled with a trust, and capable of
benefit. A grant of the next presentation to a church is         survivorship. 115 Many dignities and offices, existing at
still a contract, although it [***238] limit the grantee to a    common law, are merely honorary, and without profit,
mere right of nomination or partrongage. 114 The fallacy         and sometimes are onerous. Yet a grant of them has
of the argument consists in assuming the very ground in          never been supposed the less a contract on that account.
controversy. It is not admitted, that a contract with a          In respect to franchises, whether corporate or-not, which
trustee is in its own nature revocable, whether it be for        include a pernancy of profits, such as a right of fishery, or
special or general purposes, for public charity or               to hold a ferry, a market, or a fair, or to erect a turnpike,
particular beneficence. A private donation, vested in a          bank, or bridge, there is no pretence to say that grants of
trustee for objects of a general nature, does not thereby        them are not within the constitution.Yet they may, in
become a public trust, which the government may, at its          point of fact, be of no exchangeable value to the owners.
pleasure, take from the trustee, and administer [*698] in        They may be worthless in the market. The truth,
its own way. The truth is, that the government has no            however, is, that all incorporeal hereditaments, whether
power to revoke a grant, even of its own funds, whne             they be immunities, dignities, offices, or franchises, or
given to a private person, or a corporation for special          other rights, are deemed valuable in law. The owners
uses. It cannot recal its own endowments granted to any          have a legal estate and property in them, and legal
hospital, or college, or city, or town, for the use of such      remedies to support and recover them, is case of any
corporations. The only authority remaining to the                injury, obstruction or disseizin of them. Whenever they
government is judicial, to ascertain the validity of the         are the subjects of a contract or grant, they are just as
grant, to enforce its proper uses, to suppress frauds, and,      much within the reach of the constitution as any other
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                                        17 U.S. 518, *699; 4 L. Ed. 629, **674;
                                      1819 U.S. LEXIS 330, ***240; 4 Wheat. 518

grant. [*700] [***241] Nor is there any solid reason           power is touched by removing them [***243] from the
why a contract for the exercise of a mere authority should     trust; and then to hold the corporation itself a mere ideal
not be just as much guarded as a contract for the use and      being, capable indeed of holding property or franchises,
dominion of property. Mere naked powers, which are to          but having no interest in them which can be the subject of
be exercised for the exclusive benefit of the grantor, are     contract. Neither of these positions is admissible. The
revocable by him for that very reason. But it is otherwise     former has been already sufficiently considered, and the
where a power is to be exercised in aid of a right vested      latter may be disposed of in a few words. The
in the grantee. We all know that a power of attorney,          corporators are not mere agents, but have vested rights in
forming a part of a security upon the assignment of a          their character, as corporators. The right to be a freeman
chose in action, is not revocable by the grantor. For it       of a corporation is a valuable temporal right. It is a right
then [**675] sounds in contract, and is coupled with an        of voting and acting in the corporate concerns, which the
interest. 116 So if an estate be conveyed in trust for the     law recognizes and enforces, and for a violation of which
grantor, the estate is irrevocable in the grantee, although    it provides a remedy. It is founded on the same basis as
he can take no beneficial interest for himself. Many of        the right of voting in public elections; it is as sacred a
the best settled estates stand upon conveyances of this        right; and whatever might have been the prevalence of
nature; and there can be no doubt that such grants are         former doubts, since the time of Lord Holt, such a right
contracts within the prohibition in question.                  has always been deemed a valuable franchise or
                                                               privilege. 118
       115 Co. Lit. 113. a. Harg. and Butler's note 2.
       Sugden on Powers, 140. Jackson v. Jansen, 6                    117 2 Bl. Com. 37. 1 Kyd on Corp. 14. 16.
       Johns. Rep. 73. Franklin v. Osgood, 2 Johns. Cas. 118 Ashby v. White, 2 Ld. Raym. 938. 1 Kyd on
       1. S.C. 14 Johns. Rep. 527. Zebach v. Smith, 3                 Corp. 16.
       Binn. Rep. 69. Lessee of Moody v. Vandyke, 4
Binn. 7. 31. Attorney General v. Gleg, 1 Atk.                 [*702] This reasoning, which has been thus far
       356. 1 Bac. Abr. 586. (Gwillim edit.)                   urged, applis with full force to the case of Dartmouth
       116 Walsh v. Whitcomb, 2 Esp. 565. Bergen v.            College. The franchises granted by the charter were
       Bennett, 1 Caines' Cases in Error, 1. 15.               [***244] vested in the trustees in their corporate
       Raymond v. Squire, 11 Johns. Rep. 47.                   character. The lands and other property, subsequently
                                                               acquired, were held by them in the same manner. They
      [***242] In respect to corporate franchises, they        were the private demenses of the corporation, held by it,
are, properly speaking, legal estates vested in the            not, as the argument supposes, for the use and benefit of
corporation itself as soon as it is in esse. They are not      the people of New-Hampshire, but, as the charter itself
mere naked powers granted to the corporation; but              declares, "for the use of Dartmouth College." There were
powers coupled with an interest. The property of the           not, and in the nature of things could not be, any other
corporation vests upon the possession of its franchises;       cestui que use entitled to claim those funds. They were
and whatever may be thought as to the corporators, it          indeed to be devoted to the promotion of piety and
cannot be denied, that the corporation itself has a legal      learning, not at large, but in that college, and the
interest in them. It may sue and be sued for them. Nay,        establishments connected with it; and the mode in which
more, this very right is one of its ordinary [*701]            the charity was to be applied, and the objects of it, were
franchises. "It is likewise a franchise," says Mr. Justice     left solely to the trustees, who were the legal governors
Blackstone, "for a number of persons to be incorporated        and administrators of it. No particular person in
and subsist as a body politic, with power to maintain          New-Hampshire possessed a vested right in the bounty;
perpetual succession, and do other corporate acts; and         nor could he force himself upon the trustees as a proper
each individual member of such corporation is also said        object. The legislature itself could not deprive the
to have a franchise or freedom." 117 In order to get rid of    trustees of the corporate funds, or annul their discretion in
the legal difficulty of these franchises being considered as   the application of them, or distribute them among its own
valuable hereditaments or property, the counsel for the        favourites. Could the legislature of New-Hampshire have
defendant are driven to contend, that the corporators or       seized the land given by the State of [***245] Vermont
trustees are mere agents of the corporation, in whom no        to the corporation, and appropriated it to uses distinct
beneficial interest subsists; and so nothing but a naked       from those intended by the charity, against the will of the
                                                                                                                       Page 61
                                          17 U.S. 518, *702; 4 L. Ed. 629, **675;
                                        1819 U.S. LEXIS 330, ***245; 4 Wheat. 518

trustees? This question cannot be answered in the                      It is attempted, however, to establish, that the
affirmative, until it is established, that the legislature may    trustees have no interest in the corporate franchises,
lawfully take the property of A, and give it to B.; and if it     because it is said, that they may be witnesses in a suit
[*703] could not take away or restrain the corporate              brought agaisnt the corporation. The case cited at the bar
funds, upon what pretence can it take away or restrain the        certainly goes the length of asserting, that in a suit
corporate franchises? Without the franchises, the funds           brought agaisnt a charitable corporation for a recompence
could not be used for corporate purposes; but without the         for services performed for the corporation, the governors,
funds, the possession of the franchises might still be of         constituting the corporation, (but whether entrusted with
inestimable value to the college and to the cause of              its funds or not by the act of incorporation does not
religion and learning.                                            appear) are competent witnesses against the plaintiff. 121
                                                                  But assuming this case to have been rightly decided, (as
      Thus far, the rights of the corporation itself, in          to which upon the authorities there may be room to
respect to its property and franchises, have been more            doubt,) the corporators [*705] being technically parties
immediately considered. But there are other rights and            to the record, 122 it does not establish, that in a suit for
privileges belonging to the trustees collectively, and            the corporate property vested in the trustees in their
severally, which are deserving of notice. They are                corporate capacity, the trustees are competent [***248]
entrusted with the exclusive power to manage the funds,           witnesses. At all events, it does not establish, that in a
to choose the officers, and to regulate the corporate             suit for the corporate franchises to be exercised by the
concerns, according to their own discretion. The jus              trustees, or to enforce their visitatorial power, the trustees
patronatus is vested in them. The visitatorial power, in          would be competent witnesses. On a mandamus to
its most enlarged extent, also belongs to [***246] them.          restore a trustee to his corporate or visitatorial power, it
When this power devolves upon the founder of a charity,           will not be contended, that the trustee is himself a
it is an hereditament, descendible in perpetuity to his           competent witness to establish his own rights, or the
heirs, and in default of heirs, it escheats to the                corporate rights. Yet why not, if the law deems that a
government. 119 It is a valuable right founded in property,       trustee has no interest in the franchise? The test of
as much so as the right of patronage in any other case. It        interest assumed in the argument proves nothing in this
is a right which partakes of a judicial nature. May not the       case. It is not enough to establish, that the trustees are
founder as justly contract for the possession of this right       sometimes competent witnesses; it is necessary to show,
in return for his endowment, as for any other equivalent?         that they are always so in respect to the corporate
and, if instead of holding it as an hereditament, he assigns      franchises, and their own. It will not be pretended, that in
it in perpetuity to the trustees of the corporation, is it less   a suit for demages for obstruction in the exercise of his
a valuable hereditament in their hands? The right is not          official powers, a trustee is a disinterested witness. Such
merely a collective right in all the trustees; [*704] each        an obstruction is not a damnum absque injuria. Each
of them also has a franchise in it. Lord Holt says, "it is        trustee has a vested right, and legal interest in his office,
agreeable to reason, and the rules of law, that a franchise       and it cannot be devested but by due course of law. The
should be vested in the corporation aggregate, and yet the        illustration, therefore, lends no new force to the
benefit redound to the particular members, and be                 argument, for it does not establish, that when their own
enjoyed by them in their private capacities. Where the            rights [*706] [***249] are in controversy, the trustees
privilege of election is used by particular persons, it is a      have no legal interest in their offices.
particular right vested in each particular man." 120 Each
of the trustees had a right to vote in all elections. If                  121 Weller v. The Governor of the Foundling
obstructed in the exercise [***247] of it, the law                        Hospital, Peake's N.P. Rep. 153.
furnished him with an adequate recompense in [**676]                      122 Attorney General v. City of London, &c. 3
damages. If ousted unlawfully from his office, the law                    Bro. Ch. c. 171. S.C. 1 Ves. jun. 243. Burton v.
would, by a mandamus, compel a restoration.                               Hinde, 5 T.R. 174. Nason v. Thatcher, 7 Mass. R.
                                                                          398. Phillips on Evid. 42. 52. 57. and notes. 1
        119 Rex v. St. Catherine's Hall, 4 T.R. 233.                      Kyd on Corp. 304. &c. Highmore on Mortm.
        120 Ashby v. White, 2 Ld. Raym. 938. 952.                         514.
        Attorney General v. Dixie, 13 Ves. 519.
                                                                      The principal objections having been thus answered
                                                                                                                     Page 62
                                        17 U.S. 518, *706; 4 L. Ed. 629, **676;
                                      1819 U.S. LEXIS 330, ***249; 4 Wheat. 518

satisfactorily, at least to my own mind, it remains only to    them, impair the obligations of the charter of Drtmouth
declare, that my opinion, after the most mature                College. The attempt certainly is to force upon the
deliberation is, that the charter of Dartmouth College,        corporation a new charter against the will of the
granted, in 1769, is a contract within the purview of the      corporators. Nothing seems better settled at the common
constitutional prohibition.                                    law, than the doctrine, that the crown cannot force upon a
                                                               private corporation a new charter; or compel the old
     I might now proceed to the discussion of the second       members to give-up their own franchises, or to admit new
question; but it is necessary previously to dispose of a       members into the corporation. 126 Neither can the crown
doctrine which has been very seriously urged at the bar,       compel a man [*708] to become a member of such
viz. that the charter of Dartmouth College was dissolved       corporation against his will. 127 As little has it been
at the revolution, and is, therefore, a mere nullity. A case   supposed, that under our limited governments, the
before Lord Thurlow has been cited in support of this          legislature possessed such transcendant authority. On
doctrine. 123 The principal question in that case was,         one occasion, a very [***252] able Court held, that the
whether the corporation of William & Mary's College in         State legislature had no authority to compel a person to
Virginia, (which had received its charter from [***250]        become a member of a mere private corporation created
King William, and Queen Mary,) should still be                 for the promotion of a private enterprise, because every
permitted to administer the charity under Mr. Boyle's          man had a right to refuse a grant. 128 On another
will, no interest having passed to the college under the       occasion, the same learned Court declared, that they were
will, but it acting as an agent or trustee under a decree in   all satisfied, that the rights legally vested in a corporation,
chancery, or whether a new scheme for the administration       cannot be controled or destroyed by any subsequent
of the charity should be laid before the Court. Lord           statute, unless a power for that purpose be reserved to the
Thurlow directed a new scheme, because the college             legislature in the act of incorporation. 129 These
belonging to an independent government, was no longer          principles are so consonant with justice, sould policy, and
within the reach of the Court. And he very unnecessarily       legal reasoning, that it is difficult to resist the impression
added, that he could not now consider the college as a         of their perfect [**677] correctness. The application of
corporation, or as another report 124 states, [*707] that      them, however, does not, from our limited authority,
he could not take notice of it as a corporation, it not        properly belong to the appellate jurisdiction of this Court
having proved its existence as a corporation at all. If, by    in this case.
this, Lord Thurlow meant to declare, that all charters
acquired in Amierca from the crown, were destroyed by                  126 Rex v. Vice Chancellor of Cambridge, 3
the revolution, his doctrine is not law; and if it had been            Bur. 1656. Rex v. Passmore, 3 T.R. 240. 1 Kyd
true, it would equally apply to all other grants from the              on Corp. 65. Rex v. Larwood, Comb. 316.
crown, which would be monstrous. It is a principle of the              127 Rex. v. Dr. Askew, 4 Bur. 2200.
common law, which has been recognized as well in this,                 128 Ellis v. Marshall, 2 Mass. Rep. 269.
as in other Courts, that the division of an empire, works              129 Wales v. Stetson, 2 Mass. Rep. 143. 146.
no forfeiture of previously vested rights of property. And
this maxim is [***251] equally consonant with the                  A very summary examination of the acts of
common sense of mankind, and the maxims of eternal             New-Hampshire will abundantly show, that in many
justice. 125 This objection, therefore, may be safely          materal [***253] respects they change the charter of
dismissed without further comment.                             Dartmouth College. The act of the 27th of June, 1816,
                                                               declares that the corporation known by the name of the
       123 Attorney General v. City of London, 3 Bro.          Trustees of Dartmouth College shall be called the
       Ch. C. 171. S.C.1 Ves. jun. 243.                        Trustees of Dartmouth University. That the whole
       124 1 Ves. jun. 243.                                    number of trustees shall be twenty-one, a majority
       125 Terrett v. Taylor, 9 Cranch, 43. 50. Kelly v.       [*709] of whom shall form a quorum; that they and their
       Harrison, 2 Johns. Cas. 29. Jackson v. Lunn, 3          successors shall hold, use, and enjoy forever, all the
       Johns. Cas. 109. Calvin's case, 7 Co. 27.               powers, authorities, rights, property, liberties, privileges,
                                                               and immunities, heretofore held, &c. by the trustees of
     The remaining inquiry is, whether the acts of the         Dartmouth College, except where the act other wise
legislature of New-Hampshire now in question, or any of        provides; that they shall also have power to determine the
                                                                                                                  Page 63
                                        17 U.S. 518, *709; 4 L. Ed. 629, **677;
                                      1819 U.S. LEXIS 330, ***253; 4 Wheat. 518

times and places of their meetings and manner of              new board, too, have the power to suspend or remove any
notifying the same; to organize colleges in the university;   member, so that a minority of the old board, co-operating
to establish an institute, and elect fellows and members      with the new trustees, possess the unlimited power to
thereof; to appoint and displace officers, and determine      remove the majority of the old board. The powers, too,
their duties and compensation; to delegate the power of       of the corporation are varied. It has authority to organize
supplying vacancies in any of the offices of the university   [***256] new colleges in [*711] "the university, and to
for a limited term; to pass ordinances for the government     establish an institute, and elect fellows and members
of the students; to prescribe the course of education; and    thereof." A board of overseers is created, (a board utterly
to arrange, invest, and employ the funds of the university.   unknown to the old charter,) and is invested with a
The act then provides for the appointment [***254] of a       general supervision and negative upon all the most
board of twenty-five overseers, fifteen of whom shall         important acts and proceedings of the trustees. And to
form a quorum, of whom five are to be such ex officio,        give complete effect to this new authority, instead of the
and the residue of the overseers, as well as the new          right to appoint, the trustees are in future only to
trustees, are to be appointed by the governor and council.    nominate, and the overseers are to approve, the president
The board of overseers are, among other things, to have       and professors of the university.
power, "to inspect and confirm, or disapprove and
negative, such votes and proveedings of the board of               If these are not essential changes, impairing the
trustees as shall relate to the appointment and removal of    rights and authorities of the trustees, and vitally affecting
president, professors and other permanent officers of the     the interests and organization of Dartmouth College
university, and determine their salaries; to the              under its old charter, it is difficult to conceive what acts,
establishment of colleges and professorships, and the         short of an unconditional repeal of the charter, could have
erection of new college buildings." The act then provides,    that effect. If a grant of land or franchises be made to A.,
that the president and professors shall be nominated by       in trust for special purposes, can the grant be revoked,
the trustees, and appointed by the overseers, [*710] and      and a new grant thereof be made to A., B., and C., in trust
shall be liable to be suspended and removed in the same       for the same purposes, without violating the obligation of
manner; and that each of the two boards of trustees and       the first grant? If property be vested by grant in A. and
overseers shall have power to suspend and remove any          B., for the use of a college, or a hospital, of private
member of their respective boards. The supplementary          foundation, is not the obligation [***257] of that grant
act of the 18th of December, 1816, declares that nine         impaired when the estate is taken from their exclusive
trustees shall form a quorum, and that six votes at least     management, and vested in them in common with ten
shall be necessary for the passage of any act or              other persons? If a power of appointment be given to A.
resolution. The act of the 26th of December, [***255]         and B., is it no violation of their right to annul the
1816, contains other provisions, not very material to the     appointment, unless it be assented to by five other
question before us.                                           persons, and then confirmed by a distinct body? If a
                                                              bank, or insurance company, by the terms of its charter,
     From this short analysis it is apparent, that, in        be under the management of directors, elected by the
substance, a new corporation is created including the old     stockholders, would not the [*712] rights acquired by
corporators, with new powers, and subject to a new            the charter be impaired if the legislature should take the
control; or that the old corporation is newly organized       right of election from the stockholders, and appoint
and enlarged, and placed under an authority hitherto          directors unconnected with the corporation? These
unknown to it. The board of trustees are increased from       questions carry their own answers along with them. The
twelve to twenty-one. The college becomes a university.       common sense of mankind will teach us, that all these
The property vested in the old trustees is transferred to     cases would be direct infringements of the legal
the new board of trustees in their corporate capacities.      obligations of the grants to which they refer; and yet they
The quorum is no longer seven, but nine. The old trustees     are, with no essential distinction, the same as the case
have no longer the sole right to perpetuate their             now at the bar.
succession by electing other trustes, but the nine new
trustees are in the first instance to be appointed by the          In my judgment it is perfectly clear, that any act of a
governor and council, and the new board are then to elect     legislature which takes away any powers or franchises
other trustees from time to time as vacancies occur. The      vested by its charter in a private corporation or its
                                                                                                                    Page 64
                                          17 U.S. 518, *712; 4 L. Ed. 629, **677;
                                        1819 U.S. LEXIS 330, ***257; 4 Wheat. 518

corporate officers, or which restrains or controls the                  its establishment, that if the charter had regularly
legitimate exercise [***258] of them, or transfers them                 issued according to the forms of the French law, it
to other persons, without its assent, is a violation of the             was irrevocable, unless forfeited for non-user or
obligations of that charter. If the legislature mean to                 misuser. The advocates, (M. M. LACRETELLE
claim such an authority, it must be reserved in the grant.              and BLONDE,) who were consulted by the
The charter of Dartmouth College contains no such                       merchants of the kingdom opposed to the
reservation; and I am, therefore, bound to declare, that the            establishment of the Company, denied its legal
[**678] acts of the legislature of New-Hampshire, now                   existence, on the ground that the king had been
in question, do impair the obligations of that charter, and             surprised in his grant; that it was not yet perfected
are, consequently, unconstitutional and void.                           by the issuing of letters patent, nor duly registered
                                                                        by the parliaments; and that it both might and
     In pronouncing this judgment, it has not for one                   ought to be suppressed, as an illegal grant of
moment escaped me how delicate, difficult, and                          exclusive privileges, contrary to the true
ungracious is the task devolved upon us. The                            principles of commercial philosophy.
predicament in which this Court stands in relation to the
nation at large, is full of perplexities and embarrassments.                 On the other hand it was contended by the
It is called to decide on causes between citizens of                    Company that their grant was irrevocable; that it
different States, between a State and its citizens, and                 was but a renewal and confirmation of the charter
between different States. It stands, therefore, in the midst            of the old Company which had been suspended in
of [*713] jealousies and rivalries of conflicting parties,              1769, in consequence of the immense losses of
with the most momentous interests confided to its care.                 capital sustained in the calamitous war of 1756,
Under such circumstances, it never can have a motive to                 (but which suspension was at the time solemnly
do more than its duty; and, I trust, it will always be found            protested against by the parliament of Paris as
to possess firmness enough to do that.                                  illegal;) that their new grant might still be
                                                                        perfected by letters patent, which the faith of the
     Under these [***259] impressions I have pondered                   king was pledged to issue; and that the privileges
on the case before us with the most anxious deliberation.               thus granted to them were irrevocably vested as a
I entertain great respect for the legislature, whose acts are           right of property, of which they could not be
in question. I entertain no less respect for the enlightened            deprived by any authority in the kingdom. "En
tribunal whose decision we are called upon to review. In                effect, quand le roi accorde un privilege exclusif,
the examination, I have endeavoured to keep my steps                    ce privilege est le prix d'une mise de fonds, dans
super antiques vias of the law, under the guidance of                   un commerce hazardeux, dont l'entreprise est
authority and principle. It is not for judges to listen to the          jugee avantageuse a l'etat. Dela nait par
voice of persuasive eloquence or popular appeal. We                     consequent un contrat synallagmatique, qui se
have nothing to do but to pronounce the law as we find it;              forme entre le souverain et les actionnaries. Dela
and having done this, our justification must be left to the             nait un droit de propriete qui devient inebranlable
impartial judgment of our country.                                      pour le sourverain lui-meme." And of this opinion
                                                                        were the advocates (M. M. HARDOIN,
DISSENT BY: DUVALL                                                      GERBIER, and DE BONNIERES,) consulted by
                                                                        the company. See a Collection of Tracts on the
DISSENT                                                                 French East Company, Paris, 1788, in the Library
                                                                        of Congress.
    Mr. Justice DUVALL dissented. 130
                                                                        [***260] [*714] Upon the suggestion of the
        130 In the discussions which arose in France in
                                                                 plaintiff's counsel, that the defendant had died since the
        1786, upon the new charter then recently granted
                                                                 last term, the Court ordered the judgment to be entered
        to the French East India Company, it seems to
                                                                 nunc pro tunc as of that term, as follows:
        have been taken for granted by the lawyers on
        both sides, to whom the questions in controversy              JUDGMENT. This cause came on to be heard on the
        were submitted by the Company, and by the                transcript of the record, and was argued by counsel. And
        merchants who considered themselves in jured by
                                                                                                                 Page 65
                                        17 U.S. 518, *714; 4 L. Ed. 629, **678;
                                      1819 U.S. LEXIS 330, ***260; 4 Wheat. 518

thereupon all and singular the premises being seen, and        thousand dollars: Whereupon it is considered, ordered,
by the Court now here fully understood, and mature             and [***261] adjudged by this Court, now here, that the
deliberation being thereupon had, [*715] it appears to         aforesaid judgment of the said Superior Court of
this Court, that the said acts of the legislature of           Judicature of the State of New-Hampshire be, and the
New-Hampshire, of the twenty-seventh of June and of the        same hereby is, reversed and annulled: And this Court
eighteenth and twenty-sixth of December, Anno Domini,          proceeding to render such judgment in the premises as
1816, in the record mentioned, are repugnant to the            the said Superior Court of Judicature ought to have
constitution of the United States, and so not valid; and,      rendered, it is further considered by this Court, now here,
therefore, that the said Superior Court of Judicature of the   that the said trustees of Dartmough College do recover
State of New-Hampshire erred in rendering judgment on          against the said William Woodward the aforesaid sum of
the said special verdict in favour of the said plaintiffs;     twenty thousand dollars, with costs of suit; and it is by
and that the said Court ought to have rendered judgment        this Court, now here, further ordered, that a special
thereon, that the said trustees recover against the said       mandate do go from this Court to the said Superior Court
Woodward, the amount of damages found and assessed,            of Judicature to carry this judgment into execution.
in and by the verdict aforesaid, viz. the sum of twenty
                                                                                                               Page 1

                    ENERGY RESERVES GROUP, INC. v. KANSAS POWER & LIGHT CO.

                                                      No. 81-1370

                                  SUPREME COURT OF THE UNITED STATES

                 459 U.S. 400; 103 S. Ct. 697; 74 L. Ed. 2d 569; 1983 U.S. LEXIS 16; 51 U.S.L.W.
4106; 50 P.U.R.4th 489; 76 Oil & Gas Rep. 593

                                              November 9, 1982, Argued
                                              January 24, 1983, Decided

PRIOR HISTORY:       APPEAL FROM THE                          that the Kansas Act violated the Contract Clause of the
SUPREME COURT OF KANSAS.                                      U.S. Constitution. The Court found that the Kansas Act
                                                              did not violate the Contract Clause because the natural
DISPOSITION:           230 Kan. 176, 630 P.2d 1142,          gas industry was highly regulated in order to protect
affirmed.                                                     consumers and the Kansas Act was rationally related to
                                                              that goal of protection.
CASE SUMMARY:
                                                              OUTCOME: The Court affirmed the judgment.

PROCEDURAL POSTURE: Petitioner oil company                    CORE TERMS: intrastate, escalator clause, natural gas,
challenged a finding by the Supreme Court of Kansas that      Kansas Act, redetermination, gas prices, interstate,
the Kansas Natural Gas Protection Act, Kan. Stat. Ann. §      ceiling, indefinite, contractual, ceiling price, lawful,
55-1401 et seq., did not violate the Contracts Clause of      contract price, pass-through, terminate, regulated,
the U.S. Constitution.                                        maximum, price increase, consumers, trigger, contractual
                                                              right, price ceilings, interstate commerce, substantial
OVERVIEW: A public utility entered into a contract            impairment, escalation, emergency, impaired, energy,
with an oil company to purchase gas at a set price. There     state law, public purpose
were two price escalators in the contract. First, if a
government fixed a price higher than that in the contract,    LexisNexis(R) Headnotes
the price would rise to that level. Also, the oil company
could determine a new price every two years based upon
market fluctuations. Then, Congress passed the Natural
Gas Policy Act of 1978 (Act), 15 U.S.C.S. § 3301 et seq.,
which allowed for computation of prices at the lower of       Constitutional Law > Congressional Duties & Powers >
those set in existing contracts or at a price fixed by the    Contracts Clause > General Overview
Act. Kansas then adopted the Kansas Natural Gas               Governments > Legislation > Effect & Operation >
Protection Act (Kansas Act), Kan. Stat. Ann. § 55-1401        Retrospective Operation
et seq., which permitted increases under escalator clauses.   Governments > State & Territorial Governments >
The oil company sought to terminate the contracts, but        Police Power
the utility refused. Thus, the oil company filed suit         [HN1] Although the language of the Contract Clause is
seeking declaratory relief. The oil company complained        facially absolute, its prohibition must be accommodated
                                                                                                                    Page 2
                                           459 U.S. 400, *; 103 S. Ct. 697, **;
                                       74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16

to the inherent police power of the state to safeguard the     SUMMARY:
vital interests of its people.
                                                                    A Kansas public utility entered into two intrastate
                                                               natural gas supply contracts with an energy company in
Constitutional Law > Congressional Duties & Powers >           1975. Each contract contained a governmental price
Contracts Clause > General Overview                            escalator clause, which provided that if a governmental
[HN2] The threshold inquiry is whether the state law has,      authority fixed a price for any natural gas that was higher
in fact, operated as a substantial impairment of a             than the price specified in the contract, the contract price
contractual relationship. The severity of the impairment is    was to be increased to that level. Each contract also
said to increase the level of scrutiny to which the            contained a price redetermination clause, which gave the
legislation will be subjected. Total destruction of            energy company the option to have the contract price
contractual expectations is not necessary for a finding of     redetermined no more than once every 2 years. If the
substantial impairment. On the other hand, state               price were increased pursuant to either of these clauses,
regulation that restricts a party to gains it reasonably       each contract required the utility to seek approval from
expected from the contract does not necessarily constitute     the Kansas Corporation Commission to pass the increase
a substantial impairment. In determining the extent of the     through to consumers. On December 1, 1978, the Natural
impairment, we are to consider whether the industry the        Gas Policy Act of 1978 (15 USCS 3301 et seq.) replaced
complaining party has entered has been regulated in the        earlier federal price controls, extended federal price
past.                                                          regulation to the intrastate gas market, and permitted
                                                               states to establish maximum prices for the first sale of
                                                               natural gas produced in a state. In direct response to the
Constitutional Law > Congressional Duties & Powers >
                                                               Act, the Kansas Legislature imposed price controls on the
Contracts Clause > General Overview
                                                               intrastate gas market. The state statute, which applied
[HN3] If the state regulation constitutes a substantial
                                                               only to contracts executed before 1977, prohibited
impairment, the State, in justification, must have a
                                                               consideration either of ceiling prices set by federal
significant and legitimate public purpose behind the
                                                               authorities or of prices paid in Kansas under other
regulation, such as the remedying of a broad and general
                                                               contracts in the application of governmental price
social or economic problem. Furthermore, the Court has
                                                               escalator clauses and price redetermination clauses. The
indicated that the public purpose need not be addressed to
                                                               state statute, however, permitted indefinite price escalator
an emergency or temporary situation.
                                                               clauses to operate after March 1, 1979, to raise the price
                                                               of old intrastate gas up to the ceiling price set by 109 of
Constitutional Law > Congressional Duties & Powers >           the federal Act (15 USCS 3319). The energy company
Contracts Clause > General Overview                            and other gas suppliers notified the public utility that gas
[HN4] Once a legitimate public purpose has been                prices would be escalated to the ceiling price set for
identified, the next inquiry is whether the adjustment of      newly discovered or newly produced natural gas under
the rights and responsibilities of contracting parties is      102 of the Act (15 USCS 3312) on December 1, 1978,
based upon reasonable conditions and is of a character         pursuant to the governmental price escalator clause.
appropriate to the public purpose justifying the               When the public utility never elected to pay the higher
legislation's adoption. Unless the State itself is a           price, the energy company notified the utility that it
contracting party, as is customary in reviewing economic       would terminate the contracts because the utility had
and social regulation, courts properly defer to legislative    failed to apply to the Kansas Corporation Commission
judgment as to the necessity and reasonableness of a           for pass-through authority within 5 days as required by
particular measure.                                            the contract, had failed to obtain approval by the
                                                               Commission, and had failed to pay the increased price.
DECISION:                                                      The energy company filed an action in a state District
                                                               Court, praying for a declaratory judgment that it had the
     Kansas statute regulating price of natural gas, held to   contractual right to terminate the contracts. The utility
not impair energy company's contracts with public utility      later rejected the energy company's request under the
in violation of contract clause.                               price redetermination clause for a price increase to the
                                                               102 ceiling price for newly discovered or newly produced
                                                                                                                      Page 3
                                            459 U.S. 400, *; 103 S. Ct. 697, **;
                                        74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16

natural gas, contending that the state statute had              clause in the contract was designed to guarantee price
extinguished the utility's obligation to comply with that       increases consistent with anticipated increases in the
clause. The energy company then filed an amended                value of the energy company's gas, which meant that the
complaint, alleging that it was entitled to terminate the       energy company did not expect to receive deregulated
contracts because of the utility's refusal to redetermine       prices, and where the contracts expressly recognized the
the price. The utility counterclaimed for a declaratory         existence of extensive regulation by providing that any
judgment that the contracts were still in effect. On the        contractual terms are subject to relevant present and
parties' cross-motions for summary judgment, the state          future state and federal law, suggesting that the energy
trial court held that the federal Act's imposition of price     company knew its contractual rights were subject to
ceilings on intrastate gas did not trigger the governmental     alteration by state price regulation; indefinite price
escalator clause. The trial court also found that the state     escalator clauses in natural gas contracts cannot exempt
statute did not violate the contract clause of the Federal      an energy company from all regulatory limitation of
Constitution (Art I, 10, cl 1). The Supreme Court of            prices; therefore, the price may be escalated only to the
Kansas affirmed (230 Kan 176, 630 P2d 1142).                    ceiling price prescribed by 109 of the Natural Gas Policy
                                                                Act (15 USCS 3319) and not to the ceiling price for new
      On appeal, the United States Supreme Court                natural gas prescribed by 102 of the Act (15 USCS 3312).
affirmed. In an opinion by Blackmun, J., joined by
Brennan, White, Marshall, Stevens, and O'Connor, JJ.,
and joined in part (all but holding 2 below) by Burger,               LAW §202 ;
Ch. J., and Powell and Rehnquist, JJ., it was held that (1)
                                                                     contract clause -- natural gas -- price control -- state
the state statute regulating the price of natural gas did not
                                                                statute -- ;
impair the energy company's contracts with the public
utility; (2) the state statute did not violate the contract         Headnote:[2A][2B][2C]
clause of the Federal Constitution (Art I, 10, cl 1) even if
it did impair the energy company's contractual interests;             A state statute regulating the price of natural gas
and (3) 105 of the Natural Gas Policy Act (15 USCS              does not violate the contract clause of the Federal
3315) did not trigger governmental price escalator              Constitution (Art I, 10, cl 1), even if the statute did
clauses automatically.                                          impair an energy company's contracts with a public
                                                                utility, where the statute rests on and is prompted by
     Powell, joined by Burger, Ch. J., and Rehnquist, J.,       significant and legitimate state interests in protecting
concurred, expressing the view that it was unnecessary          consumers from the escalation of natural gas prices
for the Supreme Court to address the question of whether,       caused by deregulation and in correcting the imbalance
if there were an impairment of contractual rights, it would     between the interstate and intrastate markets by
constitute a violation of the contract clause.                  permitting intrastate prices to rise only to the ceiling price
                                                                provided by 109 of the Natural Gas Policy Act (15 USCS
LAWYERS' EDITION HEADNOTES:
                                                                3319) and where the means chosen to implement these
                                                                purposes are not deficient, particularly in light of the
      LAW §257 ;                                                deference to which the state legislature's judgment is
                                                                entitled; the state statute, which is a temporary measure
     impairment of contract -- natural gas supply contract      that expires when federal price regulation of certain
-- price control -- state statute -- ;                          categories of gas terminates, is consistent with the
                                                                national policy toward gas regulation.
    Headnote:[1A][1B]

     A state statute regulating the price of natural gas              ENERGY §35 ;
does not impair an energy company's contractual rights
with a public utility or the energy company's reasonable            Natural Gas Policy Act -- price control --
expectations where the parties are operating in a heavily       governmental price escalator clause -- ;
regulated industry, where the parties included a statement
of intent in their contracts making clear that the escalator        Headnote:[3A][3B]
                                                                                                                         Page 4
                                            459 U.S. 400, *; 103 S. Ct. 697, **;
                                        74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16

     Section 105 of the Natural Gas Policy Act (15 USCS         contractual relationship; the severity of the impairment
3315), which regulates the ceiling price for sales of           increases the level of scrutiny to which the legislation
natural gas under existing intrastate contracts, does not       will be subjected; total destruction of contractual
automatically trigger governmental price escalator              expectations is not necessary for a finding of substantial
clauses, which provide that the contract price is to be         impairment; on the other hand, state regulation that
increased if a governmental authority fixes a price for any     restricts a party to gains it reasonably expected from the
natural gas that is higher than the price specified in the      contract does not necessarily constitute a substantial
contract, in existing contracts between an energy               impairment; in determining the extent of the impairment,
company and a public utility; 105 sets a ceiling for the        the court is to consider whether the industry the
operation of contractual provisions and it does not             complaining party has entered has been regulated in the
prescribe a price; the energy company is therefore not          past.
entitled to a price increase on December 1, 1978, and it
can rely only on a price redetermination clause, which
                                                                      LAW §128 ;
gives the energy company the option to have the contract
price redetermined no more than once every 2 years, for             contract clause -- justification of state -- legitimate
any increase.                                                   public purpose -- ;

                                                                    Headnote:[7]
      STATUTES §107 ;
                                                                     If a state regulation constitutes a substantial
    construction -- avoiding constitutional question -- ;
                                                                impairment of a contract, the state, in justification, must
    Headnote:[4A][4B]                                           have a significant and legitimate public purpose behind
                                                                the regulation such as the remedying of a broad and
     The United States Supreme Court will construe a            general social or economic problem; the public purpose
statute, if fairly possible, so as to avoid a constitutional    need not be addressed to an emergency or temporary
question.                                                       situation; one legitimate state interest is the elimination
                                                                of unforeseen windfall profits; the requirement of a
                                                                legitimate public purpose guarantees that the state is
      LAW §128 ;                                                exercising its police power, rather than providing a
                                                                benefit to special interests; once a legitimate public
    contract clause -- state police power -- ;
                                                                purpose has been identified, the next inquiry in
    Headnote:[5]                                                determining whether there is a violation of the contract
                                                                clause of the Federal Constitution (Art I, 10, cl 1) is
     Although the language of the contract clause of the        whether the adjustment of the rights and responsibilities
Federal Constitution (Art I, 10, cl 1) is facially absolute,    of contracting parties is based upon reasonable conditions
its prohibition must be accommodated to the inherent            and is of a character appropriate to the public purpose
police power of the state to safeguard the vital interests of   justifying the legislation's adoption; unless the state itself
its people.                                                     is a contracting party, courts properly defer to legislative
                                                                judgment as to the necessity and reasonableness of a
                                                                particular measure.
      LAW §207 ;

    contract clause -- threshold inquiry -- severity of               LAW §142 ;
impairment -- ;
                                                                    contract clause -- state as party to contract -- ;
    Headnote:[6]
                                                                    Headnote:[8A][8B]
     The threshold inquiry in determining whether a state
statute violates the contract clause of the Federal                  When a state itself enters into a contract, it cannot
Constitution (Art I, 10, cl 1) is whether the state law has     simply walk away from its financial obligations; when
in fact operated as a substantial impairment of a               the state is a party to the contract, complete deference to a
                                                                                                                     Page 5
                                             459 U.S. 400, *; 103 S. Ct. 697, **;
                                         74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16

legislative assessment of reasonableness and necessity is       to have the contract price redetermined no more than
not appropriate in determining whether a state law              once every two years by averaging the prices being paid
violates the contract clause of the Federal Constitution        under three other gas contracts chosen by the parties. If
(Art I, 10, cl 1), because the state's self-interest is at      the price is increased pursuant to either clause, each
stake.                                                          contract requires appellee, within specified time periods,
                                                                to seek from the Kansas Corporation Commission
                                                                (Commission) approval to pass the increase through to
      ENERGY §31 ;                                              consumers. If pass-through approval is refused and
                                                                appellee elects not to pay the increase, appellant has the
    natural gas -- price control -- state statute -- ;
                                                                option to terminate the agreement. Pursuant to the price
    Headnote:[9A][9B]                                           redetermination clauses, the parties agreed on a higher
                                                                price to be effective November 27, 1977, the Commission
      A state statute regulating the price of natural gas has   approved the pass-through of the increase to consumers,
a legitimate public purpose and is not special interest         and appellee paid the new price through 1978. Effective
legislation designed to benefit a public utility where,         December 1, 1978, the Natural Gas Policy Act of 1978
given the nature of the industry, with sales to public          replaced earlier federal price controls for interstate
utilities, it is impossible for any regulation not to have a    natural gas with gradually increasing price ceilings,
major effect on a small number of participants, where           including a ceiling for newly discovered or newly
there is no indication that the political process has broken    produced gas (§ 102) and a lower ceiling for categories of
down, and where the public utility will not benefit             gas not otherwise covered by the Act (§ 109). The Act
significantly from the statute due to the automatic price       also extended federal price regulation to the intrastate gas
pass-through adjustment, which requires the utility to          market, providing in § 105(b)(1) that the ceiling price for
seek approval from a state commission to pass the               intrastate gas shall be the lower of the § 102 price and
increase through to consumers.                                  "the price under the terms of the existing contract, to
                                                                which such natural gas was subject on [November 9,
                                                                1978]." As authorized by the federal Act, the Kansas
      ERROR §727 ;                                              Natural Gas Price Protection Act was enacted in May
                                                                1979, imposing price controls on the intrastate gas market
    natural gas supply contract -- interpretation of state
                                                                with regard to contracts executed before April 20, 1977,
law -- deference by United States Supreme Court -- ;
                                                                and prohibiting consideration either of ceiling prices set
    Headnote:[10]                                               by federal authorities or of prices paid in Kansas under
                                                                other contracts in the application of governmental price
    A state Supreme Court's holding that particular             escalator and price redetermination clauses. However,
governmental price escalator clauses in natural gas             the Kansas Act permits indefinite price escalator clauses
supply contracts between an energy company and a                to operate after March 1, 1979, to raise the price of "old"
public utility were insufficient to escalate the gas price is   intrastate gas up to the federal Act's § 109 ceiling price.
an interpretation of state law to which the United States       In November 1978 appellant notified appellee that gas
Supreme Court defers.                                           prices would be escalated to the § 102 price pursuant to
                                                                the governmental price escalator clauses, but appellee,
SYLLABUS                                                        after failing to obtain pass-through approval because of
                                                                its failure to file a timely application with the
      In 1975, appellee public utility entered into two         Commission, elected not to pay the higher price and
intrastate        contracts         with          appellant's   appellant then sought to terminate the contracts. When
predecessor-in-interest to purchase wellhead and residue        appellee contended that the governmental price escalator
gas from a certain gas field. Each contract contains a          clauses were not triggered by the federal Act and that the
"governmental price escalator clause," which provides           Kansas Act prohibited their activation, appellant filed suit
that if any governmental authority fixes a price for any        in a Kansas state court, seeking a declaratory judgment
natural gas that is higher than the contract price, the         that it had the contractual right to terminate the contracts.
contract price shall be increased to that level, and a "price   Appellee later rejected appellant's request under the price
redetermination clause," which gives appellant the option       redetermination clauses for a price increase, to be
                                                                                                                   Page 6
                                           459 U.S. 400, *; 103 S. Ct. 697, **;
                                       74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16

effective in November 1979, contending that the Kansas              (c) To the extent, if any, the Kansas Act impairs
Act had extinguished appellee's obligation to comply           appellant's contractual interests, it rests on significant
with those clauses. Appellant then filed an amended            state interests in protecting consumers from the
complaint, alleging that it was entitled to terminate the      escalation of natural gas prices caused by deregulation
contracts because of appellee's refusal to redetermine the     and in correcting the imbalance between the interstate
price. Appellee counterclaimed for a declaratory               and intrastate markets by permitting the intrastate prices
judgment that the contracts were still in effect. The trial    to rise only to the § 109 level. Nor are the means chosen
court entered summary judgment for appellee, holding           to implement these purposes deficient, particularly in
that the federal Act's imposition of price ceilings on         light of the deference to which the Kansas Legislature's
intrastate gas did not trigger the governmental price          judgment is entitled. Pp. 416-419.
escalator clauses, and that the Kansas Act did not violate
the Contract Clause of the Federal Constitution. The                2. The Kansas Supreme Court did not err in holding
Kansas Supreme Court affirmed.                                 that the enactment of § 105 of the federal Act did not
                                                               trigger the governmental price escalator clauses in these
    Held:                                                      contracts so as to entitle appellant to a price increase on
                                                               December 1, 1978. As a matter of federal statutory
    1. The Kansas Act does not impair appellant's              interpretation, the federal Act does not trigger such
contracts with appellee in violation of the Contract           clauses automatically. By the language of § 105(b)(1),
Clause, and thus the contract price may be escalated           Congress set a ceiling for the operation of contractual
under either escalator clause only to the ceiling under §      provisions; it did not prescribe a price. And the Kansas
109 of the federal Act, not to the § 102 ceiling. Pp.          Supreme Court's holding that the particular governmental
409-419.                                                       price escalator clauses involved here were insufficient to
                                                               escalate the gas price is an interpretation of state law to
     (a) The Contract Clause's prohibition of any state law    which this Court defers. Pp. 419-420.
impairing the obligation of contracts must be
accommodated to the State's inherent police power to           COUNSEL: Gary W. Davis argued the cause for
safeguard the vital interests of its people. The threshold     appellant. With him on the briefs were Martin W. Bauer,
inquiry is "whether the state law has, in fact, operated as    Clark Mandigo, Edwin W. Parker II, I. Michael
a substantial impairment of a contractual relationship."       Greenberger, and Nancy J. Bregstein.
Allied Structural Steel Co. v. Spannaus, 438 U.S. 234,
244. If a substantial impairment is found, the State, in       Basil W. Kelsey argued the cause for appellee. With him
justification, must have a significant and legitimate          on the brief were Jerome T. Wolf, Terry W. Schackmann,
public purpose behind the regulation. Once such a              and David S. Black. *
purpose has been identified, the adjustment of the
contracting parties' rights and responsibilities must be              * Briefs of amici curiae urging affirmance were
based upon reasonable conditions and must be of a                     filed by Brian J. Moline, Special Assistant
character appropriate to the public purpose justifying the            Attorney General of Kansas, for the State
legislation's adoption. Pp. 410-413.                                  Corporation Commission of the State of Kansas;
                                                                      by William E. Metcalf and Patrick H. Donahue
     (b) Here, the Kansas Act has not impaired                        for Kansas Legal Services, Inc.; by Jan Eric
substantially appellant's contractual rights. The parties             Cartwright, Attorney General of Oklahoma,
are operating in a heavily regulated industry, and the                Robert D. Stewart, Jr., and Eddie M. Pope for the
statement of intent in their contracts made clear that the            Oklahoma Corporation Commission; and by
escalator clauses were designed to guarantee price                    Dennis G. Lyons, Mark J. Spooner, John L.
increases consistent with anticipated regulated increases             Arrington, Jr., Curtis M. Long, Jay M. Galt, and
in the value of appellant's gas, not that appellant expected          Harry W. Birdwell for Oklahoma Natural Gas Co.
to receive deregulated prices. Moreover, the contract                 et al.
provision making any contractual term subject to relevant
present and future state and federal law suggests that         JUDGES: BLACKMUN, J., delivered the opinion of the
appellant knew its contractual rights were subject to          Court, in which BRENNAN, WHITE, MARSHALL,
alteration by state price regulation. Pp. 413-416.             STEVENS, and O'CONNOR, JJ., joined, and in all but
                                                                                                                 Page 7
                                           459 U.S. 400, *; 103 S. Ct. 697, **;
                                       74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16

Part II-C of which BURGER, C. J., and POWELL and                    states:
REHNQUIST, JJ., joined. POWELL, J., filed an opinion
concurring in part, in which BURGER, C. J., and                          "If any federal or Kansas regulatory or
REHNQUIST, J., joined, post, p. 421.                                governmental authority having jurisdiction in the
                                                                    premises shall at any time hereafter fix a price per
OPINION BY: BLACKMUN                                                MCF applicable to any natural gas of any vintage
                                                                    produced in Kansas, higher than the contract price
OPINION                                                             then in effect under this gas contract, the price to
                                                                    be paid for gas thereafter shall be increased to
     [*403]    [***575]      [**700]      JUSTICE                   equal such regulated price. In that event, the
BLACKMUN delivered the opinion of the Court.                        increased price shall be effective as of the date of
                                                                    action of the governmental or regulatory authority
      This case concerns the regulation by the State of             establishing the regulated price, or its effective
Kansas of the price of natural gas sold at wellhead in the          date, whichever is later . . . ." App. to Juris.
intrastate market. It presents a federal Contract Clause            Statement 66a.
issue and a statutory issue.                                        2 The price redetermination provision states in
                                                                    relevant part:
    I
                                                                         "SELLER shall have the option to cause the
      On September 27, 1975, The Kansas Power & Light
                                                                    price being paid for its gas by BUYER to be
Company (KPL), a public utility and appellee here,
                                                                    redetermined every two years, beginning in 1977.
entered into two intrastate natural gas supply contracts
                                                                    The request for a price redetermination shall be
with Clinton Oil Company, the predecessor-in-interest of
                                                                    given in writing by SELLER to BUYER not later
appellant Energy Reserves Group, Inc. (ERG). Under the
                                                                    than 120 days prior to the beginning of the
first contract, KPL agrees to purchase gas directly at the
                                                                    Contract Year for which the price redetermination
wellhead on the Spivey-Grabs Field in Kingman and
                                                                    is requested. . . .
Harper Counties in southern Kansas. The second
contract obligates KPL to purchase from the same field                   ". . . Within the same one hundred twenty
residue gas, that is, gas remaining after certain recovery          (120) days following SELLER'S request for a
and processing steps are completed. The original                    price redetermination, the parties shall mutually
contract price was $ 1.50 per thousand cubic feet (Mcf)             redetermine the price by considering three (3)
of gas. The contracts continue in effect for the life of the        contracts under which the highest prices are
field or for the life of the processing plants associated           actually being paid for flowing gas ninety (90)
with the field.                                                     days prior to the date the redetermined price is to
                                                                    be effective. The contracts to be considered shall,
    A
                                                                    (a) have a primary term of one (1) or more years,
     Each contract contains two clauses known                       (b) be for gas produced in Kansas, (c) be for gas
generically as indefinite price escalators. The first is a          purchased by an interstate or intrastate company
governmental price escalator clause; this provides that if          selling or using an average daily volume of 5,000
a governmental authority fixes a price for any natural gas          MCF or more of gas for the twelve (12) months
that is higher than the price specified in the contract, the        period ending ninety (90) days prior to the date
contract price shall be increased to that level. 1 The              the redetermined price is to be effective, (d) not
second is a price redetermination [*404] [***576]                   be for the purchase of Spivey-Grabs Field gas by
clause; this gives ERG the option to have the contract              BUYER under contracts dated in 1975, (e) not
price redetermined no more than once every two years. 2             include more than one contract of any one
The new price is then [**701] set by averaging the                  purchaser in any one field, and (f) not be for a
prices being paid under three other gas contracts chosen            price then subject to regulatory suspense or
by the parties.                                                     refunds. . . .

        1   The governmental price escalator provision                  "After the BUYER and SELLER have
                                                                    decided on the three contracts and appropriate
                                                                                                                   Page 8
                                       459 U.S. 400, *404; 103 S. Ct. 697, **701;
                                     74 L. Ed. 2d 569, ***576; 1983 U.S. LEXIS 16

        prices to be used from each one for this              federal price controls that had been established under the
        redetermination, the weighted average price per       Natural Gas Act, ch. 556, 52 Stat. 821, with price ceilings
        MCF being paid under the three contracts shall be     that rise monthly based on "an inflation adjustment
        calculated. This price shall become the               factor" and other considerations. Different ceilings are
        redetermined price to be paid by BUYER to             set for different types of gas. Section 102 of the Act, 15
        SELLER." Id., at 67a-68a.                             U. S. C. § 3312 (1976 ed., Supp. V), sets a gradually
                                                              increasing ceiling price for newly discovered or newly
      When the price is increased pursuant to either of       produced natural gas. The December 1978 ceiling price
these clauses, each contract requires KPL to seek from        under § 102 was [*406] $ 2.078 per million British
the Kansas Corporation Commission (Commission)                thermal units. Section 104 sets ceiling prices for "old"
approval to pass the increase through to consumers. App.      interstate gas, that is, gas from already discovered and
to Juris. Statement 69a. The application for approval is to   producing wells. Section 109 sets another ceiling price
be submitted within 5 days after a price increase resulting   for categories of natural gas not covered by the other
from governmental action, [*405] or no fewer than 60          sections of the Act. As of December 1978, the § 109
days before a price redetermination increase is to become     ceiling price was $ 1.63 per million Btu's.
effective. Ibid. If the Commission refuses to permit the
pass-through and KPL elects not to pay the increase,               In another departure from the 1938 Natural Gas Act,
ERG has the option to terminate the agreement on 30           the new Act extended federal price regulation to the
days' written notice.                                         intrastate gas market. See S. Conf. Rep. No. 95-1126, pp.
                                                              67-68 [**702] (1978); H. R. Conf. Rep. No. 95-1752,
     Each contract states that the purpose of the price       pp. 67-68 (1978). Section 105 of the Act establishes the
escalator clauses is "solely" to compensate ERG for           rule for applying price ceilings to intrastate gas, described
"anticipated" increases in its operating costs and in the     as gas not committed to interstate commerce on
value of its gas. Id., at 70a. Each contract also provides:   November 8, 1978. 4 It provides, in its subsection (b)(1),
"Neither party shall be held in default for failure to        that the maximum lawful price of such gas "shall be the
perform hereunder if such failure is due to compliance        lower of . . . the price under the terms of the existing
with," ibid., any "relevant present and future state and      contract, to which such natural gas was subject on
federal laws." Id., at 69a.                                   [November 9, 1978], . . . or . . . the maximum lawful
                                                              price . . . computed for such month under section 102
     In 1977, ERG invoked the price redetermination           (relating to new natural gas)." 5 The parties agree that §
clause, and the parties agreed on a price of $ 1.77 per       105(b)(1) governs these contracts.
Mcf, effective November 27 of that year. The
Commission approved the pass-through of this increase                4 In pertinent part, § 105 provides:
to consumers. KPL paid the new price through 1978. 3
                                                                          "(a) Application. -- The maximum lawful
        3 On June 9, 1978, the Commission gave KPL                   price computed under subsection (b) shall apply
        permission to implement a purchased-gas price                to any first sale of natural gas delivered during
        adjustment. This authorized an automatic                     any month in the case of natural gas, sold under
        pass-through to consumers of wholesale gas cost              any existing contract or any successor to an
        increases upon written notice to the Commission.             existing contract, which was not committed or
        The Commission retained authority to review and              dedicated to interstate commerce on the day
        revoke any pass-through under its normal                     before the enactment of this Act.
        standards for reviewing rate increases.
                                                                          "(b) Maximum lawful price. --
    B
                                                                          "(1) General rule. -- Subject to paragraphs (2)
     [***577] On December 1, 1978, the Natural Gas                   and (3), the maximum lawful price under this
Policy Act of 1978 (Act), Pub. L. 95-621, 92 Stat. 3350,             section shall be the lower of --
15 U.S. C. § 3301 et seq. (1976 ed., Supp. V), designed
in principal part to encourage increased natural gas                     "(A) the price under the terms of the existing
production, became effective. The Act replaced the                   contract, to which such natural gas was subject on
                                                                                                                     Page 9
                                       459 U.S. 400, *406; 103 S. Ct. 697, **702;
                                     74 L. Ed. 2d 569, ***577; 1983 U.S. LEXIS 16

        the date of the enactment of this Act [November                Although KPL purchases a sizable portion of the
        9, 1978], as such contract was in effect on such               gas affected by the Kansas Act, there are other
        date; or                                                       purchasers as well. Moreover, as indicated in n.
                                                                       3, supra, KPL already had obtained from the
             "(B) the maximum lawful price, per million                Commission a purchased-gas price adjustment
        Btu's, computed for such month under section 102               that allowed it to pass through to its customers
        (relating to new natural gas)."                                any gas cost increase.
        5 Section 105(b)(2) applies to contracts under                 7       Section 55-1404 provides, with certain
        which the price of gas on November 9, 1978,                    exceptions, that "on or after December 1, 1978,
        exceeded the § 102 price.                                      the price allowed to be paid pursuant to federal
                                                                       legislation or any regulation by an agency
       The Act, by § 602(a), also permits a State "to                  implementing such legislation, or the price paid or
establish or enforce any maximum lawful price for the                  to be paid for any sale of natural gas in the state of
first sale of natural [*407] gas produced in such State                Kansas shall not be taken into account in applying
which does not exceed the applicable maximum lawful                    any indefinite price escalator clause contained in
price, if any, under title I of this Act."                             any gas purchase contract subject to this act, to
                                                                       the extent that such contract provides for the sale
    C
                                                                       in the state of Kansas, of gas produced within this
     In direct response to the Act, the Kansas Legislature             state which was not committed or dedicated to
promptly imposed [***578] price controls on the                        interstate commerce on November 8, 1978. This
intrastate gas market. In May 1979, the Kansas Natural                 section shall not require a reduction of any price
Gas Price Protection Act (Kansas Act), 1979 Kan. Sess.                 contained in any gas purchase contract subject to
Laws, ch. 171, codified as Kan. Stat. Ann. §§ 55-1401 to               this act below the price actually paid prior to the
55-1415 (Supp. 1982), was enacted. 6 The Kansas Act                    date of enactment of this act."
applies only to natural gas contracts executed before
                                                                   D
April 20, 1977, § 55-1403, and controls natural gas prices
until December 31, 1984, § 55-1411. Section 55-1404                On November 20, 1978, ERG and other gas suppliers
prohibits consideration either of ceiling prices set by       having similar contracts with [**703] KPL notified KPL
federal authorities or of prices paid in Kansas under other   that gas prices would be escalated to the § 102 price on
contracts in the application of governmental price            December 1, pursuant to the governmental price escalator
escalator clauses and price redetermination clauses. 7        clause. KPL sought pass-through approval from the
Section [*408] 55-1405 of the Kansas Act, however,            Commission for this increase by an application filed
permits indefinite price escalator clauses to operate after   December 7, one day too late to satisfy the 5-day
March 1, 1979, to raise the price of old intrastate gas up    contractual requirement. KPL never elected to pay the
to the federal Act's § 109 ceiling price. Section § 55-1406   higher price.
exempts new gas and gas from stripper wells.
                                                                   On June 5, 1979, ERG notified KPL that it would
        6 ERG asserts that the Kansas Act is special          terminate the contracts within 30 days because KPL had
        interest legislation designed to permit KPL to        failed to apply to the Commission for pass-through
        avoid gas price increases and to aid KPL in this      authority within five days of December 1, 1978, had
        and other litigation. ERG notes that KPL              failed to obtain Commission approval, and had failed to
        supported the bill, that the Special Joint            pay the increased price ERG contends was required by
        Committee approved the bill by only a narrow          the governmental price escalator clause. KPL's response
        margin, and that several members of the               was that the clause was not triggered by the Act and that
        Committee's minority believed the bill to be          the Kansas Act prohibited its activation. ERG then filed
        special interest legislation. Brief for Appellant
                                                              an action in the District Court of Harper County, Kan.,
        9-12. The bill, however, was supported by the         praying for a declaratory judgment that it had the
        Governor, labor unions, farmers, and municipal        contractual right to terminate the contracts.
        representatives, and was passed by substantial
        margins in both Houses of the Kansas Legislature.          [***579] On July 24, in light of KPL's refusal to
                                                                                                                   Page 10
                                        459 U.S. 400, *408; 103 S. Ct. 697, **703;
                                      74 L. Ed. 2d 569, ***579; 1983 U.S. LEXIS 16

terminate, ERG requested an increase up to the Act's §          if § 105's enactment did have that effect, ERG was
102 ceiling price under the price redetermination clause.       entitled to a price increase on December 1, 1978. If not,
The increase was to be effective in November 1979, the          ERG could rely only on the price redetermination clause
next redetermination date possible under the contracts.         for any increase. That clause could not be exercised until
KPL conceded that the price redetermination clause              November 1979. The [*410] statutory issue thus
permitted such an increase, but contended that § 55-1404        controls the timing of any increase. The constitutional
of the Kansas Act had extinguished the utility's obligation     issue, on the other hand, affects the price that ERG may
to comply with that clause. ERG then filed an amended           claim under either clause. If ERG prevails, the price may
complaint, alleging that it was entitled to terminate the       be escalated to the § 102 ceiling; if ERG does not prevail,
contracts because of KPL's refusal to redetermine [*409]        the price may be escalated only to the § 109 ceiling. We
the price. KPL counterclaimed for a declaratory                 consider the Contract Clause issue first. 10
judgment that the contracts were still in effect.
                                                                       9 "No State shall . . . pass any . . . Law impairing
     On the parties' cross-motions for summary judgment,               the Obligation of Contracts . . . ."
the state trial court held that the Act's imposition of price
ceilings on intrastate gas did not trigger the governmental          [***LEdHR4A] [4B]
escalator clause. It also found that the Kansas Act did not
                                                                       10 If fairly possible, we of course construe a
violate the Contract Clause, reasoning that Kansas has a
                                                                       statute so as to avoid a constitutional question.
legitimate interest in addressing and controlling the
                                                                       Machinists v. Street, 367 U.S. 740, 749-750
serious economic dislocations that the sudden increase in
                                                                       (1961). Because, however, the statutory issue
gas prices would cause, and that the Kansas Act
                                                                       affects only the operation of the governmental
reasonably furthered that interest. App. to Juris.
                                                                       price escalator clause, its resolution in no way
Statement 25a, 42a, 45a. The Supreme Court of Kansas,
                                                                       obviates the need to scrutinize the Kansas Act
by unanimous vote, affirmed. 230 Kan. 176, 630 P. 2d
                                                                       under the Contract Clause.
1142 (1981). 8 We noted probable jurisdiction. 456 U.S.
904 (1982).                                                          [***580] [**704] A
         8 The court held that an emergency situation
                                                                  [***LEdHR5] [5][HN1] Although the language of the
         existed because the anticipated sudden escalation
                                                                Contract Clause is facially absolute, its prohibition must
         of intrastate gas prices threatened to boost
                                                                be accommodated to the inherent police power of the
         dramatically both gas and electricity utility rates.
                                                                State "to safeguard the vital interests of its people." Home
         The court suggested that because ERG had not
                                                                Bldg. & Loan Assn. v. Blaisdell, 290 U.S. 398, 434
         attempted to exercise the price redetermination
                                                                (1934).In Blaisdell, the Court approved a Minnesota
         clause prior to the date of enactment, the Kansas
                                                                mortgage moratorium statute, even though the statute
         Act was being applied only prospectively. The
                                                                retroactively impaired contract rights. The Court
         court concluded, however, that the State's interest
                                                                balanced the language of the Contract Clause against the
         and chosen means could justify a retroactive
                                                                State's interest in exercising its police power, and
         application. 230 Kan., at 189-190, 630 P. 2d, at
                                                                concluded that the statute was justified. 11
         1153.
                                                                       11 The Court listed five factors that were then
    II
                                                                       deemed to be significant in its analysis: whether
        [***LEdHR1A] [1A] [***LEdHR2A] [2A]                            the Act (1) was an emergency measure; (2) was
[***LEdHR3A] [3A] [***LEdHR4A] [4A]ERG raises                          one to protect a basic societal interest, rather than
both statutory and constitutional issues in challenging the            particular individuals; (3) was tailored
ruling of the Kansas Supreme Court. The constitutional                 appropriately to its purpose; (4) imposed
issue is whether the Kansas Act impairs ERG's contracts                reasonable conditions; and (5) was limited to the
with KPL in violation of the Contract Clause, U.S.                     duration of the emergency. 290 U.S., at 444-447.
Const., Art. I, § 16, cl. 1. 9 The statutory issue is whether
                                                                    The Court in two recent cases has addressed Contract
the federal enactment of § 105 triggered the
                                                                Clause claims. In United States Trust Co. v. New Jersey,
governmental price escalator clause. As to the latter issue,
                                                                                                                Page 11
                                      459 U.S. 400, *410; 103 S. Ct. 697, **704;
                                  74 L. Ed. 2d 569, ***LEdHR5; 1983 U.S. LEXIS 16

431 U.S. 1 (1977), the Court held that New Jersey could       public purpose behind the regulation, United [*412]
not retroactively alter a statutory bond covenant relied      States Trust Co., 431 U.S., at 22, such as the remedying
upon by bond purchasers. One year later, in Allied            of a broad and general social or economic [**705]
Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978),        problem. Allied Structural Steel Co., 438 U.S., at 247,
the Court invalidated a Minnesota statute that required an    249. Furthermore, since Blaisdell, the Court has indicated
employer who closed its office in the State to pay a          that the public purpose need not be addressed to an
"pension funding charge" if its [*411] pension fund at        emergency or temporary situation. United States Trust
the time was insufficient to provide full benefits for all    Co., 431 U.S., at 22, n. 19; Veix v. Sixth Ward Bldg. &
employees with at least 10 years' seniority. 12 Although      Loan Assn., 310 U.S., at 39-40. One legitimate state
the legal issues and facts in these two cases differ in       interest is the elimination of unforeseen windfall profits.
certain ways, they clarify the appropriate Contract Clause    United States Trust Co., 431 U.S., at 31, n. 30. The
standard.                                                     requirement of a legitimate public purpose guarantees
                                                              that the State is exercising its police power, rather than
       12 See also Malone v. White Motor Corp., 444           providing a benefit to special interests. 13
U.S. 911 (1979), summarily aff'g 599 F.2d 283
       (CA8).                                                        13 In Allied Structural Steel Co. v. Spannaus,
                                                                     the Court held that the Minnesota pension law
                                                                     severely impaired established contractual relations
                                                                     between employers and employees. The State had
   [***LEdHR6] [6][HN2] The threshold inquiry is                     not acted to meet an important general social
"whether the state law has, in fact, operated as a                   problem. The pension statute had a very narrow
substantial impairment of a contractual relationship."               focus: it was aimed at specific employers. Indeed,
Allied Structural Steel Co., 438 U.S., at 244.See United             it even may have been directed at one particular
States Trust Co., 431 U.S., at 17. The severity of the               employer planning to terminate its pension plan
impairment is said to increase the level of scrutiny to              when its collective-bargaining agreement expired.
which the legislation will be subjected. Allied Structural           See 438 U.S., at 247-248, and n. 20.
Steel Co., 438 U.S., at 245. Total destruction of
contractual expectations is not necessary for a finding of
substantial impairment. United States Trust Co., 431
U.S., at 26-27. On the other hand, state regulation that        [***LEdHR8A] [8A][HN4] Once a legitimate public
restricts a party to gains it reasonably expected from the    purpose has been identified, the next inquiry is whether
contract does not necessarily constitute a substantial        the adjustment of "the rights and responsibilities of
impairment. Id., at 31, citing El Paso v. Simmons, 379        contracting parties [is based] upon reasonable conditions
U.S. 497, 515 (1965). In determining the extent of the        and [is] of a character appropriate to the public purpose
impairment, we are to consider whether the industry the       justifying [the legislation's] adoption." United States
complaining party has entered has been regulated in the       Trust Co., 431 U.S., at 22. Unless the State itself is a
past. Allied Structural Steel Co., 438 U.S., at 242, n. 13,   contracting party, see id., at 23, 14 "[as] is customary in
citing Veix v. Sixth Ward Bldg. & Loan Assn., 310 U.S.        reviewing [*413] economic and social regulation, . . .
32, 38 (1940) ("When he purchased into an enterprise          courts properly defer to legislative judgment as to the
already regulated in the particular to which he now           necessity and reasonableness of a particular measure."
objects, he purchased subject to further legislation upon     Id., at 22-23.
the same topic"). The Court long ago observed: "One
whose rights, such as they are, [***581] are subject to        [***LEdHR8A] [8B]
state restriction, cannot remove them from the power of
the State by making a contract about them." Hudson                   14     See generally Note, A Process-Oriented
Water Co. v. McCarter, 209 U.S. 349, 357 (1908).                     Approach to the Contract Clause, 89 Yale L. J.
                                                                     1623, 1647-1648 (1980) (distinguishing public
   [***LEdHR7] [7][HN3] If the state regulation                      from private contracts). In United States Trust
constitutes a substantial impairment, the State, in                  Co., but not in Allied Structural Steel Co., the
justification, must have a significant and legitimate                State was one of the contracting parties. When a
                                                                                                               Page 12
                                         459 U.S. 400, *413; 103 S. Ct. 697, **705;
                                   74 L. Ed. 2d 569, ***LEdHR8A; 1983 U.S. LEXIS 16

         State itself enters into a contract, it cannot simply     sale of natural gas in furtherance of conservation
         walk away from its financial obligations. In              goals. See Ohio Oil Co. v. Indiana, 177 U.S. 190,
         almost every case, the Court has held a                   210 (1900); see also 5 E. Kuntz, Law of Oil and
         governmental unit to its contractual obligations          Gas § 70.2, p. 307 (1978); cf. Henderson Co. v.
         when it enters financial or other markets. See            Thompson, 300 U.S. 258, 266 (1937) (state statute
         United States Trust Co., 431 U.S., at 25-28; W. B.        retrospectively regulating the contractual sale of
         Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935);             natural gas containing different amounts of
         Murray v. Charleston, 96 U.S. 432 (1878). But             hydrogen sulfide does not violate Contract Clause
         see Faitoute Iron & Steel Co. v. City of Asbury           of Texas Constitution). On several occasions, the
         Park, 316 U.S. 502 (1942). When the State is a            Court has approved state price regulation of
         party to the contract, "complete deference to a           natural gas that did not interfere with interstate
         legislative assessment of reasonableness and              commerce. See, e. g., Phillips Petroleum Co. v.
         necessity is not appropriate because the State's          Oklahoma, 340 U.S. 190 (1950); Cities Service
         self-interest is at stake." United States Trust Co.,      Gas Co. v. Peerless Oil & Gas Co., 340 U.S. 179
         431 U.S., at 26. In the present case, of course, the      (1950); Pennsylvania Gas Co. v. Public Service
         stricter standard of United States Trust Co. does         Comm'n, 252 U.S. 23 (1920); 5 E. Kuntz, supra, §
         not apply because Kansas has not altered its own          75.2, p. 371.
         contractual obligations.                                  17 Kansas in the past has regulated the wellhead
                                                                   price of natural gas. See Cities Service Gas Co. v.
     B                                                             State Corporation Comm'n, 355 U.S. 391 (1958),
                                                                   rev'g 180 Kan. 454, 304 P.2d 528 (1956).
  [***LEdHR1A] [1B]The threshold determination is                  Although this Court struck down the
whether the Kansas Act has impaired [***582]                       Commission's earlier attempt to set a wellhead
substantially ERG's contractual rights. Significant here is        price, it apparently did so because the price
the fact that the parties are operating in a heavily               regulation extended to gas in interstate commerce.
regulated industry. 15 See Veix v. Sixth Ward Bldg. &              See 355 U.S., at 392, citing Phillips Petroleum
Loan Assn., 310 U.S., at 38. State authority to regulate           Co. v. Wisconsin, 347 U.S. 672 (1954), and
natural gas prices is well established. See Cities Service         Natural Gas Pipeline Co. v. Panoma Corp., 349
Gas Co. v. Peerless Oil & Gas Co., 340 U.S. 179 (1950).            U.S. 44 (1955); see n. 16, supra. The instant case
16 [**706] At the time of the execution of these                   does not raise a Commerce Clause issue because
contracts, Kansas did not regulate natural gas prices              the parties agree that the gas is not in interstate
specifically, 17 but its supervision [*414] of the industry        commerce and because Congress, by § 602,
was extensive and intrusive. 18 Moreover, under the                authorized the State to regulate its price. See S.
authority of § 5(a) of the 1938 Natural Gas Act, the               Conf. Rep. No. 95-1126, p. 125 (1978) ("The
Federal Power Commission (FPC) set "just and                       Congress . . . is ceding its authority under the
reasonable" rates for prices of gas both at the wellhead           commerce clause of the Constitution to regulate
and in pipelines. Although prices in the intrastate market         prices for such production to affected States"); H.
have diverged somewhat from those in the interstate                R. Conf. Rep. No. 95-1752, p. 125 (1978) (same).
[***583] market due to the recent shortage of natural              18 For more than 75 years now, Kansas has
gas, 19 the regulation of interstate prices effectively limits     regulated     the     production,     transportation,
intrastate price increases. 20                                     distribution, and sale of natural gas. See Cities
                                                                   Service Gas Co. v. State Corporation Comm'n,
         15      In addition to the Kansas and federal             222 Kan. 598, 609-610, 567 P.2d 1343, 1352
         regulations, 38 States regulate various aspects of        (1977).
         gas production and sale. See Interstate Oil               19     Because of the shortage, some gas was
         Compact Commission, Summary of State Statutes             diverted to the intrastate market where consumers
         and Regulations for Oil and Gas Production                were willing to pay higher prices. "As the FPC
         (1979).                                                   price ceiling dropped below market levels
         16 For some time, the Court has recognized the            prevailing in the intrastate sector, new gas supply
         validity of state regulation of the production and        has increasingly gravitated toward the latter."
                                                                                                                  Page 13
                                       459 U.S. 400, *414; 103 S. Ct. 697, **706;
                                     74 L. Ed. 2d 569, ***583; 1983 U.S. LEXIS 16

       Federal Trade Commission, Staff Report of the           the price redetermination clause indicates that the
       Bureau of Economics, J. Mulholland, The                 contracts were structured against the background of
       Economic Structure and Behavior in the Natural          regulated gas prices. If deregulation had not occurred,
       Gas Production Industry 10 (1979) (footnote             the contracts undoubtedly would have called for a much
       omitted); see Executive Office of the President,        smaller price [**707] increase than that provided by the
       The National Energy Plan 18 (1977), reprinted in        Kansas Act's adoption of the § 109 ceiling. 21
       1 National Energy Plan, 95th Congress:
       Legislative History of the National Energy Acts                21 Absent deregulation, the existing interstate
       of 1978 (item 5) (1979); Comment, For Gas,                     price would have continued to act as a brake on
       Congress Spells Relief N-G-P-A: An Analysis of                 increases ERG could obtain under the price
       the Natural Gas Policy Act of 1978, 40 U. Pitt. L.             redetermination clause. As has been noted, the
       Rev. 429, 434 (1979). The Emergency Natural                    originally specified contract price was $ 1.50 per
       Gas Act of 1977, § 6(a), Pub. L. 95-2, 91 Stat. 7,             Mcf. App. to Juris. Statement 66a. Under the
       addressed this problem by extending federal price              contract, ERG was entitled to an increase of two
       regulation to the intrastate market during a                   cents per Mcf each year absent a price
       Presidentially declared emergency.             These           redetermination in excess of that amount. Ibid. A
       emergency provisions were carried forward in §                 price redetermination occurred in November
       302(a) of the 1978 Act.                                        1977, and by November 1978, the contract price
       20 "Even if the gas can be sold intrastate, FPC                had risen to $ 1.77 per Mcf. The July 1982 § 109
       price ceilings will indirectly affect price levels in          price ceiling was $ 2.194 and the § 102 ceiling
       the unregulated sector over the long term." P.                 was $ 3.152. 47 Fed. Reg. 17981, 17982 (1982).
       Starratt, The Natural Gas Shortage and the                     There is no reason to believe that, by operation of
       Congress 29 (1974). Determining the actual                     either escalator clause under the old regulatory
       effect on the intrastate market of federal                     structure, ERG's prices ever would have reached
       regulation of the interstate market is difficult               the Act's levels.
       because state oil and gas agencies have not
                                                                     [*416] Moreover, the contracts expressly recognize
       collected information on intrastate sales. See
                                                               the existence of extensive regulation by providing that
       Schanz & Frank, Natural Gas in the Future
                                                               any contractual terms are subject to relevant present and
       National Energy Pattern, in Regulation of the
                                                               future state and [***584] federal law. 22 This latter
       Natural Gas Producing Industry 18, 28-30 (K.
                                                               provision could be interpreted to incorporate all future
       Brown ed. 1972).
                                                               state price regulation, and thus dispose of the Contract
      [*415] It is in this context that the indefinite         Clause claim. Regardless of whether this interpretation is
escalator clauses at issue here are to be viewed. In           correct, 23 the provision does suggest that ERG knew its
drafting each of the contracts, the parties included a         contractual rights were subject to alteration by state price
statement of intent, which made clear that the escalator       regulation. Price regulation existed and was foreseeable
clause was designed to guarantee price increases               as the type of law that would alter contract obligations.
consistent with anticipated increases in the value of          Reading the Contract Clause as ERG does would mean
ERG's gas. App. to Juris. Statement 70a. While it is not       that indefinite price escalator clauses could exempt ERG
entirely inconceivable that ERG in September 1975              from any regulatory limitation of prices whatsoever.
anticipated the deregulation of gas prices introduced by       Such a result cannot be permitted. Hudson Water Co. v.
the Act in 1978, we think this is highly unlikely, and we      McCarter, 209 U.S., at 357. In short, ERG's reasonable
read the statement of intent to refer to nothing more than     expectations have not been impaired by the Kansas Act.
changes in value resulting from changes in the federal         See El Paso v. Simmons, 379 U.S., at 515.
regulator's "just and reasonable" rates. In exchange for
                                                                      22     Many gas sale contracts contain similar
these anticipated increases, KPL agreed to accept gas
                                                                      provisions. See 4 H. Williams, Oil and Gas Law
from the Spivey-Grabs field for the lifetime of that field.
                                                                      § 734, pp. 800-801 (1981). These stem from the
Thus, at the time of the execution of the contracts, ERG
                                                                      assumption that the contracts are subject to
did not expect to receive deregulated prices. The very
                                                                      governmental price and other regulation. Id., at
existence of the governmental price escalator clause and
                                                                                                                   Page 14
                                        459 U.S. 400, *416; 103 S. Ct. 697, **707;
                                      74 L. Ed. 2d 569, ***584; 1983 U.S. LEXIS 16

        802. Their purpose is to "provide that the contract         There can be little doubt about the legitimate public
        shall continue in effect though modified to             purpose behind the Act. 25
        conform to the requirements of such law or
        regulation." Ibid.                                             24 Although the Act does place a ceiling on
        23 A similar clause has been held implicitly not               intrastate gas, it is the highest ceiling under the
        to incorporate state price regulations that impair             law, that is, the § 102 limit for newly discovered
        interstate commerce. See Natural Gas Pipeline                  gas. Old interstate gas is subject to the much
        Co. v. Harrington, 139 F. Supp. 452, 454-455 (ND                lower ceilings of § 104, or § 106 in the case of
        Tex. 1956), vacated and remanded on other                      rollover contracts. In fact, the § 109 price for July
        grounds, 246 F.2d 915 (CA5 1957), cert. denied,                1982 of $ 2.194 per Mcf is substantially higher
        356 U.S. 957 (1958). Analogously, state price                  than any of the § 104 or § 106 prices for old
        regulations pre-empted by FPC price regulation                 interstate gas from wells drilled before 1974. See
        have been held not to be incorporated by                       47 Fed. Reg. 17981, 17982-17983 (1982). The
        governmental price escalator clauses. See Pan                  Spivey-Grabs Field gas wells covered by these
        American Petroleum Corp. v. Kansas-Nebraska                    contracts were drilled between 1954 and 1961.
        Natural Gas Co., 297 F.2d 561, 567-568 (CA8                    Brief for Appellee 41, and n. 139 (citing Kansas
        1962).                                                         Geological Society Library, Drillers' Log (Kansas
                                                                       producers)).
    C
                                                                      [***LEdHR9A] [9B]
        [***LEdHR2A] [2B]To the extent, if any, the
Kansas Act impairs ERG's contractual interests, the                    25 ERG claims that the legislation was designed
Kansas Act rests on, and is prompted by, significant and               to benefit KPL. See n. 6, supra. Unlike Allied
legitimate state interests. Kansas has [*417] exercised                Structural Steel Co. v. Spannaus, 438 U.S. 234
its police power to protect consumers from the escalation              (1978), there is little or nothing in the record here
of natural gas prices caused by deregulation. The State                to support the contention that the Kansas Act is
reasonably could find that higher gas prices have caused               special interest legislation. Given the nature of
and will cause hardship among those who use gas heat                   the industry -- sales to public utilities -- it is
but must exist on limited fixed incomes.                               impossible for any regulation not to have a major
                                                                       effect on a small number of participants. This
    The                                                                differs from the statute under challenge in Allied
                                                                       Structural Steel Co., where a small number of
       [***LEdHR2A] [2C] [***LEdHR9A] [9A]State                        employers were singled out from the larger group.
also has a legitimate interest in correcting the imbalance             The fact that there was a close vote at the
between the interstate and intrastate markets by                       committee stage, and that some of the committee
permitting intrastate prices to rise only to the § 109 level.          dissenters expressed the view that the Kansas Act
By slowly deregulating interstate prices, the Act took the             was special interest legislation, bears little if any
cap off intrastate prices as well. 24 The Kansas Act                   resemblance to the circumstantial evidence
attempts to coordinate the intrastate and interstate prices            present in Allied Structural Steel Co. Nor is there
by supplementing the federal Act's regulation of intrastate            any indication that the Kansas political process
gas. Congress specifically contemplated such action:                   had broken down. Cf. Note, 89 Yale L. J., at
                                                                       1645 (provided "legislature is functioning
     "The conference agreement provides that nothing in                properly, selection of a public purpose and
this Act shall affect the authority of any State to establish          determinations of necessity and appropriateness
or [**708] enforce any maximum lawful price for sales                  should be left to it"). In addition, the automatic
of gas in intrastate commerce which does not exceed the                price pass-through adjustment indicates that KPL
applicable [***585] maximum lawful price, if any,
                                                                       will not benefit significantly from the statute.
under Title I of this Act. This authority extends to the               Although ERG is correct that the Commission
operation of any indefinite price escalator clause." S.                could revoke the pass-through, it has given no
Conf. Rep. No. 95-1126, pp. 124-125 (1978); H. R. Conf.                indication that it will do so.
Rep. No. 95-1752, pp. 124-125 (1978).
                                                                                                                    Page 15
                                        459 U.S. 400, *417; 103 S. Ct. 697, **708;
                                  74 L. Ed. 2d 569, ***LEdHR9A; 1983 U.S. LEXIS 16

        [*418] Nor are the means chosen to implement            Supreme Court acknowledged that the Act could trigger a
these purposes deficient, particularly in light of the          governmental price escalator clause. 230 Kan., at 184,
deference to which the Kansas Legislature's judgment is         630 P. 2d, at 1149. In this case, however, it held that
entitled. On the surface, the State's Act seems limited to      "[the] [**709] NGPA did not trigger a price increase
altering indefinite price escalation clauses of intrastate      because the contracts herein did not contain a sufficient
contracts that affect less than 10% of the natural gas          escalation mechanism." Id., at 185, 630 P. 2d, at 1150.
consumed in Kansas. Tr. of Oral Arg. 16. To analyze             We agree that, as a matter of federal statutory
properly the Kansas Act's effect, however, we must              interpretation, the Act does not trigger such clauses
consider the entire state and federal gas price regulatory      automatically. See 44 Fed. Reg. 16895, 16904 (1979). 26
structure. Only natural gas subject to indefinite price         Section 105(b)(1) provides that the ceiling price shall be
escalator clauses poses the danger of rapidly increasing        the lower of [*420] the § 102 price and "the price under
prices in Kansas. Gas under contracts with fixed                the terms of the existing contract, to which such natural
escalator clauses and interstate gas purchased by the           gas was subject on [November 9, 1978], as such contract
utilities subject to § 109 would not escalate as would          was in effect on such date." By this language, Congress
intrastate gas subject to indefinite price escalator clauses.   set a ceiling for the operation of contractual provisions; it
The Kansas Act simply brings the latter category into line      did not prescribe a price:
with old interstate gas prices by limiting the operation of
the indefinite price escalator clauses.                             "[The] price under the contract may escalate through
                                                                the operation of both fixed price escalator clauses and
     The Kansas Act also rationally exempts the types of        indefinite price escalator clauses in existence as of the
new gas the production of which Congress sought to              date of enactment, but the price may not exceed the new
encourage through the higher § 102 prices. Finally, the         gas price [provided by § 102].
Act is a temporary measure that expires when federal
price regulation of certain categories of gas terminates.           ....
The Kansas statute [*419] completes the regulation of
                                                                     ". . . The conferees do not intend that the mere
the gas market by imposing gradual escalation
                                                                establishment of the ceiling prices under this Act shall
mechanisms on the intrastate market, consistent with the
                                                                trigger indefinite price escalator clauses in existing
new national policy toward gas regulation.
                                                                intrastate contracts." S. Conf. Rep. No. 95-1126, pp.
   We thus resolve the constitutional issue against             82-83 (1978); H. R. Conf. Rep. No. 95-1752, pp. 82-83
ERG.                                                            (1978).

    III                                                         See Pennzoil Co. v. FERC, 645 F.2d, at 379.

       [***LEdHR3A] [3B]We turn to ERG's statutory                     26 On December 1, 1978, the Federal Energy
contention that the Kansas courts misconstrued § 105 as                Regulatory       Commission        issued     interim
fixing the contract price at the November 9, 1978, level.              regulations stating: "The establishment of
While, on this point, the opinion of the Kansas Supreme                maximum lawful prices under the NGPA shall not
Court is not entirely clear to us, it does not appear so to            trigger indefinite price escalator clauses in
construe § 105. And KPL, in fact, does not contend that                existing intrastate or interstate contracts." 43 Fed.
it did. Instead, the court recognized [***586] that § 105              Reg. 56448, 56550 (1978). After a comment
permits the indefinite price escalator clauses to continue             period, the FERC altered the regulation to reserve
to operate to raise the contract price up to the lawful                to state law the question whether such clauses
ceiling. See Pennzoil Co. v. FERC, 645 F.2d 360, 379                   operate in intrastate contracts. 44 Fed. Reg.
(CA5 1981) ("[The] NGPA does not preclude escalation                   16895, 16904 (1979).
of area rate clauses [a type of indefinite price escalators]
to NGPA prices"), cert. denied, 454 U.S. 1142 (1982).

    The actual point of dispute is whether the                   [***LEdHR10] [10]The Kansas Supreme Court relied
governmental price escalator clauses in these contracts         on its prior decision in Mesa Petroleum Co. v. Kansas
were triggered by the enactment of § 105. The Kansas            Power & Light Co., 229 Kan. 631, 629 P.2d 190,
                                                                                                                  Page 16
                                      459 U.S. 400, *420; 103 S. Ct. 697, **709;
                                 74 L. Ed. 2d 569, ***LEdHR10; 1983 U.S. LEXIS 16

clarified, 230 Kan. 166, 630 P. 2d 1129 (1981), cert.         by the Kansas Act." Ante, at 416. This conclusion is
denied, 455 U.S. 928 (1982), which interpreted the effect     dispositive, and it is unnecessary for the Court to address
of § 105 on a similar contract provision. In that decision,   the question of whether, if there were an impairment of
it read § 105 to set the lawful ceiling at the lower price    contractual rights, it would constitute a violation of the
provided by the contract. In light of our discussion          Contract Clause. See Allied Structural [**710] Steel
above, we view this reading of the federal statute as         Co. v. Spannaus, 438 U.S. 234, 245 (1978).
unassailable. The Kansas Supreme Court's further
holding in this case that these particular governmental            The Court concludes in Part II-C that even if ERG's
price escalator clauses were insufficient to escalate the     "contractual interests" were impaired, the Act furthers
gas price is an interpretation of state law to which, of      "significant and legitimate state interests" and is a valid
course, we defer.                                             exercise of the State's police power. Ante, at 416-419. I
                                                              do not necessarily disagree with this conclusion,
    IV                                                        particularly in the context of the pervasive regulation of
                                                              public utilities. I decline to join Part II-C, however,
     The regulation of energy production [***587] and         because it addresses a substantial question and our
use is a matter of national concern. Congress set out on a    discussion of the separate issue in Part II-B disposes of
new path with the Natural Gas Policy Act of 1978. In          this case.
pursuing this path, Congress explicitly envisioned that
the States would regulate intrastate [*421] markets in        REFERENCES
accordance with the overall national policy. The Kansas       16A Am Jur 2d, Constitutional Law 701
Natural Gas Price Protection Act is one State's effort to
balance the need to provide incentives for the production     15 USCS 3301 et seq.; Constitution, Article I, Section 10,
of gas against the need to protect consumers from             Clause 1
hardships brought on by deregulation of a traditionally
regulated commodity. We see no constitutional or              US L Ed Digest, Constitutional Law 128, 202, 207, 257;
statutory infirmity in Kansas' attempt. The judgment of       Energy 35
the Supreme Court of Kansas is therefore
                                                              L Ed Index to Annos, Gas; Impairment of Contract
    Affirmed.                                                 Obligations

                                                              ALR Quick Index, Gas and Oil; Impairment of Contract
CONCUR BY: POWELL (In Part)
                                                              Obligations
CONCUR
                                                              Federal Quick Index, Impairment of                 Contract
     JUSTICE POWELL, with whom THE CHIEF                      Obligations; Oil and Gas; Rates and Charges
JUSTICE and JUSTICE REHNQUIST join, concurring
                                                                       Annotation References:
in part.
                                                              State's exercise of police power as constituting
    I concur in the judgment and all of the Court's
                                                              impairment of obligation of private contract in violation
opinion except Part II-C. The Court concludes in Part
                                                              of contract clause (Art I, 10, cl 1) of Federal Constitution.
II-B that there has been no substantial impairment of
                                                              57 L. Ed. 2d 1279.
ERG's contractual rights. The closing sentence states that
"ERG's reasonable expectations have not been impaired
                                                                                                                  Page 1

                                      Gaar, Scott & Company v. O. K. Shannon.

                                           [NO NUMBER IN ORIGINAL]

                                     COURT OF CIVIL APPEALS OF TEXAS

                          52 Tex. Civ. App. 634; 115 S.W. 361; 1908 Tex. App. LEXIS 434

                                             December 16, 1908, Decided

PRIOR HISTORY:         [***1] Appeal from the District        Moreover, the court ruled that it could not be argued that
Court of Travis County. Tried below before Hon. V. L.         the demand on the part of the officer that the business
Brooks.                                                       should pay the tax for doing business within the State
                                                              was an unlawful demand, because the officer clearly had
DISPOSITION: Affirmed.                                        the right to make such a demand.

CASE SUMMARY:                                                 OUTCOME: The court affirmed the judgment.

                                                              CORE TERMS: franchise tax, taxation, domestic,
PROCEDURAL POSTURE: Appellant business sought                 protest, property tax, interstate business, forfeiture,
review of a judgment by the District Court of Travis          franchise, doing business, collected, license, license tax,
County (Texas), which sustained the demurrer of appellee      demurrer, charter, void, capital stock, full knowledge,
Secretary of State, in his individual capacity, to the        taxing power, demanded, insisted, invalid, exacted,
business's action to recover monies it paid to the            duress, former law, license fee, charge imposed, urgent
Secretary as a franchise tax.                                 necessity, illegally collected, written protest, obligation
                                                              of contracts
OVERVIEW: The business predicated its action on the
ground that the franchise laws under which the tax was        LexisNexis(R) Headnotes
collected were unconstitutional. It argued that, since it
had been given a permit for a 10-year period and had paid
those taxes, the Legislature had no authority to impose an
additional tax by enacting a subsequent act. The
Secretary filed a demurrer, which was sustained. On           Business & Corporate Law > Corporations > Finance >
appeal, the court affirmed. Notwithstanding the fact that a   Franchise Tax > General Overview
former permit had been granted, the court held that           Criminal Law & Procedure > Criminal Offenses >
inherent power remained in the State of Texas to change       Miscellaneous Offenses > General Overview
or amend the law at any time thereafter, even to the          Tax Law > State & Local Taxes > General Overview
extent of levying an additional burden for the permission     [HN1] Section 1, pp. 21, 22, 23, Texas Acts 29th Leg.,
granted to foreign corporations to do business within the     1905.) provides for the payment by every foreign
State. The Court further held that such a change of the       corporation heretofore authorized or thereafter authorized
law did not violate the Texas Constitution prohibiting the    to do business in Texas a certain franchise tax, based
passage of any Act impairing the obligation of contracts.     upon the authorized capital stock of such corporation,
                                                                                                                     Page 2
                                        52 Tex. Civ. App. 634, *; 115 S.W. 361, **;
                                             1908 Tex. App. LEXIS 434, ***1

provides the time for its payment and prescribing a             Imposition of Tax
penalty of 25 percent on the amount of the taxes due for        [HN5] It is well settled that a State has the absolute right
failure to pay the same, as well as forfeiture of right to do   to exclude or permit foreign corporations from doing
business in the State, and directs the Secretary of State to    business within its boundaries and that it is an act of
declare such forfeiture without judicial ascertainment by       comity or grace on its part to permit their coming in at all
entering the same upon a ledger to be kept in his office        and it has the right to impose such conditions as it may
relating to such corporations. By an amendment thereto,         see proper in granting said permission. The granting of
p. 100, sec. 1, Acts of 29th Leg., it is further provided       such right or privilege rests entirely within the discretion
that it should be a misdemeanor on the part of the officers     of the State; and, of course, when granted may be
of said corporations subject to the payment of such             accompanied with such conditions as its Legislature may
franchise tax, to fail to give under oath accurate              judge most befitting to its interest and policy. It may
information as to the amount of its capital stock, when         require, as a condition of the granting of the privilege and
demanded by the Secretary of State.                             also of its continued exercise, that the corporation pay a
                                                                specified sum to the State each year or month, or a
                                                                specified portion of its gross receipts or of the profits of
Governments > Local Governments > Charters                      its business, or a sum to be ascertained in any convenient
Governments > State & Territorial Governments >                 mode which it may prescribe. The validity of the tax can
Relations With Governments                                      in no way be dependent upon the mode which the State
Tax Law > State & Local Taxes > Franchise Tax >                 may deem fit to adopt in fixing the amount for any year
Imposition of Tax                                               which it will exact for the franchise. No constitutional
[HN2] See Tex. Rev. Civ. Stat. art. 650.                        objection lies in the way of a legislative body prescribing
                                                                any mode of measurement to determine the amount it will
Governments > Local Governments > Charters                      charge for the privileges it bestows.
Governments > State & Territorial Governments >
Claims By & Against                                             Tax Law > International Taxes > Americans Operating
Tax Law > State & Local Taxes > Franchise Tax >                 Abroad > General Overview
General Overview                                                Tax Law > State & Local Taxes > Franchise Tax >
[HN3] Even a provision in a charter fixing a specified          General Overview
sum to be paid as taxes, but not providing that such sum        Tax Law > State & Local Taxes > Income Tax >
shall be in lieu of other taxes, is not a contract that no      Corporations & Unincorporated Associations > General
greater tax shall be laid.                                      Overview
                                                                [HN6] A State may tax any privilege it grants. Such a tax,
Business & Corporate Law > Corporations > Formation             or rather license fee, is the payment exacted of a foreign
> Corporate Existence, Powers & Purpose > Powers >              corporation for the privilege of doing business within the
General Overview                                                State. Since a foreign corporation may be allowed to do
Constitutional Law > Congressional Duties & Powers >            business in a State upon conditions, the payment of a sum
Contracts Clause > General Overview                             of money may be made a condition; and this may in form
Tax Law > State & Local Taxes > Income Tax >                    be the payment of a tax greater than or different from that
Corporations & Unincorporated Associations > General            paid by a domestic corporation. Such a tax is valid. It is
Overview                                                        not properly an exercise of the power to tax property, but
[HN4] Tex. Const. art. 8, § 4 provides that the power to        is a license fee paid for the privilege of entering the State
tax corporations and corporate property shall not be            and its validity is a necessary deduction from the right
surrendered or suspended by Act of the Legislature by           absolutely to exclude the foreign corporation.
any contract or grant to which the State shall be a party.
                                                                Energy & Utilities Law > Taxation
Business & Corporate Law > Foreign Businesses >                 Tax Law > International Taxes > Americans Operating
General Overview                                                Abroad > General Overview
Tax Law > State & Local Taxes > Franchise Tax >                 Tax Law > State & Local Taxes > Franchise Tax >
                                                                Imposition of Tax
                                                                                                                   Page 3
                                      52 Tex. Civ. App. 634, *; 115 S.W. 361, **;
                                           1908 Tex. App. LEXIS 434, ***1

[HN7] Taxes imposed on a foreign corporation as a             HEADNOTES
condition of doing business generally in the State of
Texas, not connected with the grant of any special               Foreign Corporation             --   License    Tax    --
privilege, is a license or privilege tax and not a property   Constitutional Law.
tax, although the amount of it may be determined by the
                                                                   Though a former permit had been granted a
capital stock of the corporation. A foreign corporation
                                                              corporation of another State to do business in Texas for a
can only come into the State and do business there by the
                                                              term of ten years, on payment of the franchise tax then
consent of the State and the charge imposed by the State
                                                              fixed by law, it was not unconstitutional for the
as the condition of that consent is not a tax on property.
                                                              Legislature to impose a higher tax thereafter and during
                                                              such term for the same privilege and to provide for
Tax Law > State & Local Taxes > Administration &              forfeiture of the right to do business on failure to pay it.
Proceedings > General Overview
[HN8] Where a party pays an illegal demand for taxes              Foreign Corporation -- Taxation.
with the full knowledge of all the facts which render such
                                                                   The charge imposed by a State on the privilege
demand illegal, without an immediate and urgent
                                                              granted to a foreign corporation to do business therein is
necessity therefor or unless to release his person or
                                                              a license, and not a property tax; and this is so though the
property from detention or to prevent an immediate
                                                              amount required to be paid is a graduated one, based on
seizure of his person or property, such payment must be
                                                              the gross receipts, or the profits of the business, or
deemed to be voluntary and can not be recovered back;
                                                              amount of capital, or such other basis as may be fixed by
and the fact that the party at the time of making the
                                                              the Legislature; and this does not constitute double
payment files a written protest does not make the
                                                              taxation.
payment involuntary.
                                                                  Unlawful Taxation -- Voluntary Payment --
Constitutional Law > Equal Protection > Scope of              Protest.
Protection
                                                                  Payment of an illegal demand, with full knowledge
Tax Law > International Taxes > Americans Operating
                                                              of the facts which render it illegal, must be deemed
Abroad > General Overview
                                                              voluntary, though made under protest, unless made under
Tax Law > State & Local Taxes > Income Tax >
                                                              urgent necessity or to release from detention or to prevent
Corporations & Unincorporated Associations >
                                                              immediate seizure of person or property.
Imposition of Tax
[HN9] A tax imposed upon foreign companies, which                Unlawful      Taxation     --   Duress   --    Interstate
does not apply to domestic corporations, is not for that      Commerce.
reason obnoxious to the provisions of most of the State
Constitutions requiring taxes to be equal and uniform.             If a foreign corporation is engaged only in business
Since the effect of such legislation is simply to classify    which is interstate commerce, and hence not taxable by
corporations and to impose certain taxes upon the class of    the State, its rights would not be affected by a forfeiture
foreign companies.                                            of its permit to do business in the State; and such
                                                              forfeiture for nonpayment of a license tax would not be
                                                              duress which would make the payment thereof by it
Governments > State & Territorial Governments >
                                                              under protest an involuntary one.
Employees & Officials
Tax Law > State & Local Taxes > Administration &                  Taxation -- License -- Equality and Uniformity.
Proceedings > Collection
Tax Law > State & Local Taxes > Real Property Tax >                A license tax on foreign corporations is not invalid if
Collection > General Overview                                 equal and uniform in its operation and application to all
[HN10] A better rule is that the collecting officer is        of that class, though a like tax is not imposed on domestic
exempt from liability to the taxpayer, who should seek        corporations.
relief from the State of Texas, a county, or a municipality
on whose account the tax was collected.                           Unlawful Taxes -- Action to Recover Back --
                                                                                                                 Page 4
                                      52 Tex. Civ. App. 634, *; 115 S.W. 361, **;
                                           1908 Tex. App. LEXIS 434, ***1

Parties.                                                      Chicago, V. & W. Coal Co., 79 Ill., 121; German
                                                              Alliance Ins. Co. v. Van Cleave, 191 Ill., 410; Swift &
     It seems, in the opinion of Mr. Justice Rice, that, in   Co. v. United States, 111 U.S. 22; Baker v. Panola
an action to recover back from the Secretary of State         County, 30 Tex. 87; Wood v. Stirman, 37 Tex. 585; City
taxes illegally collected by him from a corporation, the      of Galveston v. Snyder, 39 Tex. 236; Galveston [***3]
petition should allege that the money collected was still     Gas Co. v. County of Galveston, 54 Tex. 287; Galveston
in the possession of that officer.                            County v. Gorman, 49 Tex. 279; Galveston County v.
                                                              Galveston Gas Co., 72 Tex. 509.
COUNSEL: Bulkley, Gray & More and J. M. Patterson,
for appellant.                                                Chapters 19 and 72 of the laws of the Twenty-ninth
                                                              Legislature of the State of Texas impair the obligation of
A taxing officer can be sued. He can not justify upon the     the contract entered into between the State of Texas and
ground that the suit is against the State. Virginia Coupon    plaintiff on the 23d day of May, 1901. American Sm. &
Cases, Poindexter v. Greenhow, 114 U.S. 270; Scottish         Ref. Co. v. Colorado, 204 U.S. 103; Cumberland Teleph.
Union Nat. Ins. Co. v. Herriott, 80 N. W., 666; Insurance     & Tel. Co. v. Hopkins, 90 S.W. 594; Virginia Coupon
Co. v. Van Cleave, 191 Ill., 410; In re Tyler, 149 U.S.       Cases, 114 U.S. 270.
164; Smyth v. Ames, 169 U.S. 466; Pennoyer v.
McConnaughy, 140 U.S. 1; Scott v. Donald, 165 U.S.            Interstate commerce can not be taxed or discriminated
658; Tindal v. Wesley, 167 U.S. 204; In re Ayres, 123         against in any way. A tax upon a foreign corporation
U.S. 443.                                                     doing purely an interstate commerce, like the tax in
                                                              question, is in violation of paragraph 3, section 1 of the
The taxes sought to be recovered in this case were not        Constitution of the United States. In re Kinyon, 75 Pac.,
voluntarily paid. Virginia Coupon Cases, 114 U.S. 270;        268; Menke v. State, 97 N. W., 1020; Wrought Iron
Insurance Co. v. Van Cleave, 191 Ill., 410; Arkansas          Range Co. v. Campen, 47 S. E., 658; Rock Island Plow
Bldg. & Loan Assn. v. Madden, 175 U.S. 269; Erskine v.        Co. v. Peterson, 101 N. W., 616; DeWitt v. Berger Mfg.
Van Arsdale, 15 Wall., 75; Denver v. Evans, 84 Pac., 65;      Co., 81 S.W. 334; Bateman v. Western Star Milling Co.,
Rumford Chemical Works v. Ray, 33 Atl., 443, 34 Atl.,         1 Tex. Civ. App. 90; Gunn v. White Sewing Machine
814; Robertson v. Frank Bros., 132 U.S. 17; City of           Co., 20 S.W. 591; Stratford v. City Council of
Chicago v. Klinkert, 94 Ill. App., 524; Swift & Co. v.        Montgomery, 20 So., 127; Stockard v. Morgan, 185 U.S.
United States, 111 U.S. 22; Galveston County v.               27; Caldwell v. North Carolina, 187 U.S. 622; Norfolk &
Galveston Gas Co., 72 Tex. 509.                               W. Ry. [***4] Co. v. Sims, 191 U.S. 441; McCall v.
                                                              California, 136 U.S. 104; McNeil v. Southern Ry. Co., 26
Taxes paid under protest, duress or compulsion may be
                                                              Sup. Ct. Rep., 722.
recovered [***2] back in an action at law if illegal.
Erskine v. Van Arsdale, 15 Wall., 75; Stone v. Nelson, 42     Soliciting the sale of goods is not doing business, and is
N. W., 548; City of Marshall v. Snediker, 25 Tex. 460;        protected by the Commerce Clause of the Federal
Scottish Union & Nat. Ins. Co. v. Herriott, 80 N. W., 666;    Constitution. In addition to the authorities last above
City of Denver v. Evans, 84 Pac., 65; Rumford Chemical        enumerated, the following will apply: Rearick v. State of
Works v. Ray, 33 Atl., 443, 34 Atl., 814; Boston &            Pennsylvania, 27 Sup. Ct. Rep. (U.S.), 160; Ex parte
Sandwich Glass Co. v. City of Boston, 45 Mass., 181;          Masse, 92 S.W. 1082; French, Fitch & Co. v. Hicks, 92
Dunnell Mfg. Co. v. Newell, 2 Atl., 766; Creamer v.           S.W. 1034; King v. Monitor Drill Co., 92 S.W. 1046;
Inhabitants of Bremen, 40 Atl., 555; Woodmere                 Clark & Marshall on Corporations, 755; Leloup v. Port of
Cemetery Assn. v. Springwells Township, 90 N. W., 277;        Mobile, 127 U.S. 625; Western U. Tel. Co. v. Alabama,
Gaar-Scott & Co. v. Sorum, 90 N. W., 801; La Salle            132 U.S. 475.
County v. Simmons, 10 Ill., 513; Harvey & Boyd v.
Board of Trustees, 42 Ill., 336; Prickett v. Madison          The keeping of an office in a foreign State by a
County, 14 Ill. App., 454; Chicago v. Sperbeck, 69 Ill.       corporation for the purpose of soliciting business, is not
App., 562; Robertson v. Frank Bros. Co., 132 U.S. 17;         doing business in such foreign State only. Norfolk & W.
Chicago v. Klinkert, 94 Ill. App., 524; City of Chicago v.    Ry. Co. v. Pennsylvania, 136 U.S. 114; Texas & P. Ry.
Waukesha Brewing Co., 97 Ill. App., 585; Henry v.             Co. v. Davis, 93 Tex. 378.
Town of Chester, 15 Vt., 460; Chicago & A. R. Co. v.
                                                                                                                  Page 5
                                      52 Tex. Civ. App. 634, *; 115 S.W. 361, **;
                                           1908 Tex. App. LEXIS 434, ***4

What is or is not doing business within a State so that the   Tax Cases, 18 Wall., 229; Hoyt v. Sprague, 103 U.S. 630;
State may exercise some power of taxation other than the      Gloucester Ferry Co. v. Pennsylvania, 114 U.S. 196;
ordinary ad valorem tax upon a foreign corporation?           Pennsylvania v. Standard Oil Co., 101 Pa. St., 119.
Mearcham v. Lumber Co., 187 Pa. St., 12; Wolf Dryer
Co. v. Bigler & Co., 192 Pa. St., 466; Coyt v. Sutton, 102    Discriminating taxes are illegal and in violation of the
Mich., 324; Talapoosa Lumber Co. v. Holbert, [***5] 5         Constitution of the United States. Ward v. Maryland, 79
N. Y., 559; Maxwell & Co. v. Edens, 65 Mo. App., 439;         U.S. [***7] (12 Wall.), 418; Reser v. Umatilla County,
Milan M. & N. Co. v. Gorton, 95 Tenn., 590; Davis &           86 Pac., 598; Laundry Cases, 27 Fed., 765; Duckwall v.
Rankin Co. v. Dix, 64 Fed., 406; Beard v. American Pub.       City of New Albany, 25 Ind., 283; Eden v. People, 161
Co., 71 Ala., 60; Doty v. Michigan C. R. Co., 8 Abb. Pr.      Ill., 296; Oliver v. Washington Mills, 93 Mass., 268;
Rep., 427; Gunn v. White Sewing Mach. Co., 20 S.W.            Cook on Corporations, sec. 572, C and D; Pullman Car
591; Bateman v. Western Star Milling Co., 1 Tex. Civ.         Co. v. Pennsylvania, 141 U.S. 18; Gulph & Ship Island
App. 90; Lyons & Thomas Hdw. Co. v. Reading Hdw.              Railroad Co. v. Hughes, 183 U.S. 67; Postal Telegraph
Co., 21 S.W. 300; Zuberbier Co. v. Harris, 35 S.W. 403;       Co. v. Adams, 155 U.S. 688-696; Guy v. Baltimore, 100
Havens & Geddes Co. v. Diamond, 93 Ill. App., 557;            U.S. 434; Weber v. Virginia, 103 U.S. 344; M'Culloch v.
Sullivan v. Sullivan Timber Co., 15 So., 491; State v.        State of Maryland, 4 Wheaton, 415; Union Refrigerator
Anniston Rolling Mills, 21 So., 921; In re                    Transit Co. v. Kentucky, 199 U.S. 194; Kehrer v.
Schollenberger, 171 U.S. 1.                                   Stewart, 187 U.S. 60.

Corporations are persons and are protected by the             The tax in question is a property tax. Beach on Private
Fourteenth Amendment to the Constitution of the United        Corporations, secs. 801, 820; San Fransisco v. Insurance
States. Smyth v. Ames, 169 U.S. 466; Santa Clara              Co., 74 Cal., 113; Parker v. Insurance Co., 42 La., 429;
County v. Southern Pac. Ry. Co., 118 U.S. 394;                Taylor on Private Corporations, 479; Commonwealth v.
Charlotte, etc., R. Co. v. Gibbes, 142 U.S. 386; Gulf, C.     Standard Oil Co., 101 Pa. St., 119; Ellis v. Frazier, 63
& S. F. Ry. Co. v. Ellis, 165 Tex. 150; Clark & Marshall      Pac., 642; Reser v. Umatilla County, 86 Pac., 595;
on Corporations, 755; Hammond Beef & Provision Co. v.         Louisville & N. Ry. Co. v. Wright, 116 Fed., 670; Desty
Best, 40 Atl., 338.                                           on Taxation, 199; Cooley on Taxation, 165.

The laws of the Twenty-ninth Legislature, being chapters      Graduated taxes are illegal. Chapter 19 is in violation of
19 and 72 of the laws of the State of Texas, for the year     the Constitution of the State of Texas and special
1905, are in violation of the Fourteenth Amendment of         provisions of Section 48, Article 3; and Sections [***8]
the Constitution of the [***6] United States. Union           1, 2, and 3, Article 8. Schuster v. City of Louisville, 89
Refrigerator Transit Co. v. Kentucky, 199 U.S. 194;           S.W. 589; Cook County v. Fairbank, 222 Ill., 578;
Ward v. Maryland, 12 Wall., 418; Cooley on                    Dalrymple v. City of Milwaukee, 53 Wis., 178; State v.
Constitutional Limitations, sec. 16; Brown v. Maryland,       Gorman, 40 Minn., 232; Fatjo v. Pfister, 117 Cal., 83;
12 Wheaton, 449; Gibbons v. Ogden, 9 Wheaton, 1;              Clark & Marshall on Corporations, page 760, sec. 291.
Caldwell v. North Carolina, 187 U.S. 622; Norfolk & W.
                                                              If the tax imposed by Chapters 19 and 72, General Law
R. R. Co. v. Sims, 191 U.S. 441; Wrought Iron Range
                                                              of 1905, is not a property tax, it is an occupation tax and
Co. v. Campen, 47 S. E., 658; Virginia Coupon Cases,
                                                              invalid because not equal and uniform upon the same
114 U.S. 270; Smyth v. Ames, 169 U.S. 466; In re
                                                              class of subjects. State v. Galveston, H. & S. A. Ry. Co.,
Thornton, 12 Fed., 538; Santa Clara County v. Southern
                                                              100 Tex. 153; State v. Texas & P. Ry. Co., 100 Tex. 279;
Pac. Ry. Co., 118 U.S. 395, 9 Sawyer, 166.
                                                              Pullman Palace Car Co. v. State, 64 Tex. 274; Hoefling v.
A State law which attempts to tax that which is beyond        City of San Antonio, 85 Tex. 228.
its jurisdiction is void and violates provisions of the
                                                              Robert Vance Davidson, Attorney-General and Claude
Fourteenth Amendment of the Constitution of the United
                                                              Pollard, Assistant, for appellee.
States. Union Transit Co. v. Kentucky, 199 U.S. 202;
United States v. Railway Co., 106 N. Y., 334; Wheat.,         A tax collecting officer is not personally pecuniarily
430; 15 Wall., 281, 300; St. Louis v. Ferry Co., 11 Wall.,    liable for taxes improperly collected by him, especially so
423; Tappen v. Bank, 19 Wall., 490; Delaware Railway          when it is not shown that the money is still in his
                                                                                                                     Page 6
                                        52 Tex. Civ. App. 634, *; 115 S.W. 361, **;
                                             1908 Tex. App. LEXIS 434, ***8

possession. Money voluntarily paid under an                     property or any right, vested or otherwise. Allen v.
unconstitutional assessment of taxes can not be recovered       Tyson-Jones Buggy Co., 91 Tex. 22; Miller v. Goodman,
of the tax-collecting officer after it has been paid into the   91 Tex. 41; Brin v. Wachusetts Shirt Co., 42 S.W. 295;
treasury. Continental Land and Cattle Co. v. Board, 80          Lasater v. Purcell, Mill and Elevator Co., 22 Tex. Civ.
Tex. 492; Texas Land & Cattle Co. v. Hemphill County,           App. 33; Texas [***11] & Pac. Ry. Co. v. Davis, 93
61 S.W. 333; [***9] Dickens v. Jones, 27 Am. Dec.,              Tex. 378; Purcell v. Johnston L. & Mort. Co., 44 Am. St.
488; Saunders v. Simmons, 30 Ark., 274.                         Rep., 29; Wessell v. Johnston L. & Mort. Co., 44 Am. St.
                                                                Rep., 529; 2 Dillon on Municipal Corporations, 947.
The taxes sought to be recovered were voluntarily paid,
and, therefore, can not be recovered, even though               Chapters 19 and 72, Acts of the Twenty-ninth
improperly collected. Houston v. Feser, 76 Tex. 365;            Legislature, are not in violation of any provision of the
Galveston City Co. v. Galveston, 56 Tex. 494; Galveston         Fourteenth Amendment to the Constitution of the United
County v. Gorman, 49 Tex. 310; Lamborn v. County                States. A foreign corporation is not a "citizen" within the
Commissioners, 97 U.S. 181; Railroad Co. v.                     meaning of the prohibition that the privileges or
Commissioners, 98 U.S. 542; Little v. Bowers, 134 U.S.          immunities of citizens of the United States shall not be
554; San Francisco N. B. Co. v. Dinwiddie, 13 Fed., 789;        abridged. The right of foreign corporations to do business
Wessel v. Johnston L. & Mort. Co., 44 Am. St. Rep.,             within a State is purely ex comitate, and statutory
529; First National Bank v. Mayor, 45 Am. Rep., 476;            provisions either limiting such right, or imposing license
Peebles v. City of Pittsburg, 47 Am. Rep., 714; McMillan        fees as a prerequisite to such right, or decreeing the
v. Richards, 9 Calif., 417; Phelps v. New York, 2 L. R.         forfeiture of such right for failure to comply with
A., 626; Phillips v. Jefferson County, 5 Kan., 412;             prescribed regulations, can not be regarded as depriving
Abaunsee County v. Walker, 8 Kan., 431; Robbins v.              foreign corporations of their property without due process
Latham, 36 S.W. 33; Sheldon v. School District, 24              of law. Hall v. Virginia, 8 Wallace, 168; Philadelphia
Conn., 88; 2 Cooley on Taxation, 1500; 2 Dillon                 Fire Assn. v. New York, 119 U.S. 110; Pembina C. S. M.
Municipal Corp., 947.                                           & M. Co. v. Pennsylvania, 125 U.S. 181; Hooper v.
                                                                California, 155 U.S. 648; Orient Insurance Co. v. Daggs,
The Acts of the Twenty-ninth Legislature, Chapters 19           172 U.S. 557; Gray on Limitations of Taxing Power, par.
and 72, do not impair the obligation of any contract            1098, et seq.; [***12] Murphree on Foreign
entered into between the State of Texas and appellant.          Corporations, pars. 32-36; Beale on Foreign
Constitution of Texas, art. 8, sec. 4; Acts of 25th             Corporations, par. 79.
Legislature, pp. 140, 168; Acts of 29th Legislature,
[***10] Chapters 19 and 72; New Orleans City, etc., R.          The tax imposed under the Act of the Twenty-ninth
R. Co. v. New Orleans, 143 U.S. 192; Delaware Railroad          Legislature is not discriminating. Murphree on Foreign
Tax v. P. W. & B. R. R. Co., 18 Wall., 206; Railway Co.         Corporations, par. 162.
v. Philadelphia, 101 U.S. 528; Citizens Savings Bank v.
Owensborough, 173 U.S. 636; Covington v. Kentucky,              The tax in question is not a property tax, but is a privilege
173 U.S. 231; Louisville Water Co. v. Clark, 143 U.S. 1;        or license tax, and is not in any respect invalid or illegal.
Wyandott v. Corrigan, 35 Kan., 21; City of New Orleans          Beale on Foreign Corporations, par. 508, and authorities
v. Orleans R. R. Co., 21 Am. St. Rep., 365; Gray on             cited; Gray on Limitations of the Taxing Power, pars.
Limitations of Taxing Power, pars. 1001-5-8; Murphree           54-57.
on Foreign Corporations, pars. 34-36.
                                                                The State's power to impose a license tax, whether
If appellant is engaged exclusively in interstate               exercised for revenue or for purposes of regulation, is
commerce, it is not necessary that it should have a permit      co-extensive with the power of the sovereignty to exclude
to do business in Texas; but if appellant, with full            foreign corporations from its jurisdiction, and is subject
knowledge of the facts constituting the character of its        only to the limitation that it must not encroach upon the
business, voluntarily paid the tax, its suit can not be         exclusive power of Congress to regulate interstate
maintained. A forfeiture of its permit for failure to pay       commerce. Murphree on Foreign Corporations, par. 143;
such tax, if its business is exclusively interstate, would      Beale on Foreign Corporations, pars. 508, 509, and
have imposed no burden upon it nor deprived it of any           authorities cited.
                                                                                                                    Page 7
                                       52 Tex. Civ. App. 634, *; 115 S.W. 361, **;
                                           1908 Tex. App. LEXIS 434, ***12

JUDGES: RICE, Associate Justice.                               illegal, which we deem unnecessary to set out.

OPINION BY: RICE                                                    A general demurrer to this petition being sustained
                                                               by the court, appellants excepted and gave notice of
OPINION                                                        appeal, so that the only question for our consideration is
                                                               as to the correctness of the judgment of the trial [***15]
          [*639]       [**361]        RICE,     Associate      court sustaining said demurrer.
Justice.--Appellant instituted this suit against appellee
individually to recover the sum of $ 575, with interest             By its third assignment of error appellant insists that
thereon, $ 287 of which was alleged to have been paid by       the court erred in sustaining the general demurrer to its
it to him as Secretary [***13] of State on or about the        petition, because it appeared therefrom that the franchise
28th day of April, 1905, and $ 288 of which was paid to        laws of the State of Texas were unconstitutional and void,
him as Secretary of State on April 30, 1906, which said        being in contravention of the Constitution of the United
amounts were paid as a franchise tax, claimed to be due        States and of this State. By its first proposition thereunder
from it to the State by virtue of the Acts of the 29th         it is insisted that said acts impair the obligation of the
Legislature, pp. 21 and 100, for said years.                   contract entered into between the State and plaintiff on
                                                               the 23rd day of May, 1901. The Act of the Legislature
     The suit was predicated on the contention that said       under consideration [HN1] provided for the payment by
Acts of the Legislature under which the tax was collected      every foreign corporation heretofore authorized or
were and are unconstitutional and void. After all formal       thereafter [*640] authorized to do business in this State,
requisites were stated, the petition alleged, substantially,   a certain franchise tax, based upon the authorized capital
that the State in 1901, granted it a permit under the then     stock of such corporation, providing the time for its
existing law to transact business within the State for a       payment and prescribing a penalty of twenty-five percent
period of ten years, and that it paid the franchise tax then   on the amount of the taxes due for failure to pay the
imposed for said privilege; that thereafter, in the years      same, as well as forfeiture of right to do business in the
1905 and 1906, the Secretary of State, by virtue of the        State, and directing the Secretary of State to declare such
Acts of the 29th Legislature, heretofore mentioned,            forfeiture without judicial ascertainment by entering the
demanded and received from appellant the amounts sued          same upon a ledger to be kept in his office relating to
for as a franchise tax for said years; that said tax was so    such corporations. (Sec. 1, [***16] pp. 21, 22, 23, Acts
paid by it under written protest, on the ground that said      29th Leg., 1905.) And by an amendment thereto, p. 100,
law was unconstitutional and void, but the points relied       sec. 1, Acts of 29th Leg., it was further provided that it
upon were not set forth in said protest. The petition,         should be a misdemeanor on the part of the officers of
however, asserts the invalidity of said law chiefly            said corporations subject to the payment of such franchise
[***14] upon the following grounds, viz.: That having          tax, to fail to give under oath accurate information as to
been granted a permit under the laws of 1901, for a            the amount of its capital stock, when demanded by said
period of ten years, and having paid the tax therefor,         Secretary of State. There was a somewhat similar
[**362] the Legislature had no authority by a subsequent       provision in the revised statutes in force in 1901, relative
Act to impose an additional tax, and to do so would be         to the right of granting permits to foreign corporations to
violative of the provision of both the State and Federal       do business within this State, but the amount of such tax
Constitutions, which forbids any State to pass any law         was increased by the Acts of the 29th Legislature.
impairing the obligation of contracts. It further alleged
that said law imposed a greater burden upon foreign than            We do not think that because a permit was granted to
upon domestic corporations, and was, therefore, an unjust      appellant under a former law the State would be thereby
discrimination as against it in favor of domestic              precluded from passing any further franchise tax law
corporations; that the same was an Indiana corporation,        upon the same subject, even though it changed the
doing wholly an interstate business, and was, therefore,       conditions and imposed a greater tax than the former law.
not subject to the payment of the franchise tax and was        At the time that said permit was first granted our statute
not required to obtain a permit, and to demand the same        (art. 650) expressly provided that [HN2] "all charters or
would be in violation of law. There were other allegations     amendments to charters under the provisions of this
under which it is claimed that said franchise tax was          chapter shall be subject to the power of the Legislature to
                                                                                                                      Page 8
                                    52 Tex. Civ. App. 634, *640; 115 S.W. 361, **362;
                                            1908 Tex. App. LEXIS 434, ***16

alter, reform or amend the same." And while this Act             invalid or illegal.
might be regarded [***17] as applicable alone to
domestic corporations, there seems to be no good reason               [HN5] It is well settled that a State has the absolute
why this should not be held to be the law in the absence         right to exclude or permit foreign corporations from
of such a statute, because it has been held that unless the      doing business within its boundaries, and that it is an act
grant of a franchise to a foreign corporation expressly          of comity or grace on its part to permit their coming in at
exempted it from license taxation, the imposition of such        all, and it has the right to impose such conditions as it
tax is not invalid, and does not impair the obligation of        may see proper in granting said permission. In Beale on
any contract, and that no corporation could claim an             Foreign Corporations, sec. 508, it is said: "The granting
immunity from taxation or from license because it paid a         of such right or privilege rests entirely within the
consideration for its charter or franchise, in the absence       discretion of the State; and, of course, when granted may
of a stipulation on the part of the State or other taxing        be accompanied with such conditions as its Legislature
power that the bonus was received in lieu of any further         may judge most befitting to its interest and policy. It may
or future taxation. [HN3] Even a provision in a charter          require, as a condition of the granting of the privilege and
fixing a specified sum to be paid as taxes, but not              also of its continued exercise, that the corporation pay a
providing that such sum shall be in lieu of other taxes, is      specified sum to the State each year or month, or a
not a contract that no greater tax shall be laid. (New           specified portion of its gross receipts or of the profits of
Orleans City R. R. Co. v. New Orleans, 143 U.S. 192;             its business, or a sum to be ascertained in any convenient
Delaware R. R. Tax, 18 Wall. 206; Union P. Ry. Co. v.            mode which it may prescribe. The validity of the tax can
Philadelphia, 101 U.S. 528; Citizens' Savings Bank v.            in no [***20] way be dependent upon the mode which
Owensboro, 173 U.S. 636; Covington v. Kentucky, 173              the State may deem fit to adopt in fixing the amount for
U.S. 231; Louisville Water Co. v. Clark, 143 U.S. 1;             any year which it will exact for the franchise. No
Wyandotte v. Corrigan, 35 Kan. 21; Gray on Limitations           constitutional objection lies in the way of a legislative
of Taxing [***18] Power, pars. 1001-5-8; Murphree on             body prescribing any mode of measurement to determine
Foreign Corporations, pars. 34-36.) Besides this, [HN4]          the amount it will charge for the privileges it bestows."
our State Constitution provides "that the power to tax
                                                                      It is further said in the same section: "This tax is not
corporations and corporate property shall not be
                                                                 a property tax, even when it is measured by the amount of
surrendered or suspended by Act of the Legislature by
                                                                 property of a corporation. Therefore, to levy such a tax in
any contract or grant to which the State shall be a party"
                                                                 addition to a property tax is not double taxation, and the
(Art. 8, sec. 4), which was in force when appellant
                                                                 tax is not subject to a constitutional requirement that
secured its permit. We therefore hold that,
                                                                 taxes shall be uniform."
notwithstanding a former permit had been granted, the
inherent power remained in the State to change or amend               The same author, section 509, continuing says:
the law at any time thereafter, even to the extent of            [HN6] "A State may, as has been seen, tax any privilege
levying [*641] an additional burden for the permission           it grants. Such a tax, or rather license fee, is the payment
granted to foreign corporations to do business within the        exacted of a foreign corporation for the privilege of doing
State; and that such change of the law would not be in           business within the State. Since a foreign corporation
violation of the Constitution prohibiting the passage of         may be allowed to do business in a State upon conditions,
any Act impairing the obligation of contracts.                   the payment of a sum of money may be made a
                                                                 condition; and this may in form be the payment of a tax
     By its eleventh proposition under this assignment
                                                                 greater than or different from that paid by a domestic
appellant urges that the tax in question was a property
                                                                 corporation. Such a tax is valid. It is not properly an
tax; and by its twelfth, that fees paid to the Secretary of
                                                                 exercise of the power to tax [***21] property, but is a
[**363] State for obtaining a permit for incorporation are
                                                                 license fee paid for the privilege of entering the State, and
not taxes; and by its thirteenth, that graduated taxes are
                                                                 its validity is a necessary deduction from the right
illegal, and therefore, that the Acts of the Legislature
                                                                 absolutely to exclude the foreign corporation." See also
under consideration [***19] are in violation of the
                                                                 Gray on Limitations of Taxing Powers, pars. 4 to 57;
Constitution of the State. Appellee, on the other hand,
                                                                 Home Ins. Co. v. New York, 134 U.S. 594.
insists that the tax in question is not a property tax, but is
a privilege or license tax, and is, therefore, in no respect           [*642] [HN7] Taxes imposed on a foreign
                                                                                                                   Page 9
                                   52 Tex. Civ. App. 634, *642; 115 S.W. 361, **363;
                                           1908 Tex. App. LEXIS 434, ***21

corporation as a condition of doing business generally in      the payment involuntary." So that in the present case it
the State, not connected with the grant of any special         can not be urged that the demand on the part of the
privilege, is a license or privilege tax, and not a property   officer that appellant should pay the tax for doing
tax, although the amount of it may be determined by the        business within the State was an unlawful demand,
capital stock of the corporation. A foreign corporation        because he clearly had the right to make such demand.
can only come into the State and do business there by the      The demand was not made for the payment of a tax for
consent of the State, and the charge imposed by the State      doing an interstate business, but for doing [**364]
as the condition of that consent is not a tax on property.     business within the State. This objection, that it was not
(Horn Silver Mining Co. v. New York, 143 U.S. 305;             in fact doing business within the State, was not then
Murphree on Foreign Corporations, par. 143.)                   urged, and seems not to have been within the
                                                               contemplation either of the Secretary of State or of
     We think the quotations from the foregoing                appellant at the [***24] time of the demand for and the
authorities amply establish the principle that the State has   payment of the money. If appellant was doing an
the authority to impose a franchise tax, and that the same     interstate business, as pleaded and contended for by it,
is constitutional. We therefore overrule this assignment.      then a forfeiture of its [*643] permit could in no wise
                                                               affect it, because its right to do an interstate business
     But it is insisted by appellant under another             without first obtaining a permit is unquestioned. (Allen v.
assignment that since it appears from the allegations          Tyson-Jones Buggy Co., 91 Tex. 22; Miller v. Goodman,
[***22] of its petition that it was doing an interstate        91 Tex. 41; Lasater v. Purcell Mill & Elevator Co., 22
business, therefore, it was not subject to the franchise tax   Tex. Civ. App. 33; Texas & Pac. Ry. Co. v. Davis, 93
demanded of it, and hence the tax having been paid by it       Tex. 378.) So that the payment of the franchise tax in
under protest, that it should be held to have the right to     response to the demand by the Secretary of State was, in
recover the same. In reply to this it might be said that the   our judgment, a voluntary payment on the part of
permit granted it was for the purpose of allowing it to do     appellant, with a full knowledge of the facts. It was not
business within the State, and that it was no fault on the     made under compulsion or duress, so that even if it were
part of the State that it failed to conduct a business         held to have been unlawfully imposed and exacted, which
therein in accordance with its permit. And the fact that it    in our judgment was not the case, it is not recoverable.
paid a franchise tax for this purpose could not affect the     (Houston v. Feeser, 76 Tex. 365; Galveston City Co. v.
question if said franchise tax was legal, which we hold to     Galveston, 56 Tex. 486; Galveston Co. v. Gorham, 49
be the case. The ground of the protest in this instance was    Tex. 279; Lamborn v. County Commissioners, 97 U.S.
not that the tax was illegal because of the fact that          181; Union Pac. Railroad Co. v. Commissioners, 98 U.S.
appellant was doing an interstate business, but for the        541; Little v. Bowers, 134 U.S. 547; San Francisco N. R.
reason alone, as stated in its protest, that the law itself    Co. v. Dinwiddie, 13 F. 789; Wessel v. Johnston Land &
imposing this franchise tax was unconstitutional and           Mortgage [***25] Co., 44 Am. St. Rep. 529; First Natl.
void. It therefore follows that if the law imposing the        Bank v. Mayor, 45 Am. Rep. 476; Peebles v. City of
franchise tax is legal, that appellant is in no position to    Pittsburgh, 47 Am. Rep. 714; McMillan v. Richards, 9
complain on this score; but it is insisted by appellee that    Cal. 365; Phelps v. New York, 2 L.R.A. 626; Phillips v.
the taxes sought to be collected were voluntarily paid,        Jefferson County, 5 Kan. 412; Wabaunsee, County v.
and therefore can not be recovered, even though [***23]        Walker, 8 Kan. 431; Robins v. Latham, 36 S.W. 33;
illegally exacted. The rule on this subject seems to be        Sheldon v. South School District, 24 Conn. 88; Cooley
clearly stated in Dillon on Municipal Corporations, vol.       on Taxation, vol. 2, p. 1500, Dillon on Municipal Corp.,
2, p. 947, as follows: [HN8] "Where a party pays an            vol. 2. p. 947.)
illegal demand with the full knowledge of all the facts
which render such demand illegal, without an immediate              Again, it is urged that the tax imposed discriminated
and urgent necessity therefor, or unless to release his        in favor of domestic corporations as against foreign. It
person or property from detention, or to prevent an            will be observed that the tax is imposed alike upon all
immediate seizure of his person or property, such              foreign corporations. (Acts 29th Leg., Chaps. 19 and 72.)
payment must be deemed to be voluntary, and can not be         In Murphree on Foreign Corporations, par. 162, where
recovered back; and the fact that the party at the time of     other authorities on the same subject are collated, it is
making the payment files a written protest does not make       said: [HN9] "A tax imposed upon foreign companies, but
                                                                                                                      Page 10
                                     52 Tex. Civ. App. 634, *643; 115 S.W. 361, **364;
                                             1908 Tex. App. LEXIS 434, ***25

which does not apply to domestic corporations, is not for         the demurrer was for this reason also properly sustained;
that reason obnoxious to the provisions of most of the            but the decision, of course, is not predicated upon this
State Constitutions requiring taxes to be equal and               conclusion. In the case of Hardesty v. Fleming, 57 Tex.
uniform. Since the effect of such legislation is simply to        395, it was [***27] held that a suit might be brought
classify corporations and to impose certain taxes upon the        against [*644] a tax collector to recover taxes illegally
class of foreign companies; and the classification being          collected, if paid under protest, provided suit was brought
based upon legitimate distinctions, and the burden                before the money was paid over by the collecting officer;
[***26] being equal within the class, there can be no             but in the case of Continental Land & Cattle Co. v.
question as to the validity of the tax. Nor could the             Board, it is said: [HN10] "A better rule is that the
provision as to equality and uniformity be applied to             collecting officer is exempt from liability to the tax payer,
license taxes, for they are, in their very nature, the subject    who should seek relief from the State, county, or
of governmental discretion." The tax so imposed being             municipality on whose account the tax was collected."
equal and alike upon all foreign corporations within the          See also on the same subject, Texas Land & Cattle Co. v.
same class, we therefore think can not be assailed merely         Hemphill, 61 S.W. 333, where the same rule is
upon the ground that a less tax is imposed upon domestic          announced.
corporations; the effect of the Act being simply to
classify corporations and impose a like tax upon all                   The remaining assignments of error, in our judgment,
within the same class, which under the law, it seems the          are not well taken, and, without discussing them in detail,
State has the clear right to do. We therefore overrule this       the same are overruled.
contention.
                                                                       Believing that no error has been shown, the judgment
     It will be noticed that the petition in this case fails to   of the trial court is affirmed.
allege that appellee had the money so collected from
                                                                      Affirmed.
appellant in his possession at the time the suit was
instituted. This being true, it is the opinion of the writer,         Writ of error refused.
however not concurred in by the majority of the court,
that the petition was insufficient on this ground, and that
                                                                                                                  Page 1

              THE GILLETTE COMPANY et al., Plaintiffs and Appellants, v. FRANCHISE TAX
                      BOARD, Defendant and Respondent. [And five other cases.*]

                                                     A130803

                  COURT OF APPEAL OF CALIFORNIA, FIRST APPELLATE DISTRICT,
                                       DIVISION FOUR

                    207 Cal. App. 4th 1369; 144 Cal. Rptr. 3d 555; 2012 Cal. App. LEXIS 833

                                           July 24, 2012, Opinion Filed

NOTICE:                                                    sought review of a judgment from the Superior Court of
                                                           the City and County of San Francisco (California), which
   NOT CITABLE--SUPERSEDED BY GRANT OF                     sustained respondent Franchise Tax Board's demurrer
REHEARING                                                  without leave to amend and dismissed the taxpayers'
                                                           action for a refund of corporate income taxes paid
SUBSEQUENT HISTORY: Rehearing granted,                     pursuant to Rev. & Tax. Code, § 19382.
Depublished by Gillette Co. v. Franchise Tax Bd., 2012
Cal. App. LEXIS 970 (Cal. App. 1st Dist., Aug. 9, 2012)    OVERVIEW: The taxpayers asserted that the Multistate
Subsequent opinion on rehearing at, Substituted opinion    Tax Compact gave them the option under Rev. & Tax.
at The Gillette Co. v. Franchise Tax Bd., 2012 Cal. App.   Code, § 38006, art. III, subd. 1, to elect its apportionment
LEXIS 1030 (Cal. App. 1st Dist., Oct. 2, 2012)             formula. The court observed that interstate compacts
                                                           were both statutory law and binding contracts between
PRIOR HISTORY: [***1]                                      member states, which superseded conflicting state law.
                                                           The withdrawal provision in § 38006, art. X, subd. 2, did
     * The Procter & Gamble Manufacturing Co. v.           not render the compact less than a binding agreement.
     Franchise Tax Bd. (No. CGC-10-495912);                California could not unilaterally amend the compact by
     Kimberly-Clark Worldwide, Inc. v. Franchise Tax       mandating the use of the double-weighted sales
     Bd. (No. CGC-10-495916); Sigma-Aldrich, Inc. v.       apportionment formula in Rev. & Tax. Code, § 25128,
     Franchise Tax Bd. (No. CGC-10-496437); RB             subd. (a). The compact expressly required that taxpayers
     Holdings (USA) Inc. v. Franchise Tax Bd. (No.         be allowed to elect its apportionment formula. Depriving
     CGC-10-496438); Jones Apparel Group, Inc. v.          the taxpayers of that option would violate the
     Franchise Tax Bd. (No. CGC-10-499083).                constitutional prohibition in U.S. Const., art. I, § 10, cl. 1,
 Superior Court of San Francisco City and County, No.      and Cal. Const., art. I, § 9, against impairing the
CGC-10-495911, Richard A. Kramer, Judge.                   obligation of contracts and also would violate the
                                                           reenactment rule of Cal. Const., art. IV, § 9, because
CASE SUMMARY:                                              there had been no amendment and reenactment of the
                                                           option. Course of performance evidence as to other states'
                                                           amendments was irrelevant. There was no surrender or
PROCEDURAL POSTURE: Appellant taxpayers                    suspension of taxing powers under Cal. Const. art. XIII, §
                                                                                                                   Page 2
                                  207 Cal. App. 4th 1369, *; 144 Cal. Rptr. 3d 555, **;
                                           2012 Cal. App. LEXIS 833, ***1

31.                                                            Constitutional Law > Congressional Duties & Powers >
                                                               Contracts Clause > Coverage
OUTCOME: The court reversed the judgment of                    Governments > Legislation > Effect & Operation >
dismissal.                                                     Amendments
                                                               Governments > Legislation > Types of Statutes
CORE TERMS: compact, interstate compacts,                      [HN3] As is true of other contracts, the contract clause of
multistate,    withdrawal,     formula,    apportionment,      the United States Constitution shields compacts from
signatory, binding, apportionment formula, uniformity,         impairment by the states. Therefore, upon entering a
repeal, repealing, election, enacting, taxation, interstate,   compact, it takes precedence over the subsequent statutes
withdraw, apportion, refund, elect", business income,          of signatory states and, as such, a state may not
amend, unilaterally, enforceable, payroll, taxing, state       unilaterally nullify, revoke or amend one of its compacts
law, reenactment, mandatory, subject matter                    if the compact does not so provide. Thus interstate
                                                               compacts are unique in that they empower one state
LexisNexis(R) Headnotes                                        legislature--namely the one that enacted the
                                                               agreement--to bind all future legislatures to certain
                                                               principles governing the subject matter of the compact.
                                                               Upon entering into an interstate compact, a state
Governments > Legislation > Types of Statutes                  effectively surrenders a portion of its sovereignty; the
Governments > State & Territorial Governments >                compact governs the relations of the parties with respect
General Overview                                               to the subject matter of the agreement and is superior to
[HN1] Interstate compacts are legislatively enacted,           both prior and subsequent law. Further, when enacted, a
binding and enforceable agreements between two or more         compact constitutes not only law, but a contract which
states. Some interstate compacts require congressional         may not be amended, modified, or otherwise altered
consent, but others, that do not infringe on the federal       without the consent of all parties. One party may not
sphere, do not. The case law has set forth three primary       enact legislation which would impose burdens upon the
indicia: establishment of a joint organization for             compact absent the concurrence of the other signatories.
regulatory purposes; conditional consent by member             Nor may states amend a compact by enacting legislation
states in which each state is not free to modify or repeal     that is substantially similar, unless the compact itself
its participation unilaterally; and state enactments which     contains language enabling a state or states to modify it
require reciprocal action for their effectiveness.             through legislation concurred in by the other states.

Contracts Law > Contract Interpretation > General              Civil Procedure > Justiciability > Standing > General
Overview                                                       Overview
Governments > Legislation > Interpretation                     Tax Law > State & Local Taxes > Administration &
Governments > Legislation > Types of Statutes                  Proceedings > Credits, Overassessments & Refunds
[HN2] Where federal congressional consent was neither          Tax Law > State & Local Taxes > Income Tax >
given nor required, an interstate compact must be              Corporations & Unincorporated Associations > General
construed as state law. Moreover, since interstate             Overview
compacts are agreements enacted into state law, they           [HN4] In an action for the refund of corporate taxes paid
have dual functions as enforceable contracts between           to the state pursuant to Rev. & Tax. Code, § 19382, the
member states and as statutes with legal standing within       taxpayers have standing to claim that the tax computed
each state; and thus courts interpret them as both. The        and assessed is void in whole or in part.
contractual nature of a compact is demonstrated by its
adoption: There is an offer (a proposal to enact virtually     Civil Procedure > Justiciability > Standing > General
verbatim statutes by each member state), an acceptance         Overview
(enactment of the statutes by the member states), and          Tax Law > State & Local Taxes > Administration &
consideration (the settlement of a dispute, creation of an     Proceedings > Credits, Overassessments & Refunds
association, or some mechanism to address an issue of          Tax Law > State & Local Taxes > Income Tax >
mutual interest).                                              Corporations & Unincorporated Associations >
                                                                                                                    Page 3
                                  207 Cal. App. 4th 1369, *; 144 Cal. Rptr. 3d 555, **;
                                           2012 Cal. App. LEXIS 833, ***1

Imposition of Tax                                              some type of notice requirement.
[HN5] The Multistate Tax Compact, at Rev. & Tax.
Code, § 38006, art. III, subd. 1, explicitly gives taxpayers
                                                               Governments > State & Territorial Governments >
whose income is subject to apportionment and allocation
                                                               Finance
under the laws of a party state the option to elect to
                                                               [HN8] See Cal. Const. art. XIII, § 31.
apportion its taxes under the Uniform Division of Income
for Tax Purposes Act, Rev. & Tax. Code, § 25120 et seq.,
the compact formula. This is a right specifically extended     Governments > State & Territorial Governments >
not to the party states but to taxpayers as third parties      Finance
regulated under the compact, and as such taxpayers may         Tax Law > State & Local Taxes > Income Tax >
seek to enforce this right as part of a tax refund suit.       Corporations & Unincorporated Associations >
Moreover, the stated purposes of the compact explicitly        Imposition of Tax
embrace taxpayer interests. These purposes include             [HN9] By entering the Multistate Tax Compact,
facilitating (1) proper determination of state and local tax   California has neither surrendered nor suspended its
liability of multistate taxpayers, including the equitable     taxing powers.
apportionment of tax bases; and (2) taxpayer
convenience. § 38006, art. I, subds. 1, 3.
                                                               Governments > Legislation > Effect & Operation >
                                                               Amendments
Governments > Legislation > Statutory Remedies &               Governments > Legislation > Types of Statutes
Rights                                                         [HN10] By its very nature an interstate compact shifts
[HN6] Compacts are statutory law. Consequently, the            some of a state's authority to another state or states. Thus
assertion of private rights created or otherwise affected      signatory states cede a level of sovereignty over matters
by an interstate compact is procedurally similar to the        covered in the compact in favor of pursuing multilateral
assertion of such rights conferred by other statutes of the    action to resolve a dispute or regulate an interstate affair.
jurisdiction dealing with similar subject matter.              Because the compact is both a statute and a binding
                                                               agreement among sovereign signatory states, having
                                                               entered into it, California cannot, by subsequent
Governments > Legislation > Expirations, Repeals &
                                                               legislation, unilaterally alter or amend its terms. Indeed,
Suspensions
                                                               an interstate compact is superior to prior and subsequent
Tax Law > State & Local Taxes > Income Tax >
                                                               statutory law of member states.
Corporations & Unincorporated Associations >
Imposition of Tax
[HN7] The Multistate Tax Compact provides for a state's        Contracts Law > Contract Interpretation > General
orderly withdrawal, namely by enacting a statute               Overview
repealing the compact. However, any repealing                  Governments > Legislation > Interpretation
legislation must be prospective in nature, because it          Governments > Legislation > Types of Statutes
cannot affect any liability already incurred by or             [HN11] In part because compacts are agreements among
chargeable to a party state prior to the time of such          sovereign states, courts will not read absent terms into
withdrawal. Rev. & Tax. Code, § 38006, art. X, subd. 2.        them or dictate relief inconsistent with their express
Although notice to sister states is not specifically           terms.
required, by requiring repealing state legislation, the
process itself calls for a measured, deliberative decision
prior to withdrawal. Nevertheless, the right to withdraw is    Governments > Legislation > Expirations, Repeals &
unilateral. The withdrawal provision does not render the       Suspensions
compact something less than a binding agreement. This          Tax Law > State & Local Taxes > Income Tax >
type of withdrawal provision is common in other                Corporations & Unincorporated Associations >
interstate compacts and has not been the death knell           Imposition of Tax
rendering them nonbinding and invalid. California is a         [HN12] The plain language of the withdrawal provision
party to a number of interstate compacts containing            in the Multistate Tax Compact, enabling a party state to
virtually identical withdrawal provisions, coupled with        withdraw from the compact by enacting a statute
                                                                                                                    Page 4
                                   207 Cal. App. 4th 1369, *; 144 Cal. Rptr. 3d 555, **;
                                            2012 Cal. App. LEXIS 833, ***1

repealing the same, allows only for complete withdrawal         turns monitors the first party's compliance with contract
from the compact. California has not withdrawn from the         terms. Thus the foundation for finding course of
compact. After withdrawal, a state remains liable for any       performance evidence relevant and reliable is faulty.
obligations incurred prior to withdrawal. Faced with the
desire to escape an obligation under the compact, a state's
                                                                Constitutional Law > Congressional Duties & Powers >
only option is to withdraw completely by enacting a
                                                                Contracts Clause > General Overview
repealing statute. That is what the plain language says,
                                                                [HN16] See U.S. Const., art. I, § 10, cl. 1.
and a court cannot read into that language an inconsistent
term allowing for piecemeal amendment or elimination of
compact provisions.                                             Constitutional Law > Congressional Duties & Powers >
                                                                Contracts Clause > General Overview
                                                                [HN17] See Cal. Const., art. I, § 9.
Tax Law > State & Local Taxes > Income Tax >
Corporations & Unincorporated Associations >
Imposition of Tax                                               Constitutional Law > Congressional Duties & Powers >
[HN13] The express, unambiguous terms of the                    Contracts Clause > Coverage
Multistate Tax Compact require extending taxpayers the          [HN18] The constitutional prohibition against impairing
option of electing the Uniform Division of Income for           the obligation of contracts extends to interstate compacts.
Tax Purposes Act, Rev. & Tax. Code, § 25120 et seq.,
and set forth reciprocal repeal terms allowing a member
state to cease its participation and reclaim its sovereignty.   Governments > Legislation > Effect & Operation >
A contrary interpretation would run counter to the              Amendments
express purposes of the compact, which include                  [HN19] See Cal. Const., art. IV, § 9.
facilitating equitable apportionment of tax bases and
promoting uniformity or compatibility in significant            Governments > Legislation > Effect & Operation >
components of tax systems. Rev. & Tax. Code, § 38006,           Amendments
art. I, subds. 1, 2.                                            [HN20] The reenactment rule of Cal. Const., art. IV, § 9,
                                                                applies to acts which are in terms amendatory of some
Contracts Law > Contract Interpretation > Parol                 former act. Its applicability does not depend on the
Evidence > Course of Dealing                                    method of amendment, but rather on whether legislators
[HN14] The course of performance of a contract is only          and the public have been reasonably notified of direct
relevant to ascertaining the parties' intention at the time     changes in the law.
of contracting. Civ. Code, § 1636.
                                                                SUMMARY:

Contracts Law > Contract Interpretation > Parol                 CALIFORNIA OFFICIAL REPORTS SUMMARY
Evidence > Course of Dealing
Tax Law > State & Local Taxes > Income Tax >                        The trial court sustained the Franchise Tax Board's
Corporations & Unincorporated Associations >                    demurrer without leave to amend and dismissed an action
Imposition of Tax                                               for a refund of corporate income taxes (Rev. & Tax.
[HN15] When the parties perform under a contract,               Code, § 19382). The taxpayers asserted that the
without objection or dispute, they are fulfilling their         Multistate Tax Compact gave them the option (Rev. &
understanding of the terms of the contract. The course of       Tax. Code, § 38006, art. III, subd. 1) to elect the
performance doctrine is thus premised on the assumption         compact's apportionment formula. (Superior Court of the
that one party's response to another party's action is          City and County of San Francisco, No. CGC-10-495911,
probative of their understanding of the contract terms.         Richard A. Kramer, Judge.)
But in the context of the Multistate Tax Compact, the
                                                                    The Court of Appeal reversed the judgment of
member states do not perform or deliver their obligations
                                                                dismissal. The court observed that interstate compacts are
to one another, unlike a typical contract in which a party
                                                                both statutory law and binding contracts between member
provides services or goods to the other party, who in
                                                                                                                   Page 5
                                  207 Cal. App. 4th 1369, *; 144 Cal. Rptr. 3d 555, **;
                                           2012 Cal. App. LEXIS 833, ***1

states, which supersede conflicting state law. The             offer (a proposal to enact virtually verbatim statutes by
withdrawal provision (§ 38006, art. X, subd. 2) does not       each member state), an acceptance (enactment of the
render the compact less than a binding agreement.              statutes by the member states), and consideration (the
California could not unilaterally amend the compact by         settlement of a dispute, creation of an association, or
mandating the use of the double-weighted sales                 some mechanism to address an issue of mutual interest).
apportionment formula (Rev. & Tax. Code, § 25128,
subd. (a)). The compact expressly requires that taxpayers      (3) Constitutional Law § 72--Impairment of
be allowed to elect its apportionment formula. Depriving       Contract--Interstate Compacts.--As is true of other
the taxpayers of that option would violate the                 contracts, the contract clause of the United States
constitutional prohibition against impairing the obligation    Constitution shields compacts from impairment by the
of contracts (U.S. Const., art. I, § 10, cl. 1; Cal. Const.,   states. Therefore, upon entering a compact, it takes
art. I, § 9) and also would violate the reenactment rule       precedence over the subsequent statutes of signatory
(Cal. Const., art. IV, § 9) because there had been no          states and, as such, a state may not unilaterally nullify,
amendment and reenactment of the option. Course of             revoke or amend one of its compacts if the compact does
performance evidence as to other states' amendments was        not so provide. Thus interstate compacts are unique in
irrelevant. There was no surrender or suspension of            that they empower one state legislature--namely the one
taxing powers (Cal. Const. art. XIII, § 31). (Opinion by       that enacted the agreement--to bind all future legislatures
Reardon, J., with Ruvolo, P. J., and Sepulveda, J.,+           to certain principles governing the subject matter of the
concurring.) [*1370]                                           compact. Upon entering into an interstate compact, a state
                                                               effectively surrenders a portion of its sovereignty; the
       +    Retired Associate Justice of the Court of          compact governs the relations of the parties with respect
       Appeal, First Appellate District, assigned by the       to the subject matter of the agreement and is superior to
       Chief Justice pursuant to article VI, section 6 of      both prior and subsequent law. Further, when enacted, a
       the California Constitution.                            compact constitutes not only law, but a contract which
                                                               may not be amended, modified, or otherwise altered
HEADNOTES                                                      without the consent of all parties. One party may not
                                                               enact legislation which would impose burdens upon the
CALIFORNIA OFFICIAL REPORTS HEADNOTES                          compact absent the concurrence of the other signatories.
                                                               Nor may states amend a compact by enacting legislation
(1) State of California § 6--Contracts--Interstate
                                                               that is [*1371] substantially similar, unless the compact
Compacts.--Interstate compacts are legislatively enacted,
                                                               itself contains language enabling a state or states to
binding and enforceable agreements between two or more
                                                               modify it through legislation concurred in by the other
states. Some interstate compacts require congressional
                                                               states.
consent, but others, that do not infringe on the federal
sphere, do not. The case law has set forth three primary       (4)          Taxpayers'             Remedies             §
indicia: establishment of a joint organization for             11--Proceedings--Corporate            Tax         Refund
regulatory purposes; conditional consent by member             Action--Standing.--In an action for the refund of
states in which each state is not free to modify or repeal     corporate taxes paid to the state pursuant to Rev. & Tax.
its participation unilaterally; and state enactments which     Code, § 19382, the taxpayers have standing to claim that
require reciprocal action for their effectiveness.             the tax computed and assessed is void in whole or in part.
(2) State of California § 6--Contracts--Interstate             (5) Corporations § 59--Taxation--Apportionment of
Compacts--Interpretation.--Where                   federal     Unitary Business--Multistate Tax Compact--Option to
congressional consent was neither given nor required, an       Elect Formula.--The Multistate Tax Compact explicitly
interstate compact must be construed as state law.             gives taxpayers whose income is subject to
Moreover, since interstate compacts are agreements             apportionment and allocation under the laws of a party
enacted into state law, they have dual functions as            state the option (Rev. & Tax. Code, § 38006, art. III,
enforceable contracts between member states and as             subd. 1) to elect to apportion its taxes under the Uniform
statutes with legal standing within each state; and thus       Division of Income for Tax Purposes Act (Rev. & Tax.
courts interpret them as both. The contractual nature of a     Code, § 25120 et seq.), the compact formula. This is a
compact is demonstrated by its adoption: There is an
                                                                                                                     Page 6
                                207 Cal. App. 4th 1369, *1371; 144 Cal. Rptr. 3d 555, **;
                                           2012 Cal. App. LEXIS 833, ***1

right specifically extended not to the party states but to     Code, § 25128, had repealed the Rev. & Tax. Code, §
taxpayers as third parties regulated under the compact,        38006, taxpayer election to apportion under the
and as such taxpayers may seek to enforce this right as        Multistate Tax Compact formula, mandating the
part of a tax refund suit. Moreover, the stated purposes of    exclusive use of the double-weighted sales apportionment
the compact explicitly embrace taxpayer interests. These       formula. However, § 38006 is not just a statute but is also
purposes include facilitating (1) proper determination of      the codification of the compact, and through this
state and local tax liability of multistate taxpayers,         enactment California has entered a binding, enforceable
including the equitable apportionment of tax bases; and        agreement with the other signatory states. Multiple flaws
(2) taxpayer convenience (§ 38006, art. I, subds. 1, 3).       in the FTB's position were apparent. First, under
                                                               established compact law, the Multistate Tax Compact
(6) Statutes § 4--Operation and Effect--Interstate             supersedes subsequent conflicting state law. Second, the
Compacts--Assertion of Private Rights.--Compacts are           federal and state Constitutions prohibit states from
statutory law. Consequently, the assertion of private          passing laws that impair the obligations of contracts. And
rights created or otherwise affected by an interstate          finally, the FTB's construction of the effect of the
compact is procedurally similar to the assertion of such       amended § 25128 ran afoul of the reenactment clause of
rights conferred by other statutes of the jurisdiction         the California Constitution.
dealing with similar subject matter.
                                                                   [Cal. Forms of Pleading and Practice (2012) ch. 540,
(7) Corporations § 59--Taxation--Apportionment of              Taxes and Assessments, § 540.340.]
Unitary             Business--Multistate                Tax
Compact--Withdrawal Provision.--The Multistate Tax             (10) State of California § 6--Contracts--Interstate
Compact provides for a state's orderly withdrawal,             Compacts--Unilateral                           Amendment
namely by enacting a statute repealing the compact.            Impermissible.--By its very nature an interstate compact
However, any repealing legislation must be prospective         shifts some of a state's authority to another state or states.
in nature, because it cannot affect any liability already      Thus signatory states cede a level of sovereignty over
incurred by or chargeable to a party state prior to the time   matters covered in the compact in favor of pursuing
of such withdrawal (Rev. & Tax. Code, § 38006, art. X,         multilateral action to resolve a dispute or regulate an
subd. 2). Although notice to sister states is not              interstate affair. Because the compact is both a statute and
specifically required, by requiring repealing state            a binding agreement among sovereign signatory states,
legislation, the process itself calls for a measured,          having entered into it, California cannot, by subsequent
deliberative decision prior to withdrawal. Nevertheless,       legislation, unilaterally alter or amend its terms. Indeed,
the right to withdraw is unilateral. The withdrawal            an interstate compact is superior to prior and subsequent
provision does not render the compact something less           statutory law of member states.
than a binding agreement. This type of withdrawal
provision is [*1372] common in other interstate                (11) State of California § 6--Contracts--Interstate
compacts and has not been the death knell rendering them       Compacts--Interpretation.--In part because compacts
nonbinding and invalid. California is a party to a number      are agreements among sovereign states, courts will not
of interstate compacts containing virtually identical          read absent terms into them or dictate relief inconsistent
withdrawal provisions, coupled with some type of notice        with their express terms. [*1373]
requirement.
                                                               (12) Corporations § 59--Taxation--Apportionment of
(8) Taxation § 4--Governmental Powers--Prohibition             Unitary              Business--Multistate              Tax
Against Surrender or Suspension--Multistate Tax                Compact--Withdrawal Provision--Partial Withdrawal
Compact.--By entering the Multistate Tax Compact,              Not Authorized.--The plain language of the withdrawal
California has neither surrendered nor suspended its           provision in the Multistate Tax Compact, enabling a party
taxing powers.                                                 state to withdraw from the compact by enacting a statute
                                                               repealing the same, allows only for complete withdrawal
(9) Corporations § 59--Taxation--Apportionment of              from the compact. California has not withdrawn from the
Unitary Business--Multistate Tax Compact--Option to            compact. After withdrawal, a state remains liable for any
Elect Formula--Unaffected by Other Law.--The                   obligations incurred prior to withdrawal. Faced with the
Franchise Tax Board (FTB) asserted that Rev. & Tax.            desire to escape an obligation under the compact, a state's
                                                                                                                      Page 7
                                 207 Cal. App. 4th 1369, *1373; 144 Cal. Rptr. 3d 555, **;
                                            2012 Cal. App. LEXIS 833, ***1

only option is to withdraw completely by enacting a              applies to acts which are in terms amendatory of some
repealing statute. That is what the plain language says,         former act. Its applicability does not depend on the
and a court cannot read into that language an inconsistent       method of amendment, but rather on whether legislators
term allowing for piecemeal amendment or elimination of          and the public have been reasonably notified of direct
compact provisions.                                              changes in the law.

(13) Corporations § 59--Taxation--Apportionment of               COUNSEL: Silverstein & Pomerantz, Amy L.
Unitary Business--Multistate Tax Compact--Option to              Silverstein, Edwin P. Antolin, Johanna W. Roberts and
Elect Formula--Mandatory Nature.--The express,                   Charles E. Olson for Plaintiffs and Appellants.
unambiguous terms of the Multistate Tax Compact
require extending taxpayers the option of electing the           BraunHagey & Borden, Matthew Borden; and Jeffrey B.
Uniform Division of Income for Tax Purposes Act (Rev.            Litwak as Amici Curiae on behalf of Plaintiffs and
& Tax. Code, § 25120 et seq.) and set forth reciprocal           Appellants.
repeal terms allowing a member state to cease its
participation and reclaim its sovereignty. A contrary            Wm. Gregory Turner for Council on State Taxation as
interpretation would run counter to the express purposes         Amicus Curiae on behalf of Plaintiffs and Appellants.
of the compact, which include facilitating equitable
                                                                 Law Offices of Miriam Hiser, Miriam Hiser; Masters,
apportionment of tax bases and promoting uniformity or
                                                                 Mullins & Arrington and Richard L. Masters for
compatibility in significant components of tax systems
                                                                 Interstate Commission for Juveniles as Amicus Curiae on
(Rev. & Tax. Code, § 38006, art. I, subds. 1, 2).
                                                                 behalf of Plaintiffs and Appellants.
(14)      Contracts       §     27--Construction          and
                                                                 Kamala D. Harris, Attorney General, Paul D. Gifford,
Interpretation--Evidence         to     Aid--Course         of
                                                                 Assistant Attorney General, Joyce E. Hee and Lucy F.
Performance.--The course of performance of a contract
                                                                 Wang, Deputy Attorneys General, for Defendant and
is only relevant to ascertaining the parties' intention at the
                                                                 Respondent.
time of contracting (Civ. Code, § 1636).
                                                                 Joe Huddleston, Shirley Sicilian and Sheldon Laskin for
(15) Corporations § 59--Taxation--Apportionment of
                                                                 Multistate Tax Commission as Amicus Curiae on behalf
Unitary Business--Multistate Tax Compact--Course of
                                                                 of Defendant and Respondent.
Performance Evidence Irrelevant.--When the parties
perform under a contract, without objection or dispute,
                                                                 JUDGES: Opinion by Reardon, J., with Ruvolo, P. J.,
they are fulfilling their understanding of the terms of the
                                                                 and Sepulveda, J.,* concurring.
contract. The course of performance doctrine is thus
premised on the assumption that one party's response to                 *    Retired Associate Justice of the Court of
another party's action is probative of their understanding              Appeal, First Appellate District, assigned by the
of the contract terms. But in the context of the Multistate             Chief Justice pursuant to article VI, section 6 of
Tax Compact, the member states do not perform or                        the California Constitution.
deliver their obligations to one another, unlike a typical
contract in which a party provides services or goods to          OPINION BY: Reardon
the other party, who in turns monitors the first party's
compliance with contract terms. Thus the foundation for          OPINION
finding course of performance evidence relevant and              [**558]
reliable is faulty. [*1374]
                                                                      REARDON, J.--California is a signatory to the
(16) Constitutional Law § 72--Impairment of                      Multistate Tax Compact (Compact). (Rev. & Tax. Code,1
Contract--Interstate Compacts.--The constitutional               § 38001, California's enactment of the Compact.) This
prohibition against impairing the obligation of contracts        [***2] binding, multistate agreement obligates member
extends to interstate compacts.                                  states to offer its multistate taxpayers the option of using
                                                                 either the Compact's three-factor formula to apportion
(17) Statutes § 13--Amendment--Reenactment
                                                                 and allocate income for state income tax purposes, or the
Rule.--The reenactment rule (Cal. Const., art. IV, § 9)
                                                                                                                Page 8
                             207 Cal. App. 4th 1369, *1374; 144 Cal. Rptr. 3d 555, **558;
                                          2012 Cal. App. LEXIS 833, ***2

state's own alternative apportionment formula. (§ 38006,     amend.4
art. [*1375] III, subd. 1.) This is one of the Compact's
key mandatory provisions designed to secure a baseline             3     Other appellants are Procter & Gamble
level of uniformity in state income tax systems, a central         Manufacturing       Company;        Kimberly-Clark
purpose of the agreement.                                          Worldwide,      Inc.,   and     its   subsidiaries;
                                                                   Sigma-Aldrich, Inc.; RB Holdings (USA) Inc.,
       1 Unless noted otherwise, all statutory references          and Jones Apparel Group, Inc.
       are to the Revenue and Taxation Code.                       4     Despite the absence of a judgment of
                                                                   dismissal, we deem the order to incorporate such
      Prior to 1993, California subscribed to a single             judgment because the trial court sustained a
method of apportioning and allocating income, the                  demurrer to all causes of action, and all that
Compact formula, which ascribed equal weight to three              remains to render the order appealable is the
factors: property, payroll and sales. (Former § 25128, as          formality of entering a judgment of dismissal.
added by Stats. 1966, ch. 2, § 7, p. 179.) Then, in 1993           (Melton v. Boustred (2010) 183 Cal. App. 4th 521,
the Legislature amended section 25128 to give double               527-528, fn. 1 [107 Cal. Rptr. 3d 481].)
weight to the sales factor for most business activity,       [*1376] [**559]
specifying that "[n]otwithstanding Section 38006, all
business income shall be apportioned to this state by        I. BACKGROUND
multiplying the [business] income by a fraction, the
numerator of which is the property factor plus the payroll   A. Historical Context Leading to Enactment of the
factor plus twice the sales factor, and the denominator      Compact
[***3] of which is four ... ." (Former § 25128, subd. (a),
                                                                  Recognizing the need for uniformity in the
italics added, as amended by Stats. 1993, ch. 946, § 1, p.
                                                             apportionment of corporate income for tax purposes
5441.)2
                                                             among the various taxing states, in 1957 the National
       2 For purposes of this appeal, the current version    Conference of Commissioners on Uniform State Laws
       of section 25128, subdivision (a) is similar in all   promulgated the Uniform Division of Income for Tax
       material respects to the 1993 amendment, reading      Purposes Act (UDITPA). (7A pt. I West's U. Laws Ann.
       as follows: "Notwithstanding Section 38006, all       (2002) pp. 141-142 & § 9.) To apportion a multistate
       business income shall be apportioned to this state    corporation's business income among the [***5] various
       by multiplying the business income by a fraction,     taxing states, UDITPA uses a three-factor, equally
       the numerator of which is the property factor plus    weighted formula consisting of property, payroll and
       the payroll factor plus twice the sales factor, and   sales receipts. (7A pt. I West's U. Laws Ann., § 9.)
       the denominator of which is four ... ."               California adopted the UDITPA in 1966. (§ 25120 et
                                                             seq.; Stats. 1966, ch. 2, § 7, pp. 177-181.)
     These consolidated appeals brought by appellants
The Gillette Company and its subsidiaries, and other              By 1959, only a few states had adopted the UDITPA.
corporate entities (Taxpayers),3 present the issue of        (7A pt. I West's U. Laws Ann., supra, p. 141.) That year,
whether, for the tax years at issue since 1993, Taxpayers    the United States Supreme Court delivered its decision in
were entitled to elect the Compact formula, or, as           Northwestern Cement Co. v. Minn. (1959) 358 U.S. 450,
respondent Franchise Tax Board (FTB) asserts, did the        452 [3 L. Ed. 2d 421, 79 S. Ct. 357] (Northwestern
1993 amendment to section 25128 repeal and supersede         Cement), holding that "net income from the interstate
that formula, thereby making the state formula               operations of a foreign corporation may be subjected to
mandatory? We conclude that the Compact is a valid           state taxation provided the levy is not discriminatory and
multistate compact, and California is bound by it and its    is properly apportioned to local activities within the
apportionment election provision unless and until            taxing State forming sufficient nexus to support the
California withdraws from the Compact by enacting a          same." Northwestern Cement raised concerns in the
statute [***4] that repeals section 38006. Accordingly,      business community and within weeks of the decision,
since California has not repealed section 38006 and          Congress commenced hearings, culminating in the
withdrawn from the Compact, we reverse the trial court's     passage of Public Law No. 86-272 as an emergency,
order sustaining the FTB's demurrer without leave to         temporary measure some six months later. This law was
                                                                                                                   Page 9
                             207 Cal. App. 4th 1369, *1376; 144 Cal. Rptr. 3d 555, **559;
                                          2012 Cal. App. LEXIS 833, ***5

intended to restrict the application of Northwestern               Section 38006, article IV adopts the UDITPA and its
Cement and created a subcommittee to study state              equally weighted, three-factor apportionment formula,
business taxes and recommend legislation establishing         stating in part: "All business income shall be apportioned
uniform standards which states would [***6] observe in        to this State by multiplying the income by a fraction, the
taxing income of interstate companies. (Fatale,               numerator of which is the property factor plus the payroll
Federalism and State Business Activity Tax Nexus:             factor [***8] plus the sales factor, and the denominator
Revisiting Public Law No. 86-272 (Spring 2002) 21 Va.         of which is three." (§ 38006, art. IV, subd. 9.) However,
Tax Review, 435, 475-476; U.S. Steel Corp. v. Multistate      article III allows taxpayers the option of apportioning and
Tax Comm'n (1978) 434 U.S. 452, 455 [54 L. Ed. 2d 685,          allocating income pursuant to the UDITPA formula or
98 S. Ct. 799] (U.S. Steel).) The subsequent study,            pursuant to a given state's alternative apportionment
commonly referred to as the "Willis Report" after             provisions: "Any taxpayer subject to an income tax
Congressman Edwin E. Willis who chaired the                   whose income is subject to apportionment and allocation
subcommittee,5 called for federal legislation that would      for tax purposes pursuant to the laws of a party State ...
have limited state authority to tax interstate business       may elect to apportion and allocate his income in the
operations and imposed a uniform apportionment regime         manner provided by the laws of such State ... without
on the states. (State Taxation of Interstate Commerce,        reference to this compact, or may elect to apportion and
House Com. on Judiciary, Special Subcom. on State             allocate in accordance with Article IV." (§ 38006, art. III,
Taxation of Interstate Commerce, 89th Cong., 1st Sess.        subd. 1.) As noted in the Multistate Tax Commission's
(1965).)                                                      Third Annual Report (1969-1970),6 "The Multistate Tax
                                                              Compact makes UDITPA available to each taxpayer on
       5 Fatale, supra, 21 Va. Tax Rev. at page 477.          an optional basis, thereby preserving for him the
                                                              substantial advantages with which lack of uniformity
     In the wake of the Willis Report, Congress               provides him in some states. Thus a corporation which is
introduced a number of bills incorporating its                selling into a state in which it has little property or
recommendations. (U.S. Steel, supra, 434 U.S. at p. 456,      payroll will want to insist upon the use of the three-factor
fn. [*1377] 4; Sharpe, State Taxation of Interstate           formula (sales, property and payroll) which is included in
Businesses and the Multistate Tax Compact: The Search         UDITPA because that will substantially reduce [***9]
for a Delicate Uniformity (1974) 11 Colum. J. of Law          his tax liability to that state below what it would be if a
and Social Problems 231, 242 & n. 43.) To stave off           single sales factor formula were applied to him[;] on the
federal encroachment [***7] on their taxing powers and        other hand, he will look with favor upon the application
devise workable alternatives that would eliminate the         of the single sales factor formula to him by a state from
need for congressional action, state tax administrators and   which he is selling into [*1378] other states, since that
other state leaders drafted the Compact; by June 1967,        will reduce his tax liability to that state. The Multistate
nine states had enacted the Compact, which by its terms       Tax Compact thus preserves the right of the states to
became effective after seven states had adopted it.           make such alternative formulas available to taxpayers
[**560] (Multistate Tax Com., First Ann. Rep. (1968)          even though it makes uniformity available to taxpayers
pp. 1-2; § 38006, art. X, subd. 1.)                           where and when desired." (Id. at p. 3.)
B. Compact Provisions                                                6 Hereafter, Third Commission Report.
     California enacted the Compact in 1974. (§ 38001,             Secion 38006, article V sets out the rules for sales
Stats. 1974, ch. 93, § 3, p. 193.) Its purposes are to "1.    and use tax credits and exemptions, therein obligating
Facilitate proper determination of State and local tax        each party state to provide a full credit to taxpayers who
liability of multistate taxpayers, including the equitable    previously paid sales or use tax to another state with
apportionment of tax bases and settlement of                  respect to the same property, and to honor sales and use
apportionment disputes. [¶] 2. Promote uniformity or          tax exemption certificates from other states. (§ 38006, art.
compatibility in significant components of tax systems.
                                                              V, subd. 1.)
[¶] 3. Facilitate taxpayer convenience and compliance in
the filing of tax returns ... . [¶] 4. Avoid duplicative          The Compact leaves other matters entirely to state
taxation." (§ 38006, art. I.)                                 control. For example, it reserves to the states control over
                                                                                                                    Page 10
                              207 Cal. App. 4th 1369, *1378; 144 Cal. Rptr. 3d 555, **560;
                                           2012 Cal. App. LEXIS 833, ***9

the rate of tax (§ 38006, art. XI, subd. (a)), and simply       interpretation, established by case law, that limited
does not address the composition of a corporation's tax         application of the compact clause "'to agreements that are
base.                                                           "directed to the formation of any combination tending to
                                                                the increase of political power in the States, which may
      As well, the Compact creates the Multistate Tax           encroach upon or interfere with the just supremacy of the
Commission [***10] (Commission) with powers to                  United States." ' [Citation.] This rule states the proper
study state and local tax systems, develop and                  balance between federal and state power with respect
recommend proposals for greater uniformity of state and         [***12] to compacts and agreements among States." (434
local tax laws, and compile and publish information             U.S. at p. 471, initial quote from Virginia v. Tennessee
helpful to the states. [**561] (§ 38006, art. VI, subds. 1,     (1893) 148 U.S. 503, 519 [37 L. Ed. 537, 13 S. Ct. 728].)
3.) Each party state appoints a member to the
Commission and pays its share of expenses. (Id., art. VI,            Framing the test as whether the Compact enhances
subds. 1(a), 4(b).) The Commission may adopt uniform            state power with respect to the federal government, the
regulations in cases where two or more states have              court concluded it did not: "This pact does not purport to
uniform or similar provisions relating to specific types of     authorize the member States to exercise any powers they
taxes. (Id., art. VII.) However, such regulations are           could not exercise in its absence. Nor is there any
advisory only--each state makes its own decision whether        delegation of sovereign power to the Commission; each
to adopt the regulation in accordance with its own law.         State retains complete freedom to adopt or reject the rules
(Id., art. VII, subd. 3.) Additionally, the Commission may      and regulations of the Commission. Moreover ... , each
perform interstate audits, if requested by a party state; the   State is free to withdraw at any time." (U.S. Steel, supra,
governing article applies only in states that specifically      434 U.S. at p. 473.) In the end the court rejected all of the
adopt it by statute. (Id., art. VIII, subds. 1, 2.)             plaintiffs' challenges to the constitutional validity of the
                                                                Compact. (434 U.S. at p. 479.)
     Finally, under the Compact, states are free to
withdraw from the Compact at any time "by enacting a            D. Amendment of Section 25128; Litigation
statute repealing the same." (§ 38006, art. X, subd. 2.)
                                                                     Prior to 1993, California required corporations to
C. U.S. Steel                                                   apportion their business income to California using the
                                                                standard UDITPA, equally weighted three-factor
     In 1972, a group of multistate corporate taxpayers         apportionment formula. (§ 25128, as adopted in 1966; see
brought an action on behalf of themselves and all other         § 38006, art. IV, subd. 9.) In 1993, the Legislature
such taxpayers threatened [***11] with audits by the            amended this formula to give double weight to the sales
Commission.       The     complaint     challenged    the       factor and specified that the new formula was mandatory,
constitutionality of the Compact on several grounds,            providing     [***13] in relevant part: [**562]
including that it was invalid under the compact clause of       "Notwithstanding Section 38006 [(the Compact)], all
the United States Constitution.7 (U.S. Steel, supra, 434        business income shall be apportioned to this state by
U.S. at p. 458.)                                                multiplying the [business] income by a fraction, the
                                                                numerator of which is the property factor plus the payroll
      7 The compact clause of article I, section 10,            factor plus twice the sales factor, and the denominator of
      clause 3 of the United States Constitution states:        which is four ... ." (§ 25128, subd. (a), italics added;
      "No state shall, without the consent of Congress,         Stats. 1993, ch. 946, § 1, p. 5441.)
      ... enter into any agreement or compact with
      another state, or with a foreign power ... ."                  In January 2010, the Taxpayers lodged six
[*1379]                                                         complaints for the refund of taxes which the court
                                                                thereafter consolidated. Therein, they argued that the
    The high court acknowledged that the compact                amended section 25128 did not override or repeal the
clause, taken literally, would require the states to obtain     UDITPA formula set forth in section 38006, and sought a
congressional approval before entering into any                 refund of approximately $34 million. [*1380] The
agreement among themselves, "irrespective of form,              Taxpayers alleged that they began filing claims for refund
subject, duration, or interest to the United States." (U.S.     in 2006,8 based on their election to compute their
Steel, supra, 434 U.S. at p. 459.) However, it endorsed an      California apportionable income "using the three-factor
                                                                                                               Page 11
                             207 Cal. App. 4th 1369, *1380; 144 Cal. Rptr. 3d 555, **562;
                                         2012 Cal. App. LEXIS 833, ***13

apportionment formula (property, payroll, and                12.) Initially used to resolve boundary disputes, today
single-weighted sales) set forth in ... § 38006." The FTB    interstate compacts are a staple of interstate cooperation
denied the refund claims for the years at issue.             and, in addition to taxes, span a wide range of subject
                                                             matter and [*1381] issues including forest firefighting;
       8      Sigma-Aldrich, Inc., began filing refund       water allocation; mining regulation; storage of low level
       claims in 2003; RB Holdings (USA), Inc., began        radioactive    waste;    transportation;    environmental
       filing refund claims in 2007.                         preservation and resource conservation; regulation of
                                                             electric [**563] energy; higher education and regional
     The FTB demurred on grounds that the amended            cultural development. (Davis, Interstate Compacts in
section 25128 mandated the exclusive [***14] use of the      Commerce and Industry (1998) 23 Vt. L.Rev. 133,
double-weighted sales factor, and according to its plain     139-143.)
and unambiguous language, negated the Taxpayers' claim
of entitlement to elect the UDITPA formula. The trial             As we have seen, some interstate compacts require
court agreed that section 25128 "clearly express[ed] an      congressional consent, but others, that do not infringe on
intention to take away the alternative under [section]       [***16] the federal sphere, do not. Questioning whether
38006," and additionally the court in U.S. Steel             similar statutes in two states constituted a compact, the
determined that this alternative statutory scheme "could     Supreme Court has outlined what it deemed "classic
be obviated in the manner that the Legislature did."         indicia" of such instruments: "We have some doubt as to
Therefore, it sustained the FTB's demurrer to the            whether there is an agreement amounting to a compact.
complaints without leave to amend and entered judgment       The two statutes are similar in that they both require
accordingly.                                                 reciprocity and impose a regional limitation, both
                                                             legislatures favor the establishment of regional banking
II. DISCUSSION                                               in New England, and there is evidence of cooperation
                                                             among legislators, officials, bankers, and others in the
A. Introduction
                                                             two States in studying the idea and lobbying for the
     The Taxpayers are adamant that the Compact is a         statutes. But several of the classic indicia of a compact
valid, binding compact and as such, the Legislature          are missing. No joint organization or body has been
cannot override and eliminate the section 38006 option       established to regulate regional banking or for any other
for taxpayers to elect the Compact's apportionment           purpose. Neither statute is conditioned on action by the
formula. The FTB maintains as a threshold matter that the    other State, and each State is free to modify or repeal its
Taxpayers lack standing to complain of any purported         law unilaterally. Most importantly, neither statute
violation of the Compact. On the substantive front the       requires a reciprocation of the regional limitation."
FTB contends that the plain language of section 25128        (Northeast Bancorp v. Board of Governors, FRS (1985)
mandates the exclusive use of the double-weighted sales      472 U.S. 159, 175 [86 L. Ed. 2d 112, 105 S. Ct. 2545]
apportionment formula, thereby eliminating use of the        (Bancorp).) The Ninth Circuit Court of Appeals has aptly
equally weighted three-factor apportionment formula set      summarized Bancorp as setting forth three primary
forth as a taxpayer [***15] option in section 38006.         indicia: "These are establishment of a [***17] joint
Further, it urges that under California statutory and        organization for regulatory purposes; conditional consent
contract law, the Legislature had the power, and properly    by member states in which each state is not free to
enacted legislation, to repeal section 38006 to the extent   modify or repeal its participation unilaterally; and state
necessary to impose this mandatory apportionment             enactments which require reciprocal action for their
formula on taxpayers.                                        effectiveness." (Seattle Master Builders v. Pacific
                                                             Northwest Electric Power (9th Cir. 1986) 786 F.2d 1359,
B. Nature of Interstate Compacts                             1363.)

     (1) Some background on the nature of interstate              [HN2] (2) Where, as here, federal congressional
compacts is in order. [HN1] These instruments are            consent was neither given nor required, the Compact
legislatively enacted, binding and enforceable agreements    must be construed as state law. (McComb v. Wambaugh
between two or more states. (Litwak, Interstate Compact      (3d Cir. 1991) 934 F.2d 474, 479.) Moreover, since
Law: Cases and Materials (Semaphore Press 2011) pp. 5,       interstate compacts are agreements enacted into state law,
                                                                                                                   Page 12
                             207 Cal. App. 4th 1369, *1381; 144 Cal. Rptr. 3d 555, **563;
                                         2012 Cal. App. LEXIS 833, ***17

they have dual functions as enforceable contracts             compact absent the concurrence of the other signatories."
between member states and as statutes with legal standing     Cast a little differently, "[i]t is within the competency of a
within each state; and thus we interpret them as both.        State, which is a party to a compact with another State, to
(Aveline v. Bd. of Probation and Parole (1999) 729 A.2d       legislate in respect of matters covered by the compact so
1254, 1257; see Broun et al., The Evolving Use and the        long as such legislative action is in approbation and not
Changing Role of Interstate Compacts (ABA 2006) §             in reprobation of the compact." (Henderson v. Delaware
1.2.2, pp. 15-24 (Broun on Compacts); 1A Sutherland,          River Joint Toll Bridge Com. (1949) 362 Pa. 475 [66
Statutory Construction (7th ed. 2009) § 32:5; In re C.B.      A.2d 843, 849-850].) Nor may states amend a compact by
(2010) 188 Cal. App. 4th 1024, 1031 [116 Cal.Rptr.3d            enacting legislation that is substantially similar, unless
294] [recognizing that Interstate Compact on Placement        the compact itself contains language enabling a state
of Children shares characteristics of both contractual        [***20] or states to modify it through legislation "
agreements and statutory law].)                               'concurred in' " by the other states. (International Union
                                                              v. Delaware River Joint Toll Bridge, supra, 311 F.3d at
     (3) The contractual [***18] nature of a compact is       pp. 276-280.)
demonstrated by its adoption: "There is an offer (a
proposal to enact virtually verbatim statutes by each         C. Taxpayers Have Standing to Pursue These Actions
[*1382] member state), an acceptance (enactment of the
statutes by the member states), and consideration (the             The FTB asserts that even if California breached its
settlement of a dispute, creation of an association, or       obligations under the Compact, the Taxpayers have no
some mechanism to address an issue of mutual interest.)"      judicial remedy, are not parties to the agreement and have
(Broun on Compacts, supra, § 1.2.2, p. 18.) [HN3] As is       no enforceable rights under it.
true of other contracts, the contract clause of the United
                                                                  (4) First, [HN4] this is an action for the refund of
States Constitution shields compacts from impairment by
                                                              corporate taxes paid to the state pursuant to section
the states. (Aveline v. Bd. of Probation and Parole, supra,
                                                              19382, and without question the Taxpayers have standing
729 A.2d at p. 1257, fn. 10.) Therefore, upon entering a
                                                              in such an action to claim "that the tax computed and
compact, "it takes precedence over the subsequent
                                                              assessed is void in whole or in part ... ." (Ibid.) [*1383]
statutes of signatory states and, as such, a state may not
unilaterally nullify, revoke or amend one of its compacts          (5) Furthermore, [HN5] the Compact, at section
if the compact does not so provide." (Ibid.; accord,          38006, article III, subdivision 1 explicitly gives taxpayers
International Union v. Deleware River Joint Toll Bridge       whose income is subject to apportionment and allocation
(3d Cir. 2002) 311 F.3d 273, 281.) [**564] Thus               under the laws of a party state the option to elect to
interstate compacts are unique in that they empower one       apportion its taxes under UDITPA, the Compact formula.
state legislature--namely the one that enacted the            This is a right specifically extended not to the party states
agreement--to bind all future legislatures to certain         but to taxpayers as third parties regulated under the
principles governing the subject matter of the compact.       Compact, and as such Taxpayers may seek to enforce this
(Broun on Compacts, supra, § 1.2.2, p. 17.)                   right as part of its tax refund suit. Moreover, the stated
                                                              purposes of the Compact explicitly embrace [***21]
     As explained [***19] and summarized in C.T.
                                                              taxpayer interests. These purposes include facilitating (1)
Hellmuth      v.    Washington      Metropolitan     Area
                                                              "proper determination of State and local tax liability of
Transportation (D.Md. 1976) 414 F. Supp. 408, 409
                                                              multistate     taxpayers,     including     the     equitable
(Hellmuth): "Upon entering into an interstate compact, a
                                                              apportionment of tax bases" and (2) "taxpayer
state effectively surrenders a portion of its sovereignty;
                                                              convenience." (§ 38006, art. I, subds. 1, 3.)
the compact governs the relations of the parties with
respect to the subject matter of the agreement and is             Alabama v. North Carolina (2010) 560 U.S. ___
superior to both prior and subsequent law. Further, when      [176 L. Ed. 2d 1070, 130 S. Ct. 2295], characterized as
enacted, a compact constitutes not only law, but a            "particularly instructive" by the FTB, is not. There, the
contract which may not be amended, modified, or               Supreme Court ruled that the agency created by the
otherwise altered without the consent of all parties. It,     Compact could not bring claims for breach of compact by
therefore, appears settled that one party may not enact       a party state in a stand-alone action under the Supreme
legislation which would impose burdens upon the               Court's original jurisdiction because it had "neither a
                                                                                                                     Page 13
                              207 Cal. App. 4th 1369, *1383; 144 Cal. Rptr. 3d 555, **564;
                                          2012 Cal. App. LEXIS 833, ***21

contractual right to performance by the party States nor        by enacting repealing legislation.)
enforceable statutory rights under [the compact]." (Id.
560 U.S. at p. ___ [130 S.Ct. at p. 2315].) Our case has             Moreover, the Compact satisfies indicia of a
nothing to do with the unique features of federal original      compact. (See Seattle Master Builders v. Pacific
jurisdiction. (U.S. Const., art. III, § 2, cl. 2.)              Northwest Electric Power, supra, 786 F.2d at p. 1363.)
                                                                The Commission is an operational body charged with
     (6) [**565] In any event, in contrast, here the            duties and powers in furtherance of the Compact's
codified compact extends the right to election to               purposes. It oversees the Compact, is composed of tax
appropriate taxpayers. We find the decision in Borough          administrators from all member states, and is financed
of Morrisville v. Delaware River Basin Com. (E.D.Pa.            through a process of allocation and apportionment. (§
1975) 399 F. Supp. 469, 472-473, footnote 3 persuasive.          38006, art. VI.) Meeting on at least an annual basis, and
There, the plaintiff municipalities who used water from         with representation from each signatory state, the
the Delaware River claimed that the [***22] compact             Commission is a vehicle for continuing [***24]
commission in question exceeded its authority and               cooperative action among those states.
violated the compact and federal law by imposing certain
water charges. Resolving the standing issue in favor of               Additionally, the Compact builds in binding
the plaintiffs, the district court further stated that "'[t]o   reciprocal obligations that advance uniformity. First, as
hold that the Compact is an agreement between the               we have discussed, it secures an election for multistate
political signatories imputing only to those signatories        taxpayers to opt for apportioning their business income
standing to challenge actions pursuant to it would be           under UDITPA, the Compact formula, or in accordance
unduly narrow in view of the direct impact on plaintiffs        with the state's own apportionment formula. (§ 38006,
and other taxpayers.'" (Id. at p. 473.) This view is            art. III, subd. 1.) The election provision is not optional for
reinforced by commentators: "For the most part,                 party states. Because any multistate taxpayer "may elect"
interstate compacts have not created any privately              either approach, the party states must make the election
assertable rights ... . However, this is not invariably the     available.(Ibid.) As set forth above, the Commission has
case. For example, water allocation compacts, while they        explained that the mandate to make UDITPA available on
apportion water among states, may affect the rights of          an optional basis to taxpayers preserves "the substantial
individual water users in such a way as to make them            advantages with which lack of uniformity provides [the
proper parties to suits. In such situations, the governing      taxpayer] in some states." (Third Commission Report,
fact is that [HN6] compacts are statutory law.                  supra, at p. 3.) Thus the [**566] Compact reserves to
Consequently, the assertion of private rights created or        the states the right to provide taxpayers with alternative
otherwise affected by a compact is procedurally similar to      formulas, while at the same time making uniformity
the assertion of such rights conferred by other statutes of     available when and where desired. (Third Commission
the jurisdiction dealing with similar subject matter."          Report, at p. 3.)
(Zimmerman & Wendell, The Law and Use of [***23]
                                                                     As well, the Compact commits each state to provide
Interstate Compacts (The Council of State Governments
                                                                sales and use tax credits and exemptions. (§ 38006, art.
1976) Compact Law, ch. 1, pp. 14-15.) [*1384]
                                                                V.) Again, the sales and use tax provisions are mandatory
D. The Compact Is a Valid, Enforceable Interstate               on signatory states.
Compact
                                                                     (7) Finally, [***25] [HN7] the Compact provides
     To reiterate, the high court in U.S. Steel upheld the      for a state's orderly withdrawal, namely by enacting a
facial validity of the Compact against various                  statute repealing the Compact. However, any repealing
constitutional challenges. (U.S. Steel, supra, 434 U.S. at      legislation must be prospective in nature, because it
pp. 473-479.) Our own Attorney General has                      cannot "affect any liability already incurred by or
acknowledged the binding force of the Compact. (80              chargeable to a party State prior to the time of such
Ops.Cal.Atty.Gen. 213, 214 (1997): by virtue of enacting        withdrawal." (§ 38006, art. X, subd. 2.) Although notice
the Compact as part of the law of this state, the Compact       to sister states is not specifically required, by requiring
makes California a member of the Commission and the             repealing state legislation, the [*1385] process itself
only way to withdraw from commission membership is              calls for a measured, deliberative decision prior to
                                                                withdrawal. Moreover, advance notice could easily be
                                                                                                                Page 14
                             207 Cal. App. 4th 1369, *1385; 144 Cal. Rptr. 3d 555, **566;
                                         2012 Cal. App. LEXIS 833, ***25

accomplished through the work of the Commission.                   9     Multistate Tax Compact, Suggested State
                                                                   Legislation and Enabling Act, accessed on the
     Nevertheless, the right to withdraw is unilateral.            Web site of the Multistate Tax Commission on
Citing Bancorp, the FTB suggests that the withdrawal               July                 23,                 2012
provision renders the Compact something less than a                
not been the death knell rendering them nonbinding and       [*1386]
invalid. California is a party to a number of interstate
compacts containing virtually identical withdrawal                (8) The FTB also intimates that the Compact is
provisions, coupled with some type of notice                 invalid under article 13, section 31 of our state
requirement. (See Gov. Code, § 66801, art. X, subd. (c)      Constitution, which states: [HN8] "The power to tax may
[delineating withdrawal provision for Tahoe Regional         not be surrendered or suspended by grant or contract."
Planning [***26] Compact]; Veh. Code, § 15027 [same          But of course [HN9] by entering the Compact, California
for Driver License Compact]; Welf. & Inst. Code, §           has neither surrendered nor suspended its taxing powers.
1400, art. XI, subd. (a) [same for Interstate Compact on     California retains full control of its tax base, [***28] tax
Juveniles]; Pen. Code, § 11180, art. XII, § A [Interstate    rate and tax revenues; it simply has obligated itself to
Compact for Adult Offender Supervision]; Ed. Code, §         provide taxpayers with an option to use UDITPA or the
12510, art. VIII [Compact for Education].)                   state formula and can rescind that obligation by
                                                             withdrawing from the Compact.
     Furthermore, the situation in Bancorp, cited by the
FTB, differs dramatically from the case at hand. There,      E. California Cannot Unilaterally Repeal Compact
Massachusetts and Connecticut enacted similar statutes       Terms
allowing regional interstate banking acquisitions.
However, unlike section 38006, these statutes were not            The thrust of the FTB on appeal is this: Confirming
jointly entered into as a binding agreement; they did not    the Legislature's authority to amend, repeal or supersede
create an administrative body nor did they require           existing statutes, it proceeds to urge as a matter of
reciprocation in key respects; and they could be changed     statutory construction that the Legislature's choice of the
as well as repealed at will. (Bancorp, supra, 472 U.S. at    "[n]otwithstanding Section 38006" language in the 1993
p. 175.)                                                     amended section 25128 overrides section 38006, thus
                                                             excising the taxpayer option to use UDITPA, the
      The FTB also points to a recent Commission             Compact apportionment formula. Indeed, it goes so far as
document that refers to the Compact as a "model law"         to say that this language "constitutes a repeal of section
and "not truly a compact."9 The Commission's statements      38006 to the extent necessary to impose a mandatory
do not alter the reality that the Compact is binding on      double-weighted sales apportionment formula upon
California. Indeed, the Compact operates as a model law      taxpayers."
as to those states that choose to be associate members,
rather than signatory members. Pursuant to the                    (9) Were this simply a matter of statutory
Commission bylaws, the Commission may [***27] grant          construction involving two statutes--sections 25128 and
associate membership to states which have not enacted        38006--we would at least entertain the FTB's argument
the Compact but which have, for example, enacted             that section 25128 repealed the section 38006 taxpayer
legislation that makes effective adoption of the Compact     election to apportion under the Compact formula, and
dependent on a subsequent condition. (Third Commission       now mandates the exclusive use of the double-weighted
Report, supra, at p. 96.) Before the Legislature enacted     sales apportionment formula. However, [***29] this
the Compact, California was an associate member. Now         construct is not sustainable because it completely ignores
it is a full Compact member, having enacted the Compact      the dual nature of section 38006. Once one filters in the
"into law and entered into [it] with all jurisdictions       reality that section 38006 is not just a statute but is also
legally joining therein ... ." (§ 38001.) That the Compact   the codification of the Compact, and that through this
did not "enter into force" until enacted into [**567] law    enactment California has entered a binding, enforceable
by seven states also distinguishes it from a model law.      agreement with the other signatory states, the multiple
                                                             flaws in the FTB's position become apparent. First, under
                                                                                                                    Page 15
                               207 Cal. App. 4th 1369, *1386; 144 Cal. Rptr. 3d 555, **567;
                                           2012 Cal. App. LEXIS 833, ***29

established compact law, the Compact supersedes                  Compact, in whole or in part."
subsequent conflicting state law. Second, the federal and
state Constitutions prohibit states from passing laws that           (11) As a matter of compact law, this cannot be.
impair the obligations of contracts. And finally, the FTB's      Having established that the Compact is a binding, valid
construction of the effect of the amended section 25128          compact, we construe and apply it according to its terms.
runs afoul of the reenactment clause of the California           (Texas v. New Mexico (1983) 462 U.S. 554, 564, [77 L.
Constitution.                                                    Ed. 2d 1, 103 S. Ct. 2558].) [HN11] In part because
                                                                 compacts are agreements among sovereign states, we will
The Compact Supersedes Section 25128                             not read absent terms into them or dictate relief
                                                                 inconsistent with their express terms. (Alabama v. North
     [HN10] (10) By its very nature an interstate compact        Carolina, supra, 130 S.Ct at p. 2313.)
shifts some of a state's authority to another state or states.
Thus signatory states cede a level of sovereignty over                (12) With these concepts in mind, it is obvious that
matters covered in the Compact in favor of pursuing              [HN12] the plain language of the withdrawal provision,
multilateral action to resolve a dispute or regulate an          enabling a party state to withdraw from the Compact "by
interstate affair. (Hess v. Port Authority Trans-Hudson          enacting a statute repealing the same," allows only for
Corporation (1994) 513 U.S. 30, 42 [130 L. Ed. 2d 245,           complete withdrawal from the Compact. California has
[*1387] 115 S. Ct. 394]; Broun on Compacts, supra, §             not withdrawn from the Compact. After withdrawal, a
1.2.2, p. 23.) Because [***30] the Compact is both a             state remains liable for any obligations [***32] incurred
statute and a binding agreement among sovereign                  prior to withdrawal. Faced with the desire to escape an
signatory states, having entered into it, California cannot,     obligation under the Compact, a state's only option is to
by subsequent legislation, unilaterally alter or amend its       withdraw completely by enacting a repealing statute. That
terms. Indeed, as an interstate compact the Compact is           is what the plain language says, and we will not read into
superior to the prior and subsequent statutory laws of           that language an inconsistent term allowing for piecemeal
member states. (McComb v. Wambaugh, supra, 934 F.2d              amendment or elimination of compact provisions.
at p. 479; Hellmuth, supra, 414 F.Supp. at p. 409.)              [*1388]

     This means that the Compact trumps section 25128,                The FTB refers us to Alabama v. North Carolina,
such that, contrary to the FTB's assertion, section 25128        involving the same compact withdrawal provision, to
cannot override the UDITPA election offered to                   support its position that we should not restrictively
multistate taxpayers in [**568] section 38006, article           interpret the withdrawal provisions of the Compact. The
III, subdivision 1. It bears repeating that the Compact          FTB focuses on the following passage: "The Compact
requires states to offer this taxpayer option. If a state        imposes no limitation on North Carolina's exercise of its
could unilaterally delete this baseline uniformity               statutory right to withdraw. ... [Citation] There is no
provision, it would render the binding nature of the             restriction upon a party State's enactment of such a law ...
compact illusory and contribute to defeating one of its          ." (Alabama v. North Carolina, supra, 560 U.S. at p. ___
key purposes, namely to "[p]romote uniformity or                 [130 S.Ct. at p. 2313], italics omitted.) However, the FTB
compatibility in significant components of tax systems."         omits the context, which is crucial. North Carolina
(§ 38006, art. I, subd. 2.) Because the Compact takes            withdrew from the compact in question by enacting a law
precedent over subsequent conflicting legislation, these         repealing its status as a member state, as required by the
outcomes cannot come to pass.                                    compact. (Id., 560 U.S. at p. ___ [130 S.Ct. at p. 2304].)
                                                                 The plaintiffs alleged that North Carolina withdrew in
     The FTB offers an alternative argument, namely that         bad faith to avoid monetary sanctions. Holding that there
the UDITPA election can [***31] be superseded and                was no limitation [***33] on North Carolina's exercise
repealed pursuant to the Compact's own withdrawal                of its withdrawal right, the Supreme Court explained that
provision. Specifically, it casts the withdrawal clause as a     there was nothing in the compact suggesting that there
flexible tool giving member states the "means of                 were certain purposes for which the conferred withdrawal
overriding any and all of its provisions, including the          power could not be employed. (Id., 560 U.S. at p. ___
election and apportionment provisions. Member states             [130 S.Ct. at p. 2313].) In context, it is apparent that the
can simply utilize the unrestricted withdrawal provision         case does not support the principle of partial withdrawal
... to repeal and withdraw from the Multistate Tax
                                                                                                                    Page 16
                              207 Cal. App. 4th 1369, *1388; 144 Cal. Rptr. 3d 555, **568;
                                          2012 Cal. App. LEXIS 833, ***33

or piecemeal alteration or amendment. Rather, the                      to "whether, in terminating its efforts to obtain a
withdrawal provision calls for withdrawal from the                     license, North Carolina failed to take what the
Compact by passing a law repealing the Compact, period.                parties considered 'appropriate' steps ... ."
                                                                       (Alabama v. North Carolina, supra, 560 U.S. at p.
     In further support of its position that the withdrawal            ___ [130 S.Ct. at p. 2309].) The compact in
provision should be construed [**569] to permit partial                question obligated the defendant to take
repeal or unilateral amendment, the FTB interprets the                 appropriate steps to ensure that an application to
severability clause as providing for liberal construction of           construct and operate the facility in question was
Compact provisions. This standard clause says that if any              filed and issued by the proper authority. (Id., 560
provision is declared invalid, the remaining provisions                U.S. at p. ___ [130 S.Ct. at p. 2303].) The issue
will not be affected. In other words, if a court declares              was what constituted "appropriate steps" under
any provision unconstitutional or invalid, it will be                  the compact. Of course, in this particular context,
severed to avoid invalidation of the entire Compact. (§                the parties' course of performance would help
38006, art. XII.) How this clause advances the FTB's                   flesh out that concept.
cause is not apparent to this court. It has nothing to do
with liberal construction or the validity of state action to        (14) As important, the proffered interpretation runs
alter or amend existing Compact [***34] provisions.            counter to the express purposes of the Compact, which
                                                               include facilitating "equitable apportionment of tax
     Taking a slightly different tact, the FTB points out      bases" and promoting "uniformity or compatibility in
that a number of parties to the Compact have adopted           significant components of tax systems." (§ 38006,
statutes over the years that deviate from the Compact's        [***36] art. I, subds. 1, 2.) The FTB's interpretation, that
taxing provisions. According to materials furnished in the     the Compact does not require states to provide multistate
FTB's request for judicial notice and summarized in its        taxpayers with the election to use the UDITPA formula,
brief, 14 of 20 member states have passed some variation       would eviscerate the availability of a common formula
of a mandatory, state-specific apportionment formula that      for all taxpayers to use as an alternative, thereby diluting
departs from the Compact provisions. The states have           a potent uniformity provision of the Compact. Moreover,
accomplished this in a variety of ways.                        [HN14] the course of performance of a contract is only
                                                               relevant to ascertaining the parties' intention at the time of
     (13) The FTB recommends that we consider the              contracting. (Civ. Code, § 1636; Cedars-Sinai Medical
extrinsic evidence of this "course of conduct" in              Center v. Shewry, supra, 137 Cal.App.4th at p. 983.) The
ascertaining whether the Compact is reasonably                 express, stated purposes of the Compact are a much truer
susceptible to an interpretation that renders its taxing       measure of that intent than the subsequent statutory
provisions nonbinding and capable of being amended,            changes to state apportionment formulae.
superseded and repealed, in whole or part, by [*1389]
member states. Both parties concur that the key is                  (15) [**570] Similarly, the purpose of admitting
whether the Compact is reasonably susceptible to the           course of performance evidence is grounded in common
interpretation offered. (Cedars-Sinai Medical Center v.        sense: [HN15] "[W]hen the parties perform under a
Shewry (2006) 137 Cal. App. 4th 964, 980 [41 Cal. Rptr.          contract, without objection or dispute, they are fulfilling
3d 48].)10 It is not. As we have demonstrated, [HN13] the      their understanding of the terms of the contract."
Compact's express, unambiguous terms require extending         (Employers Reinsurance Co. v. Superior Court (2008)
taxpayers the option of electing UDITPA, and set forth         161 Cal. App. 4th 906, 922 [74 Cal. Rptr. 3d 733].) The
reciprocal repeal terms allowing a member state to cease       course of performance doctrine is thus premised on the
its [***35] participation and reclaim its sovereignty.         assumption that one party's response to another party's
                                                               action is probative of their understanding of the contract
       10     The FTB adds that "[i]n interpreting a           [***37] terms. But in the context of the Compact, the
       compact, 'the parties' course of performance under      member states do not perform or deliver their obligations
       the Compact is highly significant,'" quoting
                                                               to one another, unlike a typical contract in which a party
       Alabama v. North Carolina, supra, 560 U.S. at           provides services or goods to the other party, who in turn
       page ___ [130 S.Ct. at page 2309]. As a general         monitors the first party's compliance with contract terms.
       statement this is highly misleading. The court's        Thus the foundation for finding course of performance
       reference to the course of performance pertained
                                                                                                                 Page 17
                             207 Cal. App. 4th 1369, *1389; 144 Cal. Rptr. 3d 555, **570;
                                         2012 Cal. App. LEXIS 833, ***37

evidence relevant and reliable is faulty. For example, in    part: [HN19] "A statute may not be amended by reference
Cedars-Sinai, the reviewing court concluded that course      to its title. A section of a statute may not be amended
of conduct [*1390] performance was not relevant to           unless the section is re-enacted [***39] as amended."
interpret a disputed provision because the conduct in
question had nothing to do with providing incentives to           (17) Long ago our Supreme Court expressed the
monitor or enforce contract compliance. (Cedars-Sinai        purpose of the reenactment rule as avoiding " 'the
Medical Center v. Shewry, supra, 137 Cal.App.4th at p.       enactment of statutes in terms so blind that legislators
983.)                                                        themselves [are] sometimes deceived in regard to their
                                                             effect, and the public, from the difficulty of making the
F. The FTB's Construction Violates the Federal and State     necessary examination and comparison, fail[s] to become
Constitutional Prohibition Against Impairment of             appraised [sic] of the changes made in the laws.' "
Contracts                                                    (Hellman v. Shoulters (1896) 114 Cal. 136, 152 [45 P.
1057]; accord American Lung Assn. v. Wilson (1996) 51
     (16) Our federal and state Constitutions forbid         Cal.App.4th 743, 748 [59 Cal. Rptr. 2d 428].) [**571]
enactment of state laws that impair contractual              Clearly [HN20] the reenactment rule applies to acts
obligations. [HN16] "No state shall ... pass any ... law     "'which are in terms ... amendatory of some former act.'
impairing the obligation of contracts ... ." (U.S. Const.,   [Citation.]" (American Lung Assn. v. Wilson, supra, 51
art. I, § 10, cl. 1.) [HN17] "A ... law impairing the        Cal.App.4th at p. 749.) Its applicability does not [*1391]
obligation of contracts may not be passed." (Cal. Const.,    depend on the method of amendment, but rather "on
art. I, § 9.) [HN18] This constitutional prohibition         whether legislators and the public have been reasonably
extends to [***38] interstate compacts. (Green v. Biddle     notified of direct changes in the law." (Ibid.)
(1823) 21 U.S. 1, 12-13, 17 [5 L. Ed. 547] [Kentucky law
that narrowed rights and diminished interests of                  The FTB's construct would trigger the reenactment
landowners under compact between Kentucky and                statute because it posits that the newly amended section
Virginia violated compact and was unconstitutional]; Doe     25128 repealed and superseded the UDITPA
v. Ward (W.D.Pa. 2000) 124 F. Supp. 2d 900, 915, fn. 20.)      apportionment formula. Nonetheless, the purportedly
A construction of section 25128 that overrides and           deleted UDITPA election remains in section 38006,
disables California's obligation under the Compact to        causing confusion such that neither the public nor
afford taxpayers the option of apportioning income under     legislators would have adequate notice [***40] that
the UDITPA formula would be unconstitutional, violative      section 38006 had been eviscerated by the later
of the prohibition against impairing contracts.              enactment.

G. The FTB's Construction Runs Afoul of the                  III. DISPOSITION
Constitutional Reenactment Rule
                                                                 The judgment of dismissal is reversed. FTB to bear
     The FTB is adamant that the intent of the               costs on appeal.
"[n]otwithstanding Section 38006" language in section
25128 is to repeal and supersede the taxpayer election to        Ruvolo, P. J., and Sepulveda, J.,* concurred.
apportion under the Compact formula. At a minimum this
                                                                    *    Retired Associate Justice of the Court of
outcome would eliminate or rewrite article III,
                                                                    Appeal, First Appellate District, assigned by the
subdivision 1 and eliminate article IV, subdivision 9 of
                                                                    Chief Justice pursuant to article VI, section 6 of
section 38006. However, this result flies in the face of
                                                                    the California Constitution.
California Constitution, article IV, section 9, stating in
                                                                                                                   Page 1

                                           HARSHA v. CITY OF DETROIT

                                                     Docket No. 161

                                         SUPREME COURT OF MICHIGAN

                        261 Mich. 586; 246 N.W. 849; 1933 Mich. LEXIS 812; 90 A.L.R. 853

                                 January 25, 1933, Submitted (Calendar No. 37,094)
                                             January 31, 1933, Decided

CASE SUMMARY:                                                  legislature when it passed later taxation laws because it
                                                               was subject to the fundamental power of the state to
                                                               amend its laws.
PROCEDURAL POSTURE: Plaintiff taxpayer sought
review of an order of the trial court (Michigan), which        OUTCOME: The court affirmed the trial court's
entered a decree for defendant city. The taxpayer's            judgment that entered a decree for the city in the
equitable action sought a declaratory judgment that            taxpayer's action for a declaration that amendments to tax
certain tax increases enacted after she purchased a bond       laws applicable to the city enacted after she purchased the
issued by the city subject to Mich. 1 Comp. Laws § 2228        city's bond were void as against her and to enjoin the city
et seq. (1929) were void as against her because they           from issuing refunding bonds under one of the statutes.
impaired the contract evidenced by her bond, in violation
of the state and federal constitutions.                        CORE TERMS: municipal, rate of taxation, Pub Acts,
                                                               CONSTITUTIONAL LAW, amend, charter, repeal,
OVERVIEW: The taxpayer contended that statutes that            bonded indebtedness, indebtedness, municipal purposes,
increased the city's power to borrow money and changed         taxation, general law, impaired, impair, legislative power,
the limit of taxation and the amount of bonded                 vested right, borrowing money, constitutional provision,
indebtedness allowed, which were enacted after she             constitutional power, municipality, holder, coupons,
purchased her bond, were void because the laws that            power to borrow money, power of taxation, legislative
existed at the time she made her contract were                 department, obligation of contracts, contracting,
incorporated into the contract's terms. She sought a           bondholder, pursuance, impairing
decree holding the later legislation void and sought an
injunction against the issue of refunding bonds under one      LexisNexis(R) Headnotes
of the statutes. On appeal, the court affirmed because the
later legislation was an exercise of power authorized by
the state constitution and did not impair the taxpayer's
contract because her contract was at all times subject to
                                                               Governments > Legislation > Enactment
the right of the state, through the legislature, to exercise
                                                               [HN1] The legislative power is the authority to make,
its constitutional powers and functions. A taxation statute
                                                               alter, amend, and repeal laws. In Michigan, it is
was not subject to repeal or amendment only if the intent
                                                               co-extensive with that of the parliament of England, save
not to repeal or amend was so directly and unmistakably
                                                               as limited and restrained by the state and federal
expressed as to leave no reason for doubt. The taxpayer's
                                                               Constitutions. One legislature cannot limit or restrict the
contract, evidenced by the bond, was not impaired by the
                                                                                                                    Page 2
                                          261 Mich. 586, *; 246 N.W. 849, **;
                                       1933 Mich. LEXIS 812, ***; 90 A.L.R. 853

power of its successor.                                        generally true that the power to tax is limited in extent, in
                                                               purpose, and in methods only by the will of the state as
                                                               expressed in its laws.
Governments > Legislation > Types of Statutes
Governments > Local Governments > Charters
Governments > Local Governments > Finance                      Constitutional Law > Congressional Duties & Powers >
[HN2] The Constitution of Michigan provides that the           Contracts Clause > General Overview
legislature shall provide by a general law for the             Governments > Local Governments > Finance
incorporation of cities, and by a general law for the          Governments > State & Territorial Governments >
incorporation of villages; such general laws shall limit       Finance
their rate of taxation for municipal purposes, and restrict    [HN5] Fixing the limit of municipal indebtedness is
their powers of borrowing money and contracting debts.         delegated by the Constitution of the state to the
Mich. Const. art. 8, § 20. Under such general laws, the        legislature, which has full power and authority to increase
electors of each city and village shall have power and         it by general law. The legislature may regulate the
authority to frame, adopt and amend its charter and to         amount of municipal indebtedness and the rate of taxation
amend an existing charter of the city or village heretofore    of cities. It is expressly authorized by Mich. Const. art. 8,
granted or passed by the legislature for the government of     § 20 so to do. Its powers are plenary. It may increase or
the city or village and, through its regularly constituted     decrease the limit of bonded indebtedness and the rate of
authority, to pass all laws and ordinances relating to its     taxation for municipal purposes, subject to the
municipal concerns, subject to the Constitution and            prohibition in the Constitution of the state and of the
general laws of this State. Mich. Const. art. 8, § 21.         United States that such legislation shall not operate
                                                               directly upon contracts so as to impair their obligation by
                                                               abrogating or lessening the means of their enforcement.
Administrative Law > Separation of Powers >
Constitutional Controls > General Overview
Constitutional Law > Congressional Duties & Powers >           Constitutional Law > Congressional Duties & Powers >
Contracts Clause > General Overview                            Contracts Clause > General Overview
Governments > State & Territorial Governments >                [HN6] Where the right to alter, amend, or repeal a statute
Relations With Governments                                     existed, it must be held to be a part of a contract based
[HN3] Municipal corporations are state agencies, and,          thereon, and the subsequent exercise of that right would
subject to constitutional restrictions, the legislature may    be in accordance with the contract and could not impair
modify the corporate charters of municipal corporations        its obligation.
at will. Powers are granted to them as state agencies to
carry on local government. The state still has authority to
                                                               Governments > State & Territorial Governments >
amend their charters and enlarge or diminish their
                                                               Finance
powers. They derive all their powers from the source of
their creation, and those powers are at all times subject to   [HN7] The Michigan Constitution provides that the
                                                               power of taxation shall never be surrendered or
the control of the legislature. Such powers, also, in the
                                                               suspended by any grant or contract to which the state or
absence of any constitutional regulation forbidding it,
                                                               any municipal corporation shall be a party. Mich. Const.
may be enlarged or diminished, extended or curtailed, or
                                                               art. 10, § 9.
withdrawn altogether, as the legislature may determine.

                                                               Governments > Local Governments > Finance
Governments > State & Territorial Governments >
                                                               Governments > State & Territorial Governments >
Finance
                                                               Relations With Governments
Tax Law > State & Local Taxes > General Overview
                                                               [HN8] Under Mich. Const. art. 8, §§ 20, 21, authorizing
[HN4] The power to impose taxes is vested exclusively in
                                                               the legislature to provide by a general law for the
the legislative department of government, and cannot be
                                                               incorporation of cities and to restrict their powers of
exercised except in pursuance of its authority. The
                                                               borrowing, the question of the bonding limits of cities is a
levying of taxes is solely the function of the legislature.
                                                               legislative one over which they have no control except as
Subject to constitutional restrictions, it must be taken as
                                                                                                                  Page 3
                                         261 Mich. 586, *; 246 N.W. 849, **;
                                      1933 Mich. LEXIS 812, ***; 90 A.L.R. 853

provided in the enabling act.                                   6.   MUNICIPAL               CORPORATIONS              --
                                                             CONSTITUTIONAL LAW.

Governments > Legislation > Expirations, Repeals &                Powers are granted to municipal corporations as
Suspensions                                                  State agencies to carry on local government, and State
[HN9] Before a statute, particularly one relating to         has authority [***2] to amend their charters and enlarge
taxation, should be held to be irrepealable or not subject   or diminish their powers.
to amendment, an intent not to repeal or amend must be
so directly and unmistakably expressed as to leave no           7. CONSTITUTIONAL LAW -- POWER TO
reason for doubt. Otherwise the intent is not plainly        IMPOSE TAXES VESTED EXCLUSIVELY IN
expressed.                                                   LEGISLATIVE DEPARTMENT.

HEADNOTES                                                         Power to impose taxes is vested exclusively in
                                                             legislative department of government, and may not be
    [***1] 1. CONSTITUTIONAL LAW -- POWER                    exercised except in pursuance of its authority.
OF LEGISLATURE TO MAKE AND CHANGE LAW.
                                                                8.   MUNICIPAL    CORPORATIONS --
    Legislative power is authority to make, alter, amend,    LEGISLATURE HAS POWER TO INCREASE
and repeal laws.                                             MUNICIPAL INDEBTEDNESS.

   2. CONSTITUTIONAL LAW -- POWER LIMITED                        Fixing limit of municipal indebtedness is within
ONLY     BY     STATE    AND     FEDERAL                     constitutional power of legislature, which has full power
CONSTITUTIONS.                                               and authority to increase it by general law.

     In this State, legislative power is co-extensive with      9. CONSTITUTIONAL LAW -- LEGISLATURE
that of parliament of England, save as limited and           AUTHORIZED    TO   REGULATE   MUNICIPAL
restrained by State and Federal Constitutions.               INDEBTEDNESS.

  3. CONSTITUTIONAL LAW -- LEGISLATURE                            Legislature is expressly authorized by Constitution
MAY NOT LIMIT ITS SUCCESSOR.                                 (art. 8, § 20) to regulate amount of municipal
                                                             indebtedness and rate of taxation of cities.
    One legislature may not limit or restrict power of its
successor.                                                      10. CONSTITUTIONAL LAW -- IMPAIRMENT
                                                             OF CONTRACTS.
   4. CORPORATIONS -- POWER TO AMEND OR
REPEAL      CHARTERS      OF     PRIVATE                          Legislature may increase or decrease limit of bonded
CORPORATIONS.                                                indebtedness and rate of taxation for municipal purposes,
                                                             subject to prohibition of State and Federal Constitutions
    Rule that corporate charters in which no power of        that such legislation shall not operate so as to impair
amendment or repeal is retained, when accepted,              obligation of contracts by abrogating or lessening means
constitute contracts between State and corporation,          of their enforcement.
applies to private corporations only.
                                                                11. CONSTITUTIONAL LAW -- CONTRACT OF
   5. MUNICIPAL CORPORATIONS -- STATE                        BONDHOLDER SUBJECT [***3] TO LEGISLATIVE
AGENCIES -- LEGISLATURE MAY MODIFY                           POWER TO INCREASE CITY'S POWER TO
CHARTERS.                                                    BORROW.
     Municipal corporations are State agencies, and,              Since legislature has power, under Constitution, to
subject to constitutional restrictions, legislature may      increase limit of city's power to borrow money and rate
modify corporate charters of municipal corporations at       of taxation, contract of holder of city's bond is subject to
will.                                                        said power, and therefore its exercise would be in
                                                             accordance with said contract and not in impairment of
                                                                                                                      Page 4
                                           261 Mich. 586, *; 246 N.W. 849, **;
                                        1933 Mich. LEXIS 812, ***3; 90 A.L.R. 853

its obligation.                                                  their locating in particular municipality (Const., art. 10, §
                                                                 9).
   12. CONSTITUTIONAL LAW -- STATUTES --
POWER TO AMEND OR REPEAL.                                           17. CONSTITUTIONAL LAW -- TENDER OF
                                                                 BONDS AND COUPONS IN PAYMENT OF TAXES --
     Before statute, particularly one relating to taxation,      STATUTES.
should be held to be irrepealable or not subject to
amendment, intent not to repeal or amend must be so                   Provision in Act No. 1, Pub. Acts 1932 (2d Ex.
directly and unmistakably expressed as to leave no reason        [***5] Sess.), providing that bonds issued by city in
for doubt.                                                       pursuance thereto, and attached coupons, due or to
                                                                 become due, may be tendered in payment of general taxes
   13. CONSTITUTIONAL LAW -- IMPAIRMENT                          or special assessments of said city, delinquent or due and
OF CONTRACTS -- STATUTES.                                        payable, in lieu of money, held, not violative of
                                                                 constitutional provision prohibiting surrender of power of
    Constitutional provision prohibiting passage of laws         taxation by grant or contract (Const., art. 10, § 9).
impairing obligation of contracts may not be construed to
prohibit exercise by legislature of its constitutional           SYLLABUS
powers.
                                                                     Appeal from Wayne; Miller (Guy A.), J. Submitted
   14. CONSTITUTIONAL LAW -- NO VESTED                           January 25, 1933. (Docket No. 161, Calendar No.
RIGHT PRECLUDING CHANGE OF EXISTING LAW.                         37,094.) Decided January 31, 1933.
     There can, in nature of things, be no vested right in           Bill by Daisy E. Harsha against City of Detroit and
existing law which precludes its change or repeal, nor           others for declaration of rights secured by a bond of the
vested right in omission to legislate upon particular            City of Detroit. Bill dismissed. Plaintiff appeals.
subject which exempts contract from effect of subsequent         Affirmed.
legislation [***4] upon its subject-matter by competent
legislative authority.                                           COUNSEL: John R. Rood, for plaintiff.
   15. CONSTITUTIONAL LAW -- IMPAIRMENT                          Clarence E. Wilcox, Corporation Counsel, and Paul T.
OF CONTRACT -- INCREASING POWER OF CITY                          Dwyer, Assistant Corporation Counsel, for defendants.
TO BOND -- STATUTES.
                                                                 Hal H. Smith, Archibald Broomfield, and Beaumont,
     Obligation of contract of holder of bond issued by          Smith & Harris, amici curioe.
City of Detroit subject to limitations imposed by Act No.
279, Pub. Acts 1909, held, not impaired by enactment of          OPINION BY: POTTER
Act No. 126, Pub. Acts 1929, and Act No. 1, Pub. Acts
1932 (2d Ex. Sess.), increasing power of city to bond, in        OPINION
absence of agreement by city that no further bonds would
be issued, or that limit of bonded indebtedness would not              [*588] [**850] POTTER, J. Plaintiff, a citizen,
be raised (U.S. Const., art. 1, § 10; Const. of Mich., art. 2,   resident, and taxpayer of the city of Detroit, a municipal
§ 9).                                                            corporation, by bill in equity for a declaratory decree and
                                                                 [*589] injunction, claims she is the holder of a bond of
   16.    CONSTITUTIONAL      LAW                           --   [***6] defendant city issued subject to the provisions of
SURRENDERING POWER OF TAXATION                              --   Act No. 279, Pub. Acts 1909 (see 1 Comp. Laws 1929, §
PURPOSE OF CONSTITUTIONAL PROVISION.                             2228 et seq.), which limited the rate of taxation on the
                                                                 assessed value of the real and personal property in
     Purpose of constitutional provision prohibiting
                                                                 defendant city to 2 per cent. per annum, and limited the
surrender of power of taxation by grant or contract is to
                                                                 power of defendant city to borrow money on the credit of
prevent municipalities from granting special rate of
                                                                 the city to 8 per cent. of the assessed valuation of the real
taxation to private corporations or exempting from
                                                                 and personal property in the city; that by Act No. 203,
taxation their property for limited time on condition of
                                                                                                                    Page 5
                                      261 Mich. 586, *589; 246 N.W. 849, **850;
                                      1933 Mich. LEXIS 812, ***6; 90 A.L.R. 853

Pub. Acts 1911, the limit of the rate of taxation and of       Article 8, § 20, Constitution 1908.
bonded indebtedness was continued, but by Act No. 126,
Pub. Acts 1929, though the rate of taxation was continued           "Under such general laws, the electors of each city
as before, the limit of the defendant city's power to          and village shall have power and authority to frame,
borrow money was raised to 10 per cent. of the assessed        adopt and amend its charter and to amend an existing
valuation of the real and personal property in the city;       charter of the city or village heretofore granted or passed
that the limit of taxation and of bonded indebtedness was      by the legislature for the government of the city or village
not changed by Act No. 1, Pub. Acts 1932 (2d Ex. Sess.),       and, through its regularly constituted authority, to pass all
and that Act No. 126, Pub. Acts 1929, and Act No. 1,           laws and ordinances relating to its municipal concerns,
Pub. Acts 1932 (2d Ex. Sess.), are void as against             subject to the Constitution and general laws of this State."
plaintiff, because they impair the obligation of her           Article 8, § 21, Constitution 1908.
contract, evidenced by her bond, in violation of the
                                                                    Corporate charters in which no power of amendment
provisions of the Constitution of this State and of the
                                                               or repeal is retained, when accepted, constitute contracts
United States prohibiting the passage [***7] of laws
                                                               between the State and the corporation. [*591]
impairing the obligation of contracts.
                                                               Dartmouth College v. Woodward, 4 Wheat. (17 U.S.)
    She contends:                                              [***9] 518. This rule applies to private corporations
                                                               only. [HN3] Municipal corporations are State agencies,
    "Laws which subsist at the time and place of the           and, subject to constitutional restrictions, the legislature
making of a contract, and where it is to be performed,         may modify the corporate charters of municipal
enter into and form a part of it, as fully as if they had      corporations at will. 12 C.J. p. 1031. Powers are granted
been expressly referred to or incorporated in its terms.       to them as State agencies to carry on local government.
This principle embraces alike those laws which affect its      The State still has authority to amend their charters and
construction and those which affect its enforcement or         enlarge or diminish their powers. 1 Cooley,
discharge." Farmers & Merchants Bank v. Federal                Constitutional Limitations (8th Ed.), p. 393.
Reserve Bank, 262 U.S. 649, 660 (43 Sup. Ct. 651, 30
A.L.R. 635).                                                       "They derive all their powers from the source of their
                                                               creation, and those powers are at all times subject to the
       [*590] She seeks decree holding such later              control of the legislature. Such powers, also, in the
legislation void, and injunction against the issuance of       absence of any constitutional regulation forbidding it,
refunding bonds under Act No. 1, Pub. Acts 1932 (2d Ex.        may be enlarged or diminished, extended or curtailed, or
Sess.), and other relief. Defendants admit the facts, but      withdrawn altogether, as the legislature may determine."
deny the legislation complained of impairs the obligation      Rogers v. Burlington, 3 Wall. (70 U.S.) 654.
of plaintiff's contract. There was decree for defendants.
Plaintiff appeals.                                                   [HN4] The power to impose taxes is vested
                                                               exclusively in the legislative department of government,
      [HN1] The legislative power is the authority to          and cannot be exercised except in pursuance of its
make, alter, amend, and repeal laws. 1 Cooley,                 authority. The levying of taxes is solely the function of
Constitutional Limitations (8th Ed.), p. 183. In this State,   the legislature. 37 Cyc. p. 724. Subject to constitutional
it is co-extensive with that of the parliament of England,     restrictions, "it must be taken as generally true that the
save as limited and restrained by the State and Federal        power to tax [***10] is limited in extent, in purpose, and
Constitutions. 1 Cooley, Constitutional Limitations            in methods only by the will of the State as expressed in
[***8] (8th Ed.), p. 177; 12 C.J. p. 749. One legislature      its laws." 1 Cooley on Taxation (3d Ed.), p. 178; 2 Smith,
cannot limit or restrict the power of its successor. 12 C.J.   Modern Law of Municipal Corporations, § 1477.
p. 806. [HN2] The Constitution of this State provides:
                                                                    [HN5] Fixing the limit of municipal indebtedness is
     "The legislature shall provide by a general law for       delegated by the Constitution of this State to the
the incorporation of cities, and by a general law for the      legislature, which has full power and authority to increase
incorporation of villages; such general laws shall limit       it by general law. 44 C.J. p. 1117; 6 McQuillin,
their rate of taxation for municipal purposes, and restrict    Municipal Corporations (2d Ed.), p. 12, § 2366; Wharton
their powers of borrowing money and contracting debts."        v. City of Greensboro, 149 N.C. 62 (62 [*592] S.E.
                                                                                                                     Page 6
                                       261 Mich. 586, *592; 246 N.W. 849, **850;
                                      1933 Mich. LEXIS 812, ***10; 90 A.L.R. 853

740). The legislature [**851] may regulate the amount                "This is a new section and forever prohibits the
of municipal indebtedness and the rate of taxation of           surrender or suspension of the taxing power of the State
cities. It is expressly authorized by article 8, § 20, of the   or any municipality therein." (2 Debates, Constitutional
Constitution so to do. Its powers are plenary. It may           Convention, p. 1435.)
increase or decrease the limit of bonded indebtedness and
the rate of taxation for municipal purposes, subject to the         In City Commission of Jackson v. Vedder, 209 Mich.
prohibition in the Constitution of this State and of the        291, it was held (quoting syllabus):
United States that such legislation shall not operate
                                                                     [HN8] "Under the Constitution (article 8, §§ 20, 21)
directly upon contracts so as to impair their obligation by
                                                                authorizing the legislature to provide by a general law for
abrogating or lessening the means of their enforcement.
                                                                the incorporation of cities and to restrict their powers of
Wolff v. New Orleans, 103 U.S. 358. There is no
                                                                borrowing, the question of the bonding limits of cities is a
constitutional provision against changing [***11] the
                                                                legislative one over which they have no control except as
limit of bonded indebtedness or limiting the rate of
                                                                provided [***13] in the enabling act."
taxation for municipal purposes which in cities under the
home rule act obtained when plaintiff acquired her bond.             Plaintiff's contract is not impaired unless by the State
She had no contract with the State or with defendant city       exercising its legislative power to amend the home rule
that the limit of bonded indebtedness or the rate of            act by increasing the limit of the restrictions upon cities
taxation for municipal purposes might not be changed.           for borrowing money. The argument in her behalf
She was bound to know the legislative power of the State        amounts to saying plaintiff's contract is impaired by the
over the limit of bonded indebtedness and the rate of           lawful exercise of the legislative power of the State.
taxation for municipal purposes of defendant city               Missouri Pacific R. Co. v. Kansas, 216 U.S. 262 (30 Sup.
contained in the Constitution, and that the legislature         Ct. 330). "The claim of an irrepealable contract cannot be
possessed full power and authority by legislative action to     [*594] predicated upon a contract which is repealable."
increase the limit of the defendant city's power to borrow      Hammond Packing Co. v. Arkansas, 212 U.S. 322 (29
money and the rate of taxation for municipal purposes.          Sup. Ct. 370, 15 Ann. Cas. 645); Coombes v. Getz, 285
Her contract was at all times subject to the right of the       U.S. 434 (52 Sup. Ct. 435), per Cardozo, J. [HN9]
State, through its legislative department, to exercise its      Before a statute, particularly one relating to taxation,
constitutional powers and functions.                            should be held to be irrepealable or not subject to
                                                                amendment, an intent not to repeal or amend must be so
     As early as Dartmouth College v. Woodward, supra,
                                                                directly and unmistakably expressed as to leave no reason
696, Justice Story pointed out that [HN6] where the right
                                                                for doubt. Otherwise the intent is not plainly expressed.
to alter, amend, or repeal a statute existed, it must be held
                                                                Citizens' Savings Bank v. Owensboro, 173 U.S. 636 (19
to be a part of a contract based thereon, and the
                                                                Sup. Ct. 530, 571).
subsequent exercise of that right would *** mi143b75
p006 0916 [*593] be in accordance [***12] with the                   The power vested by the Constitution of this State in
contract and could not impair its obligation. This              the legislature to limit the rate of taxation of cities for
principle has been repeatedly recognized. Greenwood v.          municipal [***14] purposes and restrict their powers of
Freight Co., 105 U.S. 13; Hamilton Gas Light & Coke             borrowing money and contracting debts is complete in
Co. v. Hamilton City, 146 U.S. 258 (13 Sup. Ct. 90).            itself and unrestricted. Plaintiff took the bond of
                                                                defendant city subject to the possibility the legislature
    [HN7] The Constitution of this State provides:
                                                                might, at some future time when the public interest
    "The power of taxation shall never be surrendered or        demanded it, by appropriate legislation, raise the limit of
suspended by any grant or contract to which the State or        taxation upon the property in the city subject to
any municipal corporation shall be a party." Article 10, §      assessment, and raise the limit upon the bonded
9, Constitution 1908.                                           indebtedness which might be contracted by defendant
                                                                city. The constitutional provisions which prohibit the
   In its explanation of the proposed changes in the            passage of laws impairing the obligation of contracts
Michigan Constitution and the reasons therefor, the             cannot be construed to prohibit the exercise by the
Constitutional Convention of 1908 said:                         legislature of its constitutional powers. There can, in the
                                                                nature of things, be no vested right in an existing law
                                                                                                                   Page 7
                                      261 Mich. 586, *594; 246 N.W. 849, **851;
                                     1933 Mich. LEXIS 812, ***14; 90 A.L.R. 853

which precludes its change or repeal, nor vested right in     tendered in payment of general taxes or special
the omission to legislate upon a particular subject which     assessments of the city, delinquent or due and payable, in
exempts a contract from the effect of subsequent              lieu of money. There is no provision in the Constitution
legislation upon its subject-matter by competent              of this State in relation to this subject which it is claimed
legislative authority. Fitzgerald v. Railroad Co., 63 Vt.     has any effect upon this provision in the statute, save that
169, 173 (22 A. 76, 13 L.R.A. 70); Louisville &             quoted [***17] above, which provides the power of
Nashville R. Co. v. Mottley, 219 U.S. 467 (31 Sup. Ct.        taxation shall never be surrendered or suspended by any
265).                                                         grant or contract to which the State or any municipal
                                                              corporation shall be a party. This provision found its way
      [*595] Plaintiff had no contract with defendant city    into the Constitution because in the early history of the
[***15] that no further city bonds would be issued nor        State some corporations had been granted special rates of
that no further indebtedness would be contracted. None        taxation, and these charter provisions were held to be
that the limit of bonded indebtedness and the rate of         contracts which could not be impaired by subsequent
taxation of property therein might not be raised. This        action upon the part of the State; and municipalities, for
case is to be distinguished from Von Hoffman [**852] v.       the purpose of having industrial corporations located
City of Quincy, 4 Wall. (71 U.S.) 535; Antoni v.              therein, were prone to attempt to exempt their property
Greenhow, 107 U.S. 769 (2 Sup. Ct. 91); Wolff v. New          from taxation for a limited time on condition of their
Orleans, supra; Louisiana v. Pilsbury, 105 U.S. 278;          locating in the particular municipality. It has no
Hendrickson v. Apperson, 245 U.S. 105 (38 Sup. Ct. 44),       application to a case like that here involved, where it is
the principles of which were recognized in Hammond v.         sought to provide the evidence of the indebtedness of the
Place, 116 Mich. 628 (72 Am. St. Rep. 543), which             city to the bondholder may be received and canceled in
involved legislation which, in some measure, impaired         payment of the obligation of the bondholder as a taxpayer
the ability of a bondholder to obtain payment of his bond;    to the city. It amounts to a set-off of indebtedness by the
and, from cases like Smith v. Appleton, 19 Wis. 468,          respective parties. In McGahey v. Virginia, 135 U.S. 662
where bonds were issued to refund city indebtedness,          (10 Sup. Ct. 972), a similar question was before the
under a statute providing no other bonds should be issued     supreme court of the United States, and it was said:
until the bonds in question were paid, and a later statute
authorizing a subsequent issuance of bonds for railroad            [*597] "The holders of the [***18] coupons of said
purposes was held to impair the obligation of the contract    bonds, whether still attached thereto or separated
of the holders of the first bonds.                            therefrom, are entitled, by a solemn engagement of the
                                                              State, to use them in payment of State taxes and public
     Instead of plaintiff having a contract providing the     dues. This was determined in Hartman v. Greenhow, 102
limit of the rate of [***16] taxation of defendant city for   U.S. 672, decided in January, 1881; in Antoni v.
municipal purposes could not be raised, and which             Greenhow, 107 U.S. 769 (2 Sup. Ct. 91), decided in
restricted defendant city's power of borrowing money and      March, 1883; in the Virginia Coupon Cases, 114 U.S.
contracting debts, the Constitution, the fundamental law      269 (5 Sup. Ct. 903), decided in April, 1885; and in all
of this State, provides such rate of taxation and such        the cases on the subject that have come before this court
restriction on defendant city's power of borrowing money      for adjudication. This question, therefore, may be
and contracting debts might be raised by the legislature.     considered as foreclosed and no longer open for
Plaintiff contracted with reference to this fundamental       consideration. It may be laid down as undoubted law that
law, is bound thereby, and the obligation of her contract,    the lawful owner of any such coupons has the right to
evidenced by her bond, was not impaired by the                tender the same after maturity in absolute payment of all
legislature of the State exercising its constitutional        taxes, debts, dues and demands due from him to the
[*596] power in passing Act No. 126, Pub. Acts 1929,          State."
and Act No. 1, Pub. Acts 1932 (2d Ex. Sess.).
                                                                   This principle is recognized in 3 Cooley on Taxation
     Plaintiff contends that Act No. 1, Pub. Acts 1932 (2d    (4th Ed.), § 1252, and by many other cases.
Ex. Sess.), is invalid because it provides as to bonds
issued in pursuance of its provisions that the bonds and          We hold there is nothing in these provisions of Act
coupons attached thereto, due or to become due, may be        No. 1, Pub. Acts 1932 (2d Ex. Sess.), which will render
                                                                                                      Page 8
                                     261 Mich. 586, *597; 246 N.W. 849, **852;
                                    1933 Mich. LEXIS 812, ***18; 90 A.L.R. 853

such bonds invalid, either as impairing the obligation of       Decree affirmed, but without costs.
plaintiff's contract, or in any other manner that has been
suggested to this court. [***19] No other questions are         McDONALD, C.J., and CLARK, SHARPE,
raised on this appeal.                                       NORTH, FEAD, WIEST, and BUTZEL, JJ., concurred.
                                                                                                                 Page 1

               INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff-Appellant,
                        v DEPARTMENT OF TREASURY, Defendant-Appellee.

                                                      No. 146440

                                        SUPREME COURT OF MICHIGAN

                              496 Mich. 642; 852 N.W.2d 865; 2014 Mich. LEXIS 1282

                                              January 15, 2014, Argued
                                                July 14, 2014, Decided
                                                 July 14, 2014, Filed

SUBSEQUENT HISTORY: Motion granted by,                       (Docket No. 306618). It held that because there was a
Rehearing denied by, Stay denied by IBM v. Dep't of          facial conflict between the BTA's mandatory sales-factor
Treasury, 855 N.W.2d 512; 2014 Mich. LEXIS 2132              apportionment formula and the Compact's elective three-
(Mich., Nov. 14, 2014)                                       factor apportionment formula, the Legislature had
                                                             repealed the Compact's election provision by implication
PRIOR HISTORY: [***1]                                        when it enacted the BTA. The Supreme Court granted
    International Business Machines Corporation (IBM)        IBM's application for leave to appeal. 494 Mich. 874, 832
brought an action in the Court of Claims against the         N.W.2d 388 (2013). In a lead opinion by Justice Viviano,
Department of Treasury, challenging the department's         joined by Justices Cavanagh and Markman, and a
ruling that IBM was not entitled to apportion its business   concurring opinion by Justice Zahra, the Supreme Court
income tax base and modified gross receipts tax base         held: The modified gross receipts tax is an income tax for
using the three-factor apportionment formula provided in     purposes of the Multistate Tax Compact. IBM was
the Multistate Tax Compact, MCL 205.581 et seq., and         entitled to use the Compact's elective three-factor
was instead required to apportion its income using the       apportionment formula to calculate its 2008 Michigan
sales-factor formula in the Business Tax Act, MCL            taxes. Court of Appeals judgment reversed; Court of
208.1101 et seq., when calculating its state taxes for       Claims order granting summary disposition in favor of
2008. Under this ruling, IBM was entitled to a refund of     the Department reversed; case remanded to the Court of
only $1,253,609 for the 2008 tax year rather than the        Claims for entry of an order granting summary
$5,955,218 it had sought. IBM moved for summary              disposition in favor of IBM. Justice Viviano, joined by
disposition under MCR 2.116(C)(10), and the department       Justices Cavanagh and Markman, held that the modified
moved for summary disposition under MCR 2.116(I)(2).         gross receipts tax fit within the Compact's broad
After a hearing, the Court of Claims, Joyce A.               definition of "income tax" by taxing a variation of net
Draganchuk, J., denied IBM's motion and granted              income, specifically, the entire [***3] amount received
summary disposition in favor of the department, ruling       by the taxpayer as determined from any gainful activity
that the BTA mandated the use of the sales-factor            minus inventory and certain other deductions that are
apportionment formula. The Court of Appeals, Ronayne         expenses not specifically and directly related to a
Krause, P.J., and Borrello, J. (Riordan, J., concurring),    particular transaction. He further concluded that the Court
affirmed the Court of Claims order in an unpublished         of Appeals erred by holding that the BTA had repealed
opinion per curiam issued November [***2] 20, 2012           the Compact's election provision by implication because
                                                                                                                    Page 2
                                         496 Mich. 642, *; 852 N.W.2d 865, **;
                                             2014 Mich. LEXIS 1282, ***3

the statutes could be reconciled when read in pari             CORE TERMS: compact, election, apportionment
materia. Justice Zahra, concurring, agreed that IBM was        formula, repeal, apportion, tax base, income tax,
entitled to use the Compact's elective apportionment           apportionment, repealed, multistate, lead opinion's,
formula for its 2008 Michigan taxes, and also that the tax     mandatory, tax acts, tax year, taxation, elect, formula,
bases at issue were "income taxes" within the meaning of       gross receipts tax, gross receipts, apportioned, allocate,
the Compact. He would not have reached the question            gross income, modified, implied repeal, contractual,
whether the Legislature repealed the Compact's election        enacting, state law, impliedly, business income, pari
provision by implication when it enacted the BTA               materia
because the Legislature made clear that taxpayers were
entitled to use the Compact's election provision for the       LexisNexis(R) Headnotes
2008, 2009, and 2010 tax years. Justice McCormack,
joined by Chief Justice Young and Justice Kelly,
dissenting, would have affirmed the Court of Appeals
judgment, concluding that allowing taxpayers to                Civil Procedure > Appeals > Standards of Review > De
apportion their multistate income in accordance with the       Novo Review
Compact's      formula     violated    the     Legislature's   Civil Procedure > Summary Judgment > Appellate
unambiguous [***4] directive that taxes established            Review > Standards of Review
under the BTA must be in accordance with the BTA's             [HN1] An appellate court reviews de novo a court of
sales-only apportionment formula. She further concluded        claims decision on a motion for summary disposition.
that there was no constitutional barrier that prevented the
Legislature from making the Compact's alternative
election provision unavailable to taxpayers.                   Civil Procedure > Appeals > Standards of Review > De
IBM v. Dep't of Treasury, 2012 Mich. App. LEXIS 2293           Novo Review
(Mich. Ct. App., Nov. 20, 2012)                                Governments > Legislation > Interpretation
                                                               [HN2] An appellate court reviews de novo issues of
CASE SUMMARY:                                                  statutory interpretation.

OVERVIEW: HOLDINGS: [1]-A corporation was                      Constitutional Law > Bill of Rights > Fundamental
entitled to use the Multistate Tax Compact's three-factor      Rights > Procedural Due Process > General Overview
apportionment formula for its 2008 Michigan taxes;             Tax Law > State & Local Taxes > Income Tax >
[2]-The express repeal of the Compact's election               Corporations & Unincorporated Associations > General
provision effective January 1, 2011, was evidence that the     Overview
legislature had not impliedly repealed the provision when      [HN3] Throughout the evolution of Michigan's method of
it enacted the Michigan Business Tax Act (BTA); [3]-The        business taxation, the Multistate Tax Compact has
Compact's election provision remained in effect for the        remained in effect. Another constant throughout this
2008 tax year; [4]-The corporation could use the               history is that the legislature has always required a
Compact's apportionment formula for that portion of its        multistate taxpayer with business income or activity both
tax base subject to the modified gross receipts tax for the    within and without the state to apportion its tax base. This
2008 tax year; [5]-The court of appeals erred by holding       process, known as formulary apportionment, has allowed
that the BTA repealed the Compact's election provision         Michigan to tax the portion of a taxpayer's multistate
by implication.                                                business carried on in Michigan without violating the
                                                               Due Process Clause of the United States Constitution.
OUTCOME: The Supreme Court reversed the court of
appeals judgment in favor of the Department of Treasury,
                                                               Governments > Legislation > Interpretation
reversed the court of claims order granting summary
                                                               Governments > Legislation > Expirations, Repeals &
disposition in favor of the Department, and remanded to
                                                               Suspensions
the court of claims for entry of an order granting
                                                               [HN4] Repeals by implication are disfavored. A court
summary disposition in favor of the corporation.
                                                               will presume, in most circumstances, that if the
                                                               legislature had intended to repeal a statute or statutory
                                                                                                                     Page 3
                                           496 Mich. 642, *; 852 N.W.2d 865, **;
                                               2014 Mich. LEXIS 1282, ***4

provision, it would have done so explicitly. Nevertheless,       Overview
when the intention of the legislature is clear, repeal by        [HN7] See MCL 205.581, art III(1).
implication may be accomplished by the enactment of a
subsequent act inconsistent with a former act or by the
                                                                 Tax Law > State & Local Taxes > Income Tax >
occupancy of the entire field by a subsequent enactment.
                                                                 Corporations & Unincorporated Associations > General
However, where the intent of the legislature is claimed to
                                                                 Overview
be unclear, it is the court's duty to proceed on the
                                                                 [HN8] MCL 205.581, art III(1) of the Multistate Tax
assumption that the legislature desired both statutes to
                                                                 Compact allows a taxpayer subject to an income tax to
continue in effect unless it manifestly appears that such
                                                                 elect to use a party state's apportionment formula or the
view is not reasonably plausible. Repeals by implication
                                                                 Compact's three-factor apportionment formula.
will be allowed only when the inconsistency and
repugnancy are plain and unavoidable. The court will
construe statutes, claimed to be in conflict, harmoniously       Tax Law > State & Local Taxes > Income Tax >
to find any other reasonable construction than a repeal by       Corporations & Unincorporated Associations > General
implication. Only when the court determines that two             Overview
statutes are so incompatible that both cannot stand will it      [HN9] See MCL 205.581, art IV(9).
find a repeal by implication.

                                                                 Tax Law > State & Local Taxes > Income Tax >
Governments > Legislation > Interpretation                       Corporations & Unincorporated Associations > General
[HN5] In attempting to find a harmonious construction of         Overview
the statutes, a court will regard all statutes upon the same     Governments > Legislation > Interpretation
general subject-matter as part of one system. Further,           [HN10] The language of the Michigan Business Tax Act
statutes in pari materia, although in apparent conflict,         (BTA) is mandatory in nature. Under the statute, a
should, so far as reasonably possible, be construed in           taxpayer's BTA tax base must be apportioned through the
harmony with each other, so as to give force and effect to       BTA's sales-factor apportionment formula.
each.

                                                                 Tax Law > State & Local Taxes > Income Tax >
Governments > Legislation > Interpretation                       Corporations & Unincorporated Associations > General
[HN6] In the construction of a particular statute, or in the     Overview
interpretation of its provisions, all statutes relating to the   [HN11] Under MCL 205.581, art III(1) of the Multistate
same subject, or having the same general purpose, should         Tax Compact, the legislature provided a multistate
be read in connection with it, as together constituting one      taxpayer with a choice between the apportionment
law, although they were enacted at different times, and          method contained in the Compact or the apportionment
contain no reference to one another. The endeavor should         method required by Michigan's tax laws. If a taxpayer
be made, by tracing the history of legislation on the            elects to apportion its income through the Compact, MCL
subject, to ascertain the uniform and consistent purpose         205.581, art IV(9) mandates that the taxpayer do so using
of the legislature, or to discover how the policy of the         a three-factor apportionment formula. Alternatively, if the
legislature with reference to the subject-matter has been        taxpayer does not make the Compact election, then the
changed or modified from time to time. In other words, in        taxpayer must use the apportionment formula set forth in
determining the meaning of a particular statute, resort          Michigan's governing tax laws.
may be had to the established policy of the legislature as
disclosed by a general course of legislation. With this
purpose in view therefore it is proper to consider, not          Tax Law > State & Local Taxes > Income Tax >
only acts passed at the same session of the legislature, but     Corporations & Unincorporated Associations > General
also acts passed at prior and subsequent sessions.               Overview
                                                                 Governments > Legislation > Interpretation
                                                                 Governments > Legislation > Expirations, Repeals &
Tax Law > State & Local Taxes > Income Tax >                     Suspensions
Corporations & Unincorporated Associations > General             [HN12] By only repealing the Multistate Tax Compact's
                                                                                                                    Page 4
                                         496 Mich. 642, *; 852 N.W.2d 865, **;
                                             2014 Mich. LEXIS 1282, ***4

election provision starting January 1, 2011, the legislature   income, 1 or more forms of which expenses are not
created a window in which it did not expressly preclude        specifically and directly related to particular transactions.
use of the Compact's election provision for BTA                MCL 205.581, art II(4). Under the Compact's broad
taxpayers. Further, the express repeal of the Compact's        definition, a tax is an income tax if the tax measures net
election provision effective January 1, 2011, is evidence      income by subtracting expenses from gross income, with
that the legislature had not impliedly repealed the            at least one of the expense deductions not being
provision when it enacted the BTA. Therefore, a review         specifically and directly related to a particular
of the 2011 amendments supports the conclusion that the        transaction.
Compact's election provision remained in effect for the
2008 tax year.
                                                               Tax Law > State & Local Taxes > Income Tax >
                                                               Corporations & Unincorporated Associations >
Governments > Legislation > Interpretation                     Imposition of Tax
Governments > Legislation > Expirations, Repeals &             [HN17] See MCL 208.1203(2).
Suspensions
[HN13] Because there is a presumption against implied
                                                               Tax Law > State & Local Taxes > Income Tax >
repeals, it is the court's task to determine if there is any
                                                               Corporations & Unincorporated Associations > General
other reasonable construction that would harmonize
                                                               Overview
conflicting statutes and avoid a repeal by implication.
                                                               [HN18] The modified gross receipts tax base is a
                                                               taxpayer's gross receipts less purchases from other firms.
Governments > Legislation > Expirations, Repeals &
Suspensions
                                                               Tax Law > State & Local Taxes > Income Tax >
Governments > Legislation > Interpretation
                                                               Corporations & Unincorporated Associations > General
Tax Law > State & Local Taxes > General Overview
                                                               Overview
[HN14] Repeals by implication are rare, and properly so,
                                                               [HN19] The Michigan Business Tax Act defines "gross
given that a court will presume under most circumstances
                                                               receipts" as the entire amount received by the taxpayer as
that if the legislature had intended to repeal a statute or
                                                               determined by using the taxpayer's method of accounting
statutory provision, it would have done so explicitly.
                                                               used for federal income tax purposes, less any amount
They are even more unlikely in the realm of a state's
                                                               deducted as bad debt for federal income tax purposes that
taxation laws.
                                                               corresponds to items of gross receipts, from any activity
                                                               whether in intrastate, interstate, or foreign commerce
Tax Law > State & Local Taxes > Income Tax >                   carried on for direct or indirect gain, benefit, or
Corporations & Unincorporated Associations > General           advantage to the taxpayer or to others. MCL 208.1111(1).
Overview                                                       Not only is the gross receipts amount reduced by
Governments > Legislation > Expirations, Repeals &             numerous exclusions, it is also subject to a deduction for
Suspensions                                                    the amount deducted as bad debt for federal income tax
Governments > Legislation > Interpretation                     purposes that corresponds to items of gross receipts
[HN15] The Michigan Business Tax Act and the                   included in the modified gross receipts tax (MGRT) base.
Multistate Tax Compact are not so incompatible that both       This total - the entire amount received by the taxpayer
cannot stand.                                                  from any activity minus the bad-debt deduction and the
                                                               numerous exclusions under MCL 208.1111 - is the gross
                                                               receipts base from which the MGRT liability originates.
Tax Law > State & Local Taxes > Income Tax >
Corporations & Unincorporated Associations >
Imposition of Tax                                              Tax Law > State & Local Taxes > Income Tax >
[HN16] The Multistate Tax Compact defines "income              Corporations & Unincorporated Associations > General
tax" as follows: a tax imposed on or measured by net           Overview
income including any tax imposed on or measured by an          [HN20] After a taxpayer determines its gross receipts, the
amount arrived at by deducting expenses from gross             taxpayer then reduces the gross receipts base by
                                                                                                                  Page 5
                                        496 Mich. 642, *; 852 N.W.2d 865, **;
                                            2014 Mich. LEXIS 1282, ***4

purchases from other firms. The purchases from other         income from investments and from incidental or outside
firms deductions include, among other things, inventory      operations or sources.
acquired during the tax year, including freight, shipping,
delivery, or engineering charges included in the original
                                                             Tax Law > Federal Income Tax Computation > Gross
contract price; assets acquired during the tax year of a
                                                             Income (IRC sec. 61)
type that are, or under the internal revenue code will
                                                             [HN25] Black's Law Dictionary states that gross income
become, eligible for depreciation, amortization, or
                                                             means total income from all sources before deductions,
accelerated capital cost recovery for federal income tax
                                                             exemptions, or other tax reductions.
purposes; and materials and supplies to the extent not
included in inventory or depreciable property. There are
also deductions for compensation paid in certain             Tax Law > Federal Income Tax Computation > Gross
industries and for payments to independent contractors.      Income (IRC sec. 61)
Once gross receipts is reduced by any applicable             Tax Law > State & Local Taxes > Income Tax >
deductions, the taxpayer arrives at its modified gross       Corporations & Unincorporated Associations > General
receipts tax (MGRT) base, which is then subject to the       Overview
MGRT at a rate of.80 percent after allocation or             [HN26] Like gross income under the Internal Revenue
apportionment to the state.                                  Code, gross receipts under the Michigan Business Tax
                                                             Act are subject to myriad exclusions and deductions.
                                                             Notably, gross receipts are subject to a reduction for the
Tax Law > State & Local Taxes > Income Tax >
                                                             purchase of inventory during the tax year, including
Corporations & Unincorporated Associations > General
                                                             freight, shipping, delivery, or engineering charges
Overview
                                                             included in the original contract price. This is similar to
[HN21] For the modified gross receipts tax to be an
                                                             the Internal Revenue Service's definition of "gross
income tax under the Multistate Tax Compact, a tax must
                                                             income" for manufacturing, merchandising, or mining
measure net income by starting with gross income and
                                                             businesses - total sales less the cost of goods sold. In
subtracting expenses, with at least one of the expense
                                                             addition, several of these exclusions or deductions are not
deductions not specifically and directly related to a
                                                             specifically and directly related to particular transactions.
particular transaction.
                                                             Depreciable assets can be assets used over a certain
                                                             number of years and, thus, not related to a single
Tax Law > Federal Income Tax Computation > Gross             transaction. Materials and supplies purchased during a tax
Income (IRC sec. 61)                                         year can be used at any time for the operation of a
[HN22] The Internal Revenue Code defines "gross              business and for any amount of transactions. Finally, the
income" as all income from whatever source derived and       purchase of inventory, which includes such things as
includes a nonexclusive list of items that includes things   goods held for resale or raw materials, some of which can
such as gross income derived from business and gains         stay in a taxpayer's warehouse for an indeterminate
derived from dealings in property. 26 U.S.C.S. § 61.         amount of time, can be an expense not specifically or
                                                             directly related to a particular transaction.

Tax Law > Federal Income Tax Computation > Gross
Income (IRC sec. 61)                                         Tax Law > State & Local Taxes > Income Tax >
[HN23] 26 C.F.R. § 1.61-1 provides that gross income         Corporations & Unincorporated Associations > General
includes income realized in any form, whether in money,      Overview
property, or services.                                       [HN27] The modified gross receipts tax fits within the
                                                             broad definition of "income tax" under the Multistate Tax
                                                             Compact by taxing a variation of net income - the entire
Tax Law > Federal Income Tax Computation > Gross             amount received by the taxpayer as determined from any
Income (IRC sec. 61)                                         gainful activity minus inventory and certain other
[HN24] 26 C.F.R. § 1.61-3 provides that gross income         deductions that are expenses not specifically and directly
for manufacturing, merchandising, or mining businesses       related to a particular transaction.
is the total sales, less the cost of goods sold, plus any
                                                                                                               Page 6
                                       496 Mich. 642, *; 852 N.W.2d 865, **;
                                           2014 Mich. LEXIS 1282, ***4

COUNSEL: For INTERNATIONAL BUSINESS                        tax base subject to the modified gross receipts tax of the
MACHINES    CORP,   PLAINTIFF-APPELLANT:                   BTA.
GREGORY A. NOWAK, DETROIT, MI.
                                                                Accordingly, we reverse the Court of Appeals
For    TREASURY     DEPARTMENT       OF,                   judgment in favor of the Department, reverse the Court of
DEFENDANT-APPELLEE: AG, MICHAEL R. BELL,                   Claims order granting summary disposition in favor of
LANSING, MI; ZACHARY C. LARSEN, LANSING,                   the Department, and remand to the Court of Claims for
MI.                                                        entry of an order granting summary disposition in favor
                                                           of IBM.
For MICHIGAN MANUFACTURES ASSOCIATION,
AC: LONGWORTH GREG, GRAND RAPIDS, MI.                      I. FACTS AND PROCEEDINGS

For MULTISTATE TAX COMMISSION, AC: AG,                          IBM is a corporation based in New York that
MICHAEL R. BELL, LANSING, MI.                              provides information technology products and services
                                                           worldwide. In December 2009, IBM [***6] filed its
JUDGES: Chief Justice: Robert P. Young, Jr. Justices:      Michigan Business Tax annual return for the 2008 tax
Michael F. Cavanagh, Stephen J. Markman, Mary Beth         year. Line 10 of IBM's return, the "Apportionment
Kelly, Brian K. Zahra, Bridget M. McCormack, David F.      Calculation" line, read "SEE ATTACHED ELECTION."
Viviano. ZAHRA, J. (concurring). MCCORMACK, J.             IBM filed a separate [*646] statement along with its
(dissenting).                                              return, entitled "Election to use MTC Three Factor
                                                           Apportionment," indicating that it elected to apportion its
OPINION BY: David F. Viviano                               business income tax base and modified gross receipts tax
                                                           base using the three-factor apportionment formula
OPINION                                                    provided in the Compact. Under these calculations, IBM
                                                           sought a refund of $5,955,218. The Department
    [*644] [**868] BEFORE THE ENTIRE BENCH                 disagreed. It determined that IBM could not elect to use
                                                           the Compact's formula and that IBM was entitled to a
    VIVIANO, J.
                                                           refund of only $1,253,609 when calculated under the
     In this case, we must determine whether plaintiff     BTA's sales-factor apportionment formula.
International Business Machines Corporation (IBM)
                                                               IBM filed a complaint in the Court of Claims,
could elect to use the three-factor apportionment [*645]
                                                           challenging the Department's decision. Thereafter, IBM
formula under the Multistate Tax Compact1 (the
                                                           moved for summary disposition under MCR
Compact) for its 2008 Michigan taxes, or whether it was
                                                           2.116(C)(10), and the Department moved for summary
required to use the sales-factor apportionment [***5]
                                                           disposition under MCR 2.116(I)(2). [***7] After a
formula under the Michigan Business Tax Act (BTA).2
                                                           hearing on the motions, the Court of [**869] Claims
The Department of Treasury (the Department) rejected
                                                           denied summary disposition to IBM and granted
IBM's attempt to use the Compact's apportionment
                                                           summary disposition in favor of the Department. The
formula and, instead, required IBM to apportion its
                                                           Court of Claims determined that the BTA mandated the
income using the BTA's sales-factor formula.
                                                           use of the sales-factor apportionment formula.
       1 MCL 205.581 et seq.
                                                                In an unpublished opinion, the Court of Appeals
       2 MCL 208.1101 et seq.
                                                           affirmed the Court of Claims order granting summary
    We conclude that IBM was entitled to use the           disposition in favor of the Department.3 The Court of
Compact's three-factor apportionment formula for its       Appeals first determined that there was a facial conflict
2008 Michigan taxes and that the Court of Appeals erred    between the BTA and the Compact insofar as the BTA
by holding otherwise on the basis of its erroneous         mandates use of the sales-factor formula while the
conclusion that the Legislature had repealed the           Compact permits taxpayers to elect to use a three-factor
Compact's election provision by implication when it        apportionment formula.4 On the basis of this conflict, the
enacted the BTA. We further hold that IBM could use the    Court of Appeals concluded that the Legislature had
Compact's apportionment formula for that portion of its    repealed the Compact's election provision by implication
                                                                                                                Page 7
                                   496 Mich. 642, *647; 852 N.W.2d 865, **869;
                                          2014 Mich. LEXIS 1282, ***7

[*647] when it enacted the BTA.5 The Court of Appeals
then stated that it did not need to decide whether the
modified gross receipts tax was an "income tax" under
                                                                  7 IBM v Dep't of Treasury, 494 Mich. 874; 832
the Compact subject to the Compact's apportionment
                                                                  N.W.2d 388 (2013).
formula in light of its conclusion that the Compact's
election provision had been repealed by implication.6      II. STANDARD OF REVIEW
      3 IBM v Dep't of Treasury, unpublished opinion            [HN1] We review de novo a Court of Claims
      per curiam of the Court of Appeals, issued           decision on a motion for summary disposition.8 [HN2]
      November 20, 2012 (Docket No. 306618), 2012          We also review de novo issues of statutory
      Mich. App. LEXIS 2293. [***8]                        interpretation.9
      4 Id. 2012 Mich. App. LEXIS 2293 at *6.
      5 Id. 2012 Mich. App. LEXIS 2293 at *8-*10. It              8 Malpass v Dep't of Treasury, 494 Mich. 237,
      also determined that the Compact was not a                  245; 833 NW2d 272 (2013).
      binding contract.                                           9 Id.
      6 Id. 2012 Mich. App. LEXIS 2293 at *11.
      Judge RIORDAN concurred in all respects except       [*648] III. HISTORY OF BUSINESS TAXATION IN
      regarding the issue of repeal by implication. He     MICHIGAN
      determined that the panel did not need to conclude
      that the BTA had impliedly repealed the Compact           Because we believe it important to our analysis in
      because MCL 208.1309 allowed the taxpayer to         this case, we begin with a discussion of the history of
      petition for another apportionment formula. He       business taxation in Michigan. Michigan's taxation of
      concluded that the plain language of the BTA         business income or activity began in 1953, when the
      required IBM to apportion its income tax             Legislature enacted a business activities tax that taxed the
      consistently with the BTA.                           adjusted receipts of a taxpayer.10 This tax remained
                                                           [**870] in effect until Michigan adopted its first
    IBM sought leave to appeal in this Court. We           corporate income tax as part of the Income Tax Act of
granted IBM's application and asked the parties to         1967 (ITA).11 Against the backdrop of the ITA,
address                                                    Michigan joined the Multistate Tax Compact in 1970
                                                           when the Legislature enacted MCL 205.581.12 The
          (1) whether the plaintiff could elect to         Compact "symbolized the recognition that, as applied to
      use the apportionment formula provided in            multistate businesses, traditional state tax administration
      the Multistate Tax Compact, MCL                      was inefficient and costly to both [***10] State and
      205.581, in calculating its 2008 tax                 taxpayer."13 Thus, the goals of the Compact include
      liability to the State of Michigan, or               facilitating and promoting equitable and uniform taxation
      whether it was required to use the                   of multistate taxpayers.14 To this end, the [*649]
      apportionment formula provided in the                Compact operates in conjunction with Michigan's tax
      Michigan Business Tax Act, MCL                       acts, containing several provisions designed to ensure
      208.1101 et seq.; (2) whether § 301 of the           uniform taxation of multistate taxpayers.
      Michigan Business Tax Act, MCL
      208.1301, repealed by implication Article                   10 See 1953 PA 150. See also Armco Steel Corp
      III(1) of the Multistate Tax Compact; (3)                   v Dep't of Revenue, 359 Mich. 430, 444; 102
      whether the Multistate Tax Compact                          NW2d 552 (1960) ("This tax is part of a general
      constitutes a contract that cannot be                       scheme of State taxation of business activities in
      unilaterally altered or amended by a                        Michigan. It is a tax on Michigan activities
      member state; [***9] and (4) whether the                    measured, in amount, by adjusted receipts derived
      modified gross receipts tax component of                    from or attributable to Michigan sources . . . .").
      the Michigan Business Tax Act constitutes                   11 See MCL 206.61, as enacted by 1967 PA
      an income tax under the Multistate Tax                      281. The stated purpose of the ITA was "to meet
      Compact.7                                                   deficiencies in state funds by providing for the
                                                                                                                  Page 8
                                    496 Mich. 642, *649; 852 N.W.2d 865, **870;
                                          2014 Mich. LEXIS 1282, ***10

       imposition, levy, computation, collection,           However, the BTA was short-lived. Effective January 1,
       assessment, and enforcement by lien and              2012, Michigan returned to a corporate income tax.22 At
       otherwise of taxes on or measured by net income      [**871] the same time, the [*650] Legislature stayed
       activities . . . ." Title, 1967 PA 281.              true to its past practice of repealing conflicting tax acts
       12 1969 PA 343. Section 1 of 1969 PA 343,            and expressly repealed the BTA.23
       codified under MCL 205.581, includes the
       mandatory provisions of the Compact that must               19 2007 PA 36; MCL 208.1101 et seq.
       be enacted for a state to become a member. See              20 See MCL 208.1201; MCL 208.1203.
       US Steel Corp v Multistate Tax Comm, 434 U.S. 21 Enacting section 1 of 2006 PA 325 provides:
       452, 455-456; 98 S. Ct. 799; 54 L. Ed. 2d 682                   "The single business tax act, 1975 PA 228, MCL
       (1978).                                                     208.1 to 208.145, is repealed effective for tax
       13 US Steel Corp, 434 U.S. at 456.                          years that begin after December 31, 2007."
       14      See [***11] MCL 205.581, Art I ("The                22 See 2011 PA 38.
       purposes of this compact are to: (1) Facilitate             23 See 2011 PA 39, which reads in part:
       proper determination of state and local tax
       liability of multistate taxpayers, including the                            Enacting section 1. The
       equitable apportionment on tax bases and                            Michigan business tax act, 2007
       settlement of apportionment disputes[,] (2)                         PA 36, MCL 208.1101 to
       Promote uniformity or compatibility in significant                  208.1601, is repealed effective on
       components of tax systems[,] (3) Facilitate                         the date that the secretary of state
       taxpayer convenience and compliance in the filing                   receives a written notice from the
       of tax returns and in other phases of tax                           department of treasury that the last
       administration[,] and (4) Avoid duplicative                         certificated    credit    or    any
       taxation.").                                                        carryforward from that certificated
                                                                           credit has been claimed.
    In 1976, the Legislature replaced the corporate
income tax with a single business tax.15 Unlike its                            Enacting section 2. This
predecessor, the Single Business Tax Act (SBTA) taxed                      amendatory act [***13] does not
business activity, not income, and operated as "a form of                  take effect unless House Bill No.
value added tax."16 In enacting the SBTA, the Legislature                  4361 of the 96th Legislature is
expressly amended the ITA to the extent necessary to                       enacted into law.
implement the SBTA and expressly repealed provisions
of the ITA that would conflict with the SBTA.17 The
                                                                 [HN3] Throughout the evolution of our state's
Legislature, however, did not expressly repeal the
                                                            method of business taxation, the Compact has remained
Compact.18
                                                            in effect. Another constant throughout this history is that
       15 See MCL 208.1 et seq., as enacted by 1975         the Legislature has always required a multistate taxpayer
       PA 228.                                              with business income or activity both within and without
       16 Trinova Corp v Dep't of Treasury, 433 Mich        the state to apportion its tax base.24 This process, known
       141, 149; 445 NW2d 428 (1989).                       as formulary apportionment, has allowed Michigan to tax
       17 See 1975 PA 233.                                  the portion of a taxpayer's multistate business carried on
       18 See id.                                           in Michigan without violating the Due Process Clause of
                                                            the United States Constitution.25 We now address
    The SBTA remained in effect until 2008, when the        whether a multistate taxpayer retained the privilege of
Legislature enacted [***12] the BTA, which is at issue      electing the apportionment method provided by the
in this case.19 Representing another shift in business      Compact for the 2008 tax year.
taxation, the BTA imposed two main taxes: the business
income tax and the modified gross receipts tax.20 In               24 See MCL 205.553, as amended by 1954 PA
enacting the BTA, the Legislature expressly repealed the           17; 1970 CL 206.115; 1979 CL 208.41; MCL
SBTA, but again did not expressly repeal the Compact.21            208.1301.
                                                                   25 Malpass, 494 Mich at 245-246.
                                                                                                                     Page 9
                                     496 Mich. 642, *650; 852 N.W.2d 865, **871;
                                           2014 Mich. LEXIS 1282, ***13

IV. WHETHER IBM COULD ELECT TO USE THE                               Power to Rewrite Legislation under the
COMPACT'S APPORTIONMENT FORMULA FOR                                  Ballooning Conception of "Plain Repugnancy,"
ITS 2008 TAXES                                                       45 Gonz L Rev 437, 464 (2010). Lord Edward
                                                                     Coke recognized the implied repeal doctrine as far
    To determine whether IBM could elect to use the                  back as 1614. See id., p 456-458 (discussing Lord
Compact's three-factor apportionment formula to                      Coke's seminal case on the implied repeal
calculate its 2008 Michigan taxes, we must decide if the             doctrine--Doctor Foster's Case, 77 Eng Rep 1222
Legislature repealed the Compact's election provision by             (KB, 1614)).
implication [***14] when it enacted the BTA.26                       28 Wayne Co Pros, 451 Mich at 576.
                                                                     29      Washtenaw Co Rd Comm'rs v Pub Serv
       26 This is the principal argument offered by the              Comm, 349 Mich. 663, 680; 85 N.W.2d 134
       Department in disallowing use of the Compact's                (1957).
       apportionment formula. In the alternative, the                30 Wayne Co Pros, 451 Mich at 577.
       Department argues the Compact can be                          31 Tillotson v Saginaw, 94 Mich. 240, 244-245;
       harmonized with the BTA by reading the                        54 N.W. 162 (1892).
       Compact's election provision and apportionment                32      Wayne Co Pros, 451 Mich at 576-577
       formula into MCL 208.1309. We address this                    [***16] (emphasis added; citations and quotation
       argument in note 55 of this opinion.                          marks omitted).
                                                                     33 Valentine v Redford Twp Supervisor, 371
[*651] A. LEGAL PRINCIPLES
                                                                     Mich 138, 144; 123 NW2d 227 (1963). As with
    We begin our analysis "with the axiom that [HN4]                 any issue of statutory interpretation, our goal "is
repeals by implication are disfavored."27 We will                    to give effect to the Legislature's intent, focusing
presume, "in most circumstances, that if the Legislature             first on the statute's plain language." Malpass, 494
had intended to repeal a statute or statutory provision, it          Mich at 247-248 (citation and quotation marks
would have done so explicitly."28 Nevertheless, "[w]hen              omitted).
the intention of the legislature is clear, repeal by
                                                                   [HN5] In attempting to find a harmonious
implication may be accomplished by the enactment of a
                                                              construction of the statutes, we "will regard all statutes
subsequent act inconsistent with a former act" or "by the
                                                              upon the same general subject-matter as part of one
occupancy of the entire field by a subsequent
                                                              system . . . ."34 Further, "[s]tatutes in pari materia,
enactment."29 [**872] However, "where the intent of
                                                              although in apparent conflict, should, so far as reasonably
the Legislature is claimed to be unclear, it is our duty to
                                                              possible, be construed in harmony with each other, so as
proceed on the assumption that the Legislature desired
                                                              to give force and effect to each . . . ."35 This Court has
both statutes to continue in effect unless it manifestly
                                                              stated:
appears that such view is not reasonably plausible."30
Repeals by implication will be allowed "only when the
inconsistency [***15] and repugnancy are plain and                     It is a well-established rule that [HN6] in
                                                                     the construction of a particular statute, or
unavoidable."31 We will "construe statutes, claimed to be
                                                                     in the interpretation of its provisions, all
in conflict, harmoniously" to find "any other reasonable
                                                                     statutes relating to the same subject, or
[*652] construction" than a repeal by implication.32
                                                                     having the same general purpose, should
Only when we determine that two statutes "are so
                                                                     be read in connection with it, as together
incompatible that both cannot stand" will we find a repeal
                                                                     constituting one law, although they were
by implication.33
                                                                     enacted at different times, and contain no
       27 Wayne Co Pros v Dep't of Corrections, 451                  reference to one another. The endeavor
       Mich 569, 576; 548 NW2d 900 (1996). The                       should be made, by tracing the history of
       implied repeal doctrine has "remained stable over             legislation on the subject, to ascertain the
       approximately four centuries of common law in                 [***17] uniform and consistent purpose of
       the United Kingdom and then here in the United                the legislature, or to discover how the
       States." Markham, The Supreme Court's New                     policy of the legislature with reference to
       Implied Repeal Doctrine: Expanding Judicial                   the subject-matter has been changed or
                                                                                                                Page 10
                                      496 Mich. 642, *652; 852 N.W.2d 865, **872;
                                            2014 Mich. LEXIS 1282, ***17

       modified from time to time. In other                   [HN8] This provision allows a taxpayer subject to an
       words, in determining the meaning of a                 income tax to elect to use a party state's apportionment
       particular statute, resort may be had to the           formula or the Compact's three-factor apportionment
       established policy of the legislature as               formula.
       disclosed by a general course of
       legislation. With this purpose in view                        38     MCL 205.581, Art IV(9) ([HN9] "All
       therefore it is proper to consider, not only                  business income shall be apportioned to this state
       acts passed at [*653] the same session of                     by multiplying the income by a fraction, the
       the legislature, but also acts passed at prior                numerator of which is the property factor plus the
       and subsequent sessions.36                                    payroll factor plus the sales factor, and the
                                                                     denominator of which is 3.").
In this case, the Compact's election provision and § 301             39 MCL 205.581, Art III(1).
of the BTA share the common purpose of setting forth the
                                                                    [*654] However, the Department rejected IBM's
methods of apportionment of a taxpayer's multistate
                                                              attempts to [***19] apportion its income through the
business income; therefore, we must construe them
                                                              Compact's apportionment formula. Instead, it required
together as statutes in pari materia.37
                                                              IBM to apportion its BTA tax base consistently with the
       34 Rathbun v State of Michigan, 284 Mich. 521,          BTA and its sales-factor formula. Section 301 of the BTA
       544; 280 N.W. 35 (1938) (citation and quotation          reads as follows:
       marks omitted).
       35 Id. (citation and quotation marks omitted).                  (1) Except as otherwise provided in this
       36 Id. at 543-544 (citation and quotation marks               act, each tax base established under this
       omitted).                                                     act shall be apportioned in accordance
       37 Id. at 543 ("Statutes in pari materia are those            with this chapter.
       . . . which have a common purpose . . . .").
                                                                          (2) Each tax base of a taxpayer whose
B. APPLICATION                                                       business activities are confined solely to
                                                                     this state shall be allocated to this state.
     With the history of Michigan business taxation and              Each tax base of a taxpayer whose
applicable legal principles in mind, [***18] we turn to              business activities are subject to tax both
the specific statutes at issue. IBM sought to apportion its          within and outside of this state shall be
[**873] BTA tax base using the Compact's three-factor                apportioned to this state by multiplying
apportionment formula.38 In so doing, IBM relied on the              each tax base by the sales factor calculated
Compact's election provision, which reads in pertinent               under section 303.40
part:

           [HN7] (1) Any taxpayer subject to an
                                                                     40 MCL 208.1301.
       income tax whose income is subject to
       apportionment and allocation for tax                        We recognize that [HN10] the language of the BTA
       purposes pursuant to the laws of a party               is mandatory in nature.41 Under the statute, a taxpayer's
       state or pursuant to the laws of                       BTA tax base must be apportioned through the BTA's
       subdivisions in 2 or more party states may             sales-factor apportionment formula.42 The Department
       elect to apportion and allocate his income             argues that this mandatory language precludes the use of
       in the manner provided by the laws of                  any other apportionment formula and, reading it in
       such state or by the laws of such states and           isolation, we would agree. However, as stated previously,
       subdivisions without reference to this                 § 301 of the BTA is not the only provision of Michigan's
       compact, or may elect to apportion and                 tax laws pertaining to the apportionment of business
       allocate in accordance with article IV . . .           [***20] income--the Compact's election provision shares
       .39                                                    the same purpose. Therefore, we cannot interpret § 301 of
                                                              the BTA in a vacuum.43 Rather, we must [*655]
                                                                                                                      Page 11
                                      496 Mich. 642, *655; 852 N.W.2d 865, **873;
                                            2014 Mich. LEXIS 1282, ***20

consider it along with the Compact "by tracing the history              that "[a]ll business income . . . shall be
of legislation on the subject, to ascertain the uniform and             apportioned [***22] to this state" through the
consistent purpose of the legislature."44                               standard three-factor apportionment formula);
                                                                        1979 CL 208.45 (requiring that "[a]ll of the tax
       41 See Fradco v Dep't of Treasury, 495 Mich                      base . . . shall be apportioned to this state" through
       104, 114; 845 NW2d 81 (2014) ("The                               the three-factor apportionment formula). In 1991,
       Legislature's use of the word 'shall' . . . indicates a          the Legislature began to phase out the SBTA's
       mandatory and imperative directive.").                           equally weighted, three-factor apportionment
       42 MCL 208.1301(1).                                              formula, requiring a progressively more
       43 See also People v Stephan, 241 Mich App                       sales-factor-focused apportionment formula. See
       482, 497; 616 NW2d 188 (2000) (recognizing that                  MCL 208.45, as amended by 1991 PA 77.
       interpreting the unambiguous language of two                     However, the new apportionment formula was
       conflicting statutes does not end the analysis                   still mandatory.
       because "courts do not construe individual
       statutes in a vacuum" but rather construe statutes             The Department argues that the Legislature repealed
       together under the doctrine of in pari materia).          the Compact's election provision when it enacted [*656]
       44      Rathbun, 284 Mich at 543-544 (stating             the BTA because § 301 of the BTA is the first tax
       further that courts "'will regard all statutes upon       provision with apportionment language directly in
       the same general subject matter as part of one            conflict with the Compact's election provision. The
       system'") (citation omitted).                             import of this argument is that the Compact's election
                                                                 provision was a dead letter when it was enacted because
     The BTA is not the first Michigan business tax act to       both the ITA and the election provision required use of
contain a mandatory apportionment formula. All our past          the same three-factor apportionment formula. However,
business tax acts mandated that a taxpayer with [**874]          the Department's argument overlooks that the Compact's
income or activity that was taxable within and without           election provision, by using the terms "may elect,"
the [***21] state allocate and apportion its tax base            contemplates a divergence between a party state's
consistently with each respective act.45 These acts further      mandated apportionment formula and the Compact's own
mandated that the tax base be apportioned through a              formula--either [***23] at the time of the Compact's
specific apportionment formula.46 The mandatory                  adoption by a party state or at some point in the future.47
apportionment language of the BTA is nearly identical to         Otherwise, there would be no point in giving taxpayers an
the language of its predecessors.                                election between the two. In fact, reading the Compact's
                                                                 election provision as forward-looking--i.e., contemplating
       45 See MCL 205.552, as amended by 1954 PA                 the future enactment of a state income tax with a
       17 (providing that "[t]he adjusted receipts of a          mandatory apportionment formula different from the
       taxpayer derived from or attributable to Michigan         Compact's apportionment formula--is the only way to
       sources shall be determined in accordance with            give meaning to the provision when it was enacted in
       the provisions of section 3 of this act"); 1970 CL        Michigan.48 Viewed in this light, the BTA's mandatory
       206.103 (providing that "[a]ny taxpayer having            apportionment language may plausibly be read as
       income from business activity which is taxable            compatible with the Compact's election provision.
       both within and without this state . . . shall
       allocate and apportion his net income as provided                47 MCL 205.581, Art III(1). See also Black's
       in this act"); 1979 CL 208.41 (providing that "[a]               Law Dictionary (9th ed) (defining an "election" as
       taxpayer whose business activities are taxable                   "[t]he exercise of a choice; esp., the act of
       both within and without this state, shall apportion              choosing from several possible rights or remedies
       his tax base as provided in this chapter").                      in a way that precludes the use of other rights or
       46 See MCL 205.553(b), as amended by 1954                        remedies").
       PA 17 (requiring that a taxpayer with adjusted                   48 See Moore v Fennvile Pub Schs Bd of Ed,
       receipts attributable to activity within and without             223 Mich. App. 196, 201; 566 NW2d 31 (1997)
       Michigan apportion the receipts consistent with a                ("It is the duty of the courts to interpret statutes so
       three-factor formula); 1970 CL 206.115 (requiring                as to render no provision meaningless.").
                                                                                                                Page 12
                                     496 Mich. 642, *656; 852 N.W.2d 865, **874;
                                           2014 Mich. LEXIS 1282, ***23

     Moreover, our review of the statutes in pari materia     does not make the Compact election, then the taxpayer
indicates a uniform and consistent purpose of the             must use the apportionment formula set forth in
Legislature for the Compact's election provision [***24]      Michigan's governing tax laws. In this case, IBM's tax
to operate alongside Michigan's tax acts.49 Just as it did    base arose under the BTA. Had it not elected to use the
[*657] when it enacted the ITA,50 the Legislature,            Compact's apportionment formula, IBM would have been
[**875] in enacting the BTA, had full knowledge of the        required to apportion its tax base consistently [***26]
Compact and its provisions.51 Even with such knowledge        with the mandatory language of the BTA--i.e., through
on both occasions, the Legislature left the Compact's         the BTA's sales-factor apportionment formula.55 Thus,
election provision intact. By contrast, the Legislature       we believe the BTA and the Compact are compatible and
expressly repealed or amended other inconsistent acts         can be read as a harmonious whole.
regarding the taxation of businesses.52 Had the
Legislature believed that the Compact's election                     53 See Wayne Co Pros, 451 Mich at 577.
provision no longer had a place in Michigan's tax system             54 Id. at 576-577.
or conflicted with the purpose of the BTA, it could have             55         Despite the above framework, the
taken the necessary action to eliminate the election                 Department argues that if the BTA and the
provision.                                                           Compact can be harmonized, it is only through
                                                                     MCL 208.1309(1), which allows a taxpayer to
       49 Rathbun, 284 Mich at 543-544.                              petition to use another apportionment method. We
       50 Although the ITA's apportionment method is                 disagree. The Department's "harmonization"
       largely    consistent    with     the    Compact's            would actually be an abrogation of the election
       apportionment method, caselaw during the period               provision. Section 309 requires that a taxpayer
       in which both were in effect reflects some                    petition     the    Department       for     another
       potential for inconsistency. See Consumers Power              apportionment method and prove that the BTA's
       Co v Dep't of Treasury, 235 Mich. App. 380, 386 n               apportionment provision does not fairly represent
       6; 597 NW2d 274 (1999) (discussing definitional               the taxpayer's business activity in the state. Thus,
       differences between the ITA and the Compact);                 the Department's interpretation takes the choice
       Chocola v Dep't of Treasury, 132 Mich. App. 820,                out of the taxpayer's hands and is inconsistent
       831; 348 NW2d 290 (1984); Donovan Const Co v                  with the plain language of the Compact.
       Dep't of Treasury, 126 Mich. App. 11; 337                     Therefore, we decline to accept the Department's
       N.W.2d 297 (1983).                                            proposed harmonization.
       51 In re Reynolds Estate, 274 Mich. 354, 362;
       264 N.W. 399 (1936) [***25] ("The Legislature,             Subsequent action by the Legislature indicates that it
       in passing [a new act], is presumed to have done       did not impliedly repeal the Compact's election provision
       so with a full knowledge of existing statutes.").      when it enacted the BTA.56 On May 25, 2011, the
       52 See notes 21 and 23 of this opinion.                [**876] Legislature expressly amended the Compact's
                                                              [***27] election provision by adding the following
      Because the Legislature gave no clear indication that   language:
it intended to repeal the Compact's election provision, we
proceed under the assumption that the Legislature                      [E]xcept that beginning January 1, 2011
intended for both to remain in effect.53 After reading the           any taxpayer subject to the Michigan
statutes in pari materia, we conclude that a reasonable              business tax act, 2007 PA 36, MCL
construction exists other than a repeal by implication.54            208.1101 to 208.1601, or the income tax
[HN11] Under Article III(1) of the Compact, the                      act of 1967, 1967 PA 281, MCL 206.1 to
Legislature provided a multistate taxpayer with a choice             206.697, shall, for purposes of that act,
between the apportionment method contained in the                    apportion and allocate in accordance with
Compact or the apportionment method required by                      the provisions [*659] of that act and shall
Michigan's tax laws. If a taxpayer elects to apportion its           not apportion or allocate in accordance
income through the Compact, Article IV(9) mandates that              with article IV.57
the [*658] taxpayer do so using a three-factor
apportionment formula. Alternatively, if the taxpayer         There is no dispute that the Legislature specifically
                                                                                                                 Page 13
                                     496 Mich. 642, *659; 852 N.W.2d 865, **876;
                                           2014 Mich. LEXIS 1282, ***27

intended to retroactively repeal the Compact's election        implied repeals,60 it is our task to determine if there is
provision for taxpayers subject to the BTA beginning           any other reasonable construction that would harmonize
January 1, 2011. The Legislature could have--but did           the two statutes and avoid a repeal by implication.61
not--extend this retroactive repeal to the start date of the
BTA. In addressing this legislation, the dissent suggests             60 See Jackson v Mich Corrections Comm, 313
that "the 2011 Legislature may have simply been acting                Mich 352, 356; 21 NW2d 159 (1946).
expressly to confirm what the 2007 Legislature believed               61     Wayne Co Pros, 451 Mich at 576-577
it had already done implicitly."58 We would agree with                (emphasis added). See also Rathbun, 284 Mich at
that conclusion if the Legislature had retroactively                  544-545 (If we "can by any fair, strict, or liberal
repealed the Compact's election provision beginning                   construction find for the two provisions a
January 1, 2008, the effective date of the BTA. However,              reasonable field of operation, without destroying
[HN12] by only repealing the Compact's election                       their evident intent and meaning, preserving the
provision starting January 1, 2011, the Legislature                   force of both, and construing them together in
created a window in which [***28] it did not expressly                harmony with the whole course of legislation
preclude use of the Compact's election provision for BTA              upon the subject, it is [our] duty to do so.")
taxpayers. Further, we believe that the express repeal of             (emphasis added).
the Compact's election provision effective January 1,
                                                                    [HN14] Repeals by implication are rare, and
2011, is evidence that the Legislature had not impliedly
                                                               properly so, given that we will presume under most
repealed the provision when it enacted the BTA.59
                                                               circumstances that "if the Legislature [***30] [**877]
Therefore, a review of the 2011 amendments supports our
                                                               had intended to repeal a statute or statutory provision, it
conclusion that the Compact's election provision
                                                               would have done so explicitly."62 They are even more
remained in effect for the 2008 tax year.
                                                               unlikely in the realm of our state's taxation laws.63 This
       56 See Baxter v Robertson, 57 Mich. 127, 132;            certainly creates a very [*661] high bar, but we disagree
       23 N.W. 711 (1885) ("Legislative construction of          with the dissent that we have made it absolute. Rather, by
       past legislation . . . is always entitled to be         using the applicable canons of construction and faithfully
       considered with some care, so far as it throws          applying our precedents in this area, we have arrived at a
       light on doubtful language . . . .").                   reasonable construction that harmonizes the BTA and the
       57 2011 PA 40 (emphasis added).                         Compact.64
       58 Post at 6.
                                                                      62 Wayne Co Pros, 451 Mich at 576. See also
       59       See 1A Singer, Sutherland Statutory
                                                                      Matsushita Elec Indus Co v Epstein, 516 U.S.
       Construction (7th ed), § 23:11, p 485 ("[T]he later
                                                                      367, 381; 116 S. Ct. 873; 134 L. Ed. 2d 6 (1996)
       express repeal of a particular statute may be some
                                                                      ("The rarity with which we have discovered
       indication that the legislature did not previously
                                                                      implied repeals is due to the relatively stringent
       intend to repeal the statute by implication.").
                                                                      standard for such findings, namely, that there be
C. RESPONSE TO THE DISSENT                                            an 'irreconcilable conflict' between the two federal
                                                                      statutes at issue.").
     The dissent's analysis has a tantalizing simplicity to           63 1A Singer, Sutherland Statutory Construction
it. It homes in on the plain language and mandatory                   (7th ed), § 23:10, p 484, citing Sylk v United
[*660] nature of the BTA's apportionment provision.                   States, 331 F Supp 661, 665 (ED Pa, 1971) ("On
However, the dissent spends very little time considering              subjects to which the legislature pays continuous,
the language of the [***29] Compact, its history, or the              close attention, such as internal revenue laws, the
history of business taxation in Michigan. While this                  presumption against implied repeal may have
approach may be proper in construing the BTA in a                     greater force.").
typical case, it is incomplete when we are faced with the             64      Contrary to the dissent's suggestion, the
question of implied repeal. Under such circumstances,                 question is not whether the 2008 Legislature
that the dissent has arrived at the better or even the best           [***31] could disregard a policy choice by the
interpretation of the BTA does not end the inquiry.                   1970 Legislature--obviously it could--but instead
Rather, [HN13] because there is a presumption against                 what action it must take to make its intentions
                                                                                                               Page 14
                                     496 Mich. 642, *661; 852 N.W.2d 865, **877;
                                           2014 Mich. LEXIS 1282, ***31

       clear in the absence of express repealing language            67 Because we are able to [***33] harmonize
       in the statute.                                               the statutes and conclude that no repeal by
                                                                     implication occurred, we decline to discuss
     The dissent agrees that "every attempt" must be                 whether the Compact is binding and, thus,
made to construe the BTA and the Compact                             whether the Legislature even could repeal the
harmoniously. But, in the end, the dissent fails to heed             Compact by implication. That inquiry involves
this call. Instead, because of its rigid focus on the                constitutional issues, which we will not reach
mandatory language of the BTA--to the exclusion of the               because they are unnecessary to resolve the case.
language and history of the Compact, and its place in                See Booth Newspapers, Inc v Univ of Mich Bd of
Michigan's taxation scheme--the dissent's analysis is at             Regents, 444 Mich. 211, 234; 507 NW2d 422
odds with our longstanding implied-repeal jurisprudence.             (1993) ("In addition, there exists a general
                                                                     presumption by this Court that we will not reach
D. CONCLUSION AS TO THE ISSUE OF IMPLIED                             constitutional issues that are not necessary to
REPEAL                                                               resolve a case.").
     In sum, because we are able to harmonize the BTA          [**878] V. WHETHER THE MODIFIED GROSS
and the Compact's election provision, we conclude that        RECEIPTS TAX IS AN INCOME TAX UNDER THE
[HN15] the statutes are not "'so incompatible that both       COMPACT
cannot stand.'"65 We believe that our interpretation
allows the Compact's election provision to serve its               Having determined that IBM could elect to use the
purpose of providing uniformity to multistate taxpayers       Compact's apportionment formula for the 2008 tax year,
in light of Michigan's enactment of an apportionment          we must next consider whether IBM could apportion its
formula different from the Compact's formula. Any             entire BTA tax base through the Compact's
conflict apparent from a first reading of these statutes is   apportionment formula. IBM's 2008 BTA tax base
reconcilable when the statutes are read in pari materia.66    contained two components: the business income tax base
[***32] Therefore, the Department has failed to               and the modified gross receipts tax (MGRT) base. The
overcome [*662] the presumption against repeals by            parties quarrel over whether both components may be
implication. Accordingly, the Court of Appeals erred by       apportioned under the Compact. The Compact election is
holding that the Legislature repealed the Compact's           available to "[a]ny taxpayer subject to an income tax."68
election provision by implication when it enacted the         While it is undisputed that [***34] the business income
BTA. Instead, we hold that the Compact's election             tax is an income tax, the Department argues that the
provision was available to IBM for the 2008 tax year.67       [*663] MGRT is not an income tax, but rather a gross
                                                              receipts tax not subject to the Compact's election
       65 Valentine, 371 Mich at 144 (citation omitted).      provision. Therefore, we must determine whether the
       66 The Department also cannot show that the            MGRT is an income tax under the Compact and, thus,
       Legislature intended to occupy the entire field        apportionable under the Compact's three-factor
       covered by the Compact when it enacted the BTA         apportionment formula.
       to establish a repeal by implication. Washtenaw
       Co Rd Comm'rs, 349 Mich at 680. The BTA and                   68 MCL 205.581, Art III(1).
       the Compact, while having some overlapping
       provisions, occupy two different fields. The BTA            [HN16] The Compact defines "income tax" as
       is a stand-alone tax act that governs the taxation     follows:
       of businesses. The Compact acts as an overlay to
       Michigan's taxation system. It is specifically                   [A] tax imposed on or measured by net
       designed to leave the member states with                      income including any tax imposed on or
       "complete control over all legislation and                    measured by an amount arrived at by
       administrative action affecting the rate of tax, the          deducting expenses from gross income, 1
       composition of the tax base . . . , and the means             or more forms of which expenses are not
       and methods of determining tax liability and                  specifically and directly related to
       collecting any taxes determined to be due." US                particular transactions.69
       Steel Corp, 434 U.S. at 457.
                                                                                                                   Page 15
                                     496 Mich. 642, *663; 852 N.W.2d 865, **878;
                                           2014 Mich. LEXIS 1282, ***34

Under the Compact's broad definition, a tax is an income       ."71 [HN19] The BTA defines "gross receipts" as
tax if the tax measures net income by subtracting
expenses from gross income, with at least one of the                       the entire amount received by the
expense deductions not being specifically and directly                taxpayer as determined by using the
related to a particular transaction.70                                taxpayer's method of accounting used for
                                                                      federal income tax purposes, less any
       69 MCL 205.581, Art II(4). The Compact also                    amount deducted as bad debt for federal
       defines "gross receipts tax" in Art II(6) as follows:          income tax purposes that corresponds to
                                                                      items of gross receipts . . . , from any
                  [A] tax, other than a sales tax,                    activity whether in intrastate, interstate, or
               which is imposed on or measured                        foreign commerce carried on for direct or
               by the gross volume of business, in                    indirect gain, benefit, or advantage to the
               terms of gross receipts or in other                    taxpayer or to others . . . .72
               terms, and in the determination of
               which no deduction [***35] is                   Not only is the gross receipts amount reduced by
               allowed which would constitute                  numerous exclusions, it is also subject to a deduction for
               the tax an income tax.                          the "amount deducted as bad debt for federal income tax
                                                               purposes that corresponds to items of gross receipts
                                                               included in the modified gross receipts tax base."73 This
       70 We need not put a definitive label on the            total--the entire amount received by the taxpayer from
       MGRT, a task with which commentators have               any activity minus the bad-debt deduction and the
       struggled. See, e.g., McIntyre & Pomp, A Policy         numerous exclusions under MCL 208.1111--is the gross
       Analysis of Michigan's Mislabeled Gross Receipts        receipts base from which the MGRT liability originates.
       Tax, 53 Wayne L Rev 1283 (2007) (concluding
       that the MGRT is akin to a sales-subtraction value             71 MCL 208.1203(3).
       added tax but that it is not a transactional tax);             72 MCL 208.1111(1).
       Gandhi, Computing the Tax Base: The Michigan                   73 Id.
       Business Tax, 53 Wayne L Rev 1369 (2007)
       (concluding that the MGRT is a reverse-build of              [HN20] After the [***37] taxpayer determines its
       Michigan's now-repealed Single Business Tax);           gross receipts through the above calculation, the taxpayer
       Grob & Roberts, The Michigan Business Tax               then reduces the gross receipts base by "purchases from
       Replaces the State's Much-Vilified SBT, 17-Oct J        other firms."74 The "purchases from other firms"
       Multistate Tax'n & Incentives 8 (2007)                  deductions include, among other things, "inventory
       (concluding that the MGRT is something between          acquired during [*665] the tax year, including freight,
       a gross receipts tax and a gross margin tax).           shipping, delivery, or engineering charges included in the
       Instead, we are only tasked with determining            original contract price"; "assets . . . acquired during the
       whether the MGRT qualifies as an income tax             tax year of a type that are, or under the internal revenue
       under the Compact.                                      code will become, eligible for depreciation, amortization,
                                                               or accelerated capital cost recovery for federal income tax
     "Modified gross receipts tax" is not defined by the       purposes"; and materials and supplies to the extent not
BTA, but MCL 208.1203(2) states, [HN17] "[The                  included in inventory or depreciable property.75 There
MGRT] levied and imposed under this section is upon the        are also deductions for compensation paid in certain
privilege of [*664] doing business and not upon income         industries and for payments to independent contractors.76
or property." Although this statement indicates that the       Once gross receipts is reduced by any applicable
MGRT is not a tax upon income under the BTA, we must           deductions, the taxpayer arrives at its MGRT base, which
[***36] still determine whether the MGRT fits under the        is then subject to the MGRT at a rate of .80 percent after
broad definition of "income tax" under the Compact.            allocation or apportionment to this state.77

    [HN18] The MGRT base is "a taxpayer's gross                       74 MCL 208.1203(3).
receipts . . . less purchases from other [**879] firms . . .          75 MCL 208.1113(6)(a) through (c). "Inventory"
                                                                                                                Page 16
                                     496 Mich. 642, *665; 852 N.W.2d 865, **879;
                                           2014 Mich. LEXIS 1282, ***37

       is defined as "[t]he stock of goods held for resale    "gross income" for manufacturing, merchandising, or
       in the regular course of trade of a retail or          mining businesses--total sales less the cost of goods
       wholesale business" and [***38] "[f]inished            sold.81 In addition, several of these exclusions or
       goods, goods in process, and raw materials of a        deductions are not specifically and directly related to
       manufacturing business purchased from another          particular transactions.82 Depreciable [*667] assets can
       person." MCL 208.1111(4)(a), (b).                      be assets used [***40] over a certain number of years
       76 MCL 208.1113(6)(d) through (g).                     and, thus, not related to a single transaction.83 Materials
       77 MCL 208.1203(1).                                    and supplies purchased during a tax year can be used at
                                                              any time for the operation of a business and for any
     Having examined how a taxpayer's MGRT base is            amount of transactions. Finally, the purchase of
calculated, we now turn to the question whether the           inventory, which includes such things as goods held for
MGRT fits within the Compact's definition of "income          resale or raw materials, some of which can stay in a
tax." [HN21] For the MGRT to be an income tax under           taxpayer's warehouse for an indeterminate amount of
the Compact, a tax must measure net income by starting        time, can be an expense not specifically or directly
with gross income and subtracting expenses, with at least     related to a particular transaction.84
one of the expense deductions not specifically and
directly related to a particular transaction.78 The Compact          81     "Cost of goods sold" is determined by a
and the BTA do not define "gross income." Therefore, we              taxpayer's inventory. See 33A Am Jur 2d, Federal
look elsewhere to determine what normally constitutes                Taxation, § 6500 ("A taxpayer must use
gross income. [HN22] The Internal Revenue Code                       inventories to determine the cost of goods sold if
defines "gross income" as "all income from whatever                  the production, purchase, or sale of merchandise
source derived" and includes a nonexclusive list of items            is an income-producing factor."). See also Thor
that includes things such as "gross income derived                   Power Tool Co v Comm'r of Internal Revenue,
[*666] from business" and "gains derived from dealings               439 U.S. 522, 530 n 9; 99 S. Ct. 773; 58 L. Ed. 2d
in property."79 [HN23] 26 CFR § 1.61-1 [**880]                       785 (1979); Hygienic Prods Co v Comm'r of
provides that "[g]ross income includes income realized in            Internal Revenue, 111 F2d 330, 331 (CA 6, 1940).
any form, whether in money, property, or services."                  82 While the Compact does not define the phrase
[HN24] 26 CFR § 1.61-3 further provides that gross                   "not specifically and directly related to particular
income for manufacturing, merchandising, or mining                   transactions," the use of the words "specifically,"
[***39] businesses is "the total sales, less the cost of             "directly," and "particular" connotes a close
goods sold, plus any income from investments and from                relation to an individual transaction. See [***41]
incidental or outside operations or sources." Moreover,              Random House Webster's College Dictionary
[HN25] Black's Law Dictionary states that gross income               (2001). That is, the tax cannot be a tax focusing
means "[t]otal income from all sources before deductions,            on specific transactions, i.e., a transactional tax.
exemptions, or other tax reductions."80                              83 See 26 USC 167, 168.
                                                                     84 MCL 208.1111(4)(a), (b).
       78 MCL 205.581, Art II(4).
       79 26 USC 61.                                                We hold that [HN27] the MGRT fits within the
       80 Black's Law Dictionary (9th ed), p 831.             broad definition of "income tax" under the Compact by
                                                              taxing a variation of net income--the entire amount
     These definitions of gross income are similar to the     received by the taxpayer as determined from any gainful
definition of gross receipts under the BTA--the entire        activity minus inventory and certain other deductions that
amount received by the taxpayer as determined from any        are expenses not specifically and directly related to a
gainful activity. [HN26] Like gross income under the          particular transaction. Therefore, IBM could elect to use
Internal Revenue Code, gross receipts are subject to          the Compact's apportionment formula for that portion of
myriad exclusions and deductions. Notably, gross              its tax base subject to the MGRT for the 2008 tax year.85
receipts are subject to a reduction for the purchase of
inventory during the tax year, including freight, shipping,          85 Our holding is limited to the determination
delivery, or engineering charges included in the original            that the MGRT is included within the Compact
contract price. This is similar to the IRS's definition of           definition of "income tax." As noted earlier in
                                                                                                                Page 17
                                     496 Mich. 642, *667; 852 N.W.2d 865, **880;
                                           2014 Mich. LEXIS 1282, ***41

       note 70, we do not need to reach the issue whether     take immediate effect.1 MCL 8.3u provides that
       the MGRT, generally, is an income tax.
                                                                         [*669] [t]he provisions of any law or
VI. CONCLUSION                                                       statute which is re-enacted, amended or
                                                                     revised, so far as they are the same as
     We conclude that Court of Appeals erred by holding              those of prior laws, shall be construed as a
that the BTA repealed the Compact's election provision               continuation of such laws and not as new
by implication. Therefore, IBM could elect to use                    enactments. If any provision of a law is
[**881] the Compact's apportionment formula during the               repealed and in substance re-enacted, a
2008 tax [*668] year. We further hold that IBM could                 reference in any other law to the repealed
use the Compact's apportionment [***42] formula to                   provision shall be deemed a reference to
apportion its MGRT base under the BTA. Accordingly,                  the re-enacted provision.
we reverse the Court of Appeals judgment in favor of the
Department, reverse the Court of Claims order granting        Pursuant to this provision, we must construe the Compact
summary disposition in favor of the Department, and           as though it had not been impliedly repealed.2
remand to the Court of Claims for entry of an order
granting summary disposition in favor of IBM.                        1 2011 PA 40.
                                                                     2    See also 1A Singer, Sutherland Statutory
    David F. Viviano                                                 Construction (7th ed), Repeal and Reenactment, §
                                                                     23:29.
    Michael F. Cavanagh
                                                                  That said, the BTA's exclusive apportionment
    Stephen J. Markman
                                                              method remains in conflict with the election provision of
CONCUR BY: Brian K. Zahra                                     the Compact. This conflict, in my view, is easily resolved
                                                              because the Legislature in 2011 also expressly
CONCUR                                                        supplemented the [***44] Compact. This new provision
                                                              is not "the same as those of prior laws" and is a "new
    ZAHRA, J. (concurring).                                   enactment," which expressly provides that a taxpayer
                                                              could elect to apportion its income under article IV of the
     I agree with the lead opinion's holding that IBM was     Compact
entitled to use the Compact's elective three-factor
apportionment and allocation formula for its 2008                        except that beginning January 1, 2011
Michigan taxes. I also agree with both the lead opinion              any taxpayer subject to the Michigan
and the dissenting opinion that the tax bases at issue here          business tax act, 2007 PA 36, MCL
are "income taxes" within the meaning of the Compact.                208.1101 to 208.1601, or the income tax
Whether the Legislature repealed the Compact's election              act of 1967, 1967 PA 281, MCL 206.1 to
provision by implication when it enacted the BTA is a                206.697, shall, for purposes of that act,
very close question. I would not reach that question                 apportion and allocate in accordance with
because the Legislature made clear that taxpayers are                the provisions of that act and shall not
entitled to use the Compact's election provision for the             apportion or allocate in accordance with
2008, 2009, and 2010 tax years.                                      article IV.3

     Assuming that the Legislature impliedly repealed the
Compact's election provision in 2008 by enacting the
BTA, IBM could nonetheless avail itself of the Compact's             3 2011 PA 40.
[***43] election provision for tax years 2008 through
2010 because the Legislature, in 2011, clearly intended to          [**882] There can be no dispute given this
provide multistate taxpayers the benefit of the Compact's     language that the Legislature specifically intended to
election provision for these tax years. Specifically, on      retroactively repeal the Compact's election provision
May 25, 2011, the Legislature necessarily re-enacted all      beginning January 1, 2011. Further, I conclude that this
the provisions of the Compact, and ordered that act to        language contemplates that any taxpayer could avail itself
                                                                                                                Page 18
                                     496 Mich. 642, *669; 852 N.W.2d 865, **882;
                                           2014 Mich. LEXIS 1282, ***44

of the Compact's election provision for tax years 2008        constitutional barrier that prevents the Legislature from
through 2010. This is because the Legislature, either         making the Compact's alternative election provision
under the [*670] original enactment of the Compact4           unavailable to taxpayers. I would affirm the judgment of
(assuming the Legislature did not repeal the Compact's        the Court of Appeals.
election provision by implication when it enacted the
BTA) or under the above re-enactment and                      I. AN IRRECONCILABLE CONFLICT OF STATUTES
supplementation of the Compact5 (assuming the
                                                                   The threshold issue is, at its core, one of statutory
Legislature [***45] repealed the Compact's election
                                                              interpretation. When the language of a statute is
provision by implication when it enacted the BTA), chose
                                                              unambiguous, we give effect to its plain meaning. Ter
to commence its express repeal of the Compact's election
                                                              Beek v City of Wyoming, 495 Mich. 1, 8; 846 NW2d 531
provision on January 1, 2011, even though the conflict
                                                              (2014). It is hard to imagine a more unambiguous
between the BTA and the Compact had existed from the
                                                              command than the mandatory directive found in § 301 of
2008 tax year. Simply put, the contrapositive of the
                                                              the BTA: "Except as otherwise provided in this act, each
Compact's supplemental provision must mean that before
                                                              tax base established under this act shall be apportioned in
January 1, 2011, a taxpayer could, "for purposes of that
                                                              accordance with this chapter." MCL 208.1301(1).
act [the ITA or the BTA], apportion and allocate in
                                                              [***47] There is no "otherwise provided" exception in
accordance with the provisions of [the ITA or the BTA]
                                                              the BTA that would aid IBM in its [**883] attempt to
and [may] apportion or allocate in accordance with article
                                                              avoid the statute's sales-only apportionment requirement.
IV" of the Compact. This is, in my opinion, the most
                                                              And, within Chapter 208 of the Michigan Compiled
reasonable understanding of this legislation.
                                                              Laws, it is the BTA alone that provides the formula by
       4 1969 PA 343.                                         which taxpayers are to apportion their multistate income.
       5 2011 PA 40.                                          See MCL 208.1301(2); MCL 208.1303(1). Neither the
                                                              Compact nor its apportionment provisions are referred to
     In sum, the Legislature in 2011 created a window in      anywhere in the BTA.
which it intended the Compact's election provision to
apply. In this case, IBM sought to "apportion and                 I share the lead opinion's view that we must make
allocate" its taxes under the BTA well before January 1,      every attempt "to construe statutes, claimed to be in
2011, and therefore may apportion or allocate its taxes in    conflict, harmoniously[.]" Wayne Co Prosecutor v Dep't
accordance with article IV of the Compact. For this           of Corrections, 451 Mich. 569, 577; 548 NW2d 900
reason, I concur in the result reached in the lead opinion.   (1996).1 When later enacted legislation irreconcilably
                                                              [*672] conflicts with a prior act, however, "the last
    Brian K. Zahra                                            expression of the legislative will must control." Jackson v
                                                              Mich Corrections Comm, 313 Mich. 352, 356; 21 N.W.2d
DISSENT BY: Bridget M. McCormack                              159 (1946).

DISSENT                                                              1 The lead opinion implies that if the Compact is
                                                                     found to irreconcilably conflict with the BTA, the
    MCCORMACK, J. (dissenting).                                      Compact, as the earlier enacted statute, will
                                                                     necessarily have been repealed by implication.
     I respectfully dissent because I conclude that the              Our caselaw does not demand such a result. See
[***46] Michigan Business Tax Act (BTA), MCL                         Metro Life Ins Co v Stoll, 276 Mich. 637, 641; 268
208.1101 et seq., requires taxpayers to apportion their              NW 763 (1936) ("It is the rule that where
multistate income in accordance with the BTA's                       [***48] two laws in pari materia are in
sales-only apportionment formula and without resort to               irreconcilable conflict, the one last enacted will
the Multistate Tax Compact's election provision. I reach             control or be regarded as an exception to or
this result because the Legislature's              [*671]            qualification of the prior statute.") In any event,
command--"each tax base established under this act shall             regardless of whether the BTA impliedly repealed
be apportioned in accordance with this chapter," MCL                 the Compact beginning January 1, 2008, the issue
208.1301(1) (emphasis added)--is plain, unambiguous,                 remains the same--whether the Compact election
and permits only one interpretation. Further, there is no            was available for tax years 2008 through 2010.
                                                                                                                   Page 19
                                      496 Mich. 642, *672; 852 N.W.2d 865, **883;
                                            2014 Mich. LEXIS 1282, ***48

     Section 301(1) of the BTA directs that taxes               interpreting § 301 as permitting taxpayers to make the
established under the BTA be apportioned "in accordance         Compact election, the lead opinion has not, as it claims,
with this chapter." "[T]his chapter" requires taxpayers to      settled on a harmonious construction of the BTA and the
use a sales-only apportionment formula.2 The Compact,           Compact. Rather, it has resolved the conflict in favor of
however, provides that "[a]ny taxpayer subject to an            the Compact, the earlier enacted statute. But our
income tax3 . . . may elect to apportion" its income in         precedent is clear: when an irreconcilable conflict exists,
accordance      with     the     Compact's       three-factor   as in this case, the later enacted legislation controls.
apportionment formula. MCL 205.581, Art III(1).                 Jackson, 313 Mich at 356; see also Washtenaw Co Rd
Reading these provisions side by side, I see two, and only      Comm'rs v Pub Serv Comm, 349 Mich. 663, 680; 85
two, possible results: either taxes established under the       N.W.2d 134 (1957). Because I am not convinced that the
BTA need not be apportioned "in accordance with this            two statutes can be read harmoniously, I believe that, for
chapter," as § 301 demands, or taxpayers may not elect to       tax years 2008 through 2010, the enactment of the BTA
use the Compact formula to apportion tax bases                  impliedly repealed the Compact's election provision.
established under the BTA. While I agree with the lead
opinion that statutes that appear to be conflict should be           The lead opinion tries to give some effect to § 301 by
read together and reconciled, [***49] if reasonably             stating that a taxpayer "must use the apportionment
possible, Rathbun v State of Michigan, 284 Mich. 521,            formula set forth in" the BTA if it does not [***51]
544; 280 N.W. 35 (1938), I disagree that this is a case           make the [*674] Compact election. Ante at 15. This
where reconciliation is possible. The differing opinions        construction does not make § 301's mandatory directive
offered [*673] by this Court here make the underlying           "mandatory" at all. When a taxpayer is given a choice as
conflict undeniably plain. The Compact and the BTA are          to whether they will apportion their income in accordance
irreconcilably in conflict; one statute--either the Compact     with the BTA's sales-only formula, the number of
or the BTA--must prevail over the other. And neither            alternative options--a single one, or more--is irrelevant.
alternative is easily dismissed. Traditional rules of           As long as an alternative option exists, the taxpayer may,
construction lead me to resolve the conflict in favor of the    not must, use the apportionment formula set forth in the
later enacted and more specific legislation. See                BTA. And once the lead opinion's "mandatory"
Kalamazoo v KTS Indus, Inc, 263 Mich. App. 23, 38-39;             construction is revealed to be anything but that, I do not
687 NW2d 319 (2004) (resolving a direct conflict                believe that the lead opinion has persuasively explained
between two statutes in favor of the subsequently enacted       why the BTA did not impliedly amend or repeal the
legislation).                                                   Compact's election provision. Rather, the lead opinion,
                                                                relying on the fact that the Legislature has expressly
       2 Taxpayers may petition the Treasury to use an          repealed and amended tax statutes in the past, simply
       alternative apportionment method if the                  states that "[h]ad the Legislature believed that the
       apportionment provisions of the BTA "do not              Compact's election provision no longer had a place in
       fairly represent the extent of the taxpayer's            Michigan's tax system . . . , it could have taken the
       business activity in this state[.]" MCL                  necessary action to eliminate the election provision."
       208.1309(1).                                             Ante at 14-15. Because it did not, the lead opinion
       3 I agree with the lead opinion that the tax bases       "proceed[s] [***52] under the assumption that the
       at issue here are "income taxes" within the              Legislature intended for [the Compact's election
       meaning of the Compact. MCL 205.581, Art II(4).          provision] to remain in effect." Ante at 15. This, of
                                                                course, simply assumes the lead opinion's conclusion that
     The lead opinion agrees that the plain language of §       there was no repeal. Yes, repeals by implication are
301 is mandatory. But it asserts that § 301 can                 disfavored, and that the Legislature knows how to affect
nevertheless [***50] be interpreted as permitting               an express repeal is irrefutable. But by demanding that
taxpayers to make the Compact election. I do not see how        the Legislature take "the necessary action"--i.e., expressly
this interpretation of the BTA is reasonable. If a taxpayer     amend or repeal the Compact--the lead opinion has
can elect an alternative apportionment formula, then §          elevated the presumption against implied repeals into an
301 is [**884] in no sense mandatory. Quite the                 absolute bar.
opposite: § 301's mandatory apportionment "in
accordance with this chapter" becomes optional. By                  Having failed to adequately explain why the
                                                                                                                  Page 20
                                     496 Mich. 642, *674; 852 N.W.2d 865, **884;
                                           2014 Mich. LEXIS 1282, ***52

statutory language itself permits the result it reaches, the   it intended when it enacted the Compact forty years
lead opinion anchors its analysis in a historical overview     earlier or amended it three years later. While in
of business taxation in Michigan. While informative, I         answering this question the 2011 amendment may be
find this approach ultimately unpersuasive. The lead           considered "with some care, so far as it throws light on
opinion argues that because the Compact was enacted at a       doubtful language," Baxter, 57 Mich at 132, that light
time when Michigan law applied the same three-factor           does not shine on the lead opinion's argument.
apportionment [*675] formula as that provided in the
Compact, the Legislature, in enacting it, must have                 In my view the BTA made the Compact election
anticipated the future enactment of a tax act requiring a      unavailable. Because the statutes are irreconcilably in
different apportionment formula and intended for the           conflict, the latter, as the more [***55] specific and later
Compact to prevail should a conflict arise. But even           enacted statute, must be given effect over the former. For
assuming that the lead [***53] opinion is correct, that        this reason, I disagree with the lead opinion that the
interpretation reads into the Compact a policy choice by       BTA's mandatory directive can be interpreted so as to
the 1970 Legislature that the 2008 Legislature was free to     allow BTA taxpayers to make the Compact election
disagree with, either by enacting an income tax with a         instead. As a result, I find it necessary to address IBM's
different, mandatory apportionment formula, as it did in       argument that the Legislature was not constitutionally
2008, or by repealing the election provision outright, as it   permitted to make the BTA's sales-only apportionment
did in 2011. See Studier v Mich Pub Sch Employees'             formula exclusive and mandatory without first repealing
Retirement Bd, 472 Mich. 642, 661; 698 NW2d 350                 the Compact in its entirety.
(2005) ("[A] fundamental principle of the jurisprudence
                                                               II. THE LEGISLATURE WAS NOT BARRED FROM
[**885] of both the United States and this state is that
                                                               UNILATERALLY AMENDING THE COMPACT
one legislature cannot bind the power of a successive
legislature.").                                                     IBM asks this Court to invoke the authority of
                                                               "compact law" and hold that the Legislature, even had it
     The lead opinion underscores its error by attaching
                                                               intended to alter the Compact's election provision when it
particular significance to 2011 PA 40, which expressly
                                                               enacted the BTA, was prohibited from doing so.4 I would
amended the Compact to make the election unavailable to
                                                               decline that invitation.
BTA taxpayers beginning January 1, 2011. The effect of
this amendment on tax years 2011 and beyond is plain to               4 To the extent that IBM is separately arguing
see, but whether the amendment lends force to IBM's                   that the Compact is a binding contract among its
position in this dispute is not. In enacting this                     member states and that unilateral amendment of
amendment, the 2011 Legislature may have simply been                  the Compact offends the Contract Clause, that
acting expressly to confirm what the 2007 Legislature                 argument is discussed later in this opinion.
believed it had already done implicitly. And even if the
2011 Legislature was expressing its view that the BTA                      The California First District Court of Appeal
did not, in fact, repeal [***54] the election provision,              recently decided this very issue in Gillette Co v
this Court is not bound by the prior Legislature's                    Franchise Tax Bd, 209 Cal App 4th 938; 147 Cal
construction of the earlier enactment. See Robertson v                Rptr 3d 603 (2012), review [***56] granted and
Baxter, 57 Mich. 127, 132; 23 N.W. 711 (1885)                            opinion superseded sub nom Gillette v Franchise
("Legislative construction of past legislation has no                 Tax Bd, 151 Cal Rptr 3d 106; 291 P3d 327
judicial force except for the future. But it is always                (2013). The Gillette Court held that "under
entitled to be considered with some care, so far as it                established compact law, the [Multistate Tax]
throws light on doubtful language, and for future cases it            Compact superseded subsequent conflicting state
has authority."); Frey v Mitchie, 68 Mich. 323, 327;                  law . . . [and] the federal and state Constitutions
McGrath 1185, 36 N.W. 184 (1888) ("It is unnecessary to               prohibit states from passing laws that impair the
say more than that a [*676] legislative interpretation of             obligations of contracts." Gillette, 147 Cal Rptr 3d
old laws has no judicial force. Whether right or wrong                at 615. For the reasons stated herein, I believe that
must be determined by the statutes themselves."). The                 Gillette was wrongly decided.
question we must answer in this case concerns what the
Legislature intended when it enacted the BTA--not what              [*677] The United States Constitution provides that
                                                                                                                  Page 21
                                      496 Mich. 642, *677; 852 N.W.2d 865, **885;
                                            2014 Mich. LEXIS 1282, ***56

"[n]o State shall, without the [**886] Consent of               parental home in Philadelphia, where the abuse occurred.
Congress . . . enter into any Agreement of Compact with         Plaintiff argued that the Virginia court order, in
another State[.]" US Const, art I, § 10, cl 3. As the           conjunction with the Interstate Compact for Placement of
Supreme Court explained in US Steel Corp v Multistate           Children (ICPC), a compact to which Pennsylvania and
Tax Comm, 434 U.S. 452; 98 S. Ct. 799; 54 L. Ed. 2d 682             Virginia are parties that had not been congressionally
(1978), the clause is not to be read strictly, but only as      approved, extended the jurisdiction of the Virginia court
requiring congressional consent for compacts that tend to       into Pennsylvania and thereby imposed a legal duty on
increase the political power of the states in a way that        the Philadelphia social workers. The United States Court
"may encroach upon or interfere with the just supremacy         of Appeals for the Third Circuit rejected this argument,
of the United States." Id. at 471 (quotation marks and          ultimately [***59] concluding that the ICPC did not
citation omitted). Those compacts that receive                  apply when a child is returned by the [*679] sending
congressional authorization and fall within the scope of        state to a natural parent residing in another state.
the Compact Clause are treated [***57] as federal law.          McComb, 934 F2d at 482.
Cuyler v Adams, 449 U.S. 433, 440; 101 S. Ct. 703; 66 L
Ed 2d 641 (1981). Compacts without congressional                     IBM cites the Third Circuit's discussion of the scope
approval, however, are not transformed into federal law;        of the ICPC for its argument here:
thus their construction is a matter of state statutory law.
                                                                            Because Congressional consent was
     Notwithstanding the fact that the Multistate Tax                  neither given nor required, the [ICPC]
Compact, as a compact without congressional approval,                  does    not     express       federal law.
does not carry the supreme force of federal law, IBM                   Consequently, this Compact must be
believes that the Legislature could not impose an                      construed as state law. . . .
exclusive apportionment formula because the Compact
supersedes conflicting state law in any event. This is                      Nevertheless,       uniformity       of
contrary to our well-established rule that a statute can be            interpretation is important in the
amended, repealed, or superseded, in whole or in [*678]                construction of a Compact because in
part, expressly or impliedly, by a subsequently enacted                some contexts it is [**887] a contract
statute. LeRoux v Secretary of State, 465 Mich. 594, 615;              between the participating states. Having
640 N.W.2d 849 (2002) ("Absent the creation of contract                entered into a contract, a participant state
rights, the later Legislature is free to amend or repeal               may not unilaterally change its terms. A
existing statutory provisions."). The essence of IBM's                 Compact also takes precedence over
argument is that because a compact is an agreement                     statutory law in member states. [McComb,
between Michigan and the other member states, it is not                934 F2d at 479 (citations omitted;
like any other state law subject to traditional principles of          emphasis added).]
statutory construction, but rather it has some greater force
and authority. As a result, any variation [***58] from the      The McComb court did not cite any authority for the
Compact's terms is strictly prohibited. In support of this      above emphasized rule--that compacts without
proposition, IBM cites as persuasive authority McComb v         congressional approval cannot be unilaterally amended
Wambaugh, 934 F2d 474, 479 (CA 3, 1991), and CT                 and must take precedent over conflicting state law--and I
Hellmuth & Assoc, Inc v Washington Metro Area Transit           have found none. Moreover, the unsupported statement
Auth, 414 F Supp 408, 409 (D Md, 1976). Neither case,           contradicts the one that precedes it. Either the compact
in my view, supports such a rule.                               must be construed as state law or it must be construed as
                                                                something with greater authority [***60] than state law,
     In McComb, the plaintiff, as guardian ad litem for a       but the McComb court said both. Finally, this statement
minor child, brought a suit against the city of                 was dictum, because the court did not identify any
Philadelphia and its employees under 42 USC 1983. The           potential conflict between the ICPC and Pennsylvania
suit sought damages for injuries the child suffered as a        law and the court ultimately determined that the ICPC did
result of parental abuse. Before he was injured the child       not apply. Id. at 482.
was under the protective custody of a Virginia court. The
Virginia court ordered that the child be returned to his            In CT Hellmuth, the plaintiff sought to compel
                                                                                                                Page 22
                                     496 Mich. 642, *679; 852 N.W.2d 865, **887;
                                           2014 Mich. LEXIS 1282, ***60

disclosure of documents under Maryland law. The               205.581, ART III(2) DOES NOT VIOLATE THE
defendant, an interstate agency formed by an interstate       STATE OR FEDERAL CONTRACTS CLAUSE
compact between Maryland, Virginia, and the District of
Columbia, argued that its status as an interstate agency           In evaluating whether § 301 of the BTA
exempted it from the Maryland law. In granting the            unconstitutionally impairs a contract, the threshold
defendant's motion for summary judgment, the court            question is whether the Compact did, in fact, create a
remarked that                                                 contractual relationship in the first instance. I do not
                                                              believe [**888] that it did. Two factors weigh heavily in
             [*680] when enacted, a compact                   this conclusion. First, the member states' courses of
       constitutes not only law, but a contract               conduct indicate that there is no contractual obligation to
       which may not be amended, modified, or                 strictly adhere to Articles III and IV of the Compact.
       otherwise altered without the consent of               Second, the Compact is silent regarding a member state's
       all parties. It, therefore, appears settled            authority to enact exclusive apportionment formulas that
       that one party may not enact legislation               differ from the Compact's formula.
       which would impose burdens upon the
                                                                   Starting with the obvious: taxpayers like IBM were
       compact absent the concurrence of the
                                                              not parties to the Compact. To the extent that the
       other signatories. [CT Hellmuth, 414 F
                                                              Compact can be viewed as a contract, it is an agreement
       Supp at 409.]
                                                              between its member states, not between taxpayers and the
                                                              states.5 The Compact member states' courses of
CT Hellmuth and the cases it relied upon, however,
                                                              performance are critical to understanding the nature of
involved congressionally approved compacts, which, as
                                                              the agreement. As the Supreme Court recently explained,
explained, supersede subsequent state law by virtue of the
                                                              a party's course of performance is "highly significant"
Supremacy Clause. Cuyler, 449 U.S. at 440.
                                                              evidence of the party's understanding [***63] of the
     IBM's [***61] claim that the Compact trumps the          Compact's terms. Tarrant Regional Water Dist v
BTA simply because of its status as a compact relies on       Hermann, U.S. ; 133 S. Ct. 2120, 2135; 186 L Ed 2d
the faulty premise that the distinction between compacts      153 (2013) (citation and quotation marks omitted).6 Here,
that have congressional approval and those that do not is     it is plain that the member states did not view [*682]
unimportant, and that all compacts are immune to              strict adherence to Articles III and IV as a binding
unilateral modification by their member states because        contractual obligation, as Compact members have
"[a] Compact . . . takes precedence over statutory law in     deviated from the Compact's election provision and
member states." McComb, 934 F2d at 479. This assumes          apportionment formula without objection from other
too much. Any immunity, if it exists, is a result of a        members. Arkansas, for example, has retained the
compact's dual nature as both state law and a contract        Compact's election provision but changed the Compact
among its member states. See Green v Biddle, 21 U.S. (8       formula to place additional emphasis on the sales factor.
Wheat) 1; 5 L. Ed. 547 (1832) (recognizing that an              Ark Code 26-5-101, Art IV(9). Nondeviating members
interstate compact can be a contract). As a result the        have not pursued actions against those states that have
Legislature is free to amend or repeal an existing            deviated, and no member state has intervened on IBM's
statutory provision as long as it does not impair a           behalf in this case. Further, the Multistate Tax
contractual obligation. LeRoux, 465 Mich at 615; see US       Commission--the        organization    charged       with
Const, art I, § 10, cl 1; Const 1963, art 1, § 10. In other   administering the Compact--has urged us to reject IBM's
words, the Legislature is prohibited from unilaterally        rigid interpretation of the Compact. These facts weigh
amending the Compact only if that amendment impairs           heavily in favor of rejecting IBM's argument that the
contractual obligations created by the Compact itself.        Compact creates a binding contractual obligation on its
When viewed as a matter of contract law, I believe that it    member states to refrain from amending the election
was within the Legislature's power to require BTA             provision.7
taxpayers to apportion [***62] their multistate income
                                                                     5 While the Treasury has not made the argument
solely in accordance with § 301.
                                                                     in its brief on appeal, it is not entirely [***64]
 [*681] III. UNILATERAL AMENDMENT OF MCL                             clear to me why IBM has standing to enforce the
                                                                                                                   Page 23
                                      496 Mich. 642, *682; 852 N.W.2d 865, **888;
                                            2014 Mich. LEXIS 1282, ***64

       Compact as a contract, given that IBM is neither         the member states did not intend to be contractually
       a party to the Compact nor is it clear that they         bound, as it demonstrates [***66] the member states'
       were intended as a third-party beneficiary. See          desire to retain control over their sovereignty with respect
       Schmalfeldt v North Pointe Ins Co, 469 Mich. 422;         to taxation. Moreover, if continued participation in the
       670 NW2d 651 (2003); MCL 600.1405. In any                Compact is, essentially, completely voluntary, I fail to
       event, because I conclude that no such contractual       see how its terms can be construed as creating binding
       relationship was formed, I find it unnecessary to        contractual obligations, especially in light of the
       address this issue sua sponte.                           presumption against such an interpretation. Studier, 472
       6 Michigan law recognizes a similar principle.           Mich at 661.8
       See Klapp v United Ins Group Agency, Inc, 468
Mich. 459, 478-479; 663 NW2d 447 (2003).                         8 In arguing that unilateral amendment of the
       7 It bears emphasizing that Compact members                     Compact would offend the state and federal
       have not only refrained from bringing legal action              constitutions, IBM cites Green, 21 U.S. 1; 5 L.
       against one another for deviating from Articles III             Ed. 547, in which the Supreme Court analyzed an
       and IV, they have endorsed the Commissioner's                   interstate compact under the Contract Clause, US
       interpretation of the Compact: in the Gillette                  Const, art I, § 10, cl 1. While I conclude that the
       litigation, all of the member states jointly filed an           Compact did not create a contractual obligation
       amicus brief urging the Supreme Court of                        that precluded Michigan from unilaterally
       California to reject the lower court's construction             amending its election provision, it is important to
       of the Compact as a binding contract.                           note that the Supreme Court has since retreated
                                                                       from the "any deviation" standard it applied in
     Deference to principles of state sovereignty leads me             Green. See US Trust Co v New Jersey, 431 U.S.
to the same conclusion. As this Court explained in                     1, 21; 97 S. Ct. 1505; 52 L. Ed. 2d 92 (1977).
Studier, 472 Mich at 661, there is a "strong presumption               Because IBM does not engage these post-Green
that statutes do not create contractual rights." This                  developments, it has failed to explain how a
presumption is [***65] grounded in the principle that                  constitutional violation arises under a modern
"surrenders of legislative power are subject to strict                 analysis.
limitations that have developed in order to protect the
sovereign prerogatives of state governments." Id. IBM           IV. CONCLUSION
has not overcome this presumption here. The Compact's
                                                                     I would affirm the judgment of the Court of Appeals
silence on the effect of a member state's ability to elect an
                                                                because the Legislature [***67] expressly provided that
exclusive apportionment formula indicates that Michigan
                                                                taxes [*684] established under the BTA "shall be in
did not contract away its right to do exactly [*683] that.
                                                                accordance with" the BTA's sales-only apportionment
Id. at 662. While it is true that the Compact [**889]
                                                                formula. Allowing taxpayers to apportion their multistate
does not expressly allow Michigan to adopt a different
                                                                income in accordance with the Compact's formula
apportionment formula, neither does the Compact
                                                                violates this unambiguous directive. And because the
surrender the state's right to do so. When the state's
                                                                state was not contractually obligated to allow taxpayers to
sovereign power of taxation is implicated, as it is here,
                                                                make the Compact election, the BTA does not offend the
any uncertainty should be resolved in favor of concluding
                                                                state or federal constitutions.
that the state did not cede that power. See Tarrant, 133 S
Ct at 2132 (recognizing that states "do not easily cede             Bridget M. McCormack
their sovereign powers"). Admittedly, any sovereignty
concerns are abated by the fact that a member state may             Robert P. Young, Jr.
withdraw from the Compact, unilaterally and without
repercussion, at any time. MCL 205.581, Art X(2). But               Mary Beth Kelly
this withdrawal provision is equally strong evidence that
                                                                                                                    Page 1

                          STATE OF KANSAS, PLAINTIFF v. STATE OF COLORADO

                                                     No. 105, Orig.

                                   SUPREME COURT OF THE UNITED STATES

               514 U.S. 673; 115 S. Ct. 1733; 131 L. Ed. 2d 759; 1995 U.S. LEXIS 3214; 63 U.S.L.W.
4387; 95 Cal. Daily Op. Service 3593; 95 Daily Journal DAR 6183; 9 Fla. L. Weekly
                                                      Fed. S 15

                                                March 21, 1995, Argued
                                                 May 15, 1995, Decided

DISPOSITION:             Exceptions overruled, and case        approach was the best method based on expert testimony
remanded.                                                      offered by Kansas. The court held that (1) Kansas did not
                                                               inexcusably delay well-pumping claim; (2) Colorado was
CASE SUMMARY:                                                  not prejudiced and doctrine of laches did not apply, as
                                                               Colorado did not prove lack of diligence and prejudice;
                                                               (3) replacement of centrifugal with turbine pumps was
PROCEDURAL POSTURE: Plaintiff State of Kansas                  proper; (4) reports by U.S. Geological Survey were not
(Kansas) filed suit alleging violations of Arkansas River      faulty; and (5) Colorado caused material depletions in
Compact (Compact) against defendant State of Colorado          post-compact pumping.
(Colorado). A special master recommended the court find
that post-compact pumping materially depleted usable           OUTCOME: The court overruled exceptions filed by
flow in violation of Compact art. IV-d, that Kansas did        Kansas and Colorado and remanded the case to the
not prove Winter Water Storage Program (WWSP)                  special master for determination of unresolved issues.
violated compact, and that the Trinidad reservoir claims
should be dismissed. Exceptions were filed.                    CORE TERMS: compact, river, usable, reservoir,
                                                               pumping, depletion, acre-feet, stateline, laches, overrule,
OVERVIEW: Kansas and Colorado filed exceptions to              storage, state line, hydrological, materially, basin, failed
the special master's report. The court determined that         to prove, beneficial, winter, dam, border, well-pumping,
Kansas did not prove Colorado violated Operating               offset, divide, mile, coefficients, interstate, improved,
Compact of the Trinidad Reservoir as Kansas did not            depleted, annual, pumped
demonstrate the two storage practices at the reservoir
were a material depletion under Article IV-D. Kansas           LexisNexis(R) Headnotes
also failed to prove WWSP program resulted in material
depletions of usable flow in violation of Article IV-D
after examining computer models that indicated
depletions were within the range of error. And, under
                                                               Governments > State & Territorial Governments >
Article IV-D of the compact, future development and
                                                               Water Rights
construction along the river basin was allowed if it did
                                                               Transportation Law > Water Transportation >
not materially deplete state-line flow in usable quantity or
                                                               Waterways
availability and the special master concluded the
                                                                                                                  Page 2
                                          514 U.S. 673, *; 115 S. Ct. 1733, **;
                                     131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214

[HN1] The Arkansas River Compact's primary purposes           SUMMARY:
are to settle existing disputes and remove causes of future
controversy concerning the waters of the Arkansas River            The Arkansas River rises in Colorado and flows
and to equitably divide and apportion the waters of the       through Kansas and some other states until emptying into
Arkansas River, as well as the benefits arising from the      another river. The states of Colorado and Kansas
construction, operation and maintenance by the United         approved an Arkansas River Compact, which Congress
States of John Martin Reservoir.                              ratified in 1949 (63 Stat 145). The Compact generally
                                                              involved the apportionment of the river's waters and
                                                              related matters. Among other provisions, Article IV-D of
Governments > State & Territorial Governments >               the Compact stated that (1) the Compact was not intended
Water Rights                                                  to impede or prevent future beneficial development of the
[HN2] The Arkansas River Compact (compact) is not             Arkansas River basin in Colorado and Kansas by federal
intended to impede or prevent future beneficial               or state agencies, private enterprise, or combinations
development of the Arkansas River basin in Colorado and       thereof, and (2) such development might involve
Kansas by federal or state agencies, by private enterprise,   construction of dams, reservoirs, and other works for the
or by combinations thereof, which may involve                 purposes of water utilization and control, as well as the
construction of dams, reservoir, and other works for the      improved or prolonged functioning of existing works,
purposes of water utilization and control, as well as the     provided that the river's waters would not be materially
improved or prolonged functioning of existing works:          depleted in usable quantity or availability for use to the
Provided, that the waters of the Arkansas River shall not     water users in Colorado and Kansas under the Compact
be materially depleted in usable quantity or availability     by such development or construction. While Article VIII
for use to the water users in Colorado and Kansas under       of the Compact created a joint Arkansas River Compact
this compact by such future development or construction.      Administration, every decision by the Administration
                                                              required a unanimous vote by the representatives of both
                                                              states. In 1985, the state of Kansas brought an original
Civil Procedure > Equity > Maxims > General Overview
                                                              action in the United States Supreme Court against the
Civil Procedure > Pleading & Practice > Defenses,
                                                              state of Colorado to resolve disputes arising under the
Demurrers & Objections > Affirmative Defenses >
                                                              Compact. In 1986, the Supreme Court granted Kansas
Laches
                                                              leave to file the complaint (475 U.S. 1079, 89 L Ed 2d
Governments > State & Territorial Governments >
                                                              712, 106 S. Ct. 1454). After the death of the case's first
Water Rights
                                                              Special Master, the court appointed another Special
[HN3] Doctrine of laches, is based upon maxim that
                                                              Master (484 U.S. 910, 98 L. Ed. 2d 212, 108 S. Ct. 254). The
equity aids the vigilant and not those who slumber on
                                                              disputes in the case basically involved a fertile
their rights. It is defined as neglect to assert a right or
                                                              agricultural reach of the Arkansas River in Colorado and
claim which, taken together with lapse of time and other
                                                              Kansas that was affected by three federal projects: (1) the
circumstances causing prejudice to the adverse party,
operates as bar in court of equity.                           John Martin Reservoir, which was on the river and had
                                                              been completed in 1948; (2) the Pueblo Reservoir, which
                                                              was on the river and had been substantially completed in
Governments > State & Territorial Governments >               1975; and (3) the Trinidad Reservoir, which (a) was on a
Water Rights                                                  major tributary, (b) had been approved by Congress in
[HN4] The ultimate responsibility for deciding what are       1958, and (c) had been completed in 1977. The Special
correct findings of fact remains with the court.              Master bifurcated the trial of the action into a liability
                                                              phase and a remedy phase. Eventually, the Special Master
DECISION:                                                     filed a report with some findings and recommendations
                                                              concerning the liability phase.
     In original action brought in Supreme Court by
Kansas against Colorado to resolve disputes arising under         On exceptions to the report of the Special Master, the
two states' Arkansas River Compact, exceptions by both        Supreme Court overruled the exceptions filed by Kansas
states to report of Special Master overruled.                 and Colorado and remanded the case to the Special
                                                              Master for determination of the unresolved issues. In an
                                                                                                                  Page 3
                                          514 U.S. 673, *; 115 S. Ct. 1733, **;
                                     131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214

opinion by Rehnquist, Ch. J., expressing the unanimous              interstate dispute -- Arkansas River Compact --
view of the court, it was held that (1) Kansas' claim          review -- remand -- ;
concerning the Trinidad Reservoir Operating Principles,
which had been approved by the Administration in 1967,              Headnote:[1A][1B][1C][1D][1E][1F][1G][1H
was properly dismissed, because Kansas--in order to            ][1I][1J][1K]
establish a Compact violation based upon failure to obey
                                                                    In an original action brought in the United States
the Operating Principles--was required to demonstrate
                                                               Supreme Court by the state of Kansas against the state of
that this failure had resulted in a material depletion under
                                                               Colorado to resolve disputes arising under the two states'
Article IV-D, but Kansas had not established, and had not
                                                               Arkansas River Compact (ratified by Congress in 1949 at
attempted to establish, such injury; (2) Kansas had failed
                                                               63 Stat 145), the Supreme Court will overrule the
to prove its claim that the operation of the Winter Water
                                                               exceptions filed by both Kansas and Colorado to the
Storage Program at the Pueblo Reservoir had resulted in
                                                               findings and recommendations of a report by a Special
material depletions of usable flows at stateline in
                                                               Master who was appointed by the court, and the Supreme
violation of Article IV-D; (3) for purposes of the
                                                               Court will remand the case to the Special Master for
requirement that Kansas establish that development in
                                                               determination of the unresolved issues in a manner not
Colorado had resulted in material depletions of "usable"
                                                               inconsistent with the court's opinion, where (1) the
river flow at stateline in violation of Article IV-D, the
                                                               Special Master bifurcated the trial of the action into a
Special Master had properly rejected the method
                                                               liability phase and a remedy phase; (2) the report in
eventually chosen by Kansas in favor of another method;
                                                               question concerns the liability phase; (3) the Supreme
(4) even if the equitable defense of laches was available
                                                               Court adopts the Special Master's recommendations, to
in the action, Colorado had failed to prove an element
                                                               which Colorado did not file exceptions, to grant Kansas'
necessary to the recognition of that defense--that is, lack
                                                               motion to dismiss two counterclaims by Colorado; and
of diligence on the part of Kansas--with respect to
                                                               (4) the Supreme Court agrees with the Special Master's
Kansas' claim to the effect that increases in well pumping
                                                               resolution of the liability issues as to which the parties
in Colorado had caused a significant decline in the river's
                                                               filed exceptions, with respect to (a) the dismissal of
usable flow at stateline in violation of Article IV-D; (5)
                                                               Kansas' claim concerning some operating principles for
pre-Compact wells in Colorado were limited to the
                                                               the Trinidad Reservoir, (b) Kansas' failure to prove its
highest amount pumped in the years during which the
                                                               claim concerning the operation of the Winter Water
Compact had been negotiated and the highest amount of
                                                               Storage Program at the Pueblo Reservoir, (c) the choice
such pumping was 15,000 acre-feet per year; (6) with
                                                               of a method for Kansas' establishing that development in
respect to the Administration's adoption of the 1980
                                                               Colorado had resulted in material depletions of "usable"
Operating Plan for the John Martin Reservoir, the Special
                                                               river flow at stateline in violation of the Compact's
Master had properly determined that the 1980 Operating
                                                               Article IV-D, (d) the rejection of Colorado's attempt to
Plan was separately bargained for and therefore should
                                                               assert the defense of laches concerning Kansas' claim to
not offset any depletions caused by post-Compact well
pumping in Colorado, for purposes of deciding Kansas'          the effect that increases in well pumping in Colorado had
                                                               caused a significant decline in the river's usable flow at
well-pumping claim; and (7) regardless of which burden
                                                               stateline in violation of Article IV-D, (e) the existence
of proof was applicable to Kansas' well-pumping claim,
                                                               and extent of a limit on pumping by pre-Compact wells
there was no difficulty in concluding that post-Compact
                                                               in Colorado, (f) the effect of the adoption of the 1980
pumping in Colorado had caused material depletions of
                                                               Operating Plan for the John Martin Reservoir, and (g) the
the usable stateline flows of the river, in violation of the
                                                               causation by post-Compact well pumping in Colorado of
Compact.
                                                               a violation of the Compact.
LAWYERS' EDITION HEADNOTES:
                                                                      EVIDENCE §962
       REFERENCE §19
                                                                       STATES, TERRITORIES, AND POSSESSIONS
       SUPREME COURT OF THE UNITED STATES                      §58;
§58;
                                                                      Arkansas River Compact -- what constitutes
                                                                                                                   Page 4
                                          514 U.S. 673, *; 115 S. Ct. 1733, **;
                                     131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214

violation -- proof -- ;                                           Headnote:[3A][3B]

       Headnote:[2A][2B]                                           In an original action brought in the United States
                                                              Supreme Court by the downstream state of Kansas
     In an original action brought in the United States       against the upstream state of Colorado to resolve disputes
Supreme Court by the downstream state of Kansas               arising under the two states' Arkansas River Compact
against the upstream state of Colorado to resolve disputes    (ratified by Congress in 1949 at 63 Stat 145), Kansas fails
arising under the two states' Arkansas River Compact          to prove its claim that the operation of the Winter Water
(ratified by Congress in 1949 at 63 Stat 145), Kansas'        Storage Program (WWSP) at the Pueblo Reservoir, a
claim concerning the Trinidad Reservoir Operating             federal project on the river, resulted in material
Principles, which were approved by the Arkansas River         depletions of usable flows at stateline in violation of the
Compact Administration in 1967, is properly dismissed,        Compact's Article IV-D, where (1) under the WWSP,
because Kansas--in order to establish a Compact               Colorado and the United States Bureau of Reclamation
violation based upon failure to obey the Operating            used excess capacity at the Pueblo Reservoir to store a
Principles--was required to demonstrate that this failure     portion of the river's winter-time flow for beneficial use
resulted in a material depletion under the Compact's          at other times; (2) a Special Master appointed by the
Article IV-D, but Kansas has not established, and did not     Supreme Court has examined the computer models
attempt to establish, such injury, where (1) the Trinidad     submitted by Kansas and Colorado and has determined
Reservoir (a) is a federal project on a major tributary of    that (a) the depletions shown by the Kansas model were
the Arkansas River, (b) was approved by Congress in           well within the model's range of error, and (b) as a result,
1958, and (c) was completed in 1977; (2) even though          one could not be sure whether impact or error was being
Kansas claimed that any departure from the Operating          shown; and (3) the Supreme Court believes that the
Principles constituted a violation of the Compact             Special Master gave Kansas every reasonable opportunity
regardless of injury, the theory advocated by Kansas is       to meet its burden of proving the WWSP claim.
inconsistent with Article IV-D, which allows for the
development and operation of dams and reservoirs so
long as there is no resultant material depletion of usable         EVIDENCE §962;
flow at stateline; (3) Kansas offered no evidence, apart
                                                                  Arkansas River Compact -- establishing violation -- ;
from some United States Bureau of Reclamation studies
which initially proposed the Operating Principles and             Headnote:[4A][4B]
later concluded that some practices constituted a
departure from the intent of the Operating Principles, to          In an original action brought in the United States
show that the project's actual operation caused Kansas to     Supreme Court by the downstream state of Kansas
receive less water than under historical without-project      against the upstream state of Colorado to resolve disputes
conditions; (4) for Kansas to prevail in its contention, it   arising under the two states' Arkansas River Compact
would have to show that the Operating Principles had the      (ratified by Congress in 1949 at 63 Stat 145), for
effect of amending the Compact by granting either party       purposes of the requirement that Kansas establish that
the right to sue the other for violation of the Operating     development in Colorado resulted in material depletions
Principles even though the violation resulted in no           of "usable" river flow at stateline in violation of the
material depletion of usable flow at stateline; and (5)       Compact's Article IV-D, a Special Master appointed by
under Article VIII of the Compact, although the               the Supreme Court properly rejects the method eventually
Administration is empowered to prescribe procedures for       chosen by Kansas in favor of another method, where (1)
the administration of the Compact, the Administration         the Compact does not define the term "usable"; (2) the
must do so consistent with the provisions of the Compact.     Special Master's chosen method is a modification of a
                                                              third method to correct some errors resulting from the use
                                                              of the third method; (3) each of the three methods
       EVIDENCE §962;
                                                              requires two steps: (a) a calculation of total depletions
       Arkansas River Compact -- failure to prove violation   using a hydrological model presented by Kansas, and (b)
-- ;                                                          an application of "usability" criteria; and (4) Kansas'
                                                              chosen method is less compatible with the hydrological
                                                                                                                    Page 5
                                           514 U.S. 673, *; 115 S. Ct. 1733, **;
                                      131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214

model than the other methods proposed, in that Kansas'                The defense of laches requires proof of (1) lack of
chosen method requires the model to do something which           diligence by the party against whom the defense is
the model was not designed to do, that is, to predict            asserted, and (2) prejudice to the party asserting the
accurately depletions on a monthly basis.                        defense.

     EVIDENCE §966.5;                                                    STATES, TERRITORIES, AND POSSESSIONS
                                                                 §58;
    failure to prove laches -- ;
                                                                        Arkansas River Compact -- limit on well pumping --
    Headnote:[5A][5B][5C]                                        ;

     Even if the equitable defense of laches is available in            Headnote:[7A][7B]
an original action brought in 1985 in the United States
Supreme Court by the downstream state of Kansas                       In an original action brought in the United States
against the upstream state of Colorado to resolve disputes       Supreme Court by the downstream state of Kansas
arising under the two states' Arkansas River Compact             against the upstream state of Colorado to resolve disputes
(ratified by Congress in 1949 at 63 Stat 145), Colorado          arising under the two states' Arkansas River Compact
fails to prove an element necessary to the recognition of        (ratified by Congress in 1949 at 63 Stat 145), a Special
that defense with respect to Kansas' claim to the effect         Master appointed by the Supreme Court properly
that increases in well pumping in Colorado had caused a          determines that pre-Compact wells in Colorado are
significant decline in the river's usable flow at stateline in   limited to the highest amount pumped in the years during
violation of the Compact's Article IV-D, because in light        which the Compact was negotiated and that the highest
of the vague and conflicting evidence available to               amount of such pumping was 15,000 acre-feet per year,
Kansas, Colorado fails to demonstrate lack of diligence,         where (1) both parties agree that a certain amount of
that is, inexcusable delay, on the part of Kansas, where         post-Compact well pumping is allowable under the
(1) a Special Master appointed by the Supreme Court              Compact, as (a) the Compact's Article IV-D prohibits
concludes that while Kansas, prior to 1984, made no              "future" beneficial development of the river basin that
formal complaint to the Arkansas River Compact                   materially depletes the river's usable flows, and (b) some
Administration regarding post-Compact well pumping in            wells in Colorado were in existence prior to the Compact;
Colorado, Colorado's evidence does not (a) deal with the         (2) while Colorado argues that the Compact does not
issue of impact on usable flow at stateline, or (b)              limit pumping by pre-Compact wells to the highest
demonstrate that Kansas officials were aware of the              amount actually pumped in pre-Compact years, the clear
number of wells, the extent of Colorado's pumping, or the        language of Article IV-D refutes Colorado's legal
impact or even potential impact of pumping on usable             challenge, as (a) regardless of subsequent practice by the
stateline flows; (2) the Special Master explains the             parties, improved and increased pumping by existing
difficulty, due to changing conditions during the 1970's         wells clearly falls within Article IV-D's prohibition
and early 1980's, of assessing the impact of increases in        against improved or prolonged functioning of existing
post-Compact well pumping on usable stateline flows;             works, (b) although Article VI-A(2) of the Compact
and (3) as late as 1985, Colorado officials refused to           generally supports the rights of Colorado appropriators of
permit an investigation by the Administration of well            river waters, Article VI-A(2) begins with the phrase,
development in Colorado because the officials claimed            "Except as otherwise provided," and must be read in
that the evidence produced by Kansas did not suggest that        conjunction with and as limited by Article IV-D, and (c)
such development had an impact on usable stateline               new wells, the replacement of centrifugal with turbine
flows.                                                           pumps, and increased pumping from pre-Compact wells
                                                                 all come within Article IV-D; and (3) contrary to a
                                                                 factual argument by Colorado as to the figure of 15,000
     LIMITATION OF ACTIONS §16;                                  acre-feet, the Special Master properly concludes that (a)
                                                                 there is no precise answer to the amount of such
    defense of laches -- ;
                                                                 pre-Compact well pumping, (b) that amount must remain
    Headnote:[6]                                                 as an estimate, and (c) he will rely on two reports by the
                                                                                                                       Page 6
                                               514 U.S. 673, *; 115 S. Ct. 1733, **;
                                          131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214

United States Geological          Survey and the Colorado         concludes that (a) there is no evidence to support the
legislature, which reports        were responsible, reached       assertion that the benefits to Kansas under the 1980
similar conclusions as to          the amounts of Colorado        Operating Plan were in settlement of Kansas'
pumping during the 1940's,        and had since been used by      well-pumping claims, and (b) Colorado received ample
Colorado's state engineer.                                        consideration under the agreement for the 1980 Operating
                                                                  Plan without a waiver of Kansas' well-pumping claims.

       REFERENCE §23
                                                                         REFERENCE §20
        SUPREME COURT OF THE UNITED STATES
§58;                                                                      SUPREME COURT OF THE UNITED STATES
                                                                  §58;
       interstate dispute -- water rights -- facts -- ;
                                                                       interstate dispute -- water rights -- proof of violation
       Headnote:[8]                                               -- review -- ;

     On exceptions to a report of a Special Master in an                 Headnote:[10A][10B]
original action brought in the United States Supreme
Court by the state of Kansas against the state of Colorado             On exceptions to a report of a Special Master in an
to resolve disputes arising under the two states' Arkansas        original action brought in the United States Supreme
River Compact (ratified by Congress in 1949 at 63 Stat            Court by the downstream state of Kansas against the
145), the ultimate responsibility for deciding what are           upstream state of Colorado to resolve disputes arising
correct findings of fact remains with the Supreme Court.          under the two states' Arkansas River Compact (ratified by
                                                                  Congress in 1949 at 63 Stat 145), the Supreme Court will
                                                                  overrule Colorado's exception as to the burden of proof
        STATES, TERRITORIES, AND POSSESSIONS                      applicable to Kansas' claim concerning post-Compact
§58;                                                              well pumping in Colorado, where the Supreme Court
                                                                  holds that it need not resolve the burden-of-proof issue,
       Arkansas River Compact -- offset -- separate bargain
                                                                  as the court agrees with the Special Master's conclusion
-- ;
                                                                  that regardless of which burden of proof applies, there is
       Headnote:[9A][9B]                                          no difficulty in concluding that post-Compact pumping in
                                                                  Colorado had caused material depletions of the usable
     In an original action brought in the United States           stateline flows of the river, in violation of the Compact.
Supreme Court by the downstream state of Kansas
against the upstream state of Colorado to resolve disputes        SYLLABUS
arising under the two states' Arkansas River Compact
(ratified by Congress in 1949 at 63 Stat 145), with respect            Kansas and Colorado negotiated the Arkansas River
to the adoption by the joint Arkansas River Compact               Compact to settle disputes and remove causes of future
Administration of the 1980 Operating Plan for the John            controversies over the river's waters and to equitably
Martin Reservoir on the river, a Special Master appointed         divide and apportion those waters and the benefits arising
by the Supreme Court properly determines that the 1980            from the United States' construction, operation, and
Operating Plan was separately bargained for and                   maintenance of John Martin Reservoir. Under Article
therefore should not offset any depletions caused by              IV-D, the Compact is not intended to impede or prevent
post-Compact well pumping in Colorado, for purposes of            future beneficial development -- including construction of
deciding Kansas' claim that such pumping violated the             dams and reservoirs and the prolonged or improved
Compact's Article IV-D, where (1) the Administration              functioning of existing works -- provided that such
resolution adopting the 1980 Operating Plan (a) did not           development does not "materially deplete" stateline flows
state that post-Compact well pumping in Colorado or               "in usable quantity or availability for use." In this action,
Kansas was a cause of changes in the regime of the                the Special Master recommended that the Court, among
Arkansas River, and (b) expressly reserved the parties'           other things, find that post-Compact well pumping in
rights under the Compact; and (2) the Special Master              Colorado has resulted in a violation of Article IV-D of
                                                                                                                   Page 7
                                          514 U.S. 673, *; 115 S. Ct. 1733, **;
                                     131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214

the Compact; find that Kansas has failed to prove that the    maximum amount of pumping possible using wells
operation of Colorado's Winter Water Storage Program          existing prior to the Compact. Regardless of the parties'
(WWSP) violates the Compact; and dismiss Kansas'              subsequent practice, such improvements to and increased
claim that Colorado's failure to abide by the Trinidad        pumping by existing wells clearly fall within Article
Reservoir Operating Principles (Operating Principles)         IV-D's prohibition. In making the factual determination
violates the Compact. Both Kansas and Colorado have           that 15,000 acre-feet per year is the appropriate limit, the
filed exceptions.                                             Special Master properly relied on reports by the United
                                                              States Geological Survey and the Colorado Legislature,
    Held: The exceptions are overruled. Pp. 681-694.          reports that have since been used by the Colorado State
                                                              Engineer. Pp. 689-691.
     (a) Article IV-D permits development of projects so
long as their operation does not result in a material              (f) The Court agrees with the Special Master's
depletion of usable flow to Kansas users. Kansas'             conclusion that the 1980 Operating Plan for the John
exception to the dismissal of its Trinidad Reservoir claim    Martin Reservoir (Plan) was separately bargained for and
fails because Kansas has not established that Colorado's      thus there is no evidence to support the claim raised in
failure to obey the Operating Principles resulted in such a   Colorado's exception that the benefits to Kansas from the
violation. Pp. 681-683.                                       Plan were in settlement of its well claims. The Plan does
                                                              not state that post-Compact well pumping in Colorado or
     (b) Because Kansas failed to meet its burden of          Kansas was a cause of changes in the river's regime, and
proving its WWSP claim despite being given every              it expressly reserves the parties' rights under the
reasonable opportunity to do so by the Special Master,        Compact. Pp. 691-693.
there is no support for its exception to the Special
Master's conclusion on that claim. P. 684.                        (g) The Special Master concluded that, regardless
                                                              whether the burden of proof applied to Kansas'
    (c) In selecting what method should be used to            well-pumping claim is clear and convincing evidence or
determine depletions of "usable" flow, the Special Master     preponderance of the evidence, the post-Compact well
properly rejected the Spronk method -- which Kansas'          pumping in Colorado had caused material depletions of
exception proposes is correct -- as less compatible with      usable river flows in violation of the Compact. Thus, this
Kansas' hydrological model than the method ultimately         Court need not resolve the issue raised by Colorado's
adopted by the Special Master. Pp. 684-687.                   exception: that clear and convincing evidence is the
                                                              correct standard. Pp. 693-694.
     (d) In ruling on Colorado's exception to the Special
Master's conclusion that laches does not bar Kansas'
                                                              COUNSEL: John B. Draper, Special Assistant Attorney
well-pumping claim, it is not necessary to decide whether
                                                              General of Kansas, argued the cause for plaintiff. With
the laches doctrine applies to a case involving the
                                                              him on the briefs were Robert T. Stephan, Attorney
enforcement of an interstate compact because Colorado
                                                              General, John W. Campbell, Deputy Attorney General,
has failed to prove that Kansas lacked due diligence in
                                                              and Leland E. Rolfs and Mary Ann Heckman, Assistant
bringing its claim. Colorado errs in arguing that Kansas
                                                              Attorneys General.
officials had sufficient evidence about increased well
pumping in Colorado to determine that a Compact               David W. Robbins, Special Assistant Attorney General of
violation existed in 1956. The evidence available through     Colorado, argued the cause for defendant. With him on
1985 was vague and conflicting. Pp. 687-689.                  the briefs were Gale Norton, Attorney General, Stephen
                                                              K. Erkenbrack, Chief Deputy Attorney General, Timothy
     (e) This Court disagrees with both the legal and
                                                              M. Tymkovich, Solicitor General, and Dennis M.
factual claims Colorado raises in its exception to the
                                                              Montgomery, Special Assistant Attorney General.
Special Master's finding that the Compact limits annual
pumping by pre-Compact wells to 15,000 acre-feet, the         Jeffrey P. Minear argued the cause for the United States.
highest amount actually pumped in those years. Kansas'        With him on the brief were Solicitor General Days,
failure to object to the replacement of pumps or increased    Assistant Attorney General Schiffer, Deputy Solicitor
pumping by pre-Compact wells does not support                 General Kneedler, and Patricia L. Weiss. *
Colorado's legal argument that the limit should be the
                                                                                                                 Page 8
                                         514 U.S. 673, *; 115 S. Ct. 1733, **;
                                    131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214

        *      Joseph B. Meyer, Attorney General of          east and enters the Royal Gorge. As it flows through the
        Wyoming, Donald M. Gerstein, Assistant               Royal Gorge, the Arkansas River is at some [***768]
        Attorney General, and Dennis C. Cook, Special        points half a mile below the summit of the bordering
        Assistant Attorney General, filed a brief for the    cliffs. The Arkansas River thence descends gradually
        State of Wyoming as amicus curiae.                   through the high plains of eastern Colorado and western
                                                             Kansas; its elevation at the Colorado-Kansas border is
JUDGES: REHNQUIST, C. J., delivered the opinion for          3,350 feet. It then makes its great bend northward
a unanimous Court.                                           through Kansas, and from there flows southeasterly
                                                             through northeastern Oklahoma and across Arkansas.
OPINION BY: REHNQUIST                                        The Arkansas River covers about 1,450 miles from its
                                                             source in the Colorado Rockies to the point in
OPINION                                                      southeastern Arkansas where it flows into the Mississippi
                                                             River. It is the fourth longest river in the United States,
    [*675] [**1736] [***767] CHIEF JUSTICE                   and it drains in an area of 185,000 square miles.
REHNQUIST delivered the opinion of the Court.
                                                                  The first Europeans to see the Arkansas River were
       [***LEdHR1A] [1A]This original action involves a      members of the expedition of Francisco Coronado, in the
dispute between Kansas, Colorado, and the United States      course of their search for the fabled Seven Golden Cities
over alleged violations of the Arkansas River Compact.       of Cibola. In 1541, they crossed the Arkansas River near
The Special Master has filed a report (Report) detailing     what is now the Colorado-Kansas border. One year later,
his findings and recommendations concerning the              those in the expedition of Hernando DeSoto would see
liability phase of the trial. Both Kansas and Colorado       the Arkansas River 1,000 miles downstream at its mouth.
have filed exceptions to those findings and                  The western borders of the Louisiana Purchase, acquired
recommendations. We agree with the Special Master's          from France in 1803, included within them most, if not
disposition of the liability issues. Accordingly, we         all, of the Arkansas River drainage basin. Zebulon Pike,
overrule the parties' exceptions.                            in his expedition of 1805-1806, in the course of which he
                                                             sighted the mountain peak named after him, traveled up
    I
                                                             the Arkansas River. [*677] John C. Fremont traversed
     The Continental Divide in the United States begins at   the river in the other direction in his expedition of
the Canadian border in the mountains of northwestern         1843-1844.
Montana. From there, it angles southeast through
                                                                  Today, as a result of the Kerr McClellan Project, the
Montana [**1737] and Wyoming until it enters
                                                             Arkansas River is navigable for oceangoing vessels all
Colorado. It then runs roughly due south through
                                                             the way from its mouth to Tulsa, Oklahoma. The
Colorado, following first the crest of the Front Range of
                                                             Arkansas River is unique in that the pronunciation of its
the Rocky Mountains, and then shifting slightly west to
                                                             name changes from State to State. In Colorado,
follow the crest of the Sawatch Range. The Arkansas
                                                             Oklahoma, and Arkansas, it is pronounced as is the name
River rises on the east side of the Continental Divide,
                                                             of the State of Arkansas, but in Kansas, it is pronounced
[*676] between Climax and Leadville, Colorado. Thence
                                                             Ar-KAN-sas.
it flows south and east through Colorado, Kansas,
Oklahoma, and Arkansas, emptying into the Mississippi             The reach of the Arkansas River system at issue here
River, which in turn flows into the Gulf of Mexico. As if    is a fertile agricultural region that extends from Pueblo,
to prove that the ridge that separates them is indeed the    Colorado, to Garden City, Kansas. This region has been
Continental Divide, a short distance away from the           developed in Colorado by 23 major canal companies and
source of the Arkansas, the Colorado River rises and         in Kansas by 6 canal companies, which divert the surface
thence flows southwest through Colorado, Utah, and           flows of the Arkansas River and distribute them to
Arizona, and finally empties into the Gulf of Baja,          individual farmers. Report 35-38. Also relevant to this
California.                                                  dispute, the United States has constructed three large
                                                             water storage projects in the Arkansas River basin. Id., at
    The Arkansas River flows at a steep gradient from its
                                                             43-48. The John Martin Reservoir, located on the
source south to Canon City, Colorado, whence it turns
                                                                                                                       Page 9
                                      514 U.S. 673, *677; 115 S. Ct. 1733, **1737;
                                    131 L. Ed. 2d 759, ***768; 1995 U.S. LEXIS 3214

Arkansas River about 60 miles west of the Kansas border,        responsibility for administering the Compact. Id., at
was authorized by Congress in 1936, 49 Stat. 1570, and          11-15. The Administration is composed of a nonvoting
was completed in 1948. It is the largest of the federal         presiding officer designated by the President of the
reservoirs, and initially it had a storage capacity of about    United States, and three voting representatives from each
700,000 acre-feet. 1 Report 45. The Pueblo Reservoir,           State. Each State has one vote, and every decision,
located on the Arkansas River about 150 miles west of           authorization, or other action by the Administration
the Kansas border, was authorized by Congress in 1962,          requires a unanimous vote. Id., at 12-13 (Article VIII-D).
and was substantially completed in 1975. Id., at 44. In
1977, the storage capacity of the Pueblo Reservoir was                [HN1] The Compact's primary purposes are to "settle
estimated to be about 357,000 acre-feet. Ibid. Finally, the     existing disputes and remove causes of future controversy
Trinidad Reservoir, located on the Purgatoire River (a          . . . concerning the waters of the Arkansas River" and to
major tributary of the Arkansas River) was approved by          "equitably divide and apportion" the waters of the
Congress in 1958, and was completed in 1977. Id., at 43.        Arkansas River, "as well as the benefits arising from the
[**1738] The total capacity of the Trinidad Reservoir is        construction, operation [*679] and maintenance by the
about 114,000 acre-feet. Ibid.                                  United States of John Martin Reservoir." Id., at 1-2
                                                                (Articles I-A, I-B). Article IV-D, the provision of the
       1 An acre-foot is equivalent to 325,900 gallons          Compact most relevant to this dispute, states:
       of water; it represents the volume of water
       necessary to cover one acre of land with one foot                 [HN2] "This Compact is not intended to
       of water. Report xvii.                                          impede or prevent future beneficial
                                                                       development of the Arkansas River basin
      [*678] Twice before in this century, the States of               in Colorado and Kansas by Federal or
Kansas and Colorado have [***769] litigated in this                    State agencies, by private enterprise, or by
Court regarding their respective rights to the waters of the           combinations thereof, which may involve
Arkansas River. See Kansas v. Colorado, 206 U.S. 46, 51                construction of dams, reservoir, and other
L. Ed. 956, 27 S. Ct. 655 (1907); Colorado v. Kansas,                  works for the purposes of water utilization
320 U.S. 383, 88 L. Ed. 116, 64 S. Ct. 176 (1943). In the              and control, as well as the improved or
first suit, the Court denied Kansas' request to enjoin                 prolonged functioning of existing works:
diversions of the Arkansas River by Colorado because the               Provided, that the waters of the Arkansas
depletions alleged by Kansas were insufficient to warrant              River . . . shall not be materially depleted
injunctive relief. Kansas v. Colorado, supra, at 114-117.              in usable quantity or availability for use to
In the second suit, Colorado sought to enjoin lower court              the water users in Colorado and Kansas
litigation brought against Colorado water users, while                 under this Compact by such future
Kansas sought an equitable apportionment of the                        development or construction." Id., at 5
Arkansas River. Colorado v. Kansas, supra, at 388-389.                 (emphasis added).
The Court granted Colorado an injunction, but concluded
that Kansas was not entitled to an equitable
apportionment. 320 U.S. at 400. The Court suggested                   In 1983, Kansas conducted an independent
that the States resolve their differences by negotiation and    investigation of possible violations of the Compact
agreement, pursuant to the Compact Clause of the                arising from the impact of increases in post-Compact well
Constitution. Id., at 392. See U.S. Const., Art. I, § 10, cl.   pumping in Colorado and the operation of two of the
3.                                                              federal reservoirs. Report 9-10. In December 1985,
                                                                Kansas brought this original action against the State of
    In 1949, after three years of negotiations, Kansas and      Colorado to resolve disputes arising under the Compact.
Colorado approved, and Congress ratified, the Arkansas          [***770] Id., at 10. The Court granted Kansas leave to
River Compact (Compact). See 63 Stat. 145; see also             file its complaint, Kansas v. Colorado, 475 U.S. 1079, 89
Report 5-6; App. to Report 1-17 (reprinting text of             L. Ed. 2d 712, 106 S. Ct. 1454 (1986), and appointed
Compact). Article VIII of the Compact creates the               Judge Wade H. McCree, Jr., to serve as Special Master,
Arkansas       River        Compact         Administration      Kansas v. Colorado, 478 U.S. 1018, 92 L. Ed. 2d 736,
(Administration) and vests it with the power and                106 S. Ct. 3330 (1986). Upon Judge McCree's death, the
                                                                                                                Page 10
                                     514 U.S. 673, *679; 115 S. Ct. 1733, **1738;
                                   131 L. Ed. 2d 759, ***770; 1995 U.S. LEXIS 3214

Court appointed Arthur L. Littleworth as Special Master.      291-305. Colorado excepts to the Special Master's
Kansas v. Colorado, 484 U.S. 910, 98 L. Ed. 2d 212, 108       determination that: (1) Kansas was not guilty of
S. Ct. 254 (1987).                                            inexcusable delay in making its post-Compact
                                                              well-pumping claim and that Colorado was not
     Kansas advanced three principal claims, each             prejudiced by this [*681] delay, see id., at 147-170; (2)
involving an alleged Compact violation. See Report 58.        pre-Compact wells in Colorado are limited to pumping
First, Kansas alleged that increases in groundwater well      the highest amount pumped in the years during which the
pumping in Colorado in the years following adoption of        Compact was negotiated and that the highest amount of
the Compact have caused a significant decline in the          such pumping was 15,000 acre-feet per year, see id., at
Arkansas River's surface [*680] flow [**1739] in              182-200; (3) increases in usable state line flows resulting
violation of Article IV-D of the Compact. Second,             from the operating plan for the John Martin Reservoir
Kansas claimed that Colorado's Winter Water Storage           adopted by the Administration in 1980 (1980 Operating
Program (WWSP) -- a program whereby the Bureau of             Plan) were "separately bargained for" and, therefore,
Reclamation of the Department of the Interior (Bureau of      should not offset depletions caused by post-Compact well
Reclamation) and Colorado use excess capacity at the          pumping in Colorado, see id., at 171-181; and (4)
Pueblo Reservoir to store a portion of the winter flow of     [***771] Kansas need only meet the "preponderance of
the Arkansas River -- violates the Compact. Third,            the evidence" standard to prove a breach of Article IV-D
Kansas claimed that Colorado's failure to abide by the        of the Compact, see id., at 65-70.
Trinidad Reservoir Operating Principles (Operating
Principles) constituted a violation of the Compact. Ibid.         We turn to the parties' exceptions.

       [***LEdHR1A] [1B]The Special Master bifurcated             II
the trial into a liability phase and a remedy phase. At the
conclusion of the liability phase, the Special Master filed       A
his Report, outlining his findings and recommendations.
                                                                     [***LEdHR2A] [2A]In 1958, Congress authorized
In his Report, the Special Master recommended, among
                                                              construction of the Trinidad Project, a dam and a
other things, that the Court: (1) find that post-Compact
                                                              reservoir system on the Purgatoire River slightly
well pumping in Colorado has "materially depleted" the
                                                              upstream from the city of Trinidad, Colorado. See id., at
"usable" flow at the Colorado-Kansas border (state line)
                                                              382-388. Recognizing that Article IV-D of the Compact
in violation of Article IV-D of the Compact, Report 336;
                                                              prohibited any development of the Arkansas River basin
(2) find that "Kansas has failed to prove that operation of
                                                              that resulted in a material depletion of usable river flow,
the [WWSP] program has violated the Compact," ibid.;
                                                              the Bureau of Reclamation conducted studies regarding
and (3) "dismiss the Kansas claim arising from the
                                                              the future operation of the Trinidad Project. Id., at
operation of Trinidad Reservoir," ibid. 2
                                                              388-390. The Bureau of Reclamation established
       2    [***LEdHR1A] [1C]                                 Operating Principles whereby the Trinidad Project could
                                                              be administered "without adverse effect on downstream
            Colorado presented two counterclaims              water users and the inflow to John Martin Reservoir." Id.,
       against Kansas. The Special Master recommended         at 390 (internal quotation marks omitted). The Governor
       that the Court grant Kansas' motions to dismiss        of Kansas reviewed the Bureau of Reclamation's
       those counterclaims. Report 337. Colorado has          proposed Operating Principles and indicated that if five
       not filed exceptions to those recommendations.         additional conditions were accepted, then "Kansas would
       We adopt the Special Master's recommendations          be in a position to approve the amended Operating
       on Colorado's counterclaims.                           Principles and to support completion of the project." Id.,
                                                              at 392-393. In June 1967, the [*682] Administration
    Both Kansas and Colorado have filed exceptions to         approved the Operating Principles as well as Kansas' five
the Special Master's Report. Kansas excepts to the            additional conditions. Id., at 395.
Special Master's rejection of its (1) Trinidad Reservoir
claim, see id., at 373-433; (2) WWSP claim, see id., at           In 1979, Colorado began storage of water at the
306-335; and (3) preferred method for determining the         Trinidad Reservoir. Id., at 396. Kansas immediately
usability of depletions of state line flows, see id., at      complained that the Operating Principles were being
                                                                                                                 Page 11
                                     514 U.S. 673, *682; 115 S. Ct. 1733, **1739;
                               131 L. Ed. 2d 759, ***LEdHR2A; 1995 U.S. LEXIS 3214

violated. Id., at [**1740] 397. In 1988, at the request of    to "prescribe procedures for the administration of the
the Administration, the Bureau of Reclamation conducted       Compact," App. to Report 11 (Article VIII-B(2)), it must
a study of the Trinidad Reservoir. It concluded that two      do so "consistent with the provisions of the Compact,"
storage practices at the Trinidad Reservoir constituted a     ibid. (Article VIII-B(1)) (emphasis added); see also
"'departure from the intent of the operating principles.'"    Report 416 ("The Compact Administration was not
Ibid.                                                         delegated power to change the Compact"). The theory
                                                              advocated by Kansas is inconsistent with Article IV-D,
    At trial, Kansas argued that the Operating Principles     which allows for the development and operation of dams
were binding on the State of Colorado and that any            and reservoirs so long as there is no resultant material
departure from them constituted a violation of the            depletion of usable flows at stateline.
Compact "regardless of injury." Id., at 408 (internal
quotation marks omitted). Kansas, however, "offered no               3     The Special Master did "not address the
evidence, apart from the Bureau studies, to show that the            possible question of whether Kansas has a claim
actual operation of the Trinidad project caused it to                for violation of the Operating Principles that is
receive less water than under historical, without-project            independent of the Compact, that is, a cause of
conditions." Id., at 412. Instead, Kansas sought to                  action based upon a separate agreement with
quantify depletions by "comparing the flows into John                Colorado, or as a third party beneficiary under the
Martin Reservoir 'as they would have occurred under the              repayment contract, or otherwise." Report 408, n.
Operating Principles with the flows that occurred under              6. We express no view as to that question.
actual operations.'" Id., at 409. The Special Master
concluded that in order to prove a violation of the                   [***LEdHR1A] [1D] [***LEdHR2A] [2B]Thus
Compact, Kansas was required to demonstrate that "the         Kansas, in order to establish a Compact violation based
Trinidad operations caused a material depletion within        upon failure to obey the Operating Principles, was
the meaning of Article IV-D." Id., at 431. The Special        required to demonstrate that this failure resulted in a
Master recommends that we dismiss Kansas' Trinidad            material depletion under Article IV-D. Kansas "has not
claim because "Kansas has not established, and did not        established, and did not attempt to establish, such injury."
attempt to establish, such injury." Ibid.                     Id., at 431. We overrule Kansas' exception to the Special
                                                              Master's dismissal of its Trinidad Reservoir claim.
     Kansas argues that "departure from the Operating
Principles is ipso facto a violation of the Compact, and it        [*684] B
[is] entirely sufficient, for purposes of quantifying the
                                                                      [***LEdHR3A] [3A]In 1964, the Bureau of
effects of the violation, to compare the actual operation
                                                              Reclamation and Colorado began planning a program to
with simulated operation as it should have been under the
                                                              use excess capacity at Pueblo Reservoir in order to store a
Operating Principles." Kansas' Exceptions to Special
                                                              portion of the winter-time flow of the Arkansas River for
Master's Report 12. But, it must be recalled, this is an
                                                              beneficial use at other times. Under the WWSP,
original action to [***772] enforce [*683] the terms of
                                                              winter-time flow -- much of which was used previously
the Compact. 3 Article IV-D provides that the Compact is
                                                              to flood uncultivated cropland -- is instead stored at the
not intended to prevent future beneficial development of
                                                              Pueblo Reservoir. Kansas contends that the Special
the Arkansas River basin -- including dams and reservoirs
                                                              Master erred in finding that it had failed to prove that the
-- provided that the river flow shall not be materially
                                                              [**1741] WWSP had "materially depleted" usable state
depleted. The Compact thus permits the development of
                                                              line flows. We disagree.
projects such as Pueblo Reservoir so long as their
operation does not result in a material depletion of usable       In his Report, the Special Master concluded:
flow to Kansas users. For Kansas to prevail in its
contention, it would have to show that the Operating                    "Kansas has not proved that the WWSP
Principles had the effect of amending the Compact by                 has caused material Stateline depletions.
granting either party the right to sue the other for                 Kansas' case has not been helped by its
violation of the Operating Principles even though the                own contradictions in quantifying impacts
violation resulted in no material depletion of usable flow           to usable flow -- ranging during this trial
at stateline. Although the Administration is empowered               from 255,000 acre-feet initially, to 44,000
                                                                                                                Page 12
                                      514 U.S. 673, *684; 115 S. Ct. 1733, **1741;
                                131 L. Ed. 2d 759, ***LEdHR3A; 1995 U.S. LEXIS 3214

        to 40,000; nor by the fact that depletions            not usable. Id., at 293. With respect to the winter months,
        are essentially eliminated if accretions are          November through March, Durbin concluded that (1)
        taken into account." Report 335.                      24% of the winter flow was diverted; (2) flows greater
                                                              than 7,500 acre-feet per month were not usable; and (3)
The Special Master examined the computer models               flows greater than 40,000 acre-feet for the whole period
submitted by Kansas and Colorado and determined that          were not usable. Id., at 293-294.
"the depletions shown by the Kansas model are well
within the model's range of error." Id., at 334-335. As a         After Colorado isolated errors in Durbin's analysis,
result, "one [could not] be sure whether impact or error      Kansas presented a replacement case. Kansas' second
[was] being shown." Id., at 335.                              group of experts, led by Stephen P. Larson, adopted the
                                                              same methodology but revised certain exhibits and made
      [***773] [***LEdHR1A] [1E] [***LEdHR3A]                 minor corrections in data. As a result, Larson modified
[3B]We believe that the Special Master gave Kansas            Durbin's coefficients, using 72% for the summer months
every reasonable opportunity to meet its burden of            and 25% for the winter months. Id., at 295.
proving its WWSP claim. Kansas, however, failed to
prove that operation of the WWSP program resulted in                 [*686] Later, well after trial had begun, Kansas
material depletions of usable flows in violation of Article   enlisted the aid of Brent Spronk, who proposed yet
IV-D. See ibid. Therefore, we overrule Kansas' exception      another method to quantify depletions of "usable" state
to the Special Master's conclusion that Kansas had failed     line flow. Id., at 300-305. Spronk attempted to determine
to prove its WWSP claim.                                      the "percentage of days in each month when flows were
                                                              being fully used in Kansas." Id., at 301. Instead of
    C                                                         seasonal averages, the Spronk approach yielded
                                                              coefficients that varied from month to month. Spronk
      [***LEdHR4A] [4A]Article IV-D of the Compact            then multiplied these monthly coefficients by the
permits future development and construction along the         estimated depletions in flow predicted by Kansas'
Arkansas River Basin provided [*685] that it does not         hydrological model. Id., at 301-302.
materially deplete state line flows "in usable quantity or
availability." App. to Report 5 (Article IV-D) (emphasis             [***LEdHR1A] [1F] [***LEdHR4A] [4B]The
added). In order to establish a violation of Article IV-D,    Special Master concluded that "the Durbin approach,
Kansas was required to establish that development in          using Larson's coefficients, is the best of the several
Colorado resulted in material depletions of "usable" river    methods presented for determining usable flow" and that
flow. The Compact does not define the term "usable." Cf.      it provided "a reasonable way in which [***774] to
Colorado v. Kansas, 320 U.S. at 396-397 ("The critical        determine depletions of usable flow." Id., at 305.
matter is the amount of divertible flow at times when         [**1742] We agree. Each of the three methods that
water is most needed for irrigation. Calculations of          Kansas proposed for calculating usable depletions
average annual flow, which include flood flows, are,          required two steps: (1) a calculation of total depletions
therefore, not helpful in ascertaining the dependable         using the Kansas hydrological model, and (2) an
supply of water usable for irrigation"). At trial, Kansas     application of "usability" criteria. See Brief for United
presented three methods for determining depletions of         States in Response to Exeptions of Kansas and Colorado
"usable" flow.                                                30. Each of the three methods proposed by Kansas was
                                                              dependent on the Kansas hydrological model to estimate
     Kansas' first expert, Timothy J. Durbin, analyzed        total depletions. The Spronk method required the Kansas
flow data for the period between 1951 and 1985 by             hydrological model to predict accurately depletions for
plotting actual river diversions in Kansas against actual     each and every month. Report 303. But as Durbin,
stateline flows. Report 293-294. Using these data, Durbin     Kansas' first expert, testified, Kansas' hydrological model
developed criteria to determine what river flows were         was only a "'good predictor' when 'looking at long
usable. Durbin concluded that during the summer               periods of time.'" Id., at 303, n. 130 (quoting Durbin's
months, April through October, (1) 78% of the stateline       testimony). Thus, the Spronk method required the Kansas
flows were diverted; (2) flows greater than 40,000            hydrological model to do something it was not designed
acre-feet per month were not usable; and (3) flows            to do, i. e., predict accurately depletions on a monthly
greater than 140,000 acre-feet for the whole period were
                                                                                                                  Page 13
                                      514 U.S. 673, *686; 115 S. Ct. 1733, **1742;
                                    131 L. Ed. 2d 759, ***774; 1995 U.S. LEXIS 3214

basis. Id., at 303 ("The Spronk analysis assumes that the       [requested]. But, [***775] in any event, they [*688]
H-I model can accurately predict changes of Stateline           gravely add to the burden [the plaintiff] would otherwise
flow on a monthly basis"). Because the Spronk method            bear"). We need not, however, foreclose the applicability
for determining "usable" river flows was less compatible        of laches in such cases, because we conclude that
with Kansas' hydrological model than the other methods          Colorado has failed to prove an element necessary to the
proposed, we conclude that the Special Master properly          recognition of that defense. See Costello, supra, at 282.
rejected [*687] the Spronk method in favor of the
Durbin approach, as modified by the Larson coefficients.               Colorado argues that Kansas knew or should have
                                                                known by 1956, or at the latest, before 1968, that both the
    III                                                         number of post-Compact wells and the amount of
                                                                post-Compact pumping in Colorado had increased
    A                                                           substantially. Colorado's Exceptions 37, 39. Colorado
                                                                argues that by 1956 Kansas had sufficient information
      [***LEdHR5A] [5A]The Special Master concluded             about increased well pumping in Colorado and its
that Kansas was not guilty of inexcusable delay in              potential impact on usable stateline flows to call for an
making its well-pumping claim, and that Colorado had            investigation to determine if a Compact violation existed.
not been prejudiced by Kansas' failure to press its claim       Id., at 46.
earlier. Id., at 170. Colorado has excepted to this
determination. Colorado argues that the equitable                       [***LEdHR1A] [1G] [***LEdHR5A] [5C]The
doctrine of laches should bar Kansas' claim for relief. See     Special Master concluded that prior to 1984, Kansas had
Colorado's Exceptions to Special Master's Report                made no formal complaint to the Administration
(Colorado's Exceptions) 24-64. We overrule Colorado's           regarding post-Compact [**1743] well pumping in
exception.                                                      Colorado. Report 155-156. Nevertheless, the Special
                                                                Master concluded that Colorado's evidence did not "deal
        [***LEdHR5A] [5B] [***LEdHR6] [6]The                    with the issue of impact on usable flow at the Stateline,"
defense of laches "requires proof of (1) lack of diligence      id., at 161, and did "not demonstrate that [the Kansas
by the party against whom the defense is asserted, and (2)      officials] were aware of the number of wells, the extent
prejudice to the party asserting the defense." Costello v.      of Colorado's pumping, or the impact or even potential
United States, 365 U.S. 265, 282, 5 L. Ed. 2d 551, 81 S.        impact of pumping on usable Stateline flows," id., at 164.
Ct. 534 (1961); see also Black's Law Dictionary 875 (6th        The Special Master explained the difficulty of assessing
ed. 1990) [HN3] ("'Doctrine of laches,' is based upon           the impact of increases in post-Compact well pumping on
maxim that equity aids the vigilant and not those who           usable stateline flows because of changing conditions
slumber on their rights. It is defined as neglect to assert a   during the 1970's and early 1980's:
right or claim which, taken together with lapse of time
and other circumstances causing prejudice to the adverse                 "The 1970s were generally dry years and
party, operates as bar in court of equity"). This Court has            some reduction in flow was to have been
yet to decide whether the doctrine of laches applies in a              expected. Pueblo Dam came on line in
case involving the enforcement of an interstate compact.               1976 and began to reregulate native flows.
Cf. Illinois v. Kentucky, 500 U.S. 380, 388, 114 L. Ed.                Transmountain imports increased, which
2d 420, 111 S. Ct. 1877 (1991) (in the context of an                   to some extent provided an offset to
interstate boundary dispute, "the laches defense is                    pumping. The 1980 Operating Plan was
generally inapplicable against a State"); Block v. North               placed into effect, which Colorado alleges
Dakota ex rel. Board of Univ. and School Lands, 461                    offset the impacts of increased pumping
U.S. 273, 294, 75 L. Ed. 2d 840, 103 S. Ct. 1811 (1983)                downstream from John Martin Reservoir.
(O'CONNOR, J., dissenting) ("The common law has long                   The Winter Water Storage Program was
accepted the principle 'nullum tempus occurrit regi' --                instituted. Moreover, there was no
neither laches nor statutes of limitations will bar the
                                                                       quantitative     [*689]     or    specific
sovereign"); Colorado v. Kansas, supra, at 394 (In the                 entitlement against which depletions to
context of a suit seeking an equitable apportionment of                usable flow could be judged. Nor were
river flows, facts demonstrating a delay in filing a                   there any agreed upon criteria for
complaint "might well preclude the award of the relief
                                                                                                                    Page 14
                                       514 U.S. 673, *689; 115 S. Ct. 1733, **1743;
                                 131 L. Ed. 2d 759, ***LEdHR5A; 1995 U.S. LEXIS 3214

        establishing what flows were usable." Id.,                      4 Article VI-A(2) provides: "Except as otherwise
        at 162-163.                                                     provided, nothing in this Compact shall be
                                                                        construed as supplanting the administration by
As late as 1985, Colorado officials refused to permit an                Colorado of the rights of appropriators of waters
investigation by the Administration of well development                 of the Arkansas River in said State as decreed to
in Colorado because they claimed that the evidence                      said appropriators by the courts of Colorado, nor
produced by Kansas did not "'suggest that well                          as interfering with the distribution among said
development in Colorado has had an impact on usable                     appropriators by Colorado, nor as curtailing the
stateline flows.'" Id., at 163 (quoting memorandum of J.                diversion and use for irrigation and other
William McDonald, chief of the Colorado delegation to                   beneficial purposes in Colorado of the waters of
the Administration). In light of the vague and conflicting              the Arkansas River." App. to Report 10 (emphasis
evidence available to Kansas, we conclude that Colorado                 added).
has failed to demonstrate lack of diligence, i. e.,
inexcusable delay, on the part of Kansas.                              We conclude that the clear language of Article IV-D
                                                                 refutes Colorado's legal challenge. Article IV-D permits
     Accordingly, we overrule Colorado's exception to            "future beneficial development of the Arkansas River
the Special Master's conclusion that the defense of laches       basin . . . which may involve construction of dams,
should not bar Kansas' well-pumping claim.                       reservoir, and other works for the purposes of water
                                                                 utilization and control, as well as the [**1744] improved
    B                                                            or prolonged functioning of existing works: Provided,
                                                                 that the waters of the Arkansas River . . . shall not be
      [***LEdHR7A] [7A]The Compact prohibits "future             materially depleted in usable quantity or availability . . .
beneficial development of the Arkansas River basin" that         ." App. to Report 5 (emphasis added). Regardless of
"materially deplete[s]" the usable flows of the Arkansas         subsequent practice by the parties, improved and
River. App. to Report 5 (Article IV-D) (emphasis added).         increased pumping by existing wells clearly falls within
Because some wells in Colorado were in [***776]                  Article IV-D's prohibition against "improved or
existence prior to the Compact, both parties agree that a        prolonged functioning of existing works," if such action
certain amount of post-Compact well pumping is                   results in "material depletions in usable" river flows.
allowable under the Compact. Report 182. Kansas and              Ibid.; see Texas v. New Mexico, 462 U.S. 554, 564, 77 L.
Colorado, however, dispute the extent of this allowance.         Ed. 2d 1, 103 S. Ct. 2558 (1983) ("Unless the compact to
The Special Master determined that the "highest annual           which Congress has consented is somehow
amount shown to have been pumped during the                      unconstitutional, no court may order relief inconsistent
negotiations, namely 15,000 acre-feet, should be allowed         with its express terms"). Article VI-A(2) of the Compact,
under the Compact." Id., at 200. Colorado makes both a           which begins with the phrase, "Except as otherwise
legal and a factual challenge to this determination.             provided," App. to [*691] Report 10, must be read in
Colorado's Exceptions 66-73, 73-84.                              conjunction with and as limited by Article IV-D. We
                                                                 agree with the Special Master that "new wells, the
     Colorado argues as a legal matter that the Compact
                                                                 replacement of centrifugal with turbine pumps, and
does not limit the pumping by pre-Compact wells to the
                                                                 increased pumping from [pre-Compact] wells all come
highest amount actually pumped in pre-Compact years;
                                                                 within [Article IV-D]." Report 194.
rather, Colorado [*690] claims that the limit on its
pre-Compact pumping is the maximum amount that                           [***LEdHR1A] [1H] [***LEdHR7A] [7B]
Colorado law permitted or the maximum amount of                  [***LEdHR8] [8]Second, Colorado argues as a factual
pumping possible using wells existing prior to the               matter that the Special Master unreasonably relied upon
Compact. Id., at 69-70. In support of its position,              faulty reports by the United States Geological Survey
Colorado argues that the Special Master failed to consider       (USGS) and the Colorado Legislature to conclude that the
the subsequent practice of the parties, i. e., Kansas' failure
                                                                 greatest amount of annual pre-Compact pumping in
to object to replacement of centrifugal pumps with               Colorado was 15,000 acre-feet. Colorado's Exceptions
turbine pumps or increased pumping by pre-Compact                73-74. The Special Master concluded:
wells, and that Article VI-A(2) of the Compact supports
its position. 4
                                                                                                                Page 15
                                     514 U.S. 673, *691; 115 S. Ct. 1733, **1744;
                                131 L. Ed. 2d 759, ***LEdHR8; 1995 U.S. LEXIS 3214

              [***777] "There is no precise answer            because of changes in the regime of the Arkansas River,"
        to the amount of [pre-Compact] pumping.               id., at 91, "including [post-Compact] well pumping in
        . . . That amount must simply remain as an            Colorado and Kansas," ibid.; see also App. to Report 107
        estimate of water use that affected the               (Resolution Concerning an Operating Plan for John
        general allocation of water between the               Martin Reservoir) ("WHEREAS, the Arkansas River
        states when the Compact was being                     Compact Administration . . . recognizes that, because of
        negotiated. Two responsible reports, one              changes in the regime of the Arkansas River, the present
        published by the USGS and one prepared                operation of the conservation features of John Martin
        for the Colorado legislature, reached                 Reservoir does not result in the most efficient utilization
        similar conclusions as to the amounts of              possible of the water under its control"). We disagree.
        Colorado pumping during the 1940s. . . .
        They have since been used by the                              [***LEdHR1A] [1I] [***LEdHR9A] [9B]As
        Colorado State Engineer. I have relied on             Colorado acknowledges, the resolution adopting the 1980
        these reports and recommend that the                  Operating Plan "does not state that [post-Compact] well
        highest annual amount shown to have been              pumping in [**1745] Colorado or Kansas was a cause
        pumped during the negotiations, namely                of changes in the regime of the Arkansas River."
        15,000 acre-feet, should be allowed under             Colorado's Exceptions 88. In fact, Colorado argues in a
        the Compact." Report 199-200.                         separate part of its brief that "Kansas had made no
                                                              complaint about well pumping in Colorado to the
Although [HN4] the ultimate responsibility for deciding       Compact Administration . . . before 1984." Id., at 32. The
what are correct findings of fact remains with the Court,     1980 Operating Plan expressly reserves the parties' rights
Colorado v. New Mexico, 467 U.S. 310, 317, 81 L. Ed.          under the Compact, stating that "adoption of this
2d 247, 104 S. Ct. 2433 (1984), in this instance, we are in   resolution does not prejudice the ability of Kansas or of
full agreement with the Special Master. Accordingly, we       any Colorado ditch to object or to otherwise represent its
overrule Colorado's exception.                                [*693] interest in [***778] present or future cases or
                                                              controversies before the Administration or in a court of
    C                                                         competent jurisdiction." App. to Report 116. The Special
                                                              Master concluded:
         [***LEdHR9A] [9A]In April 1980, the
Administration adopted a resolution concerning the                          "The 1980 Operating Plan provided
method for operating John Martin Reservoir (1980                       benefits to both Kansas and Colorado
Operating Plan). Report 47. The 1980 Operating [*692]                  which were separately bargained for.
Plan divides the water conserved in John Martin                        There is no evidence to support the claim
Reservoir into separate accounts. Kansas is allocated 40%              that benefits to Kansas were in settlement
of the conservation storage, with the remaining 60%                    of its well claims. Colorado received
being divided in specified percentages among the nine                  ample consideration under the agreement
canal companies in Colorado Water District 67. Id., at                 for the 1980 plan without a waiver of
173. The Special Master concluded that the 1980                        Kansas' well claims. The benefits received
Operating Plan for the John Martin Reservoir was                       by Kansas under the plan should not be
"separately bargained for" and therefore should not offset             offset against compact violations, and
depletions caused by post-Compact well pumping in                      should not be a bar to any of the Kansas
Colorado. Id., at 180-181. Colorado takes exception to                 claims in this case." Report 180-181.
this ruling.
                                                              We agree with the Special Master's resolution of
     Colorado argues that increases in usable state line      Colorado's claim. Accordingly, we overrule Colorado's
flows resulting from the 1980 Operating Plan should           exception.
offset depletions to usable state line flows. Colorado's
Exceptions 85. Colorado maintains that the                        D
Administration adopted the 1980 Operating Plan "for
more efficient utilization of water under its control                 [***LEdHR10A] [10A]Finally, Colorado argues
                                                                                                             Page 16
                                    514 U.S. 673, *693; 115 S. Ct. 1733, **1745;
                             131 L. Ed. 2d 759, ***LEdHR10A; 1995 U.S. LEXIS 3214

that Kansas is required to prove its well-pumping claim            [***LEdHR1A] [1K]For these reasons, we
by clear and convincing evidence. Colorado's Exceptions     overrule the exceptions filed by the States of Kansas and
91. The Special Master, relying upon Nebraska v.            Colorado. We remand the case to the Special Master for
Wyoming, 507 U.S. 584, 123 L. Ed. 2d 317, 113 S. Ct.        determination of the unresolved issues in a manner not
1689 (1993), concluded that the proper burden of proof      inconsistent with this opinion.
for enforcing an interstate compact is the preponderance
of the evidence standard. Report 70. The Special Master         It is so ordered.
noted that the Nebraska Court had drawn a distinction
between actions seeking to "modify" a judicial decree and   REFERENCES
actions seeking to "enforce" a judicial decree. See         32A Am Jur 2d, Federal Practice and Procedure 556, 572,
Nebraska, supra, at 592 ("We find merit in [the]            574; 78 Am Jur 2d, Waters 309-311, 314, 340
contention that, to the extent that Nebraska seeks
                                                            7A Federal Procedure, L Ed, Courts and Judicial System
modification of the decree rather than enforcement, a
                                                            20:294, 20:310, 20:312
higher standard of proof applies"). The Special Master
concluded that an action seeking to enforce an interstate   L Ed Digest, Evidence 962, 966.5; Reference 19, 29;
compact stood on the same footing as an action enforcing    States, Territories, and Possessions 58; Supreme Court of
a judicial decree, and therefore was subject to the         the United States 58
"preponderance of the evidence" standard. Report 70.
                                                            L Ed Index, Reservoir; Rivers and Streams; Special
      [***LEdHR1A] [1J] [***LEdHR10A] [10B]We               Masters; Supreme Court of the United States; Waters and
need not, however, resolve this issue. The Special Master   Watercourses
concluded that "regardless of which burden of proof
[*694] applies" he had "no difficulty in concluding that    ALR Index, Masters; Original Jurisdiction; Reservoirs;
[post-Compact] pumping in Colorado had caused               Rivers and Streams; Supreme Court of United States;
material depletions of the usable Stateline flows of the    Waters and Watercourses
Arkansas River, in violation of the Arkansas River
Compact." Id., at 263. We agree with this determination,            Annotation References:
and thus overrule Colorado's exception.
                                                            Original jurisdiction of United States Supreme Court in
    IV                                                      suits between states. 68 L. Ed. 2d 969.
                                                                                                                  Page 1

                      MEMPHIS & LITTLE ROCK RAILROAD COMPANY v. RAILROAD
                                        COMMISSIONERS.

                                   SUPREME COURT OF THE UNITED STATES

                           112 U.S. 609; 5 S. Ct. 299; 28 L. Ed. 837; 1884 U.S. LEXIS 1930

                                            Submitted November 25, 1884.
                                              December 22, 1884 Decided

PRIOR HISTORY: IN ERROR TO THE SUPREME                         subscribers were authorized to organize by the election of
COURT OF THE STATE OF ARKANSAS.                                a board of directors. The 9th section of the act is as
                                                               follows:
     This was a bill in equity filed in the Chancery Court
of Pulaski County, Arkansas, seeking to enjoin the Board            "SEC. 9. The said company may at any time
of Railroad Commissioners of the State from appraising,        increase its capital to a sum sufficient to complete the
for the purposes of taxation, any part of the property of      said road, and stock it with anything necessary to give it
the plaintiff in error, on the ground that it is exempted      full operation and effect, either by opening books for new
from taxation by a contract with the State contained in its    stock or by selling such new stock, or by borrowing
charter of incorporation. The Supreme Court of the State,      money on the credit of the company, and on the mortgage
on appeal, affirmed the decree of the Chancery Court           of its charter and works; and the manner in which the
dismissing the bill. That decree of the Supreme Court          same shall be done, in either case, shall be prescribed by
was brought here by writ of error, for review, on the          the stockholders at a general meeting," &c. Laws of
allegation that it enforced a law of the State impairing the   Arkansas, 1852-3, 132-3.
obligation of a contract in violation of the rights of the
plaintiff in error under the Constitution of the United            It also contains the following:
States.
                                                                   "SEC. 28. The capital stock of said company shall
     The question arises and is to be determined upon the      be exempt from taxation until the road pays a dividend of
following case:                                                six per cent., and the road, with all its fixtures and
                                                               appurtenances, including workshops, warehouses and
     The Memphis and Little Rock Railroad Company              vehicles of transportation, shall be exempt from taxation
was chartered by an act of the General Assembly of the         for the period of twenty years from and after the
State of Arkansas, approved January 11, 1853. This act         completion of said road." Ib. 136.
authorized the formation of a company to be a body
corporate for the purpose of establishing communication             The company was organized under this act, and
by a railroad between the city of Memphis in Tennessee         afterwards, in order to borrow money for the prosecution
and Little Rock in Arkansas, and commissioners were            of the enterprise, issued its bonds to the amount
named therein to open books for subscriptions to its           $1,300,000, dated May 1, 1860, having thirty years to
capital stock.This was fixed for the purpose of                run, with interest at eight per cent. per annum, and, to
organization at $400,000, to be increased to $2,000,000 at     secure the payment of the same, executed and delivered a
the pleasure of the company. When the necessary                mortgage to Tate, Brinkley and Watkins, as trustees for
amount of capital stock had been subscribed, the               the bondholders, whereby it conveyed to them, in trust,
                                                                                                                     Page 2
                                             112 U.S. 609, *; 5 S. Ct. 299, **;
                                        28 L. Ed. 837, ***; 1884 U.S. LEXIS 1930

the Memphis and Little Rock Railroad, its road-bed, right       provisions of the act of January 11, 1853, for the
of way, and all works and rolling stock of or belonging to      incorporation of the original company; and afterwards, on
the company, "together with the charter by which said           April 30, 1877, Pierson, Matthews and Dow conveyed to
company was incorporated and under which it is                  said company the property and franchises, including the
organized, and all the rights and privileges and franchises     charter of January 11, 1853; and thereupon the bill
thereof," and also all the lands, &c., belonging to said        proceeds:
company.
                                                                     "Complainant submits that, having thus duly
     Subject thereto, a second mortgage was made by the         purchased said charter of the Memphis and Little Rock
company on March 1, 1871, conveying all its property            Railroad Company under the power therein contained,
and franchises to Henry F. Vail, in trust for the holders of    and having organized thereunder, it is the owner and
bonds secured thereby, amounting to $1,000,000.Default          holder thereof, and that it has and is entitled to all the
having been made by the company in the payment of               privileges and benefits in said act of the General
interest on this loan, Vail, the trustee, in execution of the   Assembly mentioned and set forth, among others to the
power conferred in the mortgage, sold and conveyed the          contract contained in said section 28, by which the road,
mortgaged property, the title to which became vested in         with all the franchises and appurtenances, including
Stillman Witt and his associate bondholders, who                workshops, warehouses, and vehicles of transportation,
organized the Memphis and Little Rock Railway                   shall be exempt from taxation for the period of twenty
Company, to which, on November 17, 1873, the said               years from and after the date of the completion of said
property was conveyed. This railway company, on                 road. Complainant further states that said road was not
December 1, 1873, issued its bonds to the amount of             completed till the 15th day of November, 1874, and that
$2,600,000, and, to secure the same, by a deed of that          the time of the exemption thereafter from taxation has not
date, conveyed all the franchises, privileges and property      expired. It further states that the defendant herein first
so acquired by it to trustees, of whom Pierson, Matthews        mentioned, acting as a Board of Railroad Commissioners
and Dow became successors, in trust for the bondholders.        for this State, have demanded from the complainant a
The Memphis and Little Rock Railroad Company, the               detailed inventory of all the rolling stock belonging to the
original corporation, made default in the payment of            company, and the valuation thereof, as provided in
interest accruing upon the bonds secured by the mortgage        section 48 of an act of the General Assembly of the State
of May 1, 1860, and its successor, the Memphis and              of Arkansas, approved March 31, 1883, entitled 'An Act
Little Rock Railway Company also made default in the            to revise and amend the revenue laws of the State of
payment of interest maturing on the bonds secured by the        Arkansas,' and have also demanded from the complainant
deed of December 1, 1873. Afterwards, on November               a statement or schedule showing the length of the main
12, 1876, a bill in chancery was filed, in the Circuit Court    and all the side tracks, switches and turn-outs in each
of the United States for the Eastern District of Arkansas,      county in which the road is located, and the value of all
by the trustees against the two companies, to foreclose         improvements, stations and structures, including the
those mortgages, in which suit a final decree was               railroad track, as provided in section 46 of the same act.
rendered ordering a sale of the property described in the
same, embracing the property and franchises of the said              "Complainant being willing, so far as it may without
companies, and the charter of the Memphis and Little            injury to itself, to comply with the laws of this said State,
Rock Railroad Company; and a sale thereof was made              has, in compliance with the demand made upon it, made
and confirmed, and a conveyance of the same executed to         and returned said schedule to the said board,
Pierson, Matthews and Dow, in trust for the holders of          accompanying the same with a protest against any of the
the bonds of the Memphis and Little Rock Railway                property in said schedule contained being assessed for
Company, secured by the deed of trust executed by that          taxation, in which protest complainant stated the grounds
company. On April 28, 1877, the holders of these bonds          upon which said property was exempt from taxation.
executed certain articles of association, by which after
                                                                    "Complainant states and submits that all this
reciting the premises, they organized themselves into a
                                                                property contained in the said schedules, [copies] of
company, claiming to become a corporation, under the
                                                                which it herewith files, marked 'I' and 'J,' and all the
name of "The Memphis and Little Rock Railroad
                                                                property described in said sections 46 and 48 of said act,
Company as re-organized," under and by virtue of the
                                                                                                                   Page 3
                                            112 U.S. 609, *; 5 S. Ct. 299, **;
                                       28 L. Ed. 837, ***; 1884 U.S. LEXIS 1930

are the identical property which is exempt from taxation       Arkansas was adopted and took effect. Among its
by the contract in said charter contained."                    provisions are these: That the General Assembly shall
                                                               pass no special act conferring corporate powers (art. 12,
     On December 9, 1874, an act was passed by the             sec. 2); that corporations may be formed under general
General Assembly of Arkansas, whereby the purchasers           laws, which laws may, from time to time, be altered or
of a railroad of any corporation of the State, and their       repealed (art. 12, sec. 6); that all property subject to
associates, acquiring title thereto by virtue of a judicial    taxation shall be taxed according to its value; that the
sale, or of a sale under a power contained in a mortgage       following property shall be exempt from taxation: public
or deed of trust, were authorized to organize themselves       property used exclusively for public purposes, churches
into a body corporate, vested with all the corporate rights,   used as such, cemeteries used exclusively as such, school
liberties, privileges, immunities, powers and franchises of    buildings and apparatus, libraries and grounds used
and concerning the railroad so sold, not in conflict with      exclusively for school purposes, and buildings and
the provisions of the Constitution of the State, as fully as   grounds and materials used exclusively for public charity
the same were held, exercised and enjoyed by the               (art. 16, sec. 5); that all laws exempting property from
corporation before such sale. A certificate of such            taxation, other than as above provided, shall be void (art.
organization was required to be filed in the office of the     16, sec. 6); that the power to tax corporations and
Secretary of State within six months, specifying certain       corporate property shall not be surrendered or suspended
particulars. Laws of Arkansas, 1874-5, p. 57. Prior to         by any contract or grant to which the State may be a party
the passage of that act there seems to have been no statute    (art. 16, sec. 7); and that the General Assembly shall not
authorizing the formation of such corporations, or             remit the forfeiture of the charter of any corporation then
prescribing a mode for their organization.                     existing, or alter or amend the same, or pass any general
                                                               or special law for the benefit of such corporation, except
     In 1853, when the Memphis and Little Rock Railroad        upon condition that such corporation should thereafter
Company was chartered and organized as a corporation,          hold its charter subject to the provisions of the
the Constitution of Arkansas then in force permitted the       Constitution (art. 17, sec. 8).
enactment of special acts of incorporation, and without
any restriction upon the power to exempt corporations              It was in April, 1877, that the plaintiff in error was
and their property from taxation. In 1868 a new                organized as a corporation deriving its authority for that
Constitution was adopted by the people of the State,           purpose, as it claimed, under the special act of January
which provided (art. 5, sec. 48), that, "the General           11, 1853. On behalf of the defendant in error, it is
Assembly shall pass no special act conferring corporate        claimed that the plaintiff in error had no power to
powers. Corporations may be formed under general               organize as a corporation, except as enabled by the act of
laws; but all such laws may, from time to time, be altered     December 9, 1874.
or repealed. . . . The property of corporations, now
existing or hereafter created, shall forever be subject to     CASE SUMMARY:
taxation the same as the property of individuals;" and in
art. 10, sec. 2, that, "laws shall be passed taxing by a
uniform rate all moneys, credits, investment in bonds,         PROCEDURAL POSTURE: Plaintiff railroad filed a
joint stock companies, or otherwise; and also all real and     bill in equity seeking to enjoin defendant railroad
personal property, according to its true value in money."      commissioner from appraising, for the purposes of
                                                               taxation, any part of the railroad's property. The railroad
     It was decided by the Supreme Court of Arkansas in        alleged that it was exempt from taxation by a contract
the case of Oliver v. Memphis and Little Rock Railroad         with the State of Arkansas, the terms of which were
Co., 30 Ark. 128, that the 28th section of the act of          contained in its charter of incorporation.
January 11, 1853, incorporating that company, already
quoted, was a contract between it and the State, which         OVERVIEW: The act of incorporation of the railroad
could not be impaired by these provisions of the State         empowered it to borrow money on the credit of the
Constitution, because it was protected by the Constitution     company and on the mortgage of its charter and works.
of the United States.                                          The railroad claimed that the assignment of the railroad's
                                                               charter, by way of mortgage and subsequent judicial sale,
    On October 13, 1874, the present Constitution of
                                                                                                                   Page 4
                                            112 U.S. 609, *; 5 S. Ct. 299, **;
                                       28 L. Ed. 837, ***; 1884 U.S. LEXIS 1930

resulted in another corporation in lieu of the original one   Tax Law > State & Local Taxes > Franchise Tax >
that was entitled to all the provisions of the charter as     General Overview
though it had been originally organized under it. The         [HN3] The franchise of becoming and being a
Court held that the exemption from taxation contained in      corporation, in its nature, is incommunicable by the act of
the act of incorporation for the original railroad applied    the parties and incapable of passing by assignment. The
only to the original corporation organized under it. The      franchise to be a corporation clearly cannot be transferred
Constitution of Arkansas that was adopted in 1874             by any corporate body of its own will. Such a franchise is
provided that the power to tax corporations and corporate     not, in its own nature, transmissible.
property should not be surrendered or suspended by any
contract or grant to which the state may be a party. The
                                                              Tax Law > Federal Income Tax Computation > Sales &
Court held that because the present railroad did not
                                                              Exchanges > Intangible Property (IRC secs. 1234-1235,
become a corporate body until after the restrictions in the
                                                              1241, 1253) > Franchise, Trademark & Trade Name
Constitution took effect, it was, therefore, incapable in
                                                              Transfers
law of having or enjoying the privilege of holding its
                                                              Tax Law > State & Local Taxes > Franchise Tax >
property exempt from taxation.
                                                              General Overview
OUTCOME: The Court affirmed the decision of the               [HN4] The franchise to be a corporation is not a subject
state supreme court that held that the corporate body that    of sale and transfer, unless the law, by some positive
was the railroad could not claim the same exemption           provision, has made it so, and pointed out the modes in
from taxation that was given to its predecessor.              which such sale and transfer may be effected.

CORE TERMS: franchise, charter, mortgage, purchaser,          LAWYERS' EDITION HEADNOTES:
railroad, corporate existence, corporate bodies,
corporators, exemption, organize, confer, judicial sale,          Exemption of railroad from taxation -- does not pass
successor, taxation, foreclosure sale, mortgage               by mortgage and judicial sale -- what passes by such sale
bondholders, way of mortgage, abandonment,                    -- Arkansas Constitution. --
bondholders,     conveyance,      incapable,     surrender,
becoming, railway, vested, conferred, act of                      Headnote:
incorporation, general law, foreclosure, acquiring
                                                                   1. The exemption from taxation contained in the 28th
LexisNexis(R) Headnotes                                       section of the Arkansas Act of 1853, was intended to
                                                              apply only to the Memphis and Little Rock Railroad
                                                              Company, as the original Corporation organized under it.

                                                                   2. Such exemption did not pass by the mortgage of
Mergers & Acquisitions Law > General Overview                 its charter and works, as included in the transfer of the
Tax Law > State & Local Taxes > Franchise Tax >               franchise to be a Corporation, to the mortgagees or
Limitations                                                   purchasers at the judicial sale.
[HN1] The exemption from taxation must be construed to
have been the personal privilege of the very corporation           3. The franchises embraced in that conveyance were
specifically referred to, and to have perished with that,     limited to those which had been granted as appropriate to
unless the expressed clear intention of the law requires      the construction, maintenance, operation and use of the
the exemption to pass as a continuing franchise to a          railroad as a public highway, and the right to make profit
successor.                                                    therefrom.

                                                                   4. The appellant not having become a corporate body
Governments > Legislation > Interpretation                    until after the restrictions in the Arkansas Constitution of
[HN2] It is an unbending rule that a grant of corporate       1874 took effect, was thereby incapable in law of having
existence is never implied. In the construction of a          or enjoying the privilege of holding its property exempt
statute, every presumption is against it.                     from taxation.
                                                                                                                   Page 5
                                            112 U.S. 609, *; 5 S. Ct. 299, **;
                                       28 L. Ed. 837, ***; 1884 U.S. LEXIS 1930

SYLLABUS                                                       25 Ark. 625; White v. Hart, 13 Wall. 646. The contract
                                                               here was that the company created by the act of 1853
     A statute exempting a corporation from taxation           might "mortgage its charter." Not mortgage the
confers the privilege only on the corporation specially        "franchise." Not mortgage the "right to build and operate
referred to, and the right will not pass to its successor      a railroad." Not mortgage the "exemption from taxation,"
unless the intent of the statute to that effect is clear and   but mortgage the charter. The words "charter," and "act
express. Morgan v. Louisiana, 93 U.S. 217; Wilson v.           of incorporation" are used "convertibly," and mean the
Gaines, 103 U.S. 417; and Louisville & Nashville               same thing. Humphrey v. Pegues, 16 Wall. 244. The
Railroad Company v. Palmes, 109 U.S. 244, affirmed.            grant of a power grants everything necessary to give it
                                                               beneficial effect; United States v. Fisher, 2 Cranch, 358;
    The franchise to be a corporation is not a subject of      McCulloch v. Maryland, 4 Wheat. 316, 428; Fletcher v.
sale and transfer, unless made so by a statute, which          Oliver, 25 Ark. 289, 299; N.W. Fertilizing Co. v. Hyde
provides a mode for exercising it.                             Park, 70 Ill. 634. The power to pledge the franchises and
                                                               rights of a corporation implies, as incident thereto, the
     A franchise to be a corporation is distinct from a
                                                               power to pledge everything that may be necessary to the
franchise, as a corporation, to maintain and operate a
                                                               enjoyment of the franchise, and upon which its real value
railway: the latter may be mortgaged, without the former,
                                                               depends. Phillips v. Winslow, 18 B. Mon. 431. Either the
and may pass to a purchaser at a foreclosure sale.
                                                               whole charter passed or nothing. There is no middle
     A mortgage of the charter of a corporation, made in       ground. The exemption from taxation was not separable
the exercise of a power given by statute, confers no right     from the body of the charter. This court has held that,
upon purchasers at a foreclosure sale to exist as the same     with legislative permission, any privilege or immunity
corporation: if it confers any right of corporate existence    may pass. Humphrey v. Pegues, cited above; Tomlinson
upon them, it is only a right to reorganize and a              v. Branch, 15 Wall. 460; Pacific Railroad Co. v.
corporation, subject to laws, constitutional and otherwise,    McGuire, 20 Wall. 36. In the cases of Morgan v.
existing at the time of the reorganization.                    Louisiana, 93 U.S. 217, and Louisville & Nashville
                                                               Railroad Co. v. Palmes, 109 U.S. 244, relied upon by the
COUNSEL: Mr. B. C. Brown for plaintiff in error. --            other side, there was no such permission.
Under the statutes of Arkansas the pleadings amount to
an admission that the original charter contained on            Mr. U. M. Rose, for defendants in error.
exemption from taxation, that there was authority to
                                                               OPINION BY: MATTHEWS
mortgage that charter, that it was mortgaged, that the
mortgage was foreclosed, and that the mortgaged charter
                                                               OPINION
was acquired by the plaintiff in error under the
foreclosure sale. We admit that a corporation takes only              [*617] [**302] [***840] MR. JUSTICE
so much as is granted in express words, or by fair             MATTHEWS delivered the opinion of the court. He
implication; that an exemption from taxation is not to be      recited the facts as above stated, and continued:
presumed; that the party claiming the exemption must
show his right. But there is another proposition -- which           The case of the plaintiff in error rests entirely upon
the court overlooked -- that a status or right shown to        the words of the ninth section of the act of incorporation
have been once established or existing is presumed to          of the Memphis and Little Rock Railroad Company of
continue, and it is for him who alleges that it has ended or   January 11, 1853, by which it was empowered to borrow
changed to show when and how the end or change                 money "on the credit of the company and on the
occurred. It is conceded that the property held by             mortgage of its charter and works." It is argued that these
plaintiff and now sought to be taxed was at one time           words confer power upon the company to convey to its
exempt. This was established by the Supreme Court of           bondholders, by way of mortgage and on foreclosure, to
the State itself, in The State v. Oliver, 30 Ark. 129.         purchasers absolutely, all the property of the company,
Before this cause was instituted, both the Supreme Court       and all its franchises, including the franchise of becoming
of Arkansas and this court had held that "a State can no       and being a corporation, in the sense of acquiring the
more impair the obligation of a contract by adopting a         right to organize as such under the act as successor to,
Constitution than by passing a law." Jacoway, v. Denton,       and substitute for, the original company, precisely as if
                                                                                                                       Page 6
                                          112 U.S. 609, *617; 5 S. Ct. 299, **302;
                                       28 L. Ed. 837, ***840; 1884 U.S. LEXIS 1930

the act had named them as corporators and endowed them            bondholders or other purchasers at a sale under a
with the corporate faculty. And this being assumed, it is         foreclosure of the mortgage, nor is there any mode or
thence inferred that the exemption contained in section 28        machinery prescribed in the act for such an organization.
of the act applies to the substituted corporation as though       The desired conclusion rests entirely on the inference
no change of corporate existence had taken place; and             deduced from the mortgage of the charter, and is an
thus, it is insisted, the case is taken out of rule of decision   attempt to create a corporation by a judicial
established in Morgan v. Louisiana, 93 U.S. 217; Wilson           implication.But, as was said by this court in Central
v. Gaines, 103 U.S. 417, and Louisville & Nashville               Railroad and Banking Co. v. Georgia, 92 U.S. 665, 670,
Railroad Company v. Palmes, 109 U.S. 244. According               [HN2] "it is an unbending rule that a grant of corporate
to the principle of those decisions, [HN1] the exemption          existence is never implied. In the construction of a
from taxation must be construed to have been the                  statute every presumption is against it."
personal privilege of the very corporation specifically
referred to, and to have perished with that, unless the                The application of this rule is not avoided by the
express the clear intention of the law requires the               claim that the present is not the case of an original
exemption to pass as a continuing franchise to a                  creation of a corporate body, but the transfer, by
successor. This salutary rule of interpretation is founded        assignment of a previously existing charter, and of the
upon an obvious public policy, which regards such                 right to exist as a corporation [***841] under it. [*619]
exemptions as in derogation of the sovereign authority            The difference is one of words merely. [HN3] The
and of common right, and, therefore, not to be extended           franchise of becoming and being a corporation, in its
beyond the [*618] exact and express requirement of the            nature, is incommunicable by the act of the parties and
grants, construed strictissimi juris.                             incapable of passing by assignment. "The franchise to be
                                                                  a corporation," said Hoar, J., in Commonwealth v. Smith,
     It is not claimed that the assignment of the charter,        10 Allen, 448, 455, "clearly cannot be transferred by any
by way of mortgage and subsequent judicial sale,                  corporate body of its own will. Such a franchise is not, in
constituted the purchasers to be the identical corporation        its own nature, transmissible." In Hall v. Sullivan
that the mortgagor had been; for that would involve an            Railroad Co., 21 Law Reporter, 138 (2 Redfield's Am.
assumption of its obligations and debts as well as an             Railway Cases, 621; 1 Brunner's Collected Cases, 613),
acquisition of its privileges and exemptions; but, it is          Mr. Justice Curtis said: [HN4] "The franchise to be a
insisted, that it resulted in another corporation in lieu of      corporation, is, therefore, not a subject of sale and
the original one, entitled to all the provisions of the           transfer, unless the law, by some positive provision, has
charter, by relation to its date, as though it had been           made it so, and pointed out the modes in which such sale
originally organized under it.                                    and transfer may be effected." No such positive provision
                                                                  is contained in the act under consideration, and no mode
     But such a construction of the words authorizing a           for effecting the organization of a series of corporations
mortgage of the charter and works of the company, is, in          under it is pointed out, either in the act itself or in any
our opinion, beyond the intention of the law and                  other statute prior to that of December 9, 1874.
altogether inadmissible.
                                                                       The franchise of being a corporation need not be
    There is no express grant of corporate existence to           implied as necessary to secure to the mortgage
any new body. At the time when this charter was                   bondholders, or the purchasers at a foreclosure sale, the
granted, in 1853, there was no general law in existence in        substantial rights intended to be secured. They acquire
Arkansas authorizing the formation of corporations. All           the ownership of the railroad, and the property incident to
such grants were by special act. Neither was there any            it, and the franchise of maintaining and operating it as
law authorizing the purchasers of railroads at judicial sale      such; and the corporate existence is not essential to its use
under mortgages of the property and franchises of the             and enjoyment. All the franchises necessary or important
company, to organize themselves into corporate bodies,            to the beneficial use of the railroad could as well be
such as was first passed in 1874. There is not in the act         exercised by natural persons. The essential properties of
of January 11, 1853, for the incorporation of the                 corporate existence are quite distinct from the franchises
Memphis and Little Rock Railroad Company, [**303]                 of the corporation. The franchise of being a corporation
any reference to such a right, as vested in the mortgage          belongs to the corporators, while the powers and
                                                                                                                   Page 7
                                        112 U.S. 609, *619; 5 S. Ct. 299, **303;
                                     28 L. Ed. 837, ***841; 1884 U.S. LEXIS 1930

privileges, vested in and to be exercised by the corporate    relating to the subject. It finally was displaced by the
body as such, are the franchises of the corporation. The      judicial sale, under which the plaintiff in error organized
latter has no power to dispose of the franchise of its        as successor to both. In the mean time, the original
members, which may survive in the mere fact of                corporation has never been dissolved, and for all
corporate existence, after the corporation has parted with    purposes not covered by the [*621] mortgage, still
all its property and all its franchises.If, in the present    maintains an existence as a corporate body, capable of
instance, we suppose that a mortgage and sale of the          contracting, and of suing and being sued. A conception
charter of the railroad company created a new                 which leads to such incongruities must be essentially
corporation, what becomes of the old one? If it abides for    erroneous.
the purpose of responding to obligations not satisfied by
the [*620] sale, or of owning property not covered by              If we concede to the argument for the plaintiff in
the mortgage nor embraced in the sale, as it may well do,     error the position, that the language used, which
and as it must if such debts or property exist, then there    authorizes the mortgage of the charter, may be taken in a
will be two corporations co-existing under the same           literal sense, still the assignment would transfer it, in the
charter. For, "after an act of disposition which separates    very state in which it might be at the date of the transfer.
the franchise to maintain a railroad and make profit from     But at that date the only corporation which the charter
its use, from the franchise of being a corporation, though    provided for had already been organized.The only powers
a judgment of dissolution may be authorized yet, until        conferred upon corporators to that end had already been
there be such judgment, the rights of the corporators and     exercised and exhausted. The bondholders under the
of third persons may require that the corporation be          mortgage, and their assignees, the purchasers at the sale,
considered as still existing." Coe v. Columbus, Piqua &       therefore took, and could take, nothing else than the
Indiana Railroad Co., 10 Ohio St. 372, 386, per Gholson,      charter, so far as it remained unexecuted, with such
J.                                                            franchises and powers as were capable of future
                                                              enjoyment and activity, and not such as, having already
     If, as required by the argument for the plaintiff in     spent their force by having been fully exerted, could not
error, we regard and treat the franchise of being a           be revived by a conveyance. This would include, by the
corporation as an incorporeal hereditament, and an estate     necessity of the case, the franchise to organize a
capable of passing between parties by deed, or of being       corporation, which can only be exerted once for all; for
charged by way of mortgage and of being sold under a          the simple act of organization exhausts the authority, and
power or by virtue of judicial process, the logical           having once been effected, is legally incapable of
consequences will be found to involve insuperable             repetition.
difficulties [**304] and contradictions. In the present
case, for example, after the execution of the first               It is a mistake, however, to suppose that the
mortgage, we should have the railroad company                 mortgage and sale of a charter by a corporation, in any
continuing as a corporation in esse, and the trustees for     proper sense which can be legally imputed to the words,
the bondholders, or their beneficiaries, or assigns, a        necessarily conveys every power and authority conferred
corporation in posse; and, after condition broken, the        by it, so far, at least, as to vest a title in them, as
company would hold the title to its own existence as a        franchises, irrevocable by reason of the obligation of a
mere equity of redemption. That equity it makes the           contract. In many, if not in most, acts of incorporation,
subject of a second mortgage, and, in default, the            however special in their nature, there are various
beneficiaries under the power of sale became purchasers       provisions which are matters of general law and not of
of the franchise, and organize themselves, by virtue of it,   contract, and are, therefore, subject to modification or
into the Memphis and Little Rock Railway Company.             repeal.
The latter can hardly claim the status of a corporation at
                                                                   Such, in our opinion, would be the character of the
law, as the legal title to the franchise of being a
                                                              right in the mortgage bondholders, or the purchasers at
corporation has never passed to it, on the supposition that
                                                              the sale under the mortgage, to organize as a corporation,
it might pass by a private grant; and, if a corporation at
                                                              after acquiring title [***842] to the mortgaged property,
all, it could only be regarded as the creature of equity,
                                                              by sale under the mortgage, if, in the charter under
according to the analogy of equitable estates, a
                                                              consideration, it had been conferred in express terms, and
nondescript class hitherto unknown in any system of law
                                                                                                                      Page 8
                                          112 U.S. 609, *621; 5 S. Ct. 299, **304;
                                       28 L. Ed. 837, ***842; 1884 U.S. LEXIS 1930

particular provision had been made as to the mode of             authorizing the transfer and declaring its effect, is the
procedure to effect the purpose. It would be matter              grant of a new charter [*623] couched in few words, and
[*622] of law and not of contract. At least, it would be         to take effect upon condition of the surrender or
construed as conferring only a right to organize as a            abandonment of the old charter; and the deed of transfer
corporation, according to such laws as might be in force         is to be regarded as mere evidence of the surrender or
at the time when the actual organization should take             abandonment."
place, and subject to such limitations as they might
impose. It cannot, we think, be admitted that a statutory             It is, of course, the law in force at the time the
provision for becoming a corporation in futuro can               transaction is consummated and made effectual, that must
become a contract, in the sense of that clause of the            be looked to as determining its validity and effect. This
Constitution of the United States which prohibits State          is the principle on which this court proceeded in deciding
legislation impairing its obligation, until it has become        the case of Railroad Co. v. Georgia, 98 U.S. 359. The
vested as a right by an actual organization under it; and        franchise to be a corporation remained in, and was
then it takes effect as of that date, and subject to such        exercised by, the old corporation, notwithstanding the
laws as may then be in force. Such a [**305] contract,           mortgage of its charter, until the new corporation was
so far as it seems to assume that form, is a provision           formed and organized; it was then surrendered to the
merely that, at the time, or on the happening of the event       State, and by a new grant then made passed to the
specified, the parties designated may become a                   corporators of the new corporation, and was held and
corporation according to the laws that may then be               exercised by them under the constitutional restrictions
actually in force. The stipulation, whatever be its form,        then existing.
must be construed as subject and subordinate to the
                                                                      Our conclusions, then, are, that the exemption from
paramount policy of the State, and to the sovereign
                                                                 taxation contained in the 28th section of the act of
prerogative of deciding, in the mean time, what shall
                                                                 January 11, 1853, was intended to apply only to the
constitute the essential characteristics of corporate
                                                                 Memphis and Little Rock Railroad Company as the
existence. The State does not part with the frachise until
                                                                 original corporation organized under it; that it did not
it passes to the organized corporation; and, when it is thus
                                                                 pass by the mortgage of its charter and works, as included
imparted, it must be what the government is then
                                                                 in the transfer of the franchise to be a corporation, to the
authorized to grant and does actually confer.
                                                                 mortgagees or purchasers at the judicial sale; that the
     It is immaterial that the form of the transaction is that   franchises embraced in that conveyance were limited to
of a mortgage, sale, or other transfer inter partes of the       those which had been granted as appropriate to the
franchise to be a corporation. "The real transaction, in all     construction, maintenance, operation, and use of the
such cases of transfer, sale, or conveyance," as was said        railroad as a public highway and the right to make profit
by the Supreme Court of Ohio in the case of The State v.         therefrom; and that the appellant, not having become a
Sherman, 22 Ohio St. 411, 428, "in legal effect, is              corporate body until after the restrictions in the
nothing more or less, and nothing other, than a surrender        Constitution of 1874 took effect, was thereby incapable
or abandonment of the old charter by the corporators, and        in law of having or enjoying the privilege of holding its
a grant de novo of a similar charter to the so-called            property exempt from taxation.
transferees or purchasers.To look upon it in any other
                                                                     The decree of the Supreme Court of Arkansas is
light, and to regard the transaction as a literal transfer or
                                                                 accordingly
sale of the charter, is to be deceived, we think, by a mere
figure or form of speech. The vital part of the                      Affirmed.
transaction, and that without which it would be a nullity,
is the law under which the transfer is made. The statute
                                                                                                                 Page 1

                    NATIONAL RAILROAD PASSENGER CORPORATION v. ATCHISON,
                            TOPEKA & SANTA FE RAILWAY CO. ET AL.

                                                      No. 83-1492

                                  SUPREME COURT OF THE UNITED STATES

                470 U.S. 451; 105 S. Ct. 1441; 84 L. Ed. 2d 432; 1985 U.S. LEXIS 65; 53 U.S.L.W.
4285

                                               January 15, 1985, Argued
                                               March 18, 1985, Decided *

                      * Together with No. 83-1633, Atchison, Topeka & Santa Fe Railway Co. et al. v.
                        National Railroad Passenger Corporation, also on appeal from the same court.

SUBSEQUENT HISTORY:             As Amended.                  reimburse national railroad for the pass travel of their
                                                             employees, former employees, and dependents. The
PRIOR HISTORY: APPEAL FROM THE UNITED                        district court granted summary judgment to national
STATES COURT OF APPEALS FOR THE SEVENTH                      railroad. The court of appeals reversed in part, finding
CIRCUIT.                                                     that the agreements provided railroads with a contractual
                                                             right to be free from having to finance these aspects of
DISPOSITION:        723 F.2d 1298, reversed.                 operations. On appeal, the Court found that the
                                                             agreements in no respect relieved railroads of the
CASE SUMMARY:                                                "responsibility" to provide their employees with pass
                                                             privileges, for no state or federal law imposed that
                                                             "responsibility" on them, in connection with intercity rail
PROCEDURAL POSTURE: Appellant national                       passenger operations, when the contracts were executed.
railroad sought review of the decision of the United         Therefore, the Court concluded that § 405(f) in no respect
States Court of Appeals for the Seventh Circuit which        altered railroads' existing contractual rights and duties.
held that appellee private railroads could be compelled to
reimburse national railroad for the incremental cost of      OUTCOME: The Court held that the statutory provision
carrying pass riders, but that this "windfall" to national   was constitutional, and reversed the court of appeals
railroad violated the Due Process Clause.                    insofar as it held that the 1979 and 1981 amendments to
                                                             the statute contravened the Due Process Clause.
OVERVIEW: The Rail Passenger Service Act of 1970
(Act), 45 U.S.C.S. § 501 et seq., established national       CORE TERMS: railroad, passenger service, intercity,
railroad and outlined a procedure under which private        contractual right, reimbursement, passenger, relieved,
railroads could obtain relief from their passenger-service   incremental, rider, reimburse, common carriers,
obligations by transferring those responsibilities to        transportation, cross-appeal, pass-rider, contractual
national railroad by signing basic agreements. Private       obligation, impairment, impaired, fare, travel, trains,
railroads challenged the constitutionality of § 405 of the   passenger train, contractual, impair, repeal, formula,
Act, 45 U.S.C.S. § 565(f), which required them to            unconstitutionally, contractually, rationally, reserved,
                                                                                                                      Page 2
                                           470 U.S. 451, *; 105 S. Ct. 1441, **;
                                        84 L. Ed. 2d 432, ***; 1985 U.S. LEXIS 65

covenant                                                        service. 45 U.S.C.S. § 565(a).

LexisNexis(R) Headnotes
                                                                Transportation Law > Carrier Duties & Liabilities >
                                                                Duty to Provide Service
                                                                Transportation Law > Rail Transportation > Amtrak
                                                                Transportation Law > Rail Transportation > Safety
Transportation Law > Rail Transportation > Amtrak               Appliance Act > Couplers
Transportation Law > Rail Transportation > Rates &              [HN3] See 45 U.S.C.S. § 541.
Tariffs
[HN1] The Rail Passenger Service Act of 1970 (the Act),
45 U.S.C.S. § 501 et seq., established the National             Governments > Legislation > Interpretation
Railroad Passenger Corporation, a private, for-profit           [HN4] Absent some clear indication that the legislature
corporation that has come to be known as Amtrak. The            intends to bind itself contractually, the presumption is
corporation is not "an agency or establishment" of the          that a law is not intended to create private contractual or
government but is authorized by the government to               vested rights but merely declares a policy to be pursued
operate or contract for the operation of intercity rail         until the legislature shall ordain otherwise. This
passenger service. The Act outlined a procedure under           well-established presumption is grounded in the
which private railroads could obtain relief from their          elementary proposition that the principal function of a
passenger-service obligations by transferring those             legislature is not to make contracts, but to make laws that
responsibilities to Amtrak; the Act authorized the new          establish the policy of the state. Thus, the party asserting
corporation to enter into standardized contracts with the       the creation of a contract must overcome this
private railroads, under which a railroad would be              well-founded presumption, and the court proceeds
relieved of all its responsibilities as a common carrier of     cautiously both in identifying a contract within the
passengers by rail in intercity rail passenger service under    language of a regulatory statute and in defining the
Subtitle IV of Title 49 or any state or other law relating to   contours of any contractual obligation.
the provision of intercity passenger service. 45 U.S.C.S. §
561(a)(1).
                                                                Governments > Legislation > Interpretation
                                                                [HN5] In determining whether a particular statute gives
Transportation Law > Carrier Duties & Liabilities >             rise to a contractual obligation, it is of first importance to
Duty to Provide Service                                         examine the language of the statute. Where the claim is
Transportation Law > Rail Transportation >                      that the state's policy embodied in a statute is to bind its
Abandonment                                                     instrumentalities by contract, the cardinal inquiry is as to
Transportation Law > Rail Transportation > Amtrak               the terms of the statute supposed to create such a
[HN2] To obtain relief from their common carrier                contract. If it provides for the execution of a written
obligations, the railroads had to agree to several              contract on behalf of the state the case for an obligation
conditions in the Rail Passenger Service Act of 1970 (the       binding upon the state is clear. But absent an adequate
Act), 45 U.S.C.S. § 501 et seq. First, in consideration of      expression of an actual intent of the state to bind itself,
being relieved of this responsibility, a railroad was to pay    the court will not lightly construe that which is
Amtrak an amount equal to one-half of that railroad's           undoubtedly a scheme of public regulation to be, in
financial losses from intercity passenger service during        addition, a private contract to which the state is a party.
1969. 45 U.S.C.S. § 561(a)(2). Participating railroads
also were to provide Amtrak with the use of tracks, other
                                                                Contracts Law > Formation > Tender & Delivery
facilities, and services at rates to be agreed upon by the
                                                                Transportation Law > Carrier Duties & Liabilities >
parties or, in the event of disagreement, to be set by the
                                                                Duty to Provide Service
Interstate Commerce Commission. 45 U.S.C.S. §§ 561,
                                                                Transportation Law > Rail Transportation > Amtrak
562. The Act also includes a labor protection provision
                                                                [HN6] 45 U.S.C.S. § 501 et seq., expressly established
requiring the railroads to provide fair and equitable
                                                                the National Railroad Passenger Corporation as a
arrangements to protect the interests of employees
                                                                nongovernmental entity, 45 U.S.C.S. § 541, and it used
affected by discontinuances of intercity rail passenger
                                                                                                                     Page 3
                                           470 U.S. 451, *; 105 S. Ct. 1441, **;
                                        84 L. Ed. 2d 432, ***; 1985 U.S. LEXIS 65

the term "contract" not to define the relationship of the       their dependents, held constitutional.
United States to the railroads, but instead that of the new,
nongovernmental corporation to the railroads. The statute       SUMMARY:
states clearly that the Corporation is authorized to
contract and, upon written request therefor from a                   These cases presented the question whether 405(f) of
railroad, shall tender a contract. 45 U.S.C.S. § 561(a), and    the Rail Passenger Service Act (45 USCS 565(f)),
that, upon its entering into a valid contract, the railroad     requiring that private railroads reimburse Amtrak for rail
shall be relieved of all its responsibilities.                  travel privileges that Amtrak provides to the railroads'
                                                                employees and former employees, and their dependents,
                                                                violates the due process clause of the Fifth Amendment.
Constitutional Law > Congressional Duties & Powers >            In an action by five railroads against Amtrak, in which
Contracts Clause > General Overview                             the United States intervened as a defendant, the United
Constitutional Law > Bill of Rights > Fundamental               States District Court for the Northern District of Illinois
Rights > Procedural Due Process > General Overview              granted summary judgment in favor of Amtrak and the
[HN7] To prevail on a claim that federal economic               United States, ruling that the Rail Passenger Service Act
legislation unconstitutionally impairs a private                (45 USCS 501 et seq.) which relieved participating
contractual     right,   the     party    complaining      of   railroads of the obligation to provide intercity passenger
unconstitutionality has the burden of demonstrating, first,     service, did not constitute a contract between the United
that the statute alters contractual rights or obligations. If   States and the railroads and that, therefore, 405(f) did not
an impairment is found, the reviewing court next                impair an obligation of the United States under a contract,
determines whether the impairment is of constitutional          nor any private contractual obligations between the
dimension. If the alteration of contractual obligations is      railroads and Amtrak (577 F Supp 1046). The United
minimal, the inquiry may end at this stage, if the              States Court of Appeals for the Seventh District affirmed
impairment is substantial, a court must look more closely       in part and reversed in part, holding that the railroads
at the legislation. When the contract is a private one, and     could be compelled to reimburse Amtrak for the
when the impairing statute is a federal one, this next          incremental cost of carrying the pass riders, but that the
inquiry is especially limited, and the judicial scrutiny        reimbursement scheme in the 1979 and 1981
quite minimal. The party asserting a Fifth Amendment            amendments to the Act requiring the railroads to pay
due process violation must overcome a presumption of            more than the incremental cost violated the due process
constitutionality and establish that the legislature has        clause by unreasonably and illegally impairing the rights
acted in an arbitrary and irrational way.                       of the railroads under the Basic Agreements with Amtrak
                                                                (723 F2d 1298).
Constitutional Law > Congressional Duties & Powers >                 On appeal by Amtrak and cross appeal by the
Contracts Clause > General Overview                             railroads, the United States Supreme Court reversed
Constitutional Law > Bill of Rights > Fundamental               insofar as the Court of Appeals ruled that the 1979 and
Rights > Procedural Due Process > Scope of Protection           1981 amendments to the Act contravened the due process
[HN8] Under the Fifth Amendment's Due Process                   clause. In an opinion by Marshall, J., expressing the
Clause, Congress remains free to adjust the burdens and         unanimous view of the eight participating members of the
benefits of economic life, as long as it did so in a manner     court, it was held that 405(f) is constitutional, and that
that was neither arbitrary nor irrational. Moreover, in the     even if the 1979 and 1981 amendments, by requiring the
determination of whether economic legislation that              payment by the railroads of more than the incremental
substantially alters contractual rights and duties violates     cost of pass privileges, indirectly subsidized Amtrak
due process, the burden of proving irrationality rests          operations in violation of a private contractual right, the
squarely on the party asserting a due process violation.        amendments in no respect offend the due process clause.

DECISION:                                                           Powell, J., did not participate.

    Federal statute requiring private railroads to              LAWYERS' EDITION HEADNOTES:
reimburse Amtrak for rail travel privileges that Amtrak
provides to railroads' past and present employees, and
                                                                                                                    Page 4
                                          470 U.S. 451, *; 105 S. Ct. 1441, **;
                                       84 L. Ed. 2d 432, ***; 1985 U.S. LEXIS 65

     CONSTITUTIONAL LAW §212                                   expression of actual intent to create a contract, that which
                                                               is undoubtedly a scheme of public regulation will not
     RAILROADS §6;                                             lightly be construed to be, in addition, a private contract
                                                               to which the state is a party.
     impairment of contracts -- congressional regulation
of railroads -- ;
                                                                    CONSTITUTIONAL LAW §127
    Headnote:[1A][1B][1C][1D]
                                                                    RAILROADS §6;
     The Rail Passenger Service Act (45 USCS 501 et
seq.) establishing the National Railroad Passenger                  impairment of contracts -- by United States --
Corporation (Amtrak), a private corporation authorized to      existence of contract -- ;
contract with private railroads for the operation of
intercity rail passenger service and relieving participating       Headnote:[4]
railroads of that obligation, is a regulatory policy and not
                                                                    The Basic Agreements into which private railroads
a contractual arrangement between the United States and
                                                               entered with the National Railroad Passenger Corporation
the participating railroads; thus, 405(f) of the Act (45
                                                               (Amtrak), a private corporation formed pursuant to the
USCS 565(f)) requiring participating railroads to
                                                               Rail Passenger Service Act (45 USCS 501 et seq.) which
reimburse Amtrak for rail travel privileges provided by
                                                               relieved the railroads of the obligation to provide intercity
Amtrak to the railroads' employees and former employees
                                                               passenger service, do not grant the railroads any
and their dependents violates no contractual obligation of
                                                               contractual rights against the United States, including the
the United States not to impose any passenger service
                                                               right to be free from all obligations to provide intercity
responsibilities on the railroads, and therefore does not
                                                               passenger service.
violate the due process clause of the Fifth Amendment on
that account.
                                                                    CONSTITUTIONAL LAW §127;
     APPEAL §1262;                                                 unconstitutional impairment of contracts -- federal
                                                               economic legislation -- burden of proof -- ;
    jurisdiction of Supreme Court -- cross appeal -- ;
                                                                   Headnote:[5]
    Headnote:[2A][2B]
                                                                    To prevail on a claim that federal economic
     On an appeal to the United States Supreme Court
                                                               legislation unconstitutionally impairs a private
pursuant to 28 USCS 1252 (from a judgment declaring an
                                                               contractual     right,   the     party    complaining      of
act of Congress unconstitutional in an action to which the
                                                               unconstitutionality has the burden of demonstrating, first
United States is a party), cross appellants' filing of a
jurisdictional statement on cross appeal within 30 days of     that the statute alters contractual rights or obligations; if
                                                               an impairment is found, a reviewing court next
their receipt of appellants' jurisdictional statement, as
                                                               determines whether the impairment is of constitutional
required by Supreme Court Rule 12.4, is properly a cross
                                                               dimension, and if the alteration is minimal, the inquiry
appeal over which the Supreme Court has jurisdiction.
                                                               may end at that stage, but if the impairment is substantial,
                                                               a court must look more closely at the legislation; when
     CONSTITUTIONAL LAW §125;                                  the contract is a private one, and when the impairing
                                                               statute is a federal one, this inquiry is especially limited,
    impairment of contracts -- statute -- regulation -- ;      and judicial scrutiny quite minimal; the party asserting a
                                                               Fifth Amendment due process violation must overcome a
    Headnote:[3]                                               presumption of constitutionality and establish that the
                                                               Legislature has acted in an arbitrary and irrational way.
    In determining whether a particular statute gives rise
to a contractual obligation subject to unconstitutional
impairment, it is of first importance to examine the                CONSTITUTIONAL LAW §212
language of the statute and, absent an adequate
                                                                                                                  Page 5
                                         470 U.S. 451, *; 105 S. Ct. 1441, **;
                                      84 L. Ed. 2d 432, ***; 1985 U.S. LEXIS 65

     RAILROADS §6;                                           cost to Amtrak--as the proper reimbursement amount.

    impairment of contracts -- reimbursement of Amtrak       SYLLABUS
by private railroads -- ;
                                                                   The Rail Passenger Service Act of 1970 (Act or
    Headnote:[6A][6B][6C]                                    RPSA) was enacted in an attempt to revive the failing
                                                             intercity passenger train industry. For this purpose the
     The 1979 and 1981 amendments to 405(f) of the Rail      Act established the National Railroad Passenger
Passenger Service Act (45 USCS 565(f)) requiring             Corporation (Amtrak), a private, for-profit corporation,
private railroads to reimburse the National Railroad         authorized to operate, or contract with private railroads
Passenger Corporation (Amtrak) for rail travel privileges    for the operation of, intercity rail passenger service. Most
Amtrak provides to the railroads' employees and former       private railroads offering such service entered into "Basic
employees, and their dependents, do not impair any           Agreements" with Amtrak, and thereby, as provided by
private contractual right the railroads obtained under the   the Act, shed their intercity rail passenger obligations.
Basic Agreements with Amtrak, which only relieved the        Section 7.5 of each Basic Agreement, which concerned
railroads of all pre-existing obligations to provide         railroad employees' privileges to travel on Amtrak trains
intercity passenger service.                                 for free or at reduced fares, gave Amtrak discretion to
                                                             determine such privileges. When a controversy arose
     CONSTITUTIONAL LAW §641                                 over Amtrak's decision to cut back on these privileges,
                                                             Congress in 1972 added § 405(f) to the RPSA to restore
     RAILROADS §6;                                           the privileges as they existed when Amtrak took over
                                                             passenger rail service in 1971. But § 405(f) also required
    reimbursement of Amtrak by private railroads -- due      the railroads to pay, at a reimbursement rate determined
process -- ;                                                 by the Interstate Commerce Commission, for such costs
                                                             as might be incurred by Amtrak in providing for the pass
    Headnote:[7A][7B][7C][7D]                                privileges. In 1979, Congress decided that the ICC's
                                                             reimbursement rate resulted in inadequate compensation
     Even if the 1979 and 1981 amendments to 405(f) of
                                                             to Amtrak, and accordingly amended § 405(f) to require
the Rail Passenger Service Act (45 USCS 565(f)), by
                                                             the railroads to reimburse Amtrak for pass-rider service at
requiring private railroads to pay the National Railroad
                                                             the rate of "25 percent of the systemwide average
Passenger Corporation (Amtrak) more than the
                                                             monthly yield per revenue passenger mile" for two years.
incremental cost of pass privileges provided by Amtrak to
                                                             In 1981, § 405(f) was again amended to provide that the
employees and former employees of the railroads, and
                                                             25 percent reimbursement requirement remain in effect
their dependents, indirectly subsidized Amtrak in
                                                             indefinitely. Five railroads filed suit against Amtrak in
violation of private contractual rights under the Basic
                                                             Federal District Court, challenging the constitutionality
Agreements between the railroads and Amtrak relieving
                                                             of § 405(f) on the grounds that the reimbursement
the railroads of pre-existing obligations to furnish
                                                             requirement violated the Due Process Clause of the Fifth
intercity passenger service, the amendments in no respect
                                                             Amendment. The United States intervened in the suit as
offend the due process clause; in passing 405(f),
                                                             a defendant. The District Court granted summary
Congress rationally required Amtrak to honor the
                                                             judgment in favor of Amtrak and the United States,
expectations of the railroads' past and present employees
                                                             holding that the Act did not constitute a contract between
and their dependents in order to maintain employee
                                                             the United States and the railroads, that therefore § 405(f)
morale and labor peace, and it rationally required the
                                                             did not impair an obligation of the United States under a
railroads to pay at least a portion of the cost of the
                                                             contract, and that moreover § 405(f) did not impair the
privileges both because the railroads were responsible for
                                                             Basic Agreements. The Court of Appeals affirmed in
the creation of the moral obligation to the railroad
                                                             part and reversed in part, holding that the railroads could
employees and because the railroads benefited from labor
                                                             be compelled to reimburse Amtrak for the incremental
peace and continued employee morale, and after
                                                             cost of carrying the pass riders, but that the "windfall" to
reasonably requiring the railroads to reimburse Amtrak
                                                             Amtrak under the 1979 amendment, whereby the
for benefits received, Congress acted wholly rational in
                                                             railroads were required to pay more than the incremental
selecting the value to the passholders--as opposed to the
                                                                                                                    Page 6
                                          470 U.S. 451, *; 105 S. Ct. 1441, **;
                                       84 L. Ed. 2d 432, ***; 1985 U.S. LEXIS 65

cost, violated the Due Process Clause, because it              appellant in No. 83-1492 and appellee in No. 83-1633.
unreasonably and illegally impaired the railroads' rights      With him on the briefs were William R. Perlik, David R.
under the Basic Agreements.                                    Johnson, and Andrea Timko Sallet.

    Held:                                                      Samuel A. Alito, Jr., argued the cause for the United
                                                               States as appellee under this Court's Rule 10.4 in support
    1. Section 405(f) is constitutional. Pp. 465-479.          of appellant in No. 83-1492 and appellee in No. 83-1633.
                                                               With him on the brief were Solicitor General Lee, Acting
     (a) The RPSA does not constitute a binding                Assistant Attorney General Willard, Leonard Schaitman,
obligation of Congress. Neither the language of the Act        and Al J. Daniel, Jr.
nor the circumstances surrounding its passage manifest
any intent on Congress' part to bind itself contractually to   George A. Platz argued the cause for appellees in No.
the railroads. Pp. 465-470.                                    83-1492 and appellants in No. 83-1633. With him on the
                                                               brief were Howard J. Trienens, Thomas W. Merrill, and
    (b) The Basic Agreements do not grant the railroads        W. A. Brasher.
a contractual right against the United States to be free
from all obligation to provide passenger service. Those        JUDGES: MARSHALL, J., delivered the opinion of the
Agreements are not contracts between the railroads and         Court, in which all other Members joined, except
the United States but simply between the railroads and         POWELL, J., who took no part in the decision of the
Amtrak. Pp. 470-471.                                           cases.
     (c) Section 405(f)'s payment obligation does not
                                                               OPINION BY: MARSHALL
unconstitutionally impair the railroads' private contractual
rights under the Basic Agreements. Those Agreements
                                                               OPINION
relieved the railroads only of common carriage
responsibilities and not of the responsibility to provide           [*453]    [***438]      [**1445]      JUSTICE
their employees with pass privileges, for no state or          MARSHALL delivered the opinion of the Court.
federal law imposed that responsibility on them, as
common carriers, when the Agreements were executed.                   [***LEdHR1A] [1A]The question presented in
It was not until after the Agreements were signed and          these cases is whether Congress violates the Due Process
Amtrak operations were underway, that Congress                 Clause of the Fifth Amendment by requiring private
imposed new obligations on both parties to the                 railroads to reimburse the National Railroad Passenger
Agreements. Pp. 472-475.                                       Corporation (Amtrak) for rail travel privileges that
                                                               Amtrak provides to the railroads' employees and former
     (d) Even if the railroads have a private contractual      employees, and their dependents.
right not to pay more than the incremental cost of the
pass privileges, the Due Process Clause does not limit             I
Congress' power to choose a different reimbursement
scheme. Congress' decision to assess the railroads was             A
rational, and the railroads have not met their burden of
proving irrationality and thus have not proved a due                From the middle of the 19th century, the railroad
process violation. Pp. 475-478.                                passenger coach played a significant and sometimes
                                                               romantic role in American cultural and economic life. By
     2. The railroads have no contractual right to be free     the middle of this century, however, "this time-honored
from the obligation to make any payments to Amtrak,            vehicle" threatened to "take its place in the transportation
even for incremental costs. Nothing in the RPSA or the         museum along with the [*454] stagecoach, the
Basic Agreements suggests that the railroads were              sidewheeler, and the steam locomotive." 1 Whereas in
relieved of the responsibility to reimburse Amtrak for the     1929 about 20,000 intercity trains operated in the
pass privileges in question. Pp. 478-479.                      country, 2 by 1946, there were only about 11,000 such
                                                               passenger trains; by 1971, fewer than 500 passenger
COUNSEL: Paul F. Mickey, Jr., argued the cause for             trains still operated. 3 As cars, buses, and airplanes
                                                                                                                      Page 7
                                       470 U.S. 451, *454; 105 S. Ct. 1441, **1445;
                                   84 L. Ed. 2d 432, ***LEdHR1A; 1985 U.S. LEXIS 65

displaced the passenger railroads, those railroads that                 corporation was to be named "Railpax." The
continued to provide passenger carriage incurred heavy                  corporation instead independently adopted the
and continuing losses. At the same time, as common                      official nickname "Amtrak," which is a
carriers these railroads were bound to continue providing               contraction of "American" and "Track." N. Y.
service until the Interstate Commerce Commission (ICC)                  Times, Apr. 20, 1971, p. 86, col. 7.
or state regulatory authorities relieved them of this                   6 H. R. Rep. No. 91-1580, at 5.
responsibility. Given the tremendous operating losses,                  7      Railroads that chose not to discontinue
many of the remaining handful of railroads operating                    passenger service remained subject to the
passenger coaches sought ICC permission to discontinue                  obligation to provide that service imposed on
passenger train service.                                                common carriers by the Interstate Commerce Act
                                                                        (ICA), 49 U.S. C. §§ 10908 and 10909. Section
        1 Hosmer, Examiner, Report and Recommended                      404 of the RPSA, 45 U.S. C. § 564 (1970 ed.),
        Order, Railroad Passenger Train Deficit, ICC                    declared a 5-year moratorium on the
        Docket No. 31954, p. 69 (1958) (as quoted in G.                 discontinuance of any intercity passenger train by
        Hilton, Amtrak: The National Railroad Passenger                 any railroad that had not transferred its
        Corporation 9 (1980)).                                          responsibilities to Amtrak, but authorized those
        2 P. Dorin, Amtrak: Trains & Travel 14 (1979).                  railroads to seek discontinuances, through the
        3 H. R. Rep. No. 91-1580, pp. 2-3 (1970).                       procedures of the ICA, at the end of the 5-year
                                                                        period. See 49 U.S. C. § 13a (1970 ed.),
     [HN1] The Rail Passenger Service Act of 1970 (Act                  recodified at 49 U.S. C. §§ 10908, 10909. In
or RPSA), 84 Stat. 1327, 45 U.S. C. § 501 et seq. (1970                addition, all railroads remained subject to
ed.), which took effect on May 1, 1971, was Congress'                   common carrier obligations to transport freight.
effort to "revive the failing intercity passenger train                 49 U.S. C. § 10903 et seq.
industry and retain a high-quality rail passenger service               8 The Act originally referred to the common
for the Nation." 4 On concluding [**1446] that a                        carrier obligations under Part I of the ICA, see 84
reorganized and restructured rail passenger system could                Stat. 1328, 1334; that provision of the ICA was
be successful, Congress established the National                        recodified in 1978 as Subtitle IV (§ 10101 et seq.)
[***439] Railroad Passenger Corporation, a private,                     of Title 49, which is entitled "Interstate
for-profit corporation that has come to be known as                     Commerce."
Amtrak. 5 The corporation is not "an agency or
establishment" of the Government but is authorized by                 [HN2] To obtain relief from their common carrier
the Government to operate or [*455] contract for the             obligations, the railroads had to agree to several
operation of intercity rail passenger service. 6 The Act         conditions. First, "[in] consideration of being relieved of
outlined a procedure under which private railroads could         this responsibility," a railroad was to pay Amtrak an
obtain relief from their passenger-service obligations by        amount equal to one-half of that railroad's financial losses
transferring those responsibilities to Amtrak; 7 the Act         from intercity passenger service during 1969. §
authorized the new corporation to enter into standardized        561(a)(2). Participating railroads also were to provide
contracts with the private railroads, under which a              Amtrak with the use of tracks, other facilities, and
railroad would be relieved "of all [its] responsibilities as a   services at rates to be agreed upon by the parties or, in the
common carrier of passengers by rail in intercity rail           event of disagreement, to be set by the ICC. §§ 561, 562.
passenger service under [Subtitle IV of Title 49] or any         The Act also included a labor protection provision
State or other law relating to the provision of intercity        requiring the railroads to "provide fair and equitable
passenger service." 45 U.S. C. § 561(a)(1) (1970 ed.). 8        arrangements to [*456] protect the interests of
                                                                 employees affected by discontinuances of intercity rail
        4 GAO, Comptroller General, Nos. B-196907,               passenger service." § 565(a). Participating railroads were
        CED-80-83, Report to the Congress, How Much              required to enter into "protective arrangements" with
        Should Amtrak Be Reimbursed for Railroad                 their unions, in which the railroads promised to protect
        Employees Using Passes to Ride Its Trains?               dislocated employees and to preserve employee benefits,
        (GAO Report), App. 48.                                   including pension rights and fringe benefits. §§
        5 H. R. Rep. No. 91-1580, at 5. Initially the            565(a)-(e).
                                                                                                                Page 8
                                     470 U.S. 451, *456; 105 S. Ct. 1441, **1446;
                                    84 L. Ed. 2d 432, ***439; 1985 U.S. LEXIS 65

    Finally, in § 301 of the Act, [HN3] 45 U.S. C. § 541    assumed operation, the private railroads often permitted
(1970 ed.), Congress "expressly reserved" its right to       current and retired employees and their dependents to
"repeal, alter or amend this Act at any time."               travel on the employees' home lines for free or at reduced
                                                             rates, and many railroads had reciprocal agreements
     All but five private railroads offering intercity       permitting employees and dependents of other railroads
passenger service took up the option provided by the Act     to travel at reduced rates as well. 10
[***440] and entered into contracts, known as "Basic
Agreements," with Amtrak. 9 The participating railroads             10 See GAO Report, App. 47.
made the required payments to Amtrak and shed their
intercity rail passenger obligations. On May 1, 1971,             At the time Amtrak was created, between 1.4 million
Amtrak began rail passenger service.                         and 2 million rail-travel passes were outstanding. 11
                                                             Exercising its discretion under § 7.5 of the Basic
        9     The five nonparticipating railroads were       Agreements, the corporation decided to confine pass
        Southern Railway Co., Denver & Rio Grande            privileges to employees of the railroads that operated
        Western Railroad, Chicago, Rock Island & Pacific     trains for Amtrak, and to limit those privileges to
        Railroad, Georgia Railroad, and Canadian Pacific     half-rate fares. As a result, all railroad employees lost
        Railway Co.. GAO Report, App. 48.                    their pre-Amtrak access to completely free transportation,
                                                             and employees of some railroads lost their pass privileges
     The Basic Agreements between the railroads and          entirely. Amtrak then was faced with vehement protests
Amtrak mirrored the provisions of the Act. For example,      from the railroads, which continued to operate both
§ 2.1 of each Basic Agreement, entitled "Relief from         freight trains and some passenger service, and which
Responsibility," relieved the signatory railroad "of its     asserted that the withdrawal of free transportation
entire responsibility for the provision of Intercity Rail    privileges for their employees threatened to produce
Passenger Service." [**1447] App. 13. The Agreements         severe labor problems for [***441] them. 12 The
also required the railroads to make services, tracks, and    corporation thereafter restored some, but not all of the
facilities available and to protect employees who would      canceled privileges.
be affected by a discontinuance of passenger service.
                                                                    11 Affidavit of Roger Lewis, App. 40.
     Section 7.5 of each Basic Agreement, entitled                  12 Ibid.
"Transportation Privileges," spelled out the rights of the
railroads and their employees to make use of Amtrak                 [*458] The railroads continued to protest
trains. The fifth paragraph, which concerned the rights of   vigorously the Amtrak decision to cut back pass-rider
railroad employees to travel on Amtrak trains for free or    privileges. They also reaffirmed their concern about
at reduced fares, provided that "[transportation]            employee morale and the possibility of labor strikes if
privileges, if any, with respect to business and personal    privileges were not restored. Congress responded to this
travel of Railroad personnel shall be as [*457]              problem in 1972 by amending the RPSA to restore free or
determined by [Amtrak]." The paragraph did not specify       reduced-rate transportation to all people who had enjoyed
which party was to bear the cost of the transportation.      such privileges when Amtrak took over passenger rail
                                                             service. Pub. L. 92-316, § 8, 86 Stat. 230-231. The new
    Shortly after Amtrak began operation, considerable       § 405(f) of the Act, 45 U.S. C. § 565(f) (1976 ed.) (1972
controversy arose over Amtrak's decision to cut back         amendment), required Amtrak to assure, "to the
employee pass privileges pursuant to the discretion          maximum extent practicable," that all employees and
accorded in this provision. The result of that controversy   dependents who had received free or reduced-rate
has given rise to this action, and we turn to consider the   transportation before Amtrak began operation would
evolution of this dispute.                                   continue to be eligible for such benefits. In their
                                                             Committee Reports, both the Senate and the House
    B                                                        emphasized that railroad employees should not lose their
                                                             longstanding pass privileges -- privileges they had earned
     Since the 1880's, railroad employees and retirees,
                                                             through years of service -- simply on account of the
and their dependents, have been able to ride passenger
                                                             transfer of service to Amtrak. 13 Amtrak implemented
trains for free or at reduced rates. Before Amtrak
                                                             this amendment [**1448] by permitting pass riders to
                                                                                                                  Page 9
                                      470 U.S. 451, *458; 105 S. Ct. 1441, **1448;
                                     84 L. Ed. 2d 432, ***441; 1985 U.S. LEXIS 65

travel free or at half fare depending on the length of an             No. 27194, as amended, Dec. 21, 1972, App.
employee's railroad employment, whether the employee                  23-38 (unamended decision reported at 347 I. C.
was retired, and whether he was traveling on or off the               C. 325 (1972)).
rail lines of his home railroad. 14 In addition, pass riders          16 GAO Report, App. 51.
were eligible for travel on a space-available basis only;             17 723 F.2d 1298, 1300 (CA7 1983).
they were permitted to make reservations only 24 hours
in advance on trains requiring reservations; and they were          In 1979, however, Congress decided that the ICC's
not permitted to use the passes on Amtrak's special trains     reimbursement rate resulted in inadequate compensation
called Metroliners.                                            to Amtrak. Accordingly, in the Amtrak Reorganization
                                                               Act of 1979, Pub. L. 96-73, § 120 (a), 93 Stat. 547
       13 See S. Rep. No. 92-756, pp. 11-12 (1972)             (Reorganization Act), Congress amended the § 405(f)
       ("The Committee believes that employees who             pass-rider provision to require that the railroads
       were entitled to free or reduced-rate transportation    prospectively reimburse Amtrak for pass-rider service at
       before the advent of Amtrak should not lose such        the rate of "25 percent of the systemwide average
       privileges on account of the transfer of passenger      monthly yield per revenue passenger [*460] mile" -- a
       service from the railroads to Amtrak"); see also H.     rate that amounted to approximately one-fourth of the
       R. Rep. No. 92-905, p. 11 (1972).                       normal fare for ticket-buying passengers. The new rate
       14 See GAO Report, App. 53-54.                          was to remain in effect for two years. 18

     The 1972 amendment also required the railroads to                18     After the amendment, Amtrak billed the
pay for "such costs as may be incurred" by Amtrak in                  railroads at rates from .02067 cents to .02343
providing the pass privileges mandated by § 405(f). As                cents per passenger mile. Ibid. In the first 10
the Senate [*459] Committee explained: "Because                       months of operation under the 1979 amendment,
Congress is merely continuing pass policies which the                 the railroads represented to the Court of Appeals
railroads themselves developed, it would appear that the              that they paid the following additional sums:
railroads and not Amtrak should bear the cost, if any." S.            Santa Fe, $ 336,249.82; Burlington Northern, $
Rep. No. 92-756, p. 11 (1972). The amendment did not                  490,344.72; Chesapeake & Ohio and Baltimore &
specify how the costs were to be calculated but did                   Ohio, $ 76,345.34; and Union Pacific, $
provide that the ICC should resolve the issue if Amtrak               287,784.66. Id., at 1300, n. 2. Of course, as the
and the railroads were unable to agree on the amount to               years go by, the number of eligible pass riders
be paid. The matter eventually was referred to the ICC,               declines because of employee and retiree deaths.
which set an interim reimbursement rate based on                      Whereas amendment of the RPSA in 1972 gave
Amtrak's incremental operating costs of providing the                 free or reduced rate transportation to about 2.83
service -- that is, based on the additional cost to Amtrak            million people, in December 1979 only about 1.05
to transport the riders. The initial rate was $ .00079 per            million eligible pass riders remained. GAO
passenger mile. This amount was to be offset by the                   Report, App. 56.
revenue derived from the reduced-rate fares paid by pass
riders riding pursuant to the 1972 amendment. 15 The                 At the same time, Congress also directed the
railroads also were to pay Amtrak [***442] for the             Comptroller General to conduct a study and, "taking into
administrative costs of the program. When the offset           account the value of the services being provided," §
formula was applied, the revenue derived from the              120(b), to make recommendations on the appropriate way
reduced-rate fares always exceeded the payments                to reimburse Amtrak for the cost of providing pass-rider
otherwise due from the railroads. As a result, the             transportation. In 1980, the General Accounting Office
railroads reimbursed Amtrak solely for the pass                submitted a report to Congress that analyzed in detail two
program's administrative costs. 16 From 1972 to 1979,          methods of reimbursement. GAO Report, App. 42-86.
Amtrak collected from the railroads only administrative        The report first considered [**1449] reimbursing
expenses amounting to about $ 500,000 per year. 17             Amtrak for its incremental cost in providing the service,
                                                               and second, for the value to the pass rider of the service
       15 Determination of Cost Reimbursement Under            being provided, which would be less than the fare
       Section 405(f) of the Rail Passenger Service Act,       charged a regular passenger, but which the report
                                                                                                                   Page 10
                                      470 U.S. 451, *460; 105 S. Ct. 1441, **1449;
                                     84 L. Ed. 2d 432, ***442; 1985 U.S. LEXIS 65

otherwise declined to quantify. Neither approach was           right to be free from the responsibility to provide pass
necessarily the correct one, GAO decided: "Amtrak's            privileges. Congress, they claimed, was impairing its
costs to provide transportation to pass riders are             contractual obligation through passage of § 405. Next,
debatable, and we did not find adequate analytical             the railroads claimed that even if the Act itself were not a
evidence to support one position over another or to            contractual obligation, the Basic [*462] Agreements,
recommend a specific means to reimburse Amtrak." Id.,          with identical "relief from responsibility" language, were
at 43. The report therefore concluded that the choice          such a contractual obligation of the United States; that
between the two cost reimbursement formulas was "a             obligation, the railroads asserted, was unconstitutionally
policy decision that the Congress should make," id., at        impaired by the subsequent legislation. Third, they
80; instead of offering an answer, the report simply           argued that, even if no contract existed between the
outlined the available options. Ibid.                          United States and the railroads, the statutory requirement
                                                               that the railroads pay Amtrak for allowing pass riders
     [*461] After receiving the report, Congress again         constituted a deprivation of property without due process.
amended § 405(f) of the Act and provided that the              Finally, the railroads argued that, even if Congress might
25-percent [***443] reimbursement requirement would            constitutionally require the railroads to reimburse Amtrak
remain in effect indefinitely. Pub. L. 97-35, 95 Stat. 697     for the cost of the pass-rider program, the particular
(1981 amendment).                                              reimbursement formula set forth in the 1979 amendment
                                                               exceeded the incremental cost to Amtrak of providing the
    C                                                          service and therefore constituted a deprivation of
                                                               property without due process. After the 1981 amendment
     The cases we consider began in 1980 when five
                                                               was passed, the railroads amended their complaint to
railroads, each of which had taken advantage of the
                                                               make their claims applicable to that amendment as well.
RPSA and discontinued passenger service, filed suit
against Amtrak in the United States District Court for the          The railroads filed a motion for summary judgment,
Northern District of Illinois challenging the                  and Amtrak filed a cross-motion for summary judgment.
constitutionality of § 405(f) of the Act. 19 They argued       The United States then intervened as a defendant under
that the requirement that they reimburse Amtrak for the        28 U.S. C. § 2403 and filed a motion to dismiss or, in the
pass travel of their employees, former employees, and          alternative, for summary judgment. The District Court
dependents violated the Due Process Clause of the Fifth        entered an order [***444] [**1450] granting summary
Amendment.                                                     judgment in favor of Amtrak and the United States. 577
F. Supp. 1046 (1982). It concluded that the Act, as
        19 The five railroads are Atchison, Topeka, and
                                                               amended, did not constitute a contract between the
        Santa Fe Railway Co., Burlington Northern, Inc.,
                                                               United States and the railroads. It then assumed that the
        Chesapeake and Ohio Railway Co., Baltimore and
                                                               Basic Agreements were contracts between the United
        Ohio Railroad Co., and Union Pacific Railroad
                                                               States and the railroads and held that § 405(f) did not
        Co.
                                                               impair that contract. The District Court found that the
     The railroads based this claim on four theories.          Agreements relieved the railroads of their responsibility
First, they claimed they had a contractual right against the   to provide intercity rail service, but that by the railroads'
United States, derived from the RPSA and the Basic             own admission they never had a legal or contractual
Agreements, to be free from the obligation to provide          responsibility to provide free or reduced rate
intercity rail passenger service. They asserted that §         transportation to employees and their families. The court
405(f), which had been added to the Act in 1972,               also observed that the Basic Agreements gave to Amtrak
therefore impaired an obligation of the United States          the discretion to determine what pass privileges, if any,
under this statutory contract because pass privileges          the railroad employees should have.
constituted the "intercity rail passenger service," from
                                                                     [*463] The District Court rejected the railroads'
which the railroads had been relieved of their "entire
                                                               argument that the requirement that they pay for their
responsibility" in the RPSA. Thus, since Congress had
                                                               employees' pass-rider privileges violated due process and
contracted in the RPSA to relieve the railroads of
                                                               ruled that the railroads had not overcome the firmly
intercity rail passenger service, and the railroads had
                                                               established presumption of constitutionality that attaches
fulfilled their obligations under the contract, they had a
                                                                                                                   Page 11
                                       470 U.S. 451, *463; 105 S. Ct. 1441, **1450;
                                      84 L. Ed. 2d 432, ***444; 1985 U.S. LEXIS 65

to legislative Acts "'adjusting the burdens and benefits of             Amtrak and the railroads, or as the railroads
economic life.'" Id., at 1052 (quoting Usery v. Turner                  maintained, a contract to which the United States
Elkhorn Mining Co., 428 U.S. 1, 15 (1976)). Because                    was a party as well.
the legislation at issue was neither arbitrary nor irrational,
the District Court concluded that the reimbursement
requirement of § 405 did not violate due process under
the Turner Elkhorn standard.                                        [***LEdHR2A] [2A]Amtrak appealed to this Court
                                                                 under 28 U.S. C. § 1252, arguing that the reimbursement
     Finally, the court rejected the railroads' argument         formula in § 405(f) is constitutional, and we noted
that Congress' reimbursement formula violated due                probable jurisdiction. 469 U.S. 813 (1984). The railroads
process by requiring the railroads to pay more than the          cross-appealed, contending that any reimbursement
incremental cost to Amtrak of transporting the pass              violates due process. We deferred ruling on whether
riders. "Having determined that the Congress acted               jurisdiction [**1451] over the cross-appeal was proper
constitutionally in requiring the railroads to reimburse         until consideration of the cases on the merits. Ibid. 21
Amtrak for the pass rider service, this court will not
second-guess the legislative branch on its selection of a             [***LEdHR2A] [2B]
particular mathematical formula for reimbursement,
                                                                        21      We now find that jurisdiction over the
absent a showing that the formula was selected in an
                                                                        cross-appeal is proper. The railroads filed their
arbitrary or irrational manner." 577 F.Supp., at 1055. The
                                                                        jurisdictional statement on cross-appeal within 30
court then traced Congress' decisionmaking process to
                                                                        days of their receipt of appellant's jurisdictional
demonstrate that the choice of reimbursement plans was a
                                                                        statement, as required by this Court's Rule 12.4.
rational policy decision, particularly in light of the
                                                                        If the filing was properly a cross-appeal, then this
conclusion in the GAO Report that the reimbursement
                                                                        procedure was jurisdictionally sound. We hold
issue involved a policy choice for Congress.
                                                                        that the filing was properly a cross-appeal.
     The Court of Appeals for the Seventh Circuit
                                                                             Title 28 U.S. C. § 1252 provides that "[any]
affirmed in part and reversed in part. 723 F.2d 1298
                                                                        party may appeal to the Supreme Court from an
(1983). The Court of Appeals rejected most of the
                                                                        interlocutory or final judgment, decree or order of
railroads' arguments and held that the railroads could be
                                                                        any court of the United States . . . holding an Act
compelled to reimburse Amtrak for the incremental cost
                                                                        of Congress unconstitutional in any civil action . .
of carrying the pass riders. The panel held, however, that
                                                                        . to which the United States or any of its agencies
the Basic Agreements provided the railroads with a
                                                                        . . . is a party." In Regan v. Taxation With
contractual right to be free from having to "finance
                                                                        Representation of Washington, 461 U.S. 540, 543,
aspects of [Amtrak] operations that were once part of the
                                                                        n. 3 (1983), this Court ruled that the language of §
railroads' entire responsibility for the provision of
                                                                        1252 was sufficiently broad to encompass the
intercity rail passenger service." Id., at 1302. According
                                                                        cross-appeal, which would not otherwise have
to the Court of Appeals, because the reimbursement
                                                                        been a proper appeal. This reading of § 1252 is
[*464] scheme in the 1979 amendment required the
                                                                        buttressed by the fact that once we have properly
railroads to pay more than the incremental cost to
                                                                        asserted jurisdiction under § 1252, "the whole
Amtrak, these payments supported Amtrak's general
                                                                        case is to come before us." Heckler v. Edwards,
intercity rail passenger service operations, and the statute
                                                                        465 U.S. 870, 879 (1984). Since the railroads
therefore impaired the railroads' right to be free from the
                                                                        correctly filed a cross-appeal in this case, the
responsibility for providing intercity rail passenger
                                                                        procedures for taking a cross-appeal under this
service. The court [***445] ruled that this "windfall" to
                                                                        Court's Rule 12.4 were properly invoked, the
Amtrak violated the Due Process Clause, because it
                                                                        cross-appeal was timely, and we have jurisdiction
unreasonably and illegally impaired the rights of the
                                                                        over the cross-appeal.
railroads under the Basic Agreements. 20
                                                                      [*465] II
        20 The court did not expressly state whether the
        statute impaired a private obligation between                The railroads argue that the RPSA and the Basic
                                                                                                                   Page 12
                                     470 U.S. 451, *465; 105 S. Ct. 1441, **1451;
                                 84 L. Ed. 2d 432, ***LEdHR2A; 1985 U.S. LEXIS 65

Agreements created a contractual obligation on the part       not clearly and unequivocally expressed would be to limit
of the United States not to reimpose any rail passenger       drastically the essential powers of a legislative body.
service responsibilities on those railroads that entered      Indeed, "'[the] continued existence of a government
into Basic Agreements, and that the pass-rider                [**1452] would be of no great value, if by implications
amendments to the Act unconstitutionally impair the           and presumptions, it was disarmed of the powers
"contract" into which the United States entered. Thus,        necessary to accomplish the ends of its creation.'" Keefe
the railroads conclude, the Court of Appeals correctly        v. Clark, 322 U.S. 393, 397 (1944) (quoting Charles
held that the 1979 and 1981 amendments substantially          River Bridge v. Warren Bridge, 11 Pet. 420, 548 (1837)).
impaired their contractual rights and violated due process,   Thus, the party asserting the creation of a contract must
but incorrectly ruled that the 1972 amendment, which          overcome this well-founded presumption, Dodge, supra,
required only that the railroads pay for the incremental      at 79, and we proceed cautiously both in identifying a
cost to Amtrak of the pass riders, was constitutional. In     contract within the language of a regulatory statute and in
making these arguments, the railroads argue first that the    defining the contours of any contractual obligation.
United States entered into a contractual relationship with
the railroads, either through the RPSA or the Basic              [***LEdHR3] [3][HN5] In determining whether a
Agreements, and second that the scope of the contractual      particular statute gives rise to a contractual obligation, "it
agreements encompassed reimbursement for pass-rider           is of first importance to examine the language of the
privileges. But, the railroads assert that, even if their     statute." Dodge v. Board of Education, supra, at 78.See
contractual rights were only private ones with Amtrak,        also Indiana ex rel Anderson v. Brand, supra, at 104
those private contractual agreements created a right to be    ("Where the claim is that the State's policy embodied in a
free from paying for pass-rider privileges. They maintain     statute is to bind its instrumentalities by contract, the
that the 1979 and 1981 amendments, as well as the 1972        cardinal inquiry is as to the terms of the statute supposed
assessment      of     incremental      costs,    therefore   to create such a contract"). "If it provides for the
unconstitutionally impaired those private contractual         execution of a written contract on behalf of the state the
[***446] rights. We consider, and reject, each of these       case for an obligation binding upon the state is clear."
arguments in turn.                                            302 U.S., at 78 (emphasis supplied). But absent "an
                                                              adequate expression of [*467] an actual intent" of the
    A                                                         State to bind itself, Wisconsin & Michigan R. Co. v.
                                                              Powers, 191 U.S. 379, 386-387 (1903), this Court simply
  [***LEdHR1A] [1B]The first question we address is           will not lightly construe that which is undoubtedly a
whether the RPSA constituted not merely a regulatory          scheme of public regulation to be, in addition, a private
policy but also a contractual arrangement between the         contract to which the State is a party.
United States and the railroads that entered into Basic
Agreements. [HN4] For many decades, this Court has                 The language of the RPSA discloses [***447]
maintained that absent some clear indication [*466] that      absolutely no congressional intention to have the United
the legislature intends to bind itself contractually, the     States enter into a private contractual arrangement with
presumption is that "a law is not intended to create          the railroads. By its terms, the Act does not create or
private contractual or vested rights but merely declares a    speak of a contract between the United States and the
policy to be pursued until the legislature shall ordain       railroads, and it does not in any respect provide for the
otherwise." Dodge v. Board of Education, 302 U.S. 74,         execution of a written contract on behalf of the United
79 (1937).See also Rector of Christ Church v. County of       States. [HN6] Quite to the contrary, the Act expressly
Philadelphia, 24 How. 300, 302 (1861) ("Such an               established the National Railroad Passenger Corporation
interpretation is not to be favored").                 This   as a nongovernmental entity, 45 U.S. C. § 541, and it
well-established presumption is grounded in the               used the term "contract" not to define the relationship of
elementary proposition that the principal function of a       the United States to the railroads, but instead that of the
legislature is not to make contracts, but to make laws that   new, nongovernmental corporation to the railroads. The
establish the policy of the state. Indiana ex rel. Anderson   statute states clearly that "the Corporation is authorized to
v. Brand, 303 U.S. 95, 104-105 (1938). Policies, unlike       contract and, upon written request therefor from a
contracts, are inherently subject to revision and repeal,     railroad, shall tender a contract . . . ," 45 U.S. C. §
and to construe laws as contracts when the obligation is      561(a), and that, "[upon] its entering into a valid contract
                                                                                                                 Page 13
                                      470 U.S. 451, *467; 105 S. Ct. 1441, **1452;
                                     84 L. Ed. 2d 432, ***447; 1985 U.S. LEXIS 65

. . . , the railroad shall be relieved of all its                   This atmosphere of pervasive prior regulation leads
responsibilities. . . ." Ibid. We simply cannot agree with     to several conclusions. For one, Congress would have
the railroads that the frequent usage in a statute of the      struck a profoundly inequitable bargain if, in exchange
language of contract, including the term "contract,"           for the equivalent of a half year's losses, it had entered
evidences an intent to bind the Federal Government             into a binding contract never to impose on the railroads --
contractually. Legislation outlining the terms on which        which would continue to operate their potentially
private parties may execute contracts does not on its own      profitable freight services -- any rail passenger service
constitute a statutory contract, but is instead an             [***448] obligations at all. 23 Congress simply [*469]
articulated policy that, like all policies, is subject to      cannot be presumed to have nonchalantly shed this vitally
revision or repeal. Indeed, lest there be any doubt in these   important governmental power with so little concern for
cases about Congress' will, Congress "expressly                what it would receive in exchange. Cf. United States
reserved" its rights to "repeal, alter, or amend" the Act at   Trust Co. v. New Jersey, 431 U.S. 1, 21-25 (1977)
any time. 45 U.S. C. § 541. This is hardly the language       (considering reserved powers doctrine). Also, the
of contract. 22                                                pervasiveness of the prior regulation in this area suggests
                                                               that absent some affirmative indication to the contrary,
       22     In the Sinking Fund Cases, 99 U.S. 700           the railroads had no legitimate expectation that regulation
       (1879), this Court recognized the effect of these       would cease after 1971. Coupled with the statute's
       few simple words. In that case, railroads               express reservation of the power to repeal, the heavy and
       challenged Congress' amendment of statutes that         longstanding regulation of this area strongly cuts against
       governed their obligations to the Government on         any argument that the statute created binding contractual
       securities issued to aid the initial construction of    rights. Cf. Energy Reserves Group, Inc. v. Kansas Power
       the railways. The Court rejected the argument           & Light Co., 459 U.S. 400, 413 (1983) (discussing
       that the amendment improperly interfered with           implications of pervasive regulation for inquiry into
       vested rights and observed that through the             substantial impairment of a contract).
       language of reservation "Congress not only
       retains, but has given special notice of its                   23 The Act also required the railroads to enter
       intention to retain, full and complete power to                into agreements with the new corporation to
       make such alterations and amendments of the                    provide operational assistance and facilities at
       charter as come within the just scope of legislative           rates to be set by contract (or the ICC in the event
       power." Id., at 720.                                           of disagreement), 45 U.S. C. § 562 (1970 ed.),
                                                                      and to enter into arrangements to protect the
            We also reject the railroads' argument that               interests of employees disadvantaged by the
       this clause reserved only the power to repeal,                 discontinuance of passenger service. § 565(a).
       alter, or amend the National Railroad Passenger                These requirements either were consistent with
       Corporation's corporate charter. The clause                    the railroads' continuing obligations as common
       expressly reserved the right to change "this Act,"             carriers, or easily might have been imposed as
       and we see no ground to support the railroads'                 conditions by the ICC if it granted the railroads'
       attempt to limit this term merely to a single aspect           petition to discontinue rail passenger service. See
       of the Act.                                                    49 U.S. C. §§ 10903(a)(2), 11101. Far from
                                                                      analogous to consideration, these ongoing
       [*468] [**1453] Moreover, the circumstances of                 regulatory obligations further demonstrate that the
the Act's passage belie an intent to contract away                    RPSA was a legislative policy decision, not a
governmental powers. Congress long had regulated the                  private contractual arrangement.
railroads and had compelled them through the ICC to
continue unprofitable service and undertake new service.             The railroads argue nevertheless that the RPSA
Indeed, the huge sums that the railroads insist they paid      created a contractual obligation "closely analogous to the
to Amtrak in "consideration" for the contractual right to      statutory covenant" at issue in United States Trust,
be free from their passenger service obligations               "which this Court held to be a contractual obligation of a
represented just one-half of the annual losses they            State subject to the Contract Clause." Brief for Appellees
suffered in one year under the prior regulatory scheme.        in No. 83-1492, p. 18. Far from recognizing the
                                                                                                                    Page 14
                                        470 U.S. 451, *469; 105 S. Ct. 1441, **1453;
                                       84 L. Ed. 2d 432, ***448; 1985 U.S. LEXIS 65

similarity, we find that the statute at issue in United           with Amtrak grant the railroads a contractual right
States Trust Co. v. New Jersey highlights the difference          against the United States to be free from all obligation to
between the RPSA and a true statutory contract. In                provide passenger service. While there can be no doubt
United States Trust, the Court held that New Jersey could         that the Basic Agreements are contracts, they are
not retroactively alter a statutory bond covenant relied          contracts not between the railroads and the United States
upon by bond purchasers. The covenant in that case was            but simply between the railroads and the
a part of the bistate legislation authorizing the Port            non-governmental corporation, Amtrak. The United
Authority of New York and New Jersey to acquire,                  States was [*471] not a party to the Basic Agreements;
construct, and operate the Hudson & Manhattan Railroad            by their terms, the agreements do not implicate the
and the World Trade Center in New York City. The                  United States. The railroads do not point to any language
statute read in part: "The 2 States covenant and agree            in the RPSA authorizing Amtrak to bargain away any
with each other and with the holders of any affected              portion of Congress' Commerce Clause power, or to act
bonds, as hereinafter defined, that so long as any of such        as the Government's agent and confer upon the railroads
bonds remain [*470] outstanding and unpaid . . . neither          the right to be free of any obligation to provide passenger
the States nor the port authority nor any subsidiary              service, assuming even that Congress could make that
corporation incorporated for any of the purposes of this          delegation. The District Court asserted that the
act will apply any of the rentals, tolls, fares, fees, charges,   Agreements might constitute contracts between the
revenues or reserves, which have been or shall be pledged         United States and the railroads because they granted the
in whole or in part as security for such bonds, for any           railroads relief from their passenger service obligations,
railroad purposes whatsoever other than permitted                 and because only the United States actually could grant
purposes hereinafter set forth." 1962 N. J. Laws, ch. 8, §        such relief. 577 F.Supp., at 1051. But a careful reading
6; 1962 N. Y. Laws, ch. 209, § 6. Resort [**1454] need            of the RPSA indicates that the Act, and not the Basic
not be had to a dictionary or case law to recognize the           Agreements, actually removed that responsibility.
language of contract. The States explicitly bound                 Accordingly, we find unpersuasive the railroads' efforts
themselves in a covenant not to take [***449] certain             to demonstrate that the United States is contractually
actions now or in the future, and the intent to make a            bound, either through the RPSA or the Basic Agreements,
contract was, as a result, not even contested in that case.       not to reimpose any rail passenger service obligations.
Indeed, the Court found that the States had drafted this
language in an effort to invoke the constitutional                     Because, as we have demonstrated, neither the Act
protections of the Contract Clause as security against            nor the Basic Agreements created a contract between
repeal.                                                           railroads and the United States, our focus shifts from a
                                                                  case in which we confront an alleged impairment, by the
     To the contrary, here the statute does not contain a         Government, of its own contractual obligations, to one in
provision in which the United States "[covenants] and             which we face an alleged legislative impairment of a
[agrees]" with anyone to do anything, and in fact the             private contractual right. We therefore have no need to
United States expressly declined to offer assurances              consider whether an allegation of a governmental breach
about future activity when it reserved the right to revoke        of its own contract warrants application of the more
or repeal the Act. We therefore are not persuaded by the          rigorous standard of review that the railroads urge us to
railroads' proffered analogy.                                     [***450] apply. 24 Instead, we turn [**1455] to
                                                                  consider [*472] whether the payment obligation in §
      [***LEdHR1A] [1C]Because neither the language               405(f) of the Act unconstitutionally impairs the private
of the statute nor the circumstances surrounding its              contractual rights of the railroads.
passage manifest any intent on the part of Congress to
bind itself contractually to the railroads, we hold that the             24 This Court once observed:
RPSA does not constitute a binding obligation of
Congress.                                                                    "There is a clear distinction between the
                                                                         power of the Congress to control or interdict the
    B                                                                    contracts of private parties when they interfere
                                                                         with the exercise of its constitutional authority,
     [***LEdHR4] [4]We turn next to consider whether                     and the power of the Congress to alter or
the Basic Agreements into which the railroads entered
                                                                                                                 Page 15
                                       470 U.S. 451, *472; 105 S. Ct. 1441, **1455;
                                      84 L. Ed. 2d 432, ***450; 1985 U.S. LEXIS 65

         repudiate the substance of its own engagements. .            25      When the court reviews state economic
         . . To say that the Congress may withdraw or                 legislation the inquiry will not necessarily be the
         ignore that pledge is to assume that the                     same. As we made clear in Pension Benefit
         Constitution contemplates a vain promise, a                  Guaranty Corporation v. R. A. Gray & Co., 467
         pledge having no other sanction than the pleasure            U.S., at 732-733, we have never held that the
         and convenience of the pledgor. This Court has               principles embodied in the Fifth Amendment's
         given no sanction to such a conception of the                due process guarantee are coextensive with the
         obligations of our Government." Perry v. United              prohibitions against state impairment of contracts
         States, 294 U.S. 330, 350-351 (1935).                        under the Contract Clause, and, we observed, to
                                                                      the extent the standards differ, a less searching
              Thus, the Court has observed that in order to           inquiry occurs in the review of federal economic
         maintain the credit of public debtors, see Lynch v.          legislation. See also n. 24, supra (discussing the
         United States, 292 U.S. 571, 580 (1934), and                 standard for reviewing claims of a government's
         because the "State's self-interest is at stake,"             impairment of its own contractual obligations).
         United States Trust Co. v. New Jersey, 431 U.S.
1, 26 (1977), the Government's impairment of its            [*473] [***LEdHR6A] [6A]The starting point for
         own obligations perhaps should be treated             our inquiry is therefore whether the 1979 and 1981
         differently. See also Allied Structural Steel Corp.   pass-rider amendments impaired the private contractual
         v. Spannaus, 438 U.S. 234, 244, n. 15 (1978). It is   rights that the railroads obtained under the Basic
         clear that, where the Government is not a party to    Agreements. 26 [***451] We must first consider what
         the contract at issue, these concerns are not         rights vested in the railroads pursuant to the Basic
         implicated, and there is no reason to argue for a     Agreements and then examine the way in which the 1979
         heightened standard of review.                        and 1981 amendments altered those rights. 27

     C                                                                26       We address first the 1979 and 1981
                                                                      amendments, the issue raised on appeal, and
  [***LEdHR5] [5][HN7] To prevail on a claim that                     postpone to Part III discussion of the 1972
federal economic legislation unconstitutionally impairs a             amendment, the issue raised on cross-appeal.
private contractual right, the party complaining of                   27 The RPSA established that contracts entered
unconstitutionality has the burden of demonstrating, first,           into by the corporation would be governed by the
that the statute alters contractual rights or obligations.            law of the District of Columbia. In the District of
See United States Trust Co. v. New Jersey, 431 U.S., at               Columbia, courts determine as a matter of law
17-21. If an impairment is found, the reviewing court                 whether a contract or its provisions are ambiguous
next determines whether the impairment is of                          -- that is, whether they are reasonably susceptible
constitutional dimension. If the alteration of contractual            of different interpretations. Kass v. William
obligations is minimal, the inquiry may end at this stage,            Norwitz Co., 509 F. Supp. 618, 623-624 (DC
Allied Structural Steel Co. v. Spannaus, 438 U.S. 234,                1980). The Court of Appeals ruled that the Basic
245 (1978); if the impairment is substantial, a court must            Agreement was not ambiguous. 723 F.2d, at
look more closely at the legislation, ibid.; see also Energy          1301. As the following analysis makes clear, we
Reserves Group, Inc., 459 U.S., at 411. When the                      agree.
contract is a private one, and when the impairing statute
is a federal one, this next inquiry is especially limited,             [***LEdHR6A] [6B]The only right that the
and the judicial scrutiny quite minimal. The party             railroads obtained under the Basic Agreements was the
asserting a Fifth Amendment due process violation must         right to be relieved of the pre-existing responsibilities
overcome a presumption of constitutionality and                they had as regulated common carriers. The RPSA
"'establish that the legislature has acted in an arbitrary     expressly permitted the railroads to divest themselves of,
and irrational way.'" Pension Benefit Guaranty                 and authorized Amtrak to assume, all the railroads'
Corporation v. R. A. Gray & Co., 467 U.S. 717, 729             "responsibilities as a common carrier of passengers by
(1984) (quoting Usery v. Turner Elkhorn Mining Co.,            rail in intercity rail passenger service under [Subtitle IV
428 U.S., at 15). 25                                           of Title 49] or any State or other law relating to the
                                                                                                                     Page 16
                                     470 U.S. 451, *473; 105 S. Ct. 1441, **1455;
                                 84 L. Ed. 2d 432, ***LEdHR6A; 1985 U.S. LEXIS 65

provision of intercity rail passenger service." 45 U.S. C.    the reimbursement issue completely open. It was not
§ 561(a)(1) (1970 ed.) (emphasis added). In turn, the          until after the Basic Agreements were signed, and
Basic Agreements relieved the railroads of their "entire       Amtrak operations were under way, that Congress
responsibility for the provision [**1456] of Intercity         decided to impose new obligations on both parties to the
Rail Passenger Service." § 2.1, App. 13. Thus the statute      agreements. We therefore conclude that § 405(f) in no
and the Basic Agreements together relieved the [*474]          respect altered, substantially or otherwise, the railroads'
railroads only of common carriage responsibilities they        existing contractual rights and duties.
had by virtue of federal or state law. Moreover, Amtrak
had no independent authority to relieve the railroads of           D
obligations imposed by Congress, and it is readily
                                                                    The Court of Appeals concluded that, while the
apparent that Congress limited its relief to the previously
                                                               Basic Agreements might not expressly have relieved the
imposed obligation to operate intercity rail passenger
                                                               railroads of the obligation to reimburse Amtrak for pass
trains.
                                                               riders, they did relieve the railroads of all responsibility --
     The railroads do not and could not allege that as         both operational and financial -- for intercity rail
common carriers they ever had the responsibility, by           passenger service. 723 F.2d, at 1302. But because the
statute or regulation, to provide free passes or reduced       railroads were required by the 1979 and 1981
fares for their employees and their dependents. Here, as       amendments to pay Amtrak more than its incremental
in the lower courts, they describe the provision of passes     costs, the court reasoned that some portion of the
as a "gratuitous undertaking, like providing a 'Christmas      railroads' payments might go to cover Amtrak's
turkey.'" 577 F.Supp., at 1051. It plainly is not consistent   operational expenses. In that way, the railroads would
with the nature of relief provided the railroads under the     indirectly be providing the rail passenger service from
Basic Agreements to include, within the scope of the           which they were to have been contractually freed, and
contract, relief from the "gratuitous undertakings" of         Congress' decision to require such payments might
providing free and reduced-fare passes. Nor did the            therefore violate the railroads' contractual right to be free
provision of free or half-fare passes become a                 of the responsibility to provide intercity rail service. The
"responsibility" within the meaning of the statute because     court then considered whether the impairment was
some railroads, although not the parties here, did not         unconstitutional and concluded that Amtrak had failed to
simply offer the passes as noncontractual fringe benefits,     meet its burden of proving that the amendments were
but instead were required to provide passes pursuant to        "paramount to the rights of the railroads under the basic
their collective-bargaining agreements. The Basic              agreement." Id., at 1303. The court held that the 1979 and
Agreements did not purport to relieve the railroads of         1981 amendments "unreasonably and illegally" impaired
their employee obligations under collective-bargaining         the rights of the railroads under the Basic Agreements by
agreements, and in fact the Act expressly required the         indirectly requiring the railroads to help Amtrak finance
railroads to continue to assume their responsibilities         aspects of [**1457] its operations that once were part of
under collective-bargaining agreements. 45 U.S. C. §          the railroads' responsibility. Ibid.
565(b) (1970 ed.) (a railroad shall make provision for
                                                                    Initially, it is far from evident that the railroads have
"the preservation of rights, privileges, and benefits
                                                               a private contractual right to be free from all obligations
(including continuation of pension rights and benefits) to
                                                               [*476] to make financial payments to subsidize Amtrak,
such employees under existing collective-bargaining
                                                               which is the way in which the railroads view any
agreements").
                                                               payments in excess of Amtrak's incremental costs. The
      [***452] [***LEdHR6A] [6C]We therefore find              railroads were unambiguously relieved only of
that the Basic Agreements in no respect relieved the           burdensome intercity rail responsibilities imposed by the
railroads of the "responsibility" to provide their             federal and state common carrier regulatory schemes.
employees with pass privileges, for no state or federal        But even if the Basic Agreements relieved the railroads
law imposed that "responsibility" on them, in connection       of the obligation to subsidize Amtrak, they surely did not
with intercity rail passenger operations, when the             exempt the railroads from financial obligations to Amtrak
contracts were [*475] executed. The Basic Agreements           of other kinds, and the railroads misdirect their attack
did not address this payment obligation but instead left       when they assert a right to be free from subsidizing
                                                                                                                Page 17
                                     470 U.S. 451, *476; 105 S. Ct. 1441, **1457;
                                 84 L. Ed. 2d 432, ***LEdHR6A; 1985 U.S. LEXIS 65

Amtrak. The issue in these cases is not whether the           of the cost of the privileges, both because the railroads,
railroads have a right against subsidizing Amtrak, for        rather than the taxpayers, were responsible for the
here Congress has simply required the railroads to pay for    creation of the moral obligation to the railroad employees
the value of a benefit their employees receive from           and retirees, and because the railroads benefited from
Amtrak. Nothing in the Basic Agreements lifted from the       labor peace and continued employee morale.
railroads the responsibility to pay Amtrak for the
pass-rider privileges it accords their employees,                     [***LEdHR7A] [7C]Similarly, after reasonably
[***453] and nothing gave the railroads a right to special    requiring the railroads to reimburse Amtrak for benefits
privileges in the pricing of Amtrak services. Whether at      received, Congress acted wholly rationally in selecting
some point the amount the railroads are required to pay       the value to the passholders -- as opposed to the cost to
might be so unreasonably high as to constitute a subsidy      Amtrak -- as the proper reimbursement amount, and in
we need not decide, for as we demonstrate infra Congress      settling on the 25-percent figure to quantify the value
acted rationally in setting the value of the pass to the      received. It commissioned a study by the GAO, which
employees. We therefore disagree with the Court of            [**1458] concluded that several different computations
Appeals' conclusion that Congress impaired a private          of cost made sense, and that the selection of no one
contractual right simply by passing amendments that           cost-spreading scheme was more inherently rational or
required the railroads to pay for a service rendered.         fair than any other. App. 80-81. At this point, the
Having reached this conclusion, we of course need not         decision was uniquely one for Congress, which had
consider whether the impairment is substantial.               absolutely no obligation to select the scheme that a court
                                                              later would find to be the fairest, but simply one that was
  [***LEdHR7A] [7A]Even were the Court of Appeals             rational and not arbitrary. Congress [*478] placed a
correct that the railroads have a private contractual right   value on the free passes [***454] that reasonably relates
not to pay more than the incremental cost of the passes,      to the normal fares of the public, and "[we] are unwilling
we disagree with the Court of Appeals' conclusion that        to assess the wisdom of Congress' chosen scheme . . . . It
the Due Process Clause limited Congress' power to             is enough to say that the Act approaches the problem of
choose a different reimbursement scheme in these cases.       cost spreading rationally; whether a [different]
[HN8] Under the Fifth Amendment's Due Process                 cost-spreading scheme would have been wiser or more
Clause, Congress remained free to "'[adjust] the burdens      practical under the circumstances is not a question of
and benefits of economic life,'" as long as it did so in a    constitutional dimension." Turner Elkhorn, supra, at
manner [*477] that was neither arbitrary nor irrational.      18-19. We therefore conclude that the 1979 and 1981
Pension Benefit Guaranty Corporation v. R. A. Gray &          amendments in no respect offend the Due Process Clause.
Co., 467 U.S., at 729 (quoting Usery v. Turner Elkhorn
                                                                   Having concluded that the Basic Agreements
Mining Co., 428 U.S., at 15). Moreover, in the
                                                              relieved the railroads only of the direct and onerous
determination of whether economic legislation that
                                                              responsibilities they had borne as common carriers, and
substantially alters contractual rights and duties violates
due process, the burden of proving irrationality rests        having further concluded that the provision of free and
                                                              partial-fare passes was not among those responsibilities,
squarely on the party asserting a due process violation.
                                                              we conclude that the 1979 and 1981 amendments to the
467 U.S., at 729.When it performed this due process
                                                              Act did not impair private contractual rights acquired by
inquiry, the court below erred both in placing the burden
                                                              the railroads as parties to the Basic Agreements. The
of proof on Amtrak to defend the legislation and in
                                                              amendments imposed new obligations on the railroads
defining the standard of review as rigorously as it did.
                                                              and in no respect infringed the railroads' existing
       [***LEdHR7A] [7B]Had it applied the correct            contractual rights. But even if the payment of more than
standard, the Court of Appeals would have found that the      the incremental cost of pass privileges indirectly
railroads have not met their burden of proof. In passing §    subsidizes Amtrak operations in violation of a private
405(f), Congress rationally required Amtrak to honor the      contractual right, Congress' decision to assess the
expectations of the railroads' past and present employees     railroads is rational and reasoned, and the railroads have
and their dependents. It rationally took this step to         failed to demonstrate a due process violation. We
maintain employee morale and labor peace, and it              therefore reverse the Court of Appeals insofar as it ruled
rationally required the railroads to pay at least a portion   to the contrary.
                                                                                                                Page 18
                                      470 U.S. 451, *478; 105 S. Ct. 1441, **1458;
                                     84 L. Ed. 2d 432, ***454; 1985 U.S. LEXIS 65

III                                                            13 Am Jur 2d, Carriers 24.5 (Supp); 16A Am Jur 2d,
                                                               Constitutional Law 595
     The foregoing analysis a fortiori requires us to reject
the railroads' argument on cross-appeal that they have a       45 USCS 565(f); Constitution, 5th Amendment
contractual right to be free from the obligation to make
any payments to Amtrak, even for incremental costs.            US L Ed Digest, Appeal 1262; Constitutional Law 125,
Absolutely nothing in the RPSA or the Basic Agreements         127, 212, 641; Railroads 6
suggests that the railroads were relieved of the
                                                               L Ed Index to Annos, Carriers; Constitutional Law;
responsibility to reimburse Amtrak for the costs of
                                                               Contracts; Impairment of Contract Obligations;
providing to the railroads' employees [*479] and
                                                               Railroads; United States.
retirees, and their dependents, the free passes that the
railroads had traditionally provided to them.                  ALR Quick Index, Carriers; Due Process of Law; Fifth
                                                               Amendment; Impairment of Contracts; Railroads; United
      IV
                                                               States
           [***LEdHR1A]         [1D]     [***LEdHR7A]
                                                               Federal Quick Index, Carriers; Constitutional Law; Due
[7D]Accordingly we hold that § 405(f) of the RPSA is
                                                               Process of Law; Fifth Amendment; Impairment of
constitutional, and we reverse the Court of Appeals
                                                               Contract Obligations; Railroads; United States
insofar as it held that the 1979 and 1981 amendments to
the Act contravened the Due Process Clause.                    Annotation References:
      It is so ordered.                                        State's exercise of police power as constituting
                                                               impairment of obligation of private contract in violation
    JUSTICE POWELL took no part in the decision of
                                                               of contract clause (Article 1 10, Clause 1) of Federal
these cases.
                                                               Constitution--Supreme Court cases. 57 L. Ed. 2d 1279.
REFERENCES
                                                                                                                     Page 1

                 NORTHEAST BANCORP, INC., ET AL. v. BOARD OF GOVERNORS OF THE
                              FEDERAL RESERVE SYSTEM ET AL.

                                                         No. 84-363

                                   SUPREME COURT OF THE UNITED STATES

                 472 U.S. 159; 105 S. Ct. 2545; 86 L. Ed. 2d 112; 1985 U.S. LEXIS 126; 53 U.S.L.W.
4699

                                                 April 15, 1985, Argued
                                                 June 10, 1985, Decided

PRIOR HISTORY:      CERTIORARI TO THE                           bank holding companies. The board approved the
UNITED STATES COURT OF APPEALS FOR THE                          acquisitions, and the court of appeals affirmed the board's
SECOND CIRCUIT.                                                 orders. On certiorari, the court affirmed, holding that the
                                                                state statutes were the kind contemplated by the Douglas
DISPOSITION:         740 F.2d 203, affirmed.                    Amendment to lift its bar against interstate acquisitions.
                                                                The court further held that the statutes did not violate the
CASE SUMMARY:                                                   Commerce, Compact, or Equal Protection Clauses.

                                                                OUTCOME: The court affirmed the judgment.
PROCEDURAL POSTURE: Petitioner prospective
competitors sought a writ of certiorari to the United           CORE TERMS: acquisition, Douglas Amendment,
States Court of Appeals for the Second Circuit, which           banking, compact, out-of-state, regional, ban, acquire,
upheld orders issued by the Federal Reserve Board               state statutes, region, lift, interstate banking, branch
approving respondent bank holding companies'                    banking, McFadden Act, interstate, approving,
applications for interstate acquisitions.                       commerce, local banks, dormant, specifically authorized,
                                                                interstate bank, legislative history, national banks,
OVERVIEW: Respondents applied to the Federal                    partially, authorize, local concern, political power,
Reserve Board to obtain approval for acquisition of banks       reciprocal, competitors, supremacy
in the New England states other than the ones in which
they were principally located. Petitioners challenged the       LexisNexis(R) Headnotes
applications, contending that the Douglas Amendment to
the Bank Holding Company Act of 1956, 12 U.S.C.S. §
1842(d), did not authorize the proposed interstate
acquisitions. Petitioners also argued that the state statutes
permitting the regional acquisitions, Mass. Gen. Laws           Banking Law > Bank Holding Companies > Regulation
Ann., ch. 167A, § 2 (1984), and 1983 Conn. Pub. Acts            Banking Law > Federal Acts > Bank Holding Company
83-411, violated the Commerce Clause, U.S. Const. art. I,       Act
§ 8, cl. 3, the Compact Clause, U.S. Const. art. I, § 10, cl.   Banking Law > Federal Acts > Financial Institutions
3, and the Equal Protection Clause, U.S. Const. amend.          Regulatory & Interest Rate Control Act
XIV, § 2, by discriminating against non-New England             [HN1] The Bank Holding Company Act (BHCA)
                                                                                                                      Page 2
                                            472 U.S. 159, *; 105 S. Ct. 2545, **;
                                        86 L. Ed. 2d 112, ***; 1985 U.S. LEXIS 126

regulates the acquisition of state and national banks by         provided that the other New England state accords
bank holding companies. The Act generally defines a              equivalent reciprocal privileges to Massachusetts banking
bank as any institution organized under state or federal         organizations. Mass. Gen. Laws Ann., ch. 167A, § 2
law which: (1) accepts deposits that the depositor has a         (1984). Connecticut has adopted a substantially similar
legal right to withdraw on demand, and (2) engages in the        statute. 1983 Conn. Pub. Acts 83-411.
business of making commercial loans. 12 U.S.C.S. §
1841(c). The Act defines a bank holding company as any
                                                                 Administrative Law > Judicial Review > Reviewability >
corporation, partnership, business trust, association, or
                                                                 Standing
similar organization that owns or has control over a bank
                                                                 Banking Law > Federal Acts > Bank Holding Company
or another bank holding company. 12 U.S.C.S. §§
                                                                 Act
1841(a)(1), (b), 12 U.S.C.S. § 1841(a)(5). Before a
                                                                 Mergers & Acquisitions Law > Antitrust > General
company may become a bank holding company, or a
                                                                 Overview
bank holding company may acquire a bank or
                                                                 [HN4] Pursuant to 12 U.S.C.S. § 1848, which provides
substantially all of the assets of a bank, the Act requires it
                                                                 that: any party aggrieved by an order of the Federal
to obtain the approval of the Federal Reserve Board. 12
                                                                 Reserve Board may seek review in a federal court of
U.S.C.S. § 1842.
                                                                 appeals, and § 1850, permits prospective competitors to
                                                                 be aggrieved parties under § 1848.
Banking Law > Federal Acts > Bank Holding Company
Act
                                                                 Antitrust & Trade Law > Industry Regulation >
Banking Law > Federal Acts > Financial Institutions
                                                                 Financial Institutions > General Overview
Regulatory & Interest Rate Control Act
                                                                 Banking Law > Federal Acts > Bank Holding Company
Mergers & Acquisitions Law > General Overview
                                                                 Act
[HN2] The Federal Reserve Board will evaluate the
                                                                 Mergers & Acquisitions Law > General Overview
acquisition of state and national banks by bank holding
                                                                 [HN5] The Douglas Amendment to the Bank Holding
companies for anticompetitive effects, financial and
                                                                 Company Act of 1956 prohibits the Federal Reserve
managerial resources, community needs, and the like. 12
                                                                 Board from approving the application of a bank holding
U.S.C.S. § 1842(c). In addition, The Bank Holding
                                                                 company or a bank located in one state to acquire a bank
Company Act § 3(d), 12 U.S.C.S. § 1842(d), known as
                                                                 located in another state, or substantially all of its assets,
"the Douglas Amendment," prohibits the Board from
                                                                 unless the acquisition is specifically authorized by the
approving an application of a bank holding company or
                                                                 statute laws of the state in which such bank is located, by
bank located in one state to acquire a bank located in
                                                                 language to that effect and not merely by implication. 12
another state, or substantially all of its assets, unless the
                                                                 U.S.C.S. § 1842(d).
acquisition is specifically authorized by the statute laws
of the State in which such bank is located, by language to
that effect and not merely by implication.                       Banking Law > Federal Acts > General Overview
                                                                 Banking Law > Regulatory Agencies > U.S. Federal
                                                                 Reserve Board of Governors
Antitrust & Trade Law > Industry Regulation >
                                                                 [HN6] The Federal Reserve Board is an authoritative
Financial Institutions > General Overview
                                                                 voice on the meaning of a federal banking statute.
Banking Law > Bank Holding Companies > Formation
Business & Corporate Law > Foreign Businesses >
General Overview                                                 Antitrust & Trade Law > Industry Regulation >
[HN3] Massachusetts law specifically provides that an            Financial Institutions > Bank Holding Company Act
out-of-state bank holding company with its principal             Banking Law > Bank Activities > Securities > Nonbank
place of business in one of the other New England States         Banks
(Connecticut, Maine, New Hampshire, Rhode Island, and            Banking Law > Federal Acts > Bank Holding Company
Vermont), which is not directly or indirectly controlled         Act
by another corporation with its principal place of business      [HN7] The broader purposes underlying the Bank
located outside of New England, may establish or acquire         Holding Company Act of 1956 as a whole, 12 U.S.C.S. §
a Massachusetts-based bank or bank holding company,
                                                                                                                   Page 3
                                          472 U.S. 159, *; 105 S. Ct. 2545, **;
                                      86 L. Ed. 2d 112, ***; 1985 U.S. LEXIS 126

1841 et seq., and the Douglas Amendment in particular,         privileges to the enacting state's banking organizations,
12 U.S.C.S. § 1842(d), are to retain local,                    violated the commerce, compact, and equal protection
community-based control over banking.                          clauses of the Federal Constitution by discriminating
                                                               against non-New England out-of-state bank holding
                                                               companies. The Board rejected these arguments and
Banking Law > Bank Holding Companies > General                 approved the applications, and the United States Court of
Overview                                                       Appeals for the Second Circuit, in consolidated review
Banking Law > Federal Acts > Bank Holding Company              proceedings, affirmed (740 F2d 203).
Act
Constitutional Law > Congressional Duties & Powers >                On certiorari, the United States Supreme Court
Commerce Clause > General Overview                             affirmed. In an opinion by Rehnquist, J., expressing the
[HN8] When Congress so chooses, state actions which it         unanimous view of the eight participating members of the
plainly authorizes are invulnerable to constitutional attack   court, it was held (1) that the Connecticut and
under the Commerce Clause, U.S. Const. art. I, § 8, cl. 3.     Massachusetts statutes in question, authorizing interstate
                                                               bank acquisitions on a regional basis, were of the kind
                                                               contemplated by the Douglas Amendment to lift its ban
Constitutional Law > Supremacy Clause > General
                                                               on interstate acquisitions, and (2) that these statutes did
Overview
                                                               not violate the commerce clause, the compact clause, and
[HN9] The application of the Compact Clause is limited
                                                               the equal protection clause of the United States
to agreements that are directed to the formation of any
                                                               Constitution.
combination tending to the increase of political power in
the States, which may encroach upon or interfere with the           O'Connor, J., concurred, expressing the view that
just supremacy of the United States.                           there is no meaningful distinction for equal protection
                                                               clause purposes between the Connecticut and
DECISION:
                                                               Massachusetts statute at issue here and the Alabama
    State statutes authorizing interstate bank acquisitions    statute imposing a substantially lower gross premiums tax
on a regional basis held valid.                                rate on domestic insurance companies than on
                                                               out-of-state insurance companies, at issue in Metropolitan
SUMMARY:                                                       Life Ins. Co. v Ward (1985) 470 U.S. 869, 84 L. Ed. 2d 751,
                                                               105 S. Ct. 1676.
     Three bank holding companies applied to the Federal
Reserve Board to obtain approval for the acquisitions of           Powell, J., did not participate.
banks in New England states other than the ones in which
they were located. Three prospective competitors               LAWYERS' EDITION HEADNOTES:
opposed these proposed acquisitions in proceedings
before the Board on the grounds (1) that the acquisitions           BANKS §3.5;
were not authorized by the Douglas Amendment to the
Bank Holding Company Act of 1956 (12 USCS 1842(d)),                state statutes -- interstate bank acquisitions on
prohibiting the Federal Reserve Board from approving an        regional basis -- validity under Bank Holding Company
application of a bank holding company located in one           Act -- ;
state to acquire a bank located in another state unless the
acquisition "is specifically authorized by the statute laws        Headnote:[1A][1B][1C]
of the state in which such bank is located, by language to
that effect and not merely by implication," and (2) that if        State statutes authorizing interstate bank acquisitions
they were authorized by the Act, the applicable                by bank holding companies on a regional basis are of the
Connecticut and Massachusetts statutes, substantially          kind contemplated by the Douglas Amendment to the
providing that an out-of-state bank holding company with       Bank Holding Company Act of 1956 (12 USCS 1842(d)),
its principal place of business in one of the other New        which prohibits the Federal Reserve Board from
England states may acquire an in-state bank, provided          approving an application of a bank holding company
that the other state accords equivalent reciprocal             located in one state to acquire a bank located in another
                                                                                                                      Page 4
                                           472 U.S. 159, *; 105 S. Ct. 2545, **;
                                       86 L. Ed. 2d 112, ***; 1985 U.S. LEXIS 126

state unless the acquisition is authorized by the statutes of   encroach upon or interfere with the just supremacy of the
the state in which the bank is located; the Amendment's         United States, and these state statutes, which comply with
legislative history indicates that Congress contemplated        the Douglas Amendment to the Bank Holding Company
that some states might partially lift the ban on interstate     Act of 1956 (12 USCS 1842(d)), cannot possibly infringe
banking without opening themselves up to interstate             federal supremacy, and they do not enhance the political
banking from everywhere in the nation, and these state          power of the states within the region at the expense of
statutes are not only consistent with the Amendment's           other states.
anticipation of differing approaches to interstate banking,
but they are also consistent with the broader purposes
                                                                     BANKS §3.5
underlying the Act as a whole and the Douglas
Amendment         in    particular     to   retain     local,        CONSTITUTIONAL LAW §409;
community-based control over banking.
                                                                    equal protection clause -- state statutes -- interstate
                                                                bank acquisitions on regional basis -- ;
       BANKS §3.5
                                                                    Headnote:[4A][4B]
       COMMERCE §113;
                                                                     State statutes authorizing interstate bank acquisitions
    commerce clause -- state statutes -- interstate bank
                                                                by bank holding companies on a regional basis do not
acquisitions on regional basis -- ;
                                                                violate the equal protection clause of the Fourteenth
       Headnote:[2A][2B][2C]                                    Amendment even though the statutes favor out-of-state
                                                                corporations within the region over out-of-state
     State statutes authorizing interstate bank acquisitions    corporations from other parts of the country where the
by bank holding companies on a regional basis do not            states, in enacting these statutes, considered that interstate
violate the commerce clause of the United States                banking on a regional basis combines the beneficial effect
Constitution (art I, 8, cl 3); in this instance, the commerce   of increasing the number of banking competitors with the
power of Congress is not dormant, but has been exercised        need to preserve a close relationship between those in the
by Congress when it enacted the Douglas Amendment to            community who need credit and those who provide
the Bank Holding Company Act of 1956 (12 USCS                   credit, and that acquisition of in-state banks by holding
1842(d)); when Congress so chooses, state actions which         companies headquartered outside the region would
it plainly authorizes are invulnerable to constitutional        threaten the independence of local banking institutions.
attack under the commerce clause.
                                                                SYLLABUS

       BANKS §3.5                                                     The Bank Holding Company Act of 1956 (BHCA)
                                                                requires a bank holding company to obtain the approval
        STATES, TERRITORIES, AND POSSESSIONS                    of the Federal Reserve Board (Board) before it may
§59;                                                            acquire a bank. Section 3(d) of the Act (known as the
                                                                Douglas Amendment) prohibits the Board from
    compact clause -- state statutes -- interstate bank
                                                                approving an application of a bank holding company
acquisitions on regional basis -- ;
                                                                located in one State to acquire a bank located in another
       Headnote:[3A][3B][3C]                                    State unless the acquisition "is specifically authorized by
                                                                the statute laws of the State in which such bank is
     State statutes authorizing interstate bank acquisitions    located, by language to that effect and not merely by
by bank holding companies on a regional basis do not            implication." Substantially similar Connecticut and
violate the compact clause of the United States                 Massachusetts statutes provide that an out-of-state bank
Constitution (art I, 10, cl 3); the application of the          holding company with its principal place of business in
compact clause is limited to agreements that are directed       one of the other New England States may acquire an
to the formation of any combination tending to the              in-state bank, provided that the other State accords
increase of political power in the states which may             equivalent reciprocal privileges to the enacting State's
                                                                                                                     Page 5
                                            472 U.S. 159, *; 105 S. Ct. 2545, **;
                                        86 L. Ed. 2d 112, ***; 1985 U.S. LEXIS 126

banking organizations. Certain bank holding companies            that the state statutes (along with statutes of other New
(respondents here) applied to the Board as out-of-state          England States under petitioners' theory) constitute an
companies for purposes of either the Connecticut or              agreement or compact, "application of the Compact
Massachusetts statute, seeking approval for acquisitions         Clause is limited to agreements that are 'directed to the
of banks located in one or the other of those States.            formation of any combination tending to the increase of
Petitioners, prospective competitors, opposed the                political power in the States, which may encroach upon
proposed acquisitions in proceedings before the Board,           or interfere with the just supremacy of the United
contending that the acquisitions were not authorized by          States.'" New Hampshire v. Maine, 426 U.S. 363, 369,
the Douglas Amendment and that, if they were, the                quoting Virginia v. Tennessee, 148 U.S. 503, 519. In
applicable Connecticut or Massachusetts statute, by              view of the Douglas Amendment, the challenged state
discriminating against non-New England out-of-state              statutes, which comply with the BHCA, cannot possibly
bank holding companies, violated the Commerce,                   infringe federal supremacy. Nor do the state statutes in
Compact, and Equal Protection Clauses of the Federal             question either enhance the political power of the New
Constitution. Rejecting petitioners' contentions, the            England States at the expense of other States or have an
Board approved the applications, and the Court of                impact on the federal structure. Pp. 175-176.
Appeals, in consolidated review proceedings, affirmed.
                                                                      4. The Connecticut and Massachusetts statutes do not
    Held:                                                        violate the Equal Protection Clause. The statutes favor
                                                                 out-of-state corporations within the New England region
     1. The Connecticut and Massachusetts statutes are of        over corporations from other parts of the country.
the kind contemplated by the Douglas Amendment to lift           However, Connecticut and Massachusetts, in enacting
its ban on interstate acquisitions. The Amendment's              their statutes, considered that interstate banking on a
language plainly permits States to lift the federal ban          regional basis combined the beneficial effect of
entirely, and although it does not specifically indicate that    increasing the number of banking competitors with the
a State may partially lift the ban, neither does it              need to preserve a close relationship between those in the
specifically indicate that a State is allowed only the           community who need credit and those who provide
alternatives of leaving the federal ban in place or lifting it   credit, and that acquisition of in-state banks by holding
completely. The Amendment's legislative history                  companies headquartered outside the New England
indicates that Congress intended to allow each State             region would threaten the independence of local banking
flexibility in its approach, contemplating that some             institutions. These concerns meet the traditional rational
States might partially lift the ban on interstate banking        basis for judging equal protection claims. Metropolitan
without opening themselves up to interstate banking from         Life Ins. Co. v. Ward, 470 U.S. 869, distinguished. Pp.
everywhere in the Nation. Moreover, the Connecticut              176-178.
and Massachusetts statutes, by allowing only regional
acquisitions, are consistent with the Amendment's and the        COUNSEL: Stephen M. Shapiro argued the cause for
BHCA's purpose of retaining local, community-based               petitioners. With him on the brief for petitioner Citicorp
control over banking. Pp. 168-173.                               were Ira M. Millstein, Robert L. Stern, James W. Quinn,
                                                                 and Jay N. Fastow. George D. Reycraft, John Boyer,
     2. The Connecticut and Massachusetts statutes do not        Jeffrey Q. Smith, Gregory Scott Mertz, and Joseph
violate the Commerce Clause. Congress' commerce                  Polizzotto filed a brief for petitioners Northeast Bancorp,
power is not dormant here, but has been exercised by             Inc., et al. The named attorneys filed a joint reply brief
enactment of the BHCA and the Douglas Amendment,                 and supplemental memorandum for all petitioners.
authorizing the challenged state statutes. State actions
that Congress plainly authorizes are invulnerable to             Solicitor General Lee argued the cause for the federal
constitutional attack under the Commerce Clause. Pp.             respondent. With him on the brief were Acting Assistant
174-175.                                                         Attorney General Willard, Deputy Solicitor General
                                                                 Wallace, Anthony J. Steinmeyer, and Michael Kimmel.
   3. The challenged state statutes do not violate the           Laurence H. Tribe argued the cause for respondents Bank
Compact Clause, which provides that no State, without            of New England Corp. et al. With him on the briefs were
Congress' consent, shall enter into an agreement or              Bertram M. Kantor, Michael H. Byowitz, Mark A. Weiss,
compact with another State. Even assuming, arguendo,
                                                                                                                  Page 6
                                         472 U.S. 159, *; 105 S. Ct. 2545, **;
                                     86 L. Ed. 2d 112, ***; 1985 U.S. LEXIS 126

Stuart C. Stock, Wilmot T. Pope, and Douglas M. Kraus.       Court, in which all other Members joined except
Francis X. Bellotti, Attorney General, Jamie W. Katz,        POWELL, J., who took no part in the decision of the
Assistant Attorney General, and Thomas R. Kiley, First       case. O'CONNOR, J., filed a concurring opinion, post, p.
Assistant Attorney General, filed a brief for respondent     178.
Commonwealth of Massachusetts. Joseph I. Lieberman,
Attorney General, Elliot F. Gerson, Deputy Attorney          OPINION BY: REHNQUIST
General, and John G. Haines and Jane D. Comerford,
Assistant Attorneys General, filed a brief for respondents   OPINION
State of Connecticut et al. *
                                                                  [*162]    [***117]       [**2547]     JUSTICE
       * Briefs of amici curiae urging reversal were         REHNQUIST delivered the opinion of the Court.
       filed for the State of New York by Robert
       Abrams, Attorney General, Robert Hermann,                     [***LEdHR1A] [1A] [***LEdHR2A] [2A]
       Solicitor General, R. Scott Greathead, First          [***LEdHR3A] [3A]Respondents Bank of New England
       Assistant Attorney General, and Judith T. Kramer      Corporation (BNE), Hartford National Corporation
       and Howard L. Zwickel, Assistant Attorneys            (HNC), and Bank of Boston Corporation (BBC) are bank
       General; for Chase Manhattan Corp. by Joseph A.       holding companies which applied to the Federal Reserve
       Califano, Jr., and Kent T. Stauffer; for the David    Board to obtain approval for the acquisition of banks or
       F. Bolger Revocable Trust by William A. Harvey        bank holding companies in New England States other
       and Edward S. Ellers; for the New York State          than the ones in which they are principally located.
       Bankers Association by John Leferovich, Jr.; for      Petitioners Northeast Bancorp, Inc., Union Trust
       Senator Alphonse D'Amato et al. by J. Robert          Company, and Citicorp opposed these proposed
       Lunney; and for Frank L. Morsani by Dewey R.          acquisitions in proceedings before the Board. The Board
       Villareal, Jr.,                                       approved the acquisitions, and the Court of Appeals for
                                                             the Second Circuit affirmed the orders of the Board.
            Briefs of amici curiae urging affirmance were    Petitioners sought certiorari, contending that the
       filed for the State of Georgia by Michael J.          acquisitions were not authorized by the Bank Holding
       Bowers, Attorney General, James P. Googe, Jr.,        Company Act [**2548] of 1956, 70 Stat. 133, as
       Executive Assistant Attorney General, H. Perry        amended, 12 U.S. C. § 1841 et seq., and [***118] that,
       Michael, First Assistant Attorney General, Verley     if they were authorized by that Act, the state statutes
       J. Spivey, Senior Assistant Attorney General, and     which permitted the acquisitions in each case violated the
       Grace E. Evans, Assistant Attorney General; for       Commerce Clause and the Compact Clause of the United
       Bank of New York Co., Inc., by John L. Warden;        States Constitution. We granted certiorari because of the
       for the Conference of State Bank Supervisors by       importance of these issues, 469 U.S. 810, and we now
       Erwin N. Griswold, James F. Bell, and Arthur E.       affirm.
       Wilmarth, Jr.; for the Council of State
       Governments et al. by Joyce Holmes Benjamin                [HN1] The Bank Holding Company Act (BHCA)
       and Vicki C. Jackson; for Fleet Financial Group,      regulates the acquisition of state and national banks by
       Inc., by Allan B. Taylor, J. Bruce Boisture, Robert   bank holding companies. [*163] The Act generally
       M. Taylor III, and Edward W. Dence, Jr.; and for      defines a bank as any institution organized under state or
       Bob Graham, Governor of Florida, et al. by J.         federal law which "(1) accepts deposits that the depositor
       Thomas Cardwell, Sydney H. McKenzie III, S.           has a legal right to withdraw on demand, and (2) engages
       Craig Kiser, and Carl B. Morstadt.                    in the business of making commercial loans." 12 U.S. C.
                                                             § 1841(c). The Act defines a bank holding company as
            Robert F. Mullen filed a brief for the New       any corporation, partnership, business trust, association,
       York Clearing House Association as amicus             or similar organization that owns or has control over a
       curiae.                                               bank or another bank holding company. §§ 1841(a)(1),
                                                             (b); see § 1841(a)(5). Before a company may become a
                                                             bank holding company, or a bank holding company may
                                                             acquire a bank or substantially all of the assets of a bank,
JUDGES: REHNQUIST, J., delivered the opinion of the          the Act requires it to obtain the approval of the Federal
                                                                                                                   Page 7
                                     472 U.S. 159, *163; 105 S. Ct. 2545, **2548;
                                    86 L. Ed. 2d 112, ***118; 1985 U.S. LEXIS 126

Reserve Board. § 1842.                                         located outside of New England, may establish or acquire
                                                               a Massachusetts-based bank or bank holding company,
     [HN2] The Board will evaluate the proposed                provided that the other New England State accords
transaction for anticompetitive effects, financial and         equivalent reciprocal privileges to Massachusetts banking
managerial resources, community needs, and the like. §         organizations. Mass. Gen. Laws Ann., ch. 167A, § 2
1842(c). In addition, § 3(d) of the Act, 12 U.S. C. §         (West 1984). In June 1983, Connecticut followed suit by
1842(d), known as "the Douglas Amendment," prohibits           adopting [**2549] a substantially similar statute. 1983
the Board from approving an application of a bank              Conn. Pub. Acts 83-411.
holding company or bank located in one State to acquire
a bank located in another State, or substantially all of its        The other New England States have taken different
assets, unless the acquisition "is specifically authorized     courses or have not acted. Rhode Island, in May 1983,
by the statute laws of the State in which such bank is         authorized acquisition of local banks by out-of-state bank
located, by language to that effect and not merely by          holding companies on a reciprocal basis similarly limited
implication." Pursuant to the Douglas Amendment, a             to the New England region, but this geographic limitation
number of States recently have enacted statutes which          will expire on June 30, 1986, after which the
selectively authorize interstate bank acquisitions on a        authorization will extend nationwide subject only to the
regional basis. This case requires us to consider the          reciprocity requirement. R. I. Gen. Laws § 19-30-1 et
validity of these statutes.                                    seq. (Supp. 1984). Since February 1984, Maine has
                                                               permitted banking organizations from all other States to
     From 1956 to 1972, the Douglas Amendment had the          acquire local banks without any [*165] reciprocity
effect of completely barring interstate bank acquisitions      requirement. Me. Rev. Stat. Ann., Tit. 9-B, § 1013
because no State had enacted the requisite authorizing         (Supp. 1984-1985). At the other extreme, New
statute. Beginning in 1972, several States passed statutes     Hampshire and Vermont have not enacted any statute
permitting such acquisitions in limited circumstances or       releasing the Douglas Amendment's ban on interstate
for specialized purposes. For example, Iowa passed a           bank acquisitions.
grandfathering statute which had the effect of permitting
the only out-of-state bank holding company owning an                One predictable effect of the regionally restrictive
Iowa bank to maintain and expand its in-state banking          statutes will apparently be to allow the growth of regional
activities, Iowa Code § 524.1805 (1983); see Iowa              multistate bank holding companies which can compete
Independent Bankers v. Board of Governors, [*164] 167          with the established banking giants in New York,
U. S. App. D. C. 286, 511 F.2d 1288, cert. denied, 423         California, Illinois, and Texas. See 740 F.2d 203, 209,
U.S. 875 (1975); Washington authorized out-of-state            and n. 16 (1984). The Massachusetts and Connecticut
purchasers to acquire failing local banks, Wash. Rev.          statutes have prompted at least 15 other States to consider
Code § 30.04.230(4)(a) (Supp. 1985); and Delaware              legislation which, according to the Federal Reserve
allowed out-of-state bank holding companies to set up          Board, would establish interstate banking regions in all
special purpose banks, such as credit card operations, in      parts of the country. 70 Fed. Res. Bull. 374, 375-376
Delaware so long as they do not compete in other               (1984). At least seven of these States have already
respects with locally controlled full-service banks, Del.      enacted the necessary statutes.
Code Ann., Tit. 5, § 801 et seq. (Supp. 1984).
                                                                   Two months after Connecticut passed its statute,
     Beginning with Massachusetts in December 1982,            BNE applied to the Board for approval of its merger with
several States have [***119] enacted statutes lifting the      respondent CBT Corporation (CBT), a Connecticut bank
Douglas Amendment ban on interstate acquisitions on a          holding company, and thereby to acquire indirectly the
reciprocal basis within their geographic regions. [HN3]        Connecticut Bank and Trust Company, N. A., of
The Massachusetts Act specifically provides that an            Hartford, Connecticut. Soon thereafter HNC applied to
out-of-state bank holding company with its principal           the Board for approval of the acquisition of Arltru Bank
place of business in one of the other New England States       Corporation (Arltru), a Massachusetts bank holding
(Connecticut, Maine, New Hampshire, Rhode Island, and          company which owns the Arlington Trust Company, a
Vermont), which is not directly or indirectly controlled       bank located in Lawrence, Massachusetts. Finally BBC
by another corporation with its principal place of business    applied to the Board for approval of the acquisition of the
                                                                                                                   Page 8
                                     472 U.S. 159, *165; 105 S. Ct. 2545, **2549;
                                    86 L. Ed. 2d 112, ***119; 1985 U.S. LEXIS 126

successor by merger to Colonial Bancorp, Inc., a              holding companies." Id., at 380. This renunciation of
Connecticut bank holding company, by which it would           federal interest eliminated any objection to the statutes
acquire Colonial Bank of Waterbury, Connecticut.              under the Compact Clause or dormant Commerce Clause.

     Citicorp offers financial services to consumers and            [*167] The Board also found nothing in the history
businesses nationally through its bank and nonbank            of the Amendment to suggest that "the states were to be
subsidiaries. In response to the Board's invitation for       permitted only to choose between not allowing
comments from interested persons on these three               out-of-state bank holding companies to enter, and
proposed acquisitions, Citicorp submitted [***120]            allowing completely free entry." Id., at 386. The Board
comments opposing all three of them. Northeast owns           disposed of the equal protection challenge by reasoning
petitioner Union Trust Company, a Connecticut bank that       that the regional restriction in the two statutes was
competes directly with banks owned by CBT, [*166]             "rationally related to an attempt to maintain a banking
HNC, and Colonial. In addition, Bank of New York              system responsive to local needs in New England." Id., at
Corporation has agreed to acquire Northeast if                381. The Board then analyzed the proposed transactions
Connecticut or the United States enacts the necessary         in light of the relevant statutory considerations set out in
enabling legislation. Northeast and Union Trust               12 U.S. C. §§ 1842(c) and 1843(c)(8) and approved the
submitted comments opposing BNE's application to              applications.
acquire CBT.
                                                                   [HN4] Pursuant to 12 U.S. C. § 1848, which
     The petitioners challenged the applications in part on   provides that "[any] party aggrieved by an order of the
the ground that the Douglas Amendment did not                 Board" may seek review in a federal court of appeals, and
authorize them, and in part on the grounds that the           § 1850, which permits prospective competitors to be
Massachusetts      and     Connecticut     statutes,     by   aggrieved parties under § 1848, Citibank, Northeast, and
discriminating against non-New England bank holding           Union Trust petitioned the Court of Appeals for the
companies, violated the Commerce, Compact, and Equal          Second Circuit to review the Board's order approving
Protection Clauses of the Federal Constitution. They          [***121] the BNE-CBT acquisition. Citibank also
claimed, therefore, that the proposed interstate              petitioned for review of the HNC-Arltru acquisition, and
acquisitions were not authorized by valid state statutes as   Northeast and Union Trust were permitted to intervene.
required by the Douglas Amendment. The Board rejected         These petitions were consolidated and the acquisitions
these arguments. It first determined that the BNE-CBT         stayed pending expedited review. Meanwhile, the Board
and BBC-Colonial acquisitions were specifically               stayed its order approving the BBC-Colonial acquisition,
authorized by the Connecticut statute and the HNC-Arltru      and the Court of Appeals consolidated a petition filed by
acquisition was specifically authorized by the                Citicorp for review of that transaction with the two other
Massachusetts statute, and therefore that the Douglas         pending review petitions. The court also permitted BBC,
Amendment would not prevent the Board from approving          BNE, CBT, HNC, the State of Connecticut, and the
any of the three proposed transactions.                       Commonwealth of Massachusetts to intervene. The
                                                              Court of Appeals affirmed the Board's orders approving
     The Board then rejected the constitutional challenge     the three applications in all respects. 740 F.2d 203
to the two state statutes. In doing so, it noted that it      (1984). It agreed with the Board's determination that the
would hold a state statute unconstitutional only if there     Connecticut and Massachusetts statutes satisfied the
was "clear and unequivocal evidence" of its                   terms of the Douglas Amendment, and it then rejected
unconstitutionality. [**2550] 70 Fed. Res. Bull. 353,         challenges to the Board's orders under the Commerce
354 (1984); id., at 376; 70 Fed. Res. Bull. 524, 525-526      Clause, the Compact Clause, and the Equal Protection
(1984). While stating that "the issue is not free from        Clause. The Court of Appeals stayed its mandate [*168]
doubt," it concluded that this standard had not been met.     and ordered that the status quo be maintained pending
70 Fed. Res. Bull, at 376-377. Interpreting the statutory     disposition by this Court.
language and the legislative history of the Douglas
Amendment, it determined that "the Douglas Amendment          The Douglas Amendment
should be read as a renunciation of federal interest in
regulating the interstate acquisition of banks by bank              [***LEdHR1A] [1B][HN5] The Douglas
                                                              Amendment to the BHCA prohibits the Board from
                                                                                                                     Page 9
                                      472 U.S. 159, *168; 105 S. Ct. 2545, **2550;
                                 86 L. Ed. 2d 112, ***LEdHR1A; 1985 U.S. LEXIS 126

approving the application of a bank holding company or a        agree with the Board that the legislative history of the
bank located in one State to acquire a bank located in          Amendment supplies a sufficient indication of Congress'
another State, or substantially all of its assets, unless the   intent.
acquisition "is specifically authorized by the statute laws
of the State in which such bank is located, by language to           At the time of the BHCA, interstate branch banking
that effect and not merely by implication." § 1842(d).          was already prohibited by the McFadden Act. 12 U.S.
Clearly the proposed acquisitions with which we deal in         C. § 36(c). The bank holding company device, however,
this case must be consistent with the Douglas                   had been created to get around this restriction. A holding
Amendment, or they are invalid as a matter of federal           company would purchase banks in different localities
statutory law. If the Massachusetts and Connecticut             both within and without a State, and thereby provide the
statutes allowing regional acquisitions are not the type of     equivalent of branch banking. One of the major purposes
state statutes contemplated by the Douglas Amendment,           of the BHCA was to eliminate this loophole. H. R. Rep.
they would not lift the ban imposed by the general              No. 609, 84th Cong., 1st Sess., 2-6 (1955); 101 Cong.
prohibition of the Douglas Amendment. While petitioners         Rec. 4407 (1955) (remarks of Rep. Wier); id., at
blend together arguments about the meaning of the               8028-8029 (remarks of Rep. Patman); 102 Cong. Rec.
Douglas Amendment with arguments about the effect of            6858-6859 (1956) (remarks of Sen. Douglas). As enacted
the Commerce Clause, U.S. Const., Art. I, § 8, cl. 3, we        by the House in 1955, the BHCA contained a flat ban on
think the contentions are best treated separately.              interstate bank acquisitions. The legislative history from
                                                                the House makes it clear that the policies of community
     The Board resolved the statutory issue in favor of the     control and local responsiveness of banks inspired this
state statutes, concluding that they were the sort of laws      flat ban. See 101 Cong. Rec. A2454 (1955) (remarks of
contemplated by the Douglas Amendment. [HN6] While              Rep. Wier); id., at 8030-8031 (remarks of Rep. Rains); H.
the Board apparently does not consider itself expert on         R. Rep. No. 609, supra, at 2-6.
any constitutional issues raised, it is [**2551]
nonetheless an authoritative voice on the meaning of a               The Douglas Amendment was added on the floor of
federal banking statute. Securities Industry Assn. v.           the Senate. Its entire legislative history is confined to the
Board of Governors of Federal Reserve System, 468 U.S.          Senate debate. In such circumstances, the comments of
207 (1984). The Board may have applied a higher                 individual [*170] legislators carry substantial weight,
standard than was necessary when it analyzed the                especially when they reflect a consensus as to the
Douglas Amendment to see whether there was a "clear             meaning and objectives of the proposed legislation
authorization" for selective lifting of the ban, such as the    though not necessarily the wisdom of that legislation.
Massachusetts and Connecticut statutes undertake to do.         The instant case is not a situation where the comments of
Whether or not so stringent a standard was applicable, we       an individual legislator, even a sponsor, is at odds with
think the Board was correct in concluding that it was in        the language of the statute or other traditionally more
fact met in this case.                                          authoritative indicators of legislative intent such as the
                                                                conference or committee reports.
       [*169] The language of the Douglas Amendment
plainly permits States to lift the federal ban entirely, as          The bill reported out by the Senate Committee on
has been done by Maine. It does not specifically indicate       Banking and Currency permitted interstate bank
that a State may partially lift the ban, for example in         acquisitions conditioned only on approval by the Federal
[***122] limited circumstances, for special types of            Reserve Board. This approach apparently was favored by
acquisitions, or for purchasers from a certain geographic       many of the large bank holding companies which sought
region. On the other hand, it also does not specifically        further expansion, see, e. g., Control of Bank Holding
indicate that a State is allowed only two alternatives:         Companies, 1955: Hearings on S. 880 et al. before the
leave the federal ban in place or lift it completely. The       Subcommittee of the Senate Committee on Banking and
Board concluded that the language "does not appear on           Currency, 84th Cong., 1st Sess., 132, 136 (1955)
its face to authorize discrimination" by region or "to meet     (testimony of Ellwood Jenkins, First Bank Stock Corp.),
the stringent test of explicitness laid down by" this Court     298-299 (Baldwin Maull, Marine Midland Corp.), 320
in the dormant Commerce Clause cases. 70 Fed. Res.              (Cameron Thomson, Northwest Bancorporation), cf. 375,
Bull., at 384. We need not resolve this issue because we        385 (Frank N. Belgrano, Jr., Transamerica Corp.), and by
                                                                                                                 Page 10
                                     472 U.S. 159, *170; 105 S. Ct. 2545, **2551;
                                    86 L. Ed. 2d 112, ***122; 1985 U.S. LEXIS 126

some who thought the total ban in the House bill               out-of-State holding companies to acquire banks in other
offensive to States' rights, see 102 Cong. Rec. 6752           States only to the degree that State laws expressly permit
(1956) (remarks of Sen. Robertson, floor manager of            them; and that is the provision of the McFadden Act."
Committee bill, quoting Sen. Maybank).                         Ibid.

    [**2552] The Douglas Amendment was a [***123]                  See id., at 6860.
compromise between the two extremes that also
accommodated the States' rights concern:                            In enacting the McFadden Act in 1927, Congress
                                                               relaxed federal restrictions on branch banking by national
    "Our amendment would prohibit bank holding                 banks, but at the same time subjected them to the same
companies from purchasing banks in other States unless         branching [*172] restrictions imposed by the States on
such purchases by out-of-State holding companies were          state banks. First National Bank v. Walker Bank & Trust
specifically permitted by law in such States." Id., at 6860    Co., 385 U.S. 252, 258 (1966). Congress intended "to
(remarks of Sen. Douglas).                                     leave the question of the desirability of branch banking
                                                               up to the States," ibid., and to permit branch banking by
    Accord, ibid. (remarks of Sen. Bennett in                  national banks "'in only those States the laws of which
opposition to the Amendment).                                  permit branch banking, and only to the extent that the
                                                               State laws permit branch banking.'" Id., at 259 (quoting
     Of central concern to this litigation, the Douglas        Sen. Glass, 76 Cong. Rec. 2511 (1933)). The McFadden
compromise did not simply leave to each State a choice         Act did not offer the States an all-or-nothing choice with
one way or [*171] the other -- either to permit or bar         respect to branch banking. As Senator [***124] Douglas
interstate acquisitions of local banks -- but to allow each    observed, some States had limited intrastate branching by
State flexibility in its approach. Senator Douglas             state banks, and others like Illinois had prohibited it
explained that under his amendment bank holding                altogether.
companies would be permitted to acquire banks in other
States "only to the degree that State laws expressly permit         This variative approach to intrastate branching was
them." Id., at 6858. Petitioners contend that by the           nicely illustrated at the time by the structure in New
phrase "to the degree" Senator Douglas intended merely a       York, which Senator Douglas described as follows: "In
quantitative reference to the number of States which           New York the State is divided into 10 zones. Branch
might lift the ban, and did not mean that a State could        banking is permitted within each of the zones, but a bank
partially lift the ban. Petitioners' contention, however, is   cannot have branches in another zone." 102 Cong. Rec.
refuted by the close analogy drawn by Senator Douglas          6858 (1956). At the same time, Pennsylvania permitted
between his amendment and the McFadden Act, 12 U. S.           branching in contiguous counties. Upper Darby National
C. § 36(c):                                                    Bank v. Myers, 386 Pa. 12, 124 A.2d 116 (1956). In view
                                                               of this analogy to the McFadden Act and Senator
     "The organization of branch banks proceeded very          Douglas' explanation of that Act, there can be no other
rapidly in the 1920's, and to check their growth various       conclusion but that Congress contemplated that some
States passed laws limiting, and in some cases preventing      States might partially lift the ban on interstate banking
it, as in the case of Illinois. National banks had             without opening themselves [**2553] up to interstate
previously been implicitly prohibited from opening             banking from everywhere in the Nation.
branches, and there was a strong movement to remove
this prohibition and completely open up the field for the           Not only are the Massachusetts and Connecticut
national banks. This, however, was not done. Instead, by       statutes consistent with the Douglas Amendment's
the McFadden Act and other measures, national banks            anticipation of differing approaches to interstate banking,
have been permitted to open branches only to the degree        but they are also consistent [HN7] with the broader
permitted by State laws and State authorities.                 purposes underlying the BHCA as a whole and the
                                                               Douglas Amendment in particular to retain local,
    "I may say that what our amendment aims to do is to        community-based control over banking. Faced with
carry over into the field of holding companies the same        growing competition from nonbank financial services that
provisions which already apply for branch banking under        are not confined within state lines, these States sought an
the McFadden Act -- namely, our amendment will permit          alternative that allowed expansion and growth of local
                                                                                                                 Page 11
                                     472 U.S. 159, *173; 105 S. Ct. 2545, **2553;
                                    86 L. Ed. 2d 112, ***124; 1985 U.S. LEXIS 126

[*173] banks without opening their borders to                 this type of economic "Balkanization" into confederations
unimpeded interstate banking. The Connecticut General         of States to the detriment of the welfare of the Union as a
Assembly established a Commission in 1979 to study the        whole. See, e. g., H. P. Hood & Sons, Inc., v. Du Mond,
problem. It concluded:                                        336 U.S. 525, 533 (1949); Hughes v. Oklahoma, 441
U.S. 322, 325-326 (1979); The Federalist Nos. 7 and 22,
     "Both at the national and state levels the philosophy    pp. 62-63, 143-145 (Rossiter ed. 1961). There can be
underlying our structure of bank regulation has been to       little dispute that the dormant Commerce Clause would
promote a pluralistic banking system -- a system              prohibit a group of States from establishing a system of
comprised of many units, rather than a highly                 regional banking by excluding bank holding companies
concentrated system made up of a few large banks. The         from outside the region if Congress had remained
promotion of local ownership and control of banks has as      completely silent on the subject. Lewis v. BT Investment
one of its objectives the preservation of a close             Managers, Inc., 447 U.S. 27, 39-44 (1980). Nor can there
relationship between those in our communities who need        be serious question that an individual State acting entirely
credit and those who provide credit. To allow the control     on its own authority would run afoul of the dormant
of credit that is essential for the health of our state       Commerce Clause if it sought to comprehensively
economy to pass to hands that are not immediately             regulate acquisitions of local banks by out-of-state
responsive to the interests of Connecticut citizens and       holding companies. Sporhase v. Nebraska ex rel.
businesses would not, we believe, serve our state well.       Douglas, 458 U.S. 941 [**2554] (1982).
Similarly, to expose our smaller banks to the rigors of
unlimited competition from large out-of-state banking              But that is not our case. Here the commerce power
organizations -- particularly at a time when deregulation     of Congress is not dormant, but has been exercised by
of banking products at the federal level is already putting   that body when it enacted the Bank Holding Company
strains on the resources of smaller banks -- would not be     Act and the Douglas amendment to the Act. Congress
wise." Report to the General Assembly of the State of         has authorized by the latter amendment the
Connecticut (Jan. 5, 1983), 4 App. in No. 84-4047 (CA2),      Massachusetts and Connecticut statutes which petitioners
pp. 1230, 1240-1241.                                          challenge as violative of the Commerce Clause. [HN8]
                                                              When Congress so chooses, state actions which it plainly
     Rather, the Commission proposed "an experiment in        authorizes are invulnerable to constitutional attack under
regional banking" as a first step toward full interstate      the Commerce Clause. Western & Southern Life
banking which "would afford the legislature an                Insurance Co. v. State Board of Equalization, 451 U.S.
opportunity to make its own calculus of the benefits and      648, 653-654 (1981); White v. Massachusetts Council of
detriments that might result from a broader program of        Construction Employers, Inc., 460 U.S. 204 (1983); cf.
interstate banking." Id., at 1241-1242. The Connecticut       South-Central Timber Development, Inc. v. Wunnicke,
General     Assembly      adopted    the  Commission's        [*175] 467 U.S. 82 (1984). Petitioners' Commerce
recommendations, and we believe that Connecticut's            Clause attack on the challenged acquisitions therefore
approach is precisely what was contemplated [***125]          fails.
by Congress when it adopted the Douglas Amendment.
                                                              Compact Clause
     We hold that the Connecticut and Massachusetts
statutes are of the kind contemplated by the Douglas                 [***LEdHR3A] [3B]Petitioners maintain that the
Amendment to lift its bar against interstate acquisitions.    Massachusetts and Connecticut statutes constitute a
                                                              compact to exclude non-New England banking
[*174] Commerce Clause                                        organizations which violates the Compact Clause, U. S.
                                                              Const., Art. I, § 10, cl. 3, because Congress has not
       [***LEdHR2A] [2B]Petitioners contend that the          specifically approved it. We have some doubt as to
regional limitation in the Massachusetts and Connecticut      whether there is an agreement amounting to a compact.
statutes burdens commerce from without the region while
                                                              The two statutes are similar in that they both require
permitting a free flow of commerce among the States           reciprocity and impose a regional limitation, both
within the region. They provide numerous citations to         legislatures favor the establishment of regional banking
prove that one of the principal purposes of the Framers of    in New England, and there is evidence of cooperation
the Constitution was to break up and forestall precisely
                                                                                                                 Page 12
                                     472 U.S. 159, *175; 105 S. Ct. 2545, **2554;
                                    86 L. Ed. 2d 112, ***126; 1985 U.S. LEXIS 126

[***126] among legislators, officials, bankers, and            supra, at 471, 473.
others in the two States in studying the idea and lobbying
for the statutes. But several of the classic indicia of a      Equal Protection Clause
compact are missing. No joint organization or body has
                                                                      [***LEdHR4A] [4A]Petitioners argued before the
been established to regulate regional banking or for any
                                                               Board and the Court of Appeals that the Massachusetts
other purpose. Neither statute is conditioned on action by
                                                               and Connecticut statutes violated the Equal Protection
the other State, and each State is free to modify or repeal
                                                               Clause, U.S. Const., Amdt. 14, § 2, by excluding bank
its law unilaterally. Most importantly, neither statute
                                                               holding companies from some States while admitting
requires a reciprocation of the regional limitation. Bank
                                                               those from others. This claim was abandoned in their
holding companies based in Maine, which has no
                                                               petition for [***127] certiorari and their briefs on the
regional limitation, and Rhode Island, which will drop
                                                               merits, but after our decision in Metropolitan Life
the regional limitation in 1986, are permitted by the two
                                                               Insurance Co. v. Ward, 470 U.S. 869 (1985), petitioners
statutes to acquire Massachusetts and Connecticut banks.
                                                               filed a supplemental brief urging us to consider the equal
These two States are included in the ostensible compact
                                                               protection issue. Because the issue was fully reviewed by
under petitioners' theory, yet one does not impose the
                                                               the Board and the Court of Appeals and because it would
exclusion to which petitioners so strenuously object and
                                                               undoubtedly [*177] cloud other pending applications for
the other plans to drop it after two years.
                                                               acquisitions by bank holding companies, we elect to
     But even if we were to assume that these state            decide it.
actions constitute an agreement or compact, not every
                                                                    In Metropolitan Life we held that encouraging the
such agreement violates the Compact Clause. Virginia v.
                                                               formation of new domestic insurance companies within a
Tennessee, 148 U.S. 503 (1893).
                                                               State and encouraging capital investment in the State's
     [HN9] "The application of the Compact Clause is           assets and governmental securities were not, standing
limited to agreements that are 'directed to the formation      alone, legitimate state purposes which could permissibly
of any combination tending to the increase of political        be furthered by discriminating against out-of-state
power in [*176] the States, which may encroach upon or         corporations in favor of local corporations. There we
interfere with the just supremacy of the United States.'"      said:
New Hampshire v. Maine, 426 U.S. 363, 369 (1976),
                                                                    "This case does not involve or question, as the
quoting Virginia v. Tennessee, supra, at 519.
                                                               dissent suggests, post, at 900-901, the broad authority of
   See United States Steel Corp. v. Multistate Tax             a State to promote and regulate its own economy. We
Comm'n, 434 U.S. 452, 471 (1978).                              hold only that such regulation may not be accomplished
                                                               by imposing discriminatorily higher taxes on nonresident
     In view of the Douglas Amendment to the BHCA,             corporations solely because they are nonresidents." Id., at
the challenged state statutes which comply with that Act       882, n. 10.
cannot possibly infringe federal supremacy. To the extent
that the state statutes might conflict in a particular              Here the States in question -- Massachusetts and
situation with other federal statutes, such as the provision   Connecticut -- are not favoring local corporations at the
under which the Federal Deposit Insurance Corporation          expense of out-of-state corporations. They are favoring
will arrange for the acquisition of failing banks by           out-of-state corporations domiciled within the New
out-of-state bank holding companies, 12 U.S. C. §             England region over out-of-state corporations from other
1823(f), they would be pre-empted by those statutes, and       parts of the country, and to this extent their laws may be
therefore any Compact Clause argument would be                 said to "discriminate" against the latter. But with respect
academic. Petitioners also assert that the alleged regional    to the business of banking, we do not write on a clean
compact impermissibly offends the sovereignty of sister        slate; recently in Lewis v. BT Investment Managers, Inc.,
States outside of New England. We do not see how the           447 U.S., at 38, we said that "banking and related
statutes in question either enhance the political [**2555]     financial activities are of profound local concern." This
power of the New England States at the expense of other        statement is a recognition of the historical fact that our
States or have an "impact on our federal structure."           country traditionally has favored widely dispersed control
United States Steel Corp. v. Multistate Tax Comm'n,            of banking. While many other western nations are
                                                                                                                    Page 13
                                      472 U.S. 159, *177; 105 S. Ct. 2545, **2555;
                                     86 L. Ed. 2d 112, ***127; 1985 U.S. LEXIS 126

dominated by a handful of centralized banks, we have            that I see no meaningful distinction for Equal Protection
some 15,000 commercial banks attached to a greater or           Clause purposes between the Massachusetts and
lesser degree to the communities in which they are              Connecticut statutes we uphold today and the Alabama
located. The Connecticut legislative Commission that            statute at issue in Metropolitan Life Insurance Co. v.
recommended adoption of the Connecticut statute in              Ward, 470 U.S. 869 (1985).
question considered [*178] interstate banking on a
regional basis to combine the beneficial effect of                     [*179] The Court distinguishes this case from
increasing the number of banking competitors with the           Metropolitan Life on the ground that Massachusetts and
need to preserve a close relationship between those in the      Connecticut favor neighboring out-of-state banks over all
community who need credit and those who provide                 other out-of-state banks. It is not clear to me why
credit. 4 App. in No. 84-4047 (CA2), pp. 1239-1241.             completely barring the banks of 44 States from doing
The debates in the Connecticut Legislature preceding the        business is less discriminatory than Alabama's scheme of
enactment of the Connecticut law evince concern that            taxing the insurance companies from 49 States at a
immediate acquisition of Connecticut banks by holding           slightly higher rate. Nor is it clear why the Equal
companies headquartered outside the New England                 Protection Clause should tolerate a regional "home team"
region would threaten the independence of local banking         when it condemns a state "home team." See id., at 878.
institutions. See, e. g., App. to Pet. for Cert. A157-A160.
                                                                     The Court emphasizes that here we do not write on a
No doubt similar concerns motivated the Massachusetts
                                                                clean slate as the business of banking is "of profound
Legislature.
                                                                local concern." Ante, at 177. The business of insurance is
     We think that the concerns which spurred                   also of uniquely local concern. Prudential Insurance Co.
Massachusetts and Connecticut to enact the statutes here        v. Benjamin, 328 U.S. 408, 415-417 (1946). Both
challenged, different as they are from those which              industries historically have been regulated by the States
motivated the enactment [***128] of the Alabama                 in recognition of the critical part they play in securing the
statute in Metropolitan, meet the traditional rational basis    financial well-being of local citizens and businesses.
for judging equal protection claims under the Fourteenth        Metropolitan Life Insurance Co. v. Ward, supra, at
Amendment. Barry v. Barchi, 443 U.S. 55, 67 (1979);             888-893 (dissenting opinion). States have regulated
Vance v. Bradley, 440 U.S. 93, 97 (1979).                       insurance since 1851. Like the local nature of banking,
                                                                the local nature of insurance is firmly ensconced in
     [**2556] [***LEdHR1A] [1C] [***LEdHR2A]                    federal    law.     470      U.S.,     at   888-889.     The
[2C] [***LEdHR3A] [3C] [***LEdHR4A] [4B]We                      McCarran-Ferguson Act, enacted in 1945, states:
hold that the state statutes here in question comply with
the Douglas Amendment and that they do not violate the               "Congress hereby declares that the continued
Commerce Clause, the Compact Clause, or the Equal               regulation and taxation by the several States of the
Protection Clause of the United States Constitution. The        business of insurance is in the public interest, and that
judgment of the Court of Appeals is therefore                   silence on the part of the Congress shall not be construed
                                                                to impose any barrier to the regulation or taxation of such
    Affirmed.                                                   business by the several States." 59 Stat. 33, 15 U.S. C. §
                                                                1011.
     JUSTICE POWELL took no part in the decision of
this case.                                                           The Court distinguishes the Connecticut and
                                                                Massachusetts banking laws as having a valid purpose:
CONCUR BY: O'CONNOR                                             "to [***129] preserve a close relationship between those
                                                                in the community who need credit and those who provide
CONCUR                                                          credit." Ante, at 178. This interest in preserving local
                                                                institutions responsive to local concerns was a
    JUSTICE O'CONNOR, concurring.                               cornerstone in Alabama's defense of its insurance [*180]
                                                                tax. It survives as one of the "15 additional purposes" the
     I agree that the state banking statutes at issue here do
                                                                Court remanded for reconsideration. Metropolitan Life
not violate the Commerce Clause, the Compact Clause, or
                                                                Insurance Co. v. Ward, supra, at 875-876, n. 5.
the Equal Protection Clause. I write separately to note
                                                                                                               Page 14
                                     472 U.S. 159, *180; 105 S. Ct. 2545, **2556;
                                    86 L. Ed. 2d 112, ***129; 1985 U.S. LEXIS 126

Especially where Congress has sanctioned the barriers to      L Ed Index to Annos, Banks; Equal Protection of the
commerce that fostering of local industries might             Laws
engender, this Court has no authority under the Equal
Protection Clause to invalidate classifications designed to   ALR Quick Index, Banks and Banking; Equal Protection
encourage local businesses because of their special           of Law
contributions. Today's opinion is consistent with the
                                                              Federal Quick Index, Banks; Equal Protection of the
longstanding doctrine that the Equal Protection Clause
                                                              Laws
permits economic regulation that distinguishes between
groups that are legitimately different -- as local                    Annotation References:
institutions so often are -- in ways relevant to the proper
goals of the State.                                           Jurisdiction of United States Courts of Appeals to review
                                                              agency action under 9 of Bank Holding Company Act (12
REFERENCES                                                    USCS 1848). 40 ALR Fed 593.
10 Am Jur 2d, Banks 16, 27; 54 Am Jur 2d, Monopolies,
Restraints of Trade, and Unfair Trade Practices 418 et        Construction and application of Bank Holding Company
seq.                                                          Act provision that application for approval to acquire
                                                              control of bank shall be deemed granted if Federal
4 Federal Procedure, L Ed, Banking and Financing 8:754        Reserve Board does not act on application within 91 days
et seq.                                                       (12 USCS 1842(b)). 38 ALR Fed 913.
12 USCS 1842(d)                                               Who is "party aggrieved" under 9 of Bank Holding
                                                              Company Act (12 USCS 1848), which allows any party
US L Ed Digest, Banks 3.5; Commerce 113;
                                                              aggrieved by Federal Reserve Board order under Act to
Constitutional Law 409; States, Territories, and
                                                              obtain judicial review. 36 ALR Fed 349.
Possessions 59
                                                                                                                     Page 1

                THE PEOPLE, Petitioner, v. BOARD OF SUPERVISORS OF THE COUNTY OF
                                    CALAVERAS et al., Respondents

                                                       Civ. No. 4783

                    COURT OF APPEAL OF CALIFORNIA, THIRD APPELLATE DISTRICT

                              126 Cal. App. 670; 15 P.2d 209; 1932 Cal. App. LEXIS 600

                                                October 7, 1932, Decided

SUBSEQUENT HISTORY:             [***1] A Petition for a         Constitution made lands belonging to the State exempt
Rehearing of this Cause was Denied by the District Court        from taxation. The State argued that Cal. Pol. Code §
of Appeal on November 5, 1932, and an Application by            3408a provided that when the State acquired property and
Respondents to have the Cause Heard in the Supreme              there had been an assessment made against the property
Court, after Judgment in the District Court of Appeal,          which became a lien on the property, the officer who had
was Denied by the Supreme Court on December 2, 1932.            custody of the record of the lien had to cancel the lien
                                                                because the property was now public property that was
PRIOR HISTORY: PROCEEDING in Mandamus to                        exempt from taxation. The court agreed with the State's
compel the Board of Supervisors of Calaveras County to          contention and held that it was the duty of the board to
cancel an assessment of taxes assessed against land             cancel the assessment. The court overruled the demurrer
acquired by the state for park purposes.                        to the petition and issued the writ of mandamus.

DISPOSITION: Peremptory writ granted.                           OUTCOME: The court granted the peremptory writ.

CASE SUMMARY:                                                   CORE TERMS: cancellation, canceled, supervisors,
                                                                county purposes, taxation, acquisition, exempt,
                                                                ownership, levy, writ of mandate, power of taxation,
PROCEDURAL POSTURE: Petitioner, the People of                   exemptions, directing, lands belonging, fiscal year,
the State of California, brought a proceeding against           satisfactory proof, vesting, deeded, levied, lesser, merger,
respondents, the Board of Supervisors of the County of          bare, void, surrendered, complying, prayed
Calveras, to compel the board to cancel an assessment of
taxes made against land acquired by the State for park          LexisNexis(R) Headnotes
purposes.

OVERVIEW: The State of California acquired property
which was encumbered by a tax lien filed by the board of
supervisors of the county. The State filed a petition with      Governments > State & Territorial Governments >
the court to secure a writ of mandamus to order the board       Property
to cancel the assessment made against the property              Tax Law > State & Local Taxes > Personal Property
because the property was exempt from taxation under the         Tax > Exempt Property > General Overview
provisions of Cal. Const. art. XIII, § 1. That section of the   [HN1] Under the provisions of Cal. Const. art. XIII, § 1
                                                                                                                       Page 2
                                          126 Cal. App. 670, *; 15 P.2d 209, **;
                                            1932 Cal. App. LEXIS 600, ***1

lands belonging to the state are exempt from taxation.         (3)                                    Id.--Constitutional
                                                               Law--Exemptions--Cancellation of Assessments. --
                                                               --Section 3804a of the Political Code, which provides
Governments > Local Governments > Administrative               that assessments on land acquired by the state after the
Boards                                                         time a tax or assessment becomes a lien thereon may be
Governments > Local Governments > Finance                      canceled, is not in conflict with section 6 of article XIII
Tax Law > State & Local Taxes > Real Property Tax >            of the Constitution or with section 12 of article XI; and in
Assessment & Valuation > General Overview                      this proceeding, where it was shown that there had been a
[HN2] Cal. Pol. Code § 3408 provides, in part, that when       compliance with section 3804 of the Political Code, the
property is acquired and owned by the state, county, city,     state was entitled to a writ of mandate to compel
etc., and that prior to such ownership there had been an       cancellation of the assessment.
assessment of said property, which at the time of said
assessment became a lien, and which because of such            SYLLABUS
public ownership is not subject to sale for delinquent
taxes, the assessment may, upon satisfactory proof                 The facts are stated in the opinion of the court.
thereof, be canceled by the officer having custody of the
record thereof upon the order of the Board of                  COUNSEL: U. S. Webb, Attorney-General, and Neil
Supervisors, or other governing board with the written         Cunningham      and       Jess    Hession, Deputies
consent of the district attorney, city attorney, or other      Attorney-General, for Petitioner.
legal adviser of said board. Section 3408 further provides
that no cancellation should be made of such charges on         Virgil M. Airola, District Attorney, for Respondents.
property exempt from taxation in event of failure to
comply with this law, if any, relative to manner of            JUDGES: JAMISON, J., pro tem. Plummer, Acting P. J.,
claiming exemptions.                                           and Thompson (R. L.), J., concurred.

                                                               OPINION BY: JAMISON
Real Property Law > Nonmortgage Liens > Tax Liens
Tax Law > State & Local Taxes > Administration &               OPINION
Proceedings > Tax Liens
Tax Law > State & Local Taxes > Personal Property                     [*670] [**209] JAMISON, J., pro tem. This
Tax > Exempt Property > General Overview                       proceeding is based upon a petition for a writ of mandate
[HN3] There has been the enactment of a law providing          requiring the defendants, constituting the Board of
for the cancellation of a lien for taxes attaching prior to    Supervisors, to make an order directing the officer having
the acquisition of the premises by the state. This law is      charge of the records thereof to cancel an assessment of
contained in Cal. Pol. Code § 3804a, and it is not in          taxes assessed against land now [*671] owned by the
violation of the Constitution.                                 state of California, and acquired by it for park purposes.

HEADNOTES                                                           [***2] The said petition sets forth, in substance, the
                                                               following facts: That the above-named defendants are the
CALIFORNIA OFFICIAL REPORTS HEADNOTES                          duly elected and qualified supervisors of said county of
                                                               Calaveras; that the Park Commission is a duly authorized
(1) Taxation--Exemptions--Public Lands. -- --Under             body created by act of the legislature of this state for the
the provisions of section 1 of article XIII of the             purpose, among other purposes, of acquiring real estate
Constitution, lands belonging to the state are exempt          for park purposes; that petitioner is now the owner of,
from taxation.                                                 and ever since the 23d of June, 1931, has been the owner
                                                               of certain lands described in its petition; that said lands
(2) Id.--Assessments--Liens--Public Lands. -- --Where
                                                               were acquired from one Whitesides by deed dated June
the state acquires land for park purposes after the lien for
                                                               24, 1931; that for the fiscal year 1931-32 the county
taxes thereon has attached, the assessment or tax may be
                                                               assessor of said county assessed the said lands for
canceled by complying with the requirements of section
                                                               taxation;
3804 of the Political Code.
                                                                                                                       Page 3
                                       126 Cal. App. 670, *671; 15 P.2d 209, **209;
                                            1932 Cal. App. LEXIS 600, ***2

     That on or about the fifth day of November, 1931,           there had been an assessment of said property, which at
application was made by the said Park Commission to              the time of said assessment became a lien, and which
said Board of Supervisors for the cancellation of said           because of such public ownership is not subject to sale
assessment and levy upon said property for the fiscal year       for delinquent taxes, the assessment may, upon
1931-32; that with said application petitioner presented         satisfactory proof thereof, be canceled by the officer
satisfactory proof to said Board of Supervisors that said        having custody of the record thereof upon the order of the
lands had been deeded to the state of California; that said      Board of Supervisors, or other governing board with the
application for cancellation of said tax was made upon           written consent of the district attorney, city attorney, or
the ground that said property was exempt from taxation           other legal adviser of said [***5] board.
under the provisions [***3] of section 1, article XIII, of
the state Constitution, and that said assessment should be           This section further provides that no cancellation
canceled under the provisions of section 3804a of the            should be made of such charges on property exempt from
Political Code;                                                  taxation in event of failure to comply with this law, if
                                                                 any, relative to manner of claiming exemptions.
     That on June 14, 1932, the attorney-general, acting in
place of the district attorney, under section 470 of the              Respondent relies upon the case of Santa Monica v.
Political Code, gave his consent in writing to the making        Los Angeles County, 15 Cal. App. 710 [115 P. 945, 946].
of [**210] an order by said Board of Supervisors                 In that case there had been assessment of land for county
directing that the said taxes be canceled; that the said         purposes and the lien of said assessment had attached
board has failed and refused to order the cancellation of        before the city acquired ownership. The city paid the
said taxes.                                                      taxes so assessed and then brought suit against the county
                                                                 of Los Angeles. Judgment was rendered in favor of the
     Upon the filing of this petition an alternative writ of     city and upon appeal the court in reversing it used the
mandate was issued directing the said Board of                   following language: "Under the law, counties are
Supervisors to make said order or show cause why the             authorized to levy taxes for certain school and county
same should not be done. Thereupon the said defendants           purposes, and when collected the taxes are so applied;
demurred to said petition upon the ground that it failed to      with reference to such matters the city may not exercise
state facts sufficient to constitute a cause of action and       any right. Plaintiff by its organization as a part of the
warranted the relief prayed for. Defendant also filed a          state government has not been [*673] vested with power
verified answer to the petition in which it is alleged that      to aid the state in connection with county government or
prior to the acquisition of said land by plaintiff, that is to   school government under the control of the county
say, prior to June 23, [*672] 1931, one Whitesides was           authorities. The taxes so levied upon the property were
the owner thereof and had been such owner for many               levied and assessed by the county [***6] for purposes
years, and was such owner when the lien for said tax had         within its jurisdiction. The bare acquisition of the
attached and become fixed. [***4] And upon                       premises upon which the tax levy attached did not carry
information and belief alleged that at the time the owner        with it any interest or estate in the lien therein created for
thereof deeded the said land to plaintiff, the said owner        county purposes. There was, therefore, no vesting of any
obligated himself to pay all taxes and liens then existing       lesser estate, held in the same right or otherwise, through
against said land.                                               which a merger could be said to result. The plaintiff,
                                                                 when it acquired this land, took it subject to the lien for
      (1) It must be conceded that [HN1] under the               county purposes to the same extent as would a private
provisions of section 1 of article XIII of the Constitution      purchaser."
lands belonging to the state are exempt from taxation.
                                                                      No mention is made in said decision of section 3804a
      (2) The question then for determination is whether         of the Political Code.
or not a tax on lands acquired by the state after the lien
for taxes thereon has attached can be canceled by                    As a matter of fact, it was not in existence at that
complying with the requirements of section 3804 of the           time. This decision was rendered March 8, 1911, and the
Political Code. This section of said code [HN2] provides         said section was enacted and became a law on June 8,
in part that when property is acquired and owned by the          1911, but as then enacted it did not contain the provision
state, county, city, etc., and that prior to such ownership      for cancellation hereinbefore set forth, and it was not
                                                                                                                     Page 4
                                       126 Cal. App. 670, *673; 15 P.2d 209, **210;
                                            1932 Cal. App. LEXIS 600, ***6

until the amendment of 1925 that the said provision was              Respondent contends [***8] that this section of the
incorporated in said section.                                   Political Code is in violation of section 6, article XIII, of
                                                                the Constitution and therefore void. This section of the
      (3) Respondent contends that section 3804a of the         Constitution is as follows:
Political Code, in so far as it provides that an assessment
after the time said tax or assessment becomes a lien                "The power of taxation shall never be surrendered by
thereon, shall be canceled, is in conflict with article XIII,   any grant or contract to which the state shall be a party."
section 6, of the Constitution and, also, in conflict [***7]
with article XI, section 12, of said Constitution and               We find nothing in this record indicating that the
therefore void.                                                 power of taxation has been surrendered by the state either
                                                                by grant or contract. The facts before us show that the
    No authorities are cited in support of this contention      power of taxation was exercised, and that by operation of
except City of Santa Monica v. Los Angeles County,              law, it has ceased to be a charge upon the land for the
supra, which does not pass upon this question.                  reason that the land is now the property of the state.

     It is true that article XI, section 12, of the                 We are of the opinion that, upon the showing made
Constitution vests in the county the authority to assess        by petitioner, it was the duty of respondents to order the
and collect taxes for county purposes, and in the instant       cancellation of the said assessment.
case, the assessment was made for county purposes, and
as was held in Santa Monica v. Los Angeles County,                  The demurrer to the petition is overruled.
supra, the bare acquisition by the state of the premises
                                                                    Let the peremptory writ issue as prayed for.
upon which the assessment attached, did not carry with it
any interest or estate in the lien, and therefore there was         Plummer, Acting P. J., and Thompson (R. L.), J.,
no vesting of a lesser estate, held in the same right,          concurred.
through which a merger could result, but since that
decision was rendered [HN3] there has been the                      A petition for a rehearing of this cause was denied by
enactment of a law providing for the cancellation of a          the District Court of Appeal on November 5, 1932, and
[*674] lien for taxes attaching prior to the acquisition of     an application by respondents to have the cause heard in
the premises by the state.                                      the Supreme Court, after judgment in the District Court
                                                                of Appeal, was denied by the Supreme Court on
     This law is contained in section 3804a of the              December 2, [***9] 1932.
Political Code, and if it is not in violation of the
Constitution, then unquestionably [**211] the petitioner
has the right to have the said assessment canceled.
                                                                                                                   Page 1

                   THE RAILROAD TAX CASES; COUNTY OF SAN MATEO v. SOUTHERN
                                        PACIFIC R. CO.

                                              Circuit Court, D. California

                                  13 F. 722; 1882 U.S. App. LEXIS 2045; 8 Sawy. 238

                                                   September 25, 1882

CASE SUMMARY:                                                  protection, natural persons, levied, corporators, deprive,
                                                               mile, state board of equalization, rolling stock, charter,
                                                               constitutional provision, property of individuals, public
PROCEDURAL POSTURE: Plaintiff county sued                      use, prescribed, uniformity, valuation, situated, state
defendant railroad to recover back taxes levied on the         constitutions, road-bed, supposed, railway, void
railroad's property. The railroad demurred alleging that
the taxes violated U.S. Const. amend. XIV because they         LexisNexis(R) Headnotes
were discriminatory and the railroad was not given an
opportunity to contest the assessment.

OVERVIEW: A county assessed taxes against a
railroad's property and sued the railroad to collect and the   Constitutional Law > Equal Protection > Scope of
railroad demurred. The court entered judgment in favor         Protection
of the railroad upon the demurrer and held as follows:         [HN1] Whatever acts may be imputed justly or unjustly
The railroad was a person for U.S. Const. amend. XIV           to the corporations, they are entitled when they enter the
purposes and was entitled to have the same justice meted       tribunals of the nation to have the same justice meted out
out to it as that meted out to the humblest citizen no         to them which is meted out to the humblest citizen. There
matter what acts were attributed to it because of its power    cannot be one law for them and another law for others.
and wealth. Because the tax imposed a different system
of assessment on the railroad than for other persons, the      Constitutional Law > The Judiciary > Jurisdiction >
tax violated the equal protection clause of amend. XIV         Amount in Controversy
and was thus unlawful and could not be collected.              International Trade Law > General Overview
Because the assessment under Cal. Const. art. 13 did not       Tax Law > State & Local Taxes > Administration &
provide for notice and opportunity to be heard on the          Proceedings > General Overview
assessment, the tax procedures violated the due process        [HN2] The power of taxation possessed by a state may be
clause of amend. XIV.                                          exercised upon any subject within her jurisdiction, and to
                                                               any extent not prohibited by the constitution of the
OUTCOME: The court entered judgment in favor of a              United States. It may touch property in every shape, -- in
railroad on its demurrer to a county's suit to collect back    its natural condition, in its manufactured form, and in its
taxes on the railroad's property.                              various transmutations. And the amount of the taxation
                                                               may be determined by the value of the property, or its
CORE TERMS: taxation, railroad, notice, process of             use, or its capacity, or its productiveness. It may touch
law, taxed, guaranty, franchise, mortgage, deprived, equal
                                                                                                                    Page 2
                                      13 F. 722, *; 1882 U.S. App. LEXIS 2045, **;
                                                       8 Sawy. 238

business in the almost infinite forms in which it is           the power to declare war, to make peace, to enter into
conducted, -- in professions, in commerce, in                  treaties of alliance, and to regulate commerce with
manufactures, and in transportation. Unless restrained by      foreign nations. The question in all cases presented to a
provisions of the federal constitution, the power of the       federal court, where complaint is made of a tax levied by
state as to the mode, form, and extent of taxation is          the states, is whether there is any inhibition, express or
unlimited where the subjects to which it applies are           implied, in the constitution of the United States upon the
within her jurisdiction. The hardship and injustice of a tax   imposition of the tax. If there be, it is the duty of the
levied by a state, considered with reference to its amount,    court to enforce the inhibition, it matters not whom its
are not subjects of federal cognizance.                        decision may affect, nor how great and irresponsible the
                                                               power of the state may be independently of such
                                                               prohibition.
Administrative Law > Separation of Powers >
Constitutional Controls > General Overview
Constitutional Law > Supremacy Clause > General                Constitutional Law > Equal Protection > Scope of
Overview                                                       Protection
Governments > Federal Government > General                     Tax Law > State & Local Taxes > Administration &
Overview                                                       Proceedings > Judicial Review
[HN3] There are in the very nature of the federal              [HN5] The fourteenth amendment to the U.S.
government, and the powers with which it is clothed,           Constitution, in declaring that no state shall deny to any
many prohibitions upon the taxing power of the states.         person within its jurisdiction the equal protection of the
Within the sphere of its action that government is             laws, imposes a limitation upon the exercise of all the
supreme, and no impediment to the free and full exercise       powers of the state which can touch the individual or his
of its power is permissible. The state cannot, therefore,      property, including among them that of taxation.
place any restrictions upon the agencies of the federal        Whatever the state may do, it cannot deprive any one
government; otherwise it might embarrass and even              within its jurisdiction of the equal protection of the laws.
defeat the operations of that government. The power to         And by equal protection of the laws is meant equal
tax involves the power to destroy; and there would be a        security under them to every one on similar terms, -- in
manifest repugnance in allowing one government to              his life, his liberty, his property, and in the pursuit of
control the constitutional measures of another                 happiness. It not only implies the right of each to resort,
government in respect to which the latter is declared to be    on the same terms with others, to the courts of the
supreme.                                                       country for the security of his person and property, the
                                                               prevention and redress of wrongs and the enforcement of
                                                               contracts, but also his exemption from any greater
Constitutional Law > Supremacy Clause > General                burdens or charges than such as are equally imposed
Overview                                                       upon all others under like circumstances. Unequal
International Law > Authority to Regulate > General            exactions in every form, or under any pretense, are
Overview                                                       absolutely forbidden; and of course unequal taxation, for
International Trade Law > General Overview                     it is in that form that oppressive burdens are usually laid.
[HN4] In regard to the express prohibitions upon the           It is not possible to conceive of equal protection under
states contained in the federal constitution; they apply       any system of laws where arbitrary and unequal taxation
equally to taxation and to any other action of the state.      is permissible; where different persons may be taxed on
They cannot be evaded under the plea that the state            their property of the same kind, similarly situated, at
possesses the unrestricted power to tax. It is to no           different rates.
purpose to speak of the power of taxation as an attribute
of state sovereignty which cannot be surrendered; that
sovereignty, whatever its extent, must be exerted in           Constitutional Law > Equal Protection > Scope of
subordination to the prohibition of the constitution, which    Protection
is the supreme law of the land. Many of the attributes of      Tax Law > State & Local Taxes > Administration &
sovereignty which the states would possess if                  Proceedings > General Overview
independent political communities, have been in like           [HN6] To compel individuals to contribute money or
manner surrendered to the federal government, such as          property to the use of the public without reference to any
                                                                                                                    Page 3
                                      13 F. 722, *; 1882 U.S. App. LEXIS 2045, **;
                                                       8 Sawy. 238

common ratio, and without requiring the sum paid by one        taxation; personal property to another rate. Property in
piece or kind of property, or by one person, to bear any       particular districts may be taxed for local purposes, while
relation whatever to that paid by another, is to levy a        property elsewhere may be exempt.
forced contribution, not a tax, duty, or impost, within the
sense of these terms as applied to the exercise of powers
                                                               Constitutional Law > Involuntary Servitude
by any enlightened or responsible government.
                                                               [HN10] The amendment prohibiting slavery and
                                                               involuntary servitude, except as a punishment for crime,
Constitutional Law > Involuntary Servitude                     had its origin in the previous existence of African slavery.
Constitutional Law > Equal Protection > Scope of               But the generality of its language makes its prohibition
Protection                                                     apply to slavery of white men as well as that of black
Tax Law > State & Local Taxes > Administration &               men; and also to serfage, vassalage, villenage, peonage,
Proceedings > General Overview                                 and every other form of compulsory labor to minister to
[HN7] Absolute equality and uniformity may not be              the pleasure, caprice, vanity, or power of others.
attainable in practice, but an approximation to them is
possible, and any plain departure from the rule will defeat
                                                               Constitutional Law > Equal Protection > Scope of
the tax. What is called for under a constitutional
                                                               Protection
provision requiring equality and uniformity in the
                                                               [HN11] The court cannot limit the application of the
taxation of property must be equally called for by the
                                                               prohibition of the fourteenth amendment to legislation
fourteenth amendment. The forced contribution from one
                                                               touching members of the enfranchised race. It has a much
which would follow taxation of his property without
                                                               broader operation. It does not, indeed, place any limit
reference to a common ratio, would be inconsistent with
                                                               upon the subjects in reference to which the states may
that equal protection which the amendment requires the
                                                               legislate. It does not interfere with their police power.
state to extent to every person within its jurisdiction. The
                                                               Upon every matter upon which previously to its adoption
application of the amendment to taxation has been
                                                               they could act, they may still act. They can legislate now,
recognized by the legislation of congress.
                                                               as they always could, to promote the health, good order,
                                                               and peace of the community; to develop their resources,
Constitutional Law > Equal Protection > Scope of               increase their industries, and advance their prosperity; but
Protection                                                     it does require that in all such legislation hostile and
Tax Law > State & Local Taxes > Administration &               partial discrimination against any class or person shall be
Proceedings > General Overview                                 avoided; that the state shall impose no greater burdens
[HN8] As the foundation of all just and equal taxation is      upon any one than upon others of the community under
the assessment of the property taxed, -- that is, the          like circumstances, nor deprive any one of rights which
ascertainment of its value, -- in order that the tax may be    others similarly situated are allowed to enjoy. It forbids
levied according to some ratio to the value, uniformity of     the state to lay its hand more heavily upon one than upon
taxation necessarily requires uniformity in the mode of        another, under like conditions. It stands in the
assessment as well as in the rate of taxation. Uniformity      constitution as a perpetual shield against all unequal and
in taxing implies equality in the burden of taxation, and      partial legislation by the states, and the injustice which
this equality of burden cannot exist without uniformity in     follows from it, whether directed against the most humble
the mode of assessment as well as in the rate of taxation.     or the most powerful; against the despised laborer from
                                                               China, or the envied master of millions.

Tax Law > State & Local Taxes > Administration &
Proceedings > General Overview                                 Business & Corporate Law > Corporate Names >
Tax Law > State & Local Taxes > Personal Property              Requirements
Tax > Exempt Property > General Overview                       Business & Corporate Law > Corporations > Formation
Tax Law > State & Local Taxes > Real Property Tax >            > Corporate Existence, Powers & Purpose > General
General Overview                                               Overview
[HN9] Property may be classified for purposes of               Constitutional Law > Equal Protection > Scope of
taxation. Real property may be subjected to one rate of        Protection
                                                                                                                    Page 4
                                      13 F. 722, *; 1882 U.S. App. LEXIS 2045, **;
                                                       8 Sawy. 238

[HN12] Whenever a provision of the constitution, or of a       > Corporate Existence, Powers & Purpose > General
law, guaranties to persons the enjoyment of property, or       Overview
affords to them means for its protection, or prohibits         Constitutional Law > Relations Among Governments >
legislation injuriously affecting it, the benefits of the      Privileges & Immunities
provision extend to corporations, and that the courts will     Constitutional Law > Privileges & Immunities
always look beyond the name of the artificial being to the     [HN15] Nor do all the privileges and immunities of
individuals whom it represents.                                citizenship attach to corporations. These bodies have
                                                               never been considered citizens for any other purpose than
                                                               the protection of the property rights of the corporators.
Constitutional Law > Bill of Rights > Fundamental              The status of citizenship, entitling the citizen to certain
Rights > Procedural Due Process > Scope of Protection          privileges and immunities in the several states, does not
Criminal Law & Procedure > Grand Juries >                      belong to corporations. The special privileges which
Indictments > Right to Indictment by Grand Jury                citizens acquire by becoming incorporated in one state
Criminal Law & Procedure > Accusatory Instruments >            cannot, therefore, be exercised in another state without
Indictments > General Overview                                 the latter's consent, although such consent will generally
[HN13] See U.S. Const. amend. V.                               be presumed in the absence of positive prohibition.

Business & Corporate Law > Corporations >                      Business & Corporate Law > Corporations > Formation
Shareholders > Disregard of Corporate Entity >                 > Corporate Existence, Powers & Purpose > General
General Overview                                               Overview
Constitutional Law > Bill of Rights > Fundamental              Civil Rights Law > Contractual Relations & Housing >
Rights > Eminent Domain & Takings                              General Overview
Constitutional Law > Bill of Rights > Fundamental              Constitutional Law > Equal Protection > Scope of
Rights > Procedural Due Process > Scope of Protection          Protection
[HN14] To deprive a corporation of its property, or to         [HN16] The term "person" includes, or may include,
burden it, is, in fact, to deprive the corporators of their    corporations; which amounts to what we have already
property or to lessen its value. Their interest, undivided     said, that whenever it is necessary for the protection of
though it be, and constituting only a right during the         contract or property rights, the courts will look through
continuance of the corporation to participate in its           the ideal entity and name of the corporation to the
dividends, and on its dissolution to receive a                 persons who compose it, and protect them, though the
proportionate share of its assets, has an appreciable value,   process be in its name. All the guaranties and safeguards
and is property in a commercial sense, and whatever            of the constitution for the protection of property
affects the property of the corporation necessarily affects    possessed by individuals may, therefore, be invoked for
the commercial value of their interests. If, for example, to   the protection of the property of corporations. And as no
take the illustration given by counsel, a corporation          discriminating and partial legislation, imposing unequal
created for banking purposes acquires land, notes, stocks,     burdens upon the property of individuals, would be valid
bonds, and money, no stockholder can claim that he owns        under the fourteenth amendment, so no legislation
any particular item of this property, but he owns an           imposing such unequal burdens upon the property of
interest in the whole of it which the courts will protect      corporations can be maintained.
against unlawful seizure or appropriation by others, and
on the dissolution of the company he will receive a
proportionate share of its assets. Now, if a statute of the    Tax Law > State & Local Taxes > Personal Property
state takes the entire property, who suffers loss by the       Tax > General Overview
legislation? Whose property is taken? Certainly, the           [HN17] See Cal. Const. art. 13, § 10.
corporation is deprived of its property; but at the same
time, in every just sense of the constitutional guaranty,
                                                               Tax Law > State & Local Taxes > Administration &
corporations are also deprived of their property.
                                                               Proceedings > General Overview
                                                               [HN18] The presentation to a state board by a corporation
Business & Corporate Law > Corporations > Formation            of a statement of its property and of its value, which it is
                                                                                                                      Page 5
                                      13 F. 722, *; 1882 U.S. App. LEXIS 2045, **;
                                                       8 Sawy. 238

required to furnish, is not the equivalent to a notice of the   the valuation committed by the officers. Notice to him
assessment made and of an opportunity to be heard               will be deemed sufficient, if the time and place of hearing
thereon. It is a preliminary proceeding, and until the          be designated by statute. But whatever the character of
assessment the corporation cannot know whether it will          the proceeding, and whether it takes property directly, or
have good cause of complaint. No hearing upon the               creates a charge or liability which may be the basis of
statement presented is allowed, and when the assessment         taking it, the law directing the proceeding must provide
is made the matter is closed; no opportunity to correct         for some kind of notice, and offer to the owner an
any errors committed is provided. The presentation of the       opportunity to be heard, or the proceeding will want the
statement can no more supersede the necessity of                essential ingredient of due process of law. Nothing is
allowing a subsequent hearing of the owners, than the           more clearly established by a weight of authority
filing of a complaint in court can dispense with the right      absolutely overwhelming than that notice and opportunity
of the suitor and his contestant to be there heard.             to be heard are indispensable to the validity of the
                                                                proceeding.

Constitutional Law > Bill of Rights > Fundamental
Rights > Procedural Due Process > Scope of Protection           Tax Law > State & Local Taxes > Personal Property
[HN19] The provision in the fourteenth amendment is in          Tax > General Overview
the form of an interdict upon the states -- Nor shall any       Torts > Transportation Torts > Rail Transportation >
state deprive any person of life, liberty, or property          General Overview
without due process of law. And by due process is meant         [HN21] Cal. Const. art. 13 is not intended to make any
one which, following the forms of law, is appropriate to        change in the powers or rights of corporations under the
the case, and just to the parties to be affected. It must be    laws of the state. It treats entirely of revenue and taxation,
pursued in the ordinary mode prescribed by the law; it          and of the rules which shall govern the assessment of the
must be adapted to the end to be attained; and it must          property of individuals, and of railroad and other quasi
give to the party to be affected an opportunity of being        public corporations. It is in another article that provisions
heard respecting the justice of the judgment sought.            are made for the control of railroad corporations; and the
Without these conditions entering into the proceeding, it       duties and responsibilities of corporations generally, and
would be anything but due process. If it touched life or        the power of the state over them, are declared.
liberty, it would be wanton punishment, or rather wanton
cruelty.
                                                                Business & Corporate Law > Corporations > Formation
                                                                > Corporate Existence, Powers & Purpose > General
Civil Procedure > Eminent Domain Proceedings >                  Overview
General Overview                                                Constitutional Law > Supremacy Clause > General
Constitutional Law > Bill of Rights > Fundamental               Overview
Rights > Procedural Due Process > Scope of Protection           [HN22] The state, in the creation of corporations, or in
Tax Law > State & Local Taxes > Administration &                amending their charters, or rather in passing or amending
Proceedings > General Overview                                  general laws under which corporations may be formed
[HN20] In the taking of property by taxation the                and altered, possesses no power to withdraw them when
proceeding is more summary and stringent. The                   created, or by amendment, from the guaranties of the
necessities of revenue for the support of government will       federal constitution.
not admit of the delays attendant upon judicial
proceedings in the courts of justice. The statute fixes the
                                                                Business & Corporate Law > Corporations > Formation
rate of taxation upon the value of the property, and
                                                                > Corporate Existence, Powers & Purpose > General
appoints officers to estimate and appraise the value. Due
                                                                Overview
process of law in the proceeding is deemed to be pursued,
                                                                Constitutional Law > Congressional Duties & Powers >
when, after the assessment is made by the assessing
                                                                Contracts Clause > General Overview
officers upon such information as they may obtain, the
                                                                Governments > Legislation > Expirations, Repeals &
owner is allowed a reasonable opportunity, at a time and
                                                                Suspensions
place to be designated, to be heard respecting the
                                                                [HN23] The charter of a private corporation is a contract
correctness of the assessment, and to show any errors in
                                                                                                                     Page 6
                                     13 F. 722, *; 1882 U.S. App. LEXIS 2045, **;
                                                      8 Sawy. 238

between the corporators and the state, and that it is,        had under the provisions of the constitution of California,
therefore, within the prohibition of the federal              adopted in 1879, which in that respect are in conflict with
constitution against the impairment of contracts. To avoid    the fourteenth amendment of the constitution of the
this result the states have generally inserted clauses in     United States.
their constitutions reserving a right to repeal, alter, or
amend charters granted by their legislatures, or to repeal,        By the constitution of California, all property in the
alter, or amend the general laws under which                  state, not exempt under the laws of the United States, is,
corporations are allowed to be formed. The reservation        with certain exceptions, to be taxed in proportion to its
relates only to the contract of incorporation, which,         value, to be ascertained as prescribed by law; but in the
without such reservation, would be irrepealable. It           ascertainment of its value as a basis for taxation, a
removes the impediment to legislation touching the            distinction is made between the property owned by
contract. It places the corporation in the same position it   individuals and that owned by railroad corporations. By
would have occupied had the supreme court held that           the thirteenth article, "a mortgage, deed of trust, or other
charters are not contracts, and that laws repealing or        obligation by which a debt is secured, is treated, for the
altering them did not impair the obligation of contracts.     purposes of assessment and taxation, [*728] "as an
The property of the corporation, acquired in the exercise     interest in the property affected thereby," and, "except as
of its faculties, is held independently of such reserved      to railroad and other quasi public corporations," the value
power, and the state can only exercise over it the control    of the property affected, less the value of the security, is
which it exercises over the property of individuals           to be assessed and taxed to its owner, and the value of the
engaged in similar business.                                  security is to be assessed and taxed to its holder. Section
                                                              4. But by the same article "the franchise, road-way,
COUNSEL: [**1] A. L. Rhodes, A. L. Hart, Atty. Gen.,          road-bed, rails, and rolling stock of all railroads operated
and Tolles and Ware, Dist. Attys., for plaintiff.             in [**3] more than one county" are to be assessed at their
                                                              actual value, and apportioned to the counties, cities, and
Creed Haymond, J. Norton Pomeroy, T. I. Bergin, and T.        districts in which the roads are located in proportion to
B. Bishop, for defendants.                                    the number of miles of rail-way laid therein. No
                                                              deduction from this value is allowed for any mortgages
OPINION BY: FIELD                                             on the property.

OPINION                                                            By the constitution there is also a different system of
                                                              assessment provided for "the franchise, road-way,
      [*727] FIELD, Justice. This action is brought to        road-bed, rails, and rolling stock" of railroads operated in
recover of the Southern Pacific Railroad Company, a           more than one county from that provided for other
corporation formed under the laws of California, certain      property. The assessment of other property is to be made
state and county taxes levied upon its property for the       in the county, city, or district in which it is situated in the
fiscal year of 1881 and 1882, alleged to be due to the        manner prescribed by law; and the supervisors of each
plaintiff, with 5 per cent. added for their non-payment,      county constitute a board of equalization of the taxable
and interest. It was commenced in one of the superior         property of the county, and must act upon prescribed
courts of the state, and, on application of the defendant,    rules of notice to its owners. A state board of
was removed to this court.                                    equalization is also created to equalize the valuation of
                                                              the taxable property of the several counties, so that
     The railroad company, besides a general denial of the    equality may be preserved between the tax-payers of the
allegations of the complaint, sets up as a special answer     different localities, and its action in this respect must
to the action that in the assessment of its property,         likewise be upon prescribed rules of notice.
according to which the taxes claimed were levied, an
unlawful and unjust discrimination was made between its            The assessment of the franchise, road-way, road-bed,
property and the property of individuals, to its              rails, and rolling stock of railroads [**4] operated in
disadvantage, subjecting it to an unequal share of the        more than one county in the state is to be made by this
public burdens, and that it was not afforded an               state board. And in making it, the board is not required to
opportunity of being heard respecting the assessment, and     give any notice to the owners, nor is any provision made
that such discrimination was [**2] made and proceeding
                                                                                                                     Page 7
                                   13 F. 722, *728; 1882 U.S. App. LEXIS 2045, **4;
                                                      8 Sawy. 238

for affording them an opportunity to be heard respecting       the valuation of its property for the mortgage thereon, and
the valuation of their property. The tenth section of the      was thus subjected to an unjust proportion of the public
article which confers this power of assessment has been        burdens, and denied the equal protection of the laws
held by the supreme court of the state to be                   guarantied by the fourteenth amendment of the federal
self-executing, requiring no legislation for its               constitution; and (2) because the assessment was made in
enforcement.                                                   pursuance of provisions of the state constitution, which
                                                               gave no notice to the company, and afforded it no
     The defendant, as already stated, is a corporation        opportunity to be heard respecting the value of the
formed under the laws of the state, and operates a railroad    property, or for the correction of any errors of the board,
through several counties. The entire length of its road in     thus depriving it of its property without due process of
the state is a little over 711 miles, of which twenty-five     law guarantied by that amendment.
miles and one-tenth of a mile pass through the county of
San Mateo. Its principal place of business is at San               The plaintiff, on the other hand, contends:
Francisco. Its stockholders are, and always have been,
citizens of the United States, some of whom are residents           (1) That the power of taxation possessed by the state
of this state, and some of other states. Previously to         is unlimited, except by the constitution of the United
January 1, 1881, it was indebted to different citizens of      States, and that its exercise cannot be assailed in a federal
the United States, many of them residents of this [*729]       court, either for the hardship or injustice of the tax levied;
state, in large sums, advanced to construct and equip the      (2) that the classification of property for taxation, and the
road; and to secure this indebtedness it executed, [**5]       [**7] apportionment of taxes according to such
prior to that date, a mortgage upon its road, its franchise,   classification, are not forbidden by the constitution of the
and its rolling stock and appurtenances, and also upon a       United States, and that within this principle the taxes on
large number of tracts of land situated in different           the property of the railroad company were lawfully
counties. The indebtedness secured exceeds $3,000 a            imposed; (3) that the fourteenth amendment of the
mile of the road, no part of which, except the accruing        constitution of the United States was adopted to protect
interest, has been paid; the whole remains a valid and         the newly-made citizens of the African race in their
subsisting obligation of the company.                          freedom, and [*730] should not be extended beyond that
                                                               purpose; (4) that corporations are not persons within the
     In the fiscal year of 1881 and 1882, the state board of   meaning of that amendment; (5) that the statute fixing the
equalization assessed the franchise, road-way, road-bed,       sessions of the state board of equalization, and requiring a
rails, and rolling stock of the defendant at $11,739,915, --   statement in writing from the defendant of the amount
that is, at the rate of $16,500 per mile, -- and apportioned   and value of its property, afforded all the notice and
to the county of San Mateo $414,150. Upon the amount           hearing essential to the validity of the assessment made;
thus apportioned the taxes were levied for which the           and (6) that the provisions of article 13 of the
present action is brought. In the assessment no deduction      constitution, as to the taxation of railroad property, are to
was allowed for the mortgage, but the property was             be treated as conditions upon the continued existence of
assessed at its entire value independently of the              railroad corporations.
mortgage. Nor was any notice given to the company by
the board of its action, nor was any opportunity allowed           We do not state the positions of the several counsel
the company to be heard respecting the assessment.             who argued the case in their precise language, for they
These facts are admitted by the demurrer, and the validity     were presented in various forms, but we give their
of the defense rests upon the application of the law to        substance and purport.
them.
                                                                    The questions thus presented for our determination
     The railroad company contends that the [**6] taxes        [**8] are of the greatest magnitude and importance. The
are invalid and void on two grounds:                           answer to them concerns not merely the railroad
                                                               corporations of this state, but all corporations other than
    (1) Because the assessment, according to which they        municipal within the United States. It is of the highest
were levied, was made in pursuance of the discriminating       interest to them all to know whether their property is
provisions of the state constitution, in the enforcement of    subject to the same rules of assessment and taxation to
which the company was not allowed any deduction from           which the property of individuals is subject, or whether it
                                                                                                                      Page 8
                                    13 F. 722, *730; 1882 U.S. App. LEXIS 2045, **8;
                                                       8 Sawy. 238

can be separated and distinguished from that of                  language to the affect that the state's power of taxation is
individuals and made liable to such different burdens in         without limitation; language which may be correct when
the way of taxation as the state may choose to impose.           applied to the special facts of the cases in which it is
The questions have been argued with great ability and            used, but which should always be read with a reservation
learning by distinguished counsel on both sides, and they        that the exercise of the power does not conflict with any
have received from the court the most patient and                of the inhibitions of the federal constitution.
thoughtful examination. Indeed, their examination has
been accompanied with a painful anxiety to reach a right              [HN3] There are in the very nature of the federal
conclusion, aware as the court is of the opinion prevailing      government, and the powers with which it is clothed,
throughout the community that the railroad corporations          many prohibitions upon the taxing power of the states.
of the state, by means of their great wealth and the             Within the sphere of its action that government is
numbers in their employ, have become so powerful as to           supreme, and no impediment to the free and full exercise
be disturbing influences in the administration of the laws;      of its power is permissible. The state cannot, therefore,
an opinion which will be materially strengthened by a            place [**11] any restrictions upon the agencies of the
decision temporarily relieving any one [**9] of them             federal government; otherwise it might embarrass and
from its just proportion of the public burdens. That             even defeat the operations of that government. It was
consideration, however, cannot be allowed to affect the          long ago said by Chief Justice Marshall that the power to
judgment of the court. [HN1] Whatever acts may be                tax involves the power to destroy; and that there would be
imputed justly or unjustly to the corporations, they are         a manifest repugnance in allowing one government to
entitled when they enter the tribunals of the nation to          control the constitutional measures of another
have the same justice meted out to them which is meted           government in respect to which the latter is declared to be
out to the humblest citizen. There cannot be one law for         supreme. When, therefore, congress had created a bank
them and another law for others.                                 of the United States as an agency in the menagement of
                                                                 the finances of the government, it was held that the states
     It is undoubtedly true that [HN2] the power of              were inhibited from taxing the institution.
taxation possessed by the state may be exercised upon
any subject within her jurisdiction, and to any extent not            "If the states," said that great judge, "may tax one
prohibited by the constitution of the United States. As          instrument employed by the government in the execution
stated by the supreme court: "It may touch property in           of its powers, they may tax any and every other
every shape, -- in its natural condition, in its                 instrument. They may tax the mail; they may tax the
manufactured form, and in its various transmutations.            mint; they may tax the papers of the custom-house; they
And the amount of the taxation may be determined                 may tax judicial process; they may tax all the means
[*731] by the value of the property, or its use, or its          employed by the government to an excess which would
capacity, or its productiveness. It may touch business in        defeat all the ends of government. This was not intended
the almost infinite forms in which it is conducted, -- in        by the American people. They did not design to make
professions, in commerce, in manufactures, and in                their government dependent on the states." McCullough
transportation. Unless restrained by provisions of the           v. Maryland, 4 [**12] Wheat. 432.
federal constitution, the power of the state as to the mode,
                                                                       [*732] For like reasons the public securities of the
form, and extent [**10] of taxation is unlimited where
                                                                 United States are exempt from taxation by the states,
the subjects to which it applies are within her
                                                                 except so far as such taxation is permitted by congress. A
jurisdiction." State Tax on Foreign-held Bonds, 15 Wall.
                                                                 tax imposed by the city of Charleston upon all personal
319.
                                                                 estate in its limits, including among other things stock of
     It is also undoubtedly true that the hardship and           the United States, was therefore adjudged to be invalid.
injustice of a tax levied by the state, considered with          The court said that the tax was upon a contract between
reference to its amount, are not subjects of federal             the government and individuals, and therefore operated
cognizance. Whether a tax upon property, subject to              directly upon the power to borrow money on the credit of
taxation, be 1 per cent. of its value, or 10 per cent., or 20,   the United States; that if the right to impose it existed
or more, is a mere matter of state discretion; a question of     with the states, it was a right which in its nature
policy and not of power. So we often find in the reports         acknowledged no limits, and might be exercised to an
                                                                                                                       Page 9
                                   13 F. 722, *732; 1882 U.S. App. LEXIS 2045, **12;
                                                       8 Sawy. 238

extent which would seriously embarrass the government.                [HN5] The fourteenth amendment to the constitution,
Its existence was therefore held inconsistent with the          in declaring that no state shall deny to any person within
supremacy of the government in the exercise of its              its jurisdiction the equal protection of the laws, imposes a
granted powers. Weston v. Charleston, 2 Pet. 449.               limitation upon the exercise of all the powers of the state
                                                                which can touch the individual or his property, including
     Other illustrations might be given of implied              among them that of taxation. Whatever [**15] the state
inhibitions of the federal constitution to taxation by the      may do, it cannot deprive any one within its jurisdiction
states. The powers of the general government cannot be          of the equal protection of the laws. And by equal
interfered with, or their exercise embarrassed in any           protection of the laws is meant equal security under them
respect, by such taxation; as has often been held with          to every one on similar terms, -- in his life, his liberty, his
reference to attempted [**13] taxation on goods                 property, and in the pursuit of happiness. It not only
imported, while retaining the character of imports in           implies the right of each to resort, on the same terms with
unbroken packages, and on goods in transit from one             others, to the courts of the country for the security of his
state to another. The power to regulate commerce,               person and property, the prevention and redress of
foreign and interstate, cannot be thus trammeled by state       wrongs and the enforcement of contracts, but also his
action. Brown v. Maryland, 12 Wheat. 434; Welton v.             exemption from any greater burdens or charges than such
State, 100 U.S. 275; Webber v. Virginia, 103 U.S. 344.          as are equally imposed upon all others under like
                                                                circumstances.
     So [HN4] in regard to the express prohibitions upon
the states contained in the federal constitution; they apply        Unequal exactions in every form, or under any
equally to taxation and to any other action of the state.       prtense, are absolutely forbidden; and of course unequal
They cannot be evaded under the plea that the state             taxation, for it is in that form that oppressive burdens are
possesses the unrestricted power to tax. Where, for             usually laid. It is not possible to conceive of equal
example, a state has stipulated for a valid consideration to    protection under any system of laws where arbitrary and
exempt certain property from taxation, as it has been           unequal taxation is permissible; where different persons
repeatedly held that it may do, the stipulation cannot          may be taxed on their property of the same kind,
subsequently be withdrawn, and the property subjected to        similarly situated, at different rates; where, for instance,
taxation. The provision which secures the inviolability of      one may be taxed at 1 per cent. on the value of his
contracts against state legislation stands as a perpetual       property, another at 2 or 5 per cent., or where one may be
interdict against the imposition of the charge. It is to no     thus [**16] taxed according to his color, because he
purpose in such case to speak of the power of taxation as       white, or black, or brown, or yellow, or according to any
an attribute of state sovereignty which cannot be               other rule than that of a fixed rate proportionate to the
surrendered; that sovereignty, whatever its extent, [**14]      value of his property.
must be exerted in subordination to the prohibition of the
constitution, which is the supreme law of the land. Many             In the constitution of several states a provision is
of the attributes of sovereignty which the states would         found requiring "equality and uniformity" in the taxation
possess if independent political communities, have been         of property, and this is held to mean that taxes must be
in like manner surrendered to the federal government,           levied according to some fixed rate or rule of
such as the power to declare war, to make peace, to enter       apportionment, so that all persons shall pay the like
into treaties of alliance, and to regulate commerce [*733]      amount upon similar kinds of property of the same value.
with foreign nations. The question in all cases presented       As it seemed to one of the judges of the supreme court of
to a federal court, where complaint is made of a tax            Michigan:
levied by the states, is whether there is any inhibition,
express or implied, in the constitution of the United                [HN6] "To compel individuals to contribute money
States upon the imposition of the tax. If there be, it is the   or property to the use of the public without reference to
duty of the court to enforce the inhibition, it matters not     any common ratio, and without requiring the sum paid by
whom its decision may affect, nor how great and                 one piece or kind of property, or by one person, to bear
irresponsible the power of the state may be independently       any relation [*734] whatever to that paid by another, is
of such prohibition.                                            to levy a forced contribution, not a tax, duty, or impost,
                                                                within the sense of these terms as applied to the exercise
                                                                                                                    Page 10
                                   13 F. 722, *734; 1882 U.S. App. LEXIS 2045, **16;
                                                       8 Sawy. 238

of powers by any enlightened or responsible                     constitutional authority to exact from one citizen the
government." Woodbridge v. City of Detroit, 8 Mich.             entire revenue of the commonwealth; [*735] and though
301; Burroughs, Taxation, c. 5.                                 the distinction between constitutional [**19] taxation
                                                                and the taking of private property for public use by
     [HN7] Absolute equality and uniformity may not be          legislation might not be definable with perfect precision,
attainable in practice, but an approximation [**17] to          the court was clearly of the opinion that whenever the
them is possible, and any plain departure from the rule         property of a citizen was taken from him by the sovereign
will defeat the tax.                                            will and appropriated without his consent to the benefit of
                                                                the public, the exaction could not be considered a tax
     What is called for under a constitutional provision        unless similar contributions were made by the public
requiring equality and uniformity in the taxation of            itself, or rather exacted by the same public will from such
property must be equally called for by the fourteenth           constituent members of the same community as own the
amendment. The forced contribution from one which               same kind of property; and that, though there may be a
would follow taxation of his property without reference         discrimination in the subjects of taxation, still persons of
to a common ratio, would be inconsistent with that equal        the same class, and property of the same kind, must
protection which the amendment requires the state to            generally be subjected alike to the same common burden.
extent to every person within its jurisdiction.                 9 Dana, (Ky.) 513.
     The application of the amendment to taxation has               In State v. Township of Readington the supreme
been recognized by the legislation of congress. Soon            court of New Jersey said:
after the adoption of the constitutional amendment,
abolishing slavery and involuntary servitude, measures              "Taxation operates upon a community, or a class in a
were proposed to give practical freedom to the                  community, according to some rule of apportionment.
emancipated race, which resulted in the passage of the          When the amount levied upon individuals is determined
civil-rights act. This act gave citizenship to persons of       without regard to the amount or value exacted from any
that race, and then declared that citizens of the United        other individual or classes of individuals, the power
States of every race and color, without regard to any           exercised is not that of taxation, but of eminent domain.
previous condition of slavery or involuntary servitude,         A tax upon the persons or property [**20] of A., B., and
should have the same right in every state and territory to      C. individually, whether designated by name or in any
make and enforce contracts, to sue, be parties, and give        other way, which is in excess of an equal apportionment
evidence, to inherit, purchase, lease, [**18] sell, own,        among the persons, or property of the class of persons or
and convey real and personal property, and to the full and      kind of property subject to the taxation, is to the extent of
equal benefit of all laws and proceedings for the security      such excess, the taking of private property for a public
of person and property, as is enjoyed by white citizens,        use without compensation. The process is one of
and should be subject to like punishments, pains, and           confiscation, and not of taxation." 36 N.J. Law, 70.
penalties, and to none other. After the adoption of the
fourteenth amendment, congress re-enacted this act, and              [HN8] As the foundation of all just and equal
to the clause that all persons within the jurisdiction of the   taxation is the assessment of the property taxed, -- that is,
United States should enjoy the same rights as white             the ascertainment of its value, -- in order that the tax may
citizens, and be subject only to like punishments, pains,       be levied according to some ratio to the value, uniformity
and penalties, it added, and subject only to like "taxes,       of taxation necessarily requires uniformity in the mode of
licenses, and exactions of every kind, and to no other."        assessment as well as in the rate of taxation; or, to quote
Rev. St. § 1977.                                                the language of the supreme court of Ohio expressing the
                                                                same thought: "Uniformity in taxing implies equality in
     The adjudications as to the meaning of the rule of         the burden of taxation, and this equality of burden cannot
equality and uniformity to be observed in taxation, may,        exist without uniformity in the mode of assessment as
therefore, be properly referred to in construing the            well as in the rate of taxation." Exchange Bank of
requirement of the fourteenth amendment, when it is             Colunbus v. Hines, 3 Ohio St. 1.
invoked with respect to burdens imposed by taxation. In
Lexington v. McQuillan's Heirs the supreme court of                 If we now look at the scheme of taxation prescribed
Kentucky said that the legislature of the state had no          by the constitution of California for the property of
                                                                                                                    Page 11
                                   13 F. 722, *735; 1882 U.S. App. LEXIS 2045, **20;
                                                       8 Sawy. 238

railroad companies, we shall [**21] perceive a flagrant         the valuation of his personal property, except so much as
departure from the rule of equality and uniformity so           consisted of those shares, taxed the shares at a greater
essential to equality in the distribution of the burdens of     rate than other moneyed capital.
government. Whenever an individual holds property
incumbered with a mortgage he is assessed at its value,              The assessment thus held to be a discrimination
after deducting [*736] from it the amount of the                against the shares of national banks in the taxation system
mortgage. If a railroad company holds property subject to       of New York is similar to what we hold to be a
a mortgage, it is assessed at its full value, without any       discrimination against the property of railroad
deduction for the mortgage; that is, as though the              corporations in the taxation system of California.
property were unincumbered. The inequality and
                                                                     [*737] In the case of the Evansville Bank v. Britton,
discriminating character of the procedure will be apparent
                                                                decided at the last term of the supreme court, the doctrine
by an illustration given by counsel. Suppose a private
                                                                of the Weaver Case was affirmed, and it was held that the
person owns a farm which is valued at $100,000, and is
                                                                taxation of shares in the national banks, under the
incumbered with a mortgage amounting to $80,000: he is,
                                                                revenue laws of Indiana, without permitting the
in that case, assessed at $20,000; if the rate of taxation be
                                                                shareholder to deduct from their assessed value the
2 per cent. he would pay $400 taxes. If a railroad
                                                                amount of his bona fide indebtedness, which was allowed
corporation owns an adjoining tract worth $100,000,
                                                                in the case of other investments of moneyed capital, was
which is also incumbered by a mortgage for $80,000, it
                                                                a discrimination against the act of congress and illegal.
would be assessed for $100,000, and be required to pay
                                                                105 U.S. 322.
$2,000 taxes, or five times as much as the private person.
There is here a discrimination too palpable and gross to             It is no answer to this discrimination to say that
be questioned, and such is the nature of the                    property in the state may be divided into [**24] classes,
discrimination made against [**22] the Southern Pacific         and different rates prescribed for them. Undoubtedly
Railroad Company in the taxation of its property.               [HN9] property may be classified for purposes of
Nothing can be clearer than that the rule of equality and       taxation. Real property may be subjected to one rate of
uniformity is thus entirely disregarded.                        taxation; personal property to another rate. Property in
                                                                particular districts may be taxed for local purposes, while
     The case of People v. Weaver, 100 U.S. 539, decided
                                                                property elsewhere may be exempt. Taxation on business
by the supreme court, respecting the taxation of shares of
                                                                in the form of licenses may also vary according to the
the national banks, may be cited in this connection.
                                                                calling or occupation licensed, and the extent of business
Without the permission of congress, the shares of these
                                                                transacted, but even then there must be uniformity of
banks could not be taxed by the states. Congress gave the
                                                                charges with respect to the same calling or occupation in
permission on condition that the taxation should not be at
                                                                the same locality. It is, however, only with the taxation
a greater rate than is assessed on other moneyed capital in
                                                                of property that we are concerned in this case, and the
the hands of individual citizens of the state, and that the
                                                                whole object of classifying property is that each class
shares owned by non-residents of the state should be
                                                                may be subjected to a special rate of taxation. There is no
taxed at the place where the bank is located. Rev. St. §
                                                                difference in the rate prescribed by the law of the state for
5219. In the case cited the court held, with regard to such
                                                                the property of railroad corporations, and the rate
taxation:
                                                                prescribed for the property of individuals. There is only
     (1) That the prohibition imposed by congress against       one rate for all property. There is, therefore, no case
discrimination had reference to the entire process of           presented for the application of the doctrine of
assessment, and included the valuation of the shares as         classification. The discrimination complained of arises
well as the rate of percentage charged; (2) that a statute of   from the different rule adopted in ascertaining the value
New York which established a mode of assessment by              of the property [**25] of railroad corporations as a basis
which such shares were valued higher in proportion to           for taxation, not from any different rate of taxation when
their real value than other moneyed capital, [**23] was         the value is established. In all taxes upon property,
in conflict with the prohibition, although the same             whatever its form or nature, the property is taken as
percentage on such valuation was levied; and (3) that a         representing a pecuniary value; as standing for so much
statute which permitted a party to deduct his debts from        money invested. The tax is the rate per centum of this
                                                                                                                   Page 12
                                  13 F. 722, *737; 1882 U.S. App. LEXIS 2045, **25;
                                                      8 Sawy. 238

pecuniary value. The value being ascertained, the law               "They were in some states forbidden to appear in the
fixes the rate. The ground of complaint here is that the       towns in any other character than as menial servants.
law requires a higher value to be placed upon the              They were required to reside on and cultivate the soil
defendant's property than upon the property of                 without the right to purchase or own it. They were
individuals similarly incumbered, or rather requires the       excluded from many occupations of gain and hire, and
assessor of the defendant's property, in estimating its        were not permitted to give testimony in the courts in any
value, to disregard and set aside certain elements             case where a white man was a party. It was said that their
materially affecting its amount, which are to be               lives were at the mercy of bad men, either because the
considered in estimating the value of the property of          laws for their protection were inefficient, or were not
individuals. It is not classifying property to make this       enforced." 16 Wall. 70.
distinction in determining its value. It [*738] is not
classifying property to provide that the property of certain        There was probably much exaggeration in what was
parties, which has a mortgage upon it, shall be assessed at    reported of their treatment, but the statements made
its value after deducting the mortgage; and that the           produced a profound impression upon congress. The
property of other parties, also having a mortgage upon it,     validity of the [**28] civil-rights act was also [*739]
shall be taxed at its full value without any deduction.        called in question, and in some instances was adjudged
[**26] That is not providing for a different rate of           by state courts to be invalid. Reports also prevailed that
taxation for different kinds of property, but for unequal      loyal men of the south were treated with exceptional
taxation according to the character of the owner.              harshness, and that men from the north seeking residence
                                                               there were met with marked hostility and aversion. It is
     Is the defendant, being a corporation, a person within    not surprising that such was the fact, for notwithstanding
the meaning of the fourteenth amendment, so as to be           the fiery courage and martial spirit of her people, their
entitled, with respect to its property, to the equal           battalions had gone down before the forces of the Union.
protection of the laws? The learned counsel of the             With the sound of the tread of the victorious army still
plaintiff, and attorney general of the state, take the         ringing in their ears; with the desolations of was all
negative of this question, and assert with much                around them, and the sudden rupture of their social
earnestness that the amendment applies, and was intended       relations by the emancipation of their former slaves, -- it
to apply, only to the newly-made citizens of the African       would have been a miracle if bitterness towards their
race, and should be limited to their protection.               recent foes had not lingered in their hearts and been
                                                               exhibited in their conduct. A proud and brave people feel
      It is undoubtedly true that the amendment had its        more keenly than others the sting of defeat. Undoubtedly
origin in a purpose to secure to these newly-made citizens     much misconception and falsehood were mingled with
the full enjoyment of their freedom. When the                  the statements made respecting their action; nevertheless
amendment abolishing slavery and involitary servitude          they led to the introduction into congress of the
was adopted, there were men in congress who believed           proposition for the fourteenth amendment. The discussion
that it was intended to make every one born within the         which followed, indicated that the purpose [**29] of its
United States a freeman, and as such to give to him the        framers and advocates was to obviate objections to
right to pursue his happiness, in the ordinary vocations of    legislation similar to that contained in the first section of
life, subject to no restraint except such as affects others,   the civil-rights act, and to prevent for the future the
and to enjoy equally with them the fruits of his labor.        possibility of any discriminating and hostile state
They therefore [**27] proposed the civil-rights bill, and      legislation against any one.
secured its passage, the substantial provisions of which
we have stated. Notwithstanding this expression of the              Mr. Stevens, of the house of representatives, in
national legislature as to the purpose of the amendment,       presenting the proposition, after stating the provisions of
the newly-made citizens were subjected in several of the       the first section, said:
states to various disabilities and burdens, and curtailed of
their rights to such an extent that their freedom became of         "I can hardly believe that any person can be found
little value. To quote from the opinion of Mr. Justice         who will not admit that every one of these provisions is
Miller, speaking for the court, in the Slaughter-house         just. They are all asserted in some form or other in our
Cases:                                                         declaration or organic law. But the constitution limits
                                                                                                                  Page 13
                                  13 F. 722, *739; 1882 U.S. App. LEXIS 2045, **29;
                                                      8 Sawy. 238

only the action of congress, and is not a limitation on the    slavery. But the generality of its language makes its
states. This amendment supplies that defect, and allows        prohibition apply to slavery of white men as well as that
congress to correct the unjust legislation of the states so    of black men; and also to serfage, vassalage, villenage,
far that the law which operates upon one man shall             peonage, and every other form of compulsory labor to
operate equally upon all."                                     minister to the pleasure, caprice, vanity, or power of
                                                               others.
    In reply to an objection that the first section of the
amendment was in substance the civil-rights bill, which             The provision of the constitution prohibiting
congress had passed over the president's veto, and that by     legislation by states impairing the obligation of contracts
voting to so amend the constitution as to put the bill into    had its origin in the existence of tender laws,
it was to admit that the bill was unconstitutional, Mr.        appraisement laws, stay laws, and installment laws
Garfield, then also a member of the [**30] house, said:        passed by the states soon after the [**32] revolution,
                                                               when their finances were embarrassed and their people
     "We propose to lift that great and good law above the     were overwhelmed with debts. These laws, according to
reach of political strife, beyond the reach of plots and       Story, prostrated all private credit and all private morals,
machinations of any party, and fix it in the serene sky, in    and led to the adoption of the prohibition, by which such
the eternal firmament of the constitution, where no storm      legislation was forever prevented. But in its construction
of passion can skake it and no cloud can obscure it. For       the provision has not been limited to mere commercial
this reason, and not because I believe the civil-rights bill   contracts. In the Dartmouth College Case it was urged
unconstitutional, I am glad to see that first section here."   that the charter of the college was not a contract
                                                               contemplated by the constitution, because no valuable
      [*740] Though the occasion of the amendment was          consideration passed to the king as an equivalent for the
the supposed denial of rights in some states to                grant, and that contracts merely voluntary were not
newly-made citizens of the African race, and the               [*741] within the prohibition. But Chief Justice
supposed hostility to Union men, the generality of the         Marshall, after showing that the charter was a contract
language used extends the protection of its provisions to      upon a valuable consideration, said:
persons of every race and condition against
discriminating and hostile state action of any kind. Its            "It is more than possible that the preservation of
effect in preserving free institutions, and preventing harsh   rights of this description was not particularly in view of
and oppressive state legislation, can hardly be overstated.    the framers of the constitution when the clause under
When burdens are placed upon particular classes or             consideration was introduced into that instrument. It is
individuals, while the majority of the people are              probable that interferences of more frequent recurrence,
exempted, little heed may be paid to the complaints of         to which the temptation was stronger and of which the
those affected. Oppression thus becomes possible and           mischief was more extensive, constituted the great motive
lasting. But a burdensome law operating equally upon all       for imposing this restriction on [**33] the state
will soon create a [**31] movement for its repeal. With        legislatures. But although a particular and a rare case
the amendment enforced, a bad or an oppressive state law       may not in itself be of sufficient magnitude to induce a
will not long be left on any statute book.                     rule, yet it must be governed by the rule when
                                                               established, unless some plain and strong reason for
    The argument that a limitation must be given to the        excluding it can be given." And again: "The case being
scope of this amendment because of the circumstances of        within the words of the rule, must be within its operation
its origin is without force. Its authors, seeing how           likewise, unless there be something in the literal
possible it was for the states to oppress without relief       construction so obviously absurd or mischievous, or
from the federal government, placed in the constitution        repugnant to the general spirit of the instrument, as to
an interdict upon their action which makes lasting             justify those who expound the constitution in making it
oppression of any kind by them under the form of law           an exception." 4 Wheat. 644.
impossible.
                                                                    Following that authority, [HN11] we cannot adopt
    [HN10] The amendment prohibiting slavery and               the narrow view for which counsel contend, and limit the
involuntary servitude, except as a punishment for crime,       application of the prohibition of the fourteenth
had its origin in the provious existence of African
                                                                                                                  Page 14
                                  13 F. 722, *741; 1882 U.S. App. LEXIS 2045, **33;
                                                      8 Sawy. 238

amendment to legislation touching members of the              grievances, and to be secure in their persons, houses,
enfranchised race. It has a much broader operation. It        papers, and effects, against unreasonable searches and
does not, indeed, place any limit upon the subjects in        seizures; that certain securities against wanton
reference to which the states may legislate. It does not      prosecution [**36] for public offenses should not be
interfere with their police power. Upon every matter          withdrawn, such as that no person should be held to
upon which previously to its adoption they could act,         answer for a felony except upon the presentment or an
they may still act. They can legislate now, as they always    indictment of a grand jury; that in all prosecutions the
could, to promote the health, good order, and peace of the    accused should have the benefit of a speedy trial; should
community; to develop [**34] their resources, increase        be informed of the nature and cause of the accusation;
their industries, and advance their prosperity; but it does   should be confronted with the witnesses against him;
require that in all such legislation hostile and partial      should have compulsory process for obtaining witnesses,
discrimination against any class or person shall be           and the assistance of counsel; that certain guaranties
avoided; that the state shall impose no greater burdens       against oppression of person and spoliation of property
upon any one than upon others of the community under          should not be violated, such as afford protection against
like circumstances, nor deprive any one of rights which       the deprivation of life, liberty, and property without due
others similarly situated are allowed to enjoy. It forbids    process of law, and the taking of private property by the
the state to lay its hand more heavily upon one than upon     public without compensation; that the enumeration in the
another, under like conditions. It shands in the              constitution of certain rights should not be construed to
constitution as a perpetual shield against all unequal and    deny or disparage others retained by the people; and that
partial legislation by the states, and the injustice which    the powers not delegated to the United States by the
follows from it, whether directed against the most humble     constitution, nor prohibited by it to the states, were
or the most powerful; against the despised laborer from       reserved to the states, respectively, or to the people.
China, or the envied master of millions.                      These were all restraints upon the general government.
                                                              Had the population of the United States continued as
     The adoption of the federal constitution met, as all     sparse as when the constitution was formed, and [**37]
know, with most determined opposition from a large            the means of more rapid intercourse between the states
class who believed that the exercise of the powers            had not been invented, it is possible that further
delegated to the general government would eripple and         amendments to the constitution would not have been
embarrass the states in the administration of their local     demanded. But the immense development of the
[*742] affairs. The dread of centralization disturbed the     resources of the country, the [*743] great increase of
minds of some of the purest and greatest statesmen of the     population, the constant intercourse between the states by
day. This [**35] feeling continued after the adoption of      steamer, railway, and telegraph, changed the business and
the constitution, and finally led to the first 10             commercial relations of the states to each other, and led
amendments. The population of the country was sparse;         the people of one section to seek a closer union, and to
each state afforded security to its people, and was to them   desire a greater authority to be exercised by the central
the special object of attachment. They enjoyed under its      government, while the peculiar institutions of the other
laws protection in their property, in their homes, and in     section, and the different industries they developed, led
their business. They felt a natural distrust of a power       its people to desire to limit, rather than to strengthen, the
wielded by officers not selected by themselves. They          central authority. Differences of opinion in matters of
apprehended that the rights which they enjoyed might be       internal policy, and the estrangement engendered by
encroached upon, if not destroyed. So the amendments          controversies growing out of the existence of slavery in
proposed contained limitations upon the powers of             some of the states, ultimately culminated in civil war.
congress, many of which were, indeed, unnecessary, but        Men then saw that danger was to be apprehended in a
were adopted in order to prevent "misconception or abuse      direction opposite to that which led to the original
of the powers of the general government." They declared,      amendments. Restraints upon the power and action of the
among other things, that certain liberties should not be      states were therefore suggested, and to impose them and
abridged, such as the free exercise of religion, the          to abolish slavery, the great [**38] cause of the civil
freedom of speech and of the press; that certain rights       conflict, the new amendments -- the thirteenth,
should not be taken away, such as the right of the people     fourteenth, and fifteenth -- were adopted.
to peaceably assemble and petition for a redress of
                                                                                                                     Page 15
                                    13 F. 722, *743; 1882 U.S. App. LEXIS 2045, **38;
                                                        8 Sawy. 238

     "While, therefore," to quote the language of an              aggregate value of their property is several thousand
admirable writer and eminent jurist, Judge Cooley, "the           millions. * It would be a most singular result if a
first amendments were for the purpose of keeping the              constitutional provision intended for the protection of
central power within due limits, at a time when the               every person against partial and discriminating legislation
tendency to centralization was alarming to many persons,          by the states, should cease to exert such protection the
the last were adopted to impose new restraints on state           moment the person becomes a member of a corporation.
sovereignty, at a time when state powers had nearly               We cannot accept such a conclusion. On the contrary, we
succeeded in destroying the national sovereignty. Of              think that it is well established by numerous
these amendments it may be safely affirmed that the first         adjudications of the supreme court of the United States
ten took from the Union no power it ought ever to have            and of the several states, that [HN12] whenever a
exercised, and that the last three required of the states the     provision of the constitution, or of a law, guaranties to
surrender of no power which any free government should            persons the enjoyment of property, or affords to them
ever employ."                                                     means for its protection, or prohibits legislation
                                                                  injuriously affecting it, the benefits of the provision
     It would tend, therefore, to defeat the great purposes       extend to corporations, and that the courts will always
of the late amendments, if to any of them we should give          look beyond the name of the artificial being to the
the narrow construction for which counsel contend.                individuals whom it represents. [**41]

     Private corporations are, it is true, artificial persons,           *     NOTE. The number of corporations here
but with the exception of a sole corporation, with which                 stated is much less than the number actually
we are not concerned, they consist of aggregations of                    existing. There are over 5,000 corporations in
individuals united for some legitimate business. In this                 California alone.
state they are formed [**39] under general laws; and the
Civil Code provides that they "may be formed for any                   The case of the Society for the Propagation of the
purpose for which individuals may lawfully associate              Gospel in Foreign Parts v. Town of New Haven, 8
themselves." Any five or more persons may by voluntary            Wheat. 464, furnishes an apt illustration of this doctrine.
association form themselves into a corporation. And, as a         The sixth article of the treatly of peace with Great Britain
matter of fact, nearly all enterprises in this state, requiring   of 1783 provided that there should be "no future
for their execution an expenditure of large capital, are          confiscations made, nor any prosecutions commenced,
undertaken by corporations. They engage in commerce;              against any person or persons for or by reason of the part
they build and sail ships; they cover our navigable               which he or they may have taken in the present war, and
streams with steamers; they construct houses; they bring          that no person shall on that account suffer any future loss
the products of earth and sea to market; they light our           or damage, either in his person, liberty, or property." An
streets and buildings; they [*744] open and work mines;           English corporation claimed the benefit of this article
they carry water into our cities; they build railroads, and       with reference to certain lands in Vermont granted to it
cross mountains and deserts with them; they erect                 before the revolution, which the legislature of that state
churches, colleges, lyceums, and theaters; they set up            had undertaken to give to the [*745] town where they
manufactories, and keep the spindle and shuttle in                were situated. It was contended that the treaty only
motion; they establish banks for savings; they insure             applied to natural persons; that it did not embrace
against accidents on land and sea; they give policies on          corporations, because they were not persons who could
life; they make money exchanges with all parts of the             take part in the war, or could be considered British
world; they publish newspapers and books, and send                subjects; but the position was held [**42] to be
news by lightning across the continent and under the              untenable. The court, speaking through Mr. Justice
ocean. Indeed, there is nothing which is lawful to be             Washington, said that the argument proceeded upon an
done to feed [**40] and clothe our people, to beautify            incorrect view of the subject, and referred to the case of
and adorn their dwellings, to relieve the sick, to help the       U.S. v. Devaux, 5 Cranch, 86, to show that the court,
needy, and to enrich and ennoble humanity, which is not           when necessary, will look beyond the name of a
to a great extent done through the instrumentalities of           corporation to reach and protect those whom it
corporations. There are over 500 corporations in this             represents.
state; there are 30,000 in the United States, and the
                                                                                                                        Page 16
                                    13 F. 722, *745; 1882 U.S. App. LEXIS 2045, **42;
                                                        8 Sawy. 238

     The constitution, in defining the judicial power of the           "A corporation," observed Mr. Justice Grier,
United States, declares that it shall extend to                   speaking for the court, "it is said, is an artificial person, a
"controversies between citizens of different states;" and         mere legal entity, invisible and intangible. This is no
in the case referred to by Mr. Justice Washington the             doubt metaphysically true in a certain sense. The
question arose whether a corporation composed of                  inference, also, that such an artificial entity 'cannot be a
citizens of one state could sue in the circuit court of the       citizen' is a logical conclusion from the premises, which
United States a citizen of another state, and it was held         cannot be denied. But a citizen who has made a contract,
that it could. In deciding the question, the court,               and has a controversy with a corporation, may also say,
speaking through Chief Justice Marshall, said:                    with equal truth, that he did not deal with a mere
                                                                  metaphysical abstraction, but with natural persons; that
     "However true the fact may be that the tribunals of          his writ has not been served on an imaginary entity, but
the state will administer justice as impartially as those of      on men and citizens; and that his contract was made
the nation to parties of every description, it is not less true   [**45] with them as the legal representatives of
that the constitution itself either entertains apprehension       numerous unknown associates, or secret and dormant
on this subject, or views with such indulgence the                partners.
possible fears and apprehensions of suitors, that it has
established national tribunals [**43] for the decision of               "The necessities and conveniences of trade and
controversies between aliens and citizens, or between             business require that such numerous associates and
citizens of different states. Aliens or citizens of different     stockholders should act by representation, and have the
states are not less susceptible of these apprehensions, nor       faculty of contracting, suing, and being sued in a
can they be supposed to be less the objects of                    ficititious or collective name. But these important
constitutional provision because they were allowed to sue         faculties, conferred on them by state legislation, for their
by a corporate name. That name, indeed, cannot be an              own convenience, cannot be wielded to deprive others of
alien or a citizen, but the persons whom it represents may        acknowledged rights. It is not reasonable that those who
be the one or the other, and the controversy is, in fact and      deal with such persons should be deprived of a valuable
in law, between those persons suing in their corporate            privilege by a syllogism, or rather sophism, which deals
character, by their corporate names, for a corporate right,       subtly with words and names, without regard to the
and the individual against whom the suit may be                   things or persons they are used to represent."
instituted. Substantially and essentially the parties in
such a case, where the members of the corporation are                  The fifth amendment to the constitution declares that
aliens or citizens of a different state from the opposite         --
party, come within the spirit and terms of the jurisdiction
                                                                       [HN13] "No person shall be held to answer for a
conferred by the constitution on the national tribunals.
                                                                  capital or otherwise infamous crime, unless on a
Such has been the universal understanding on the subject.
                                                                  presentment or indictment of a grand jury, except in cases
Repeatedly has this court decided causes between a
                                                                  arising in the land or naval forces, or in the militia, when
corporation and an individual without feeling a doubt
                                                                  in actual service in time of war or public danger; nor shall
respecting its jurisdiction."
                                                                  any person be subject for the same offense to be twice put
     The same point was presented in another form in the          in jeopardy of life or limb; nor shall he be compelled in
case of Marshall v. [**44] Baltimore & O.R. Co. 16                any [**46] criminal case to be a witness against himself,
How. 326. There the question was whether a citizen of             nor be deprived of life, liberty, or property without due
one state could sue in the circuit court of the United            process of law; nor shall private property be taken for
States a corporation of another state, and a similar              public use without just compensation."
conclusion was reached. After referring to the clause of
                                                                      From the nature of the prohibitions in this
the constitution extending the judicial power of the
                                                                  amendment it would seem, with the exception of the last
United States to controversies between [*746] citizens
                                                                  one, as though they could apply only to natural persons.
of different states, the court proceeded to consider the
                                                                  No others can be witnesses; no others can be twice put in
objections urged to treating a corporation as a citizen, so
                                                                  jeopardy of life or limb, or compelled to be witnesses
far as it might be necessary to protect the corporators:
                                                                  against themselves; and therefore it might be said with
                                                                  much force that the word "person," there used in
                                                                                                                    Page 17
                                   13 F. 722, *746; 1882 U.S. App. LEXIS 2045, **46;
                                                       8 Sawy. 238

connection with the prohibition against the deprivation of      the latter's consent, as was held in Paul v. Virginia, 8
life, liberty, and property without due process of law, is      Wall. 168, although such consent will generally be
in like manner limited to a natural person. But such has        presumed in the absence of positive prohibition.
not been the construction of the courts. A similar
provision is found in nearly all of the state constitutions;         Decisions of state courts, in harmony with the views
and everywhere, and at all times, and in all courts, it has     we have expressed, exist in great numbers. But it is
been held, either by tacit assent or express adjudication,      unnecessary to cite them. It is sufficient to add that in all
to extend, so far as their property is concerned, [*747] to     text writers, in all codes, and in all [**49] revised
corporations. And this has been because the property of a       statutes, it is laid down that [HN16] the term "person"
corporation is in fact the property of the corporators.         includes, or may include, corporations; which amounts to
[HN14] To deprive the corporation of its [**47]                 what we have already said, that whenever it is necessary
property, or to burden it, is, in fact, to deprive the          for the protection of contract or property [*748] rights,
corporators of their property or to lessen its value. Their     the courts will look through the ideal entity and name of
interest, undivided though it be, and constituting only a       the corporation to the persons who compose it, and
right during the continuance of the corporation to              protect them, though the process be in its name. All the
participate in its dividends, and on its dissolution to         guaranties and safeguards of the constitution for the
receive a proportionate share of its assets, has an             protection of property possessed by individuals may,
appreciable value, and is property in a commercial sense,       therefore, be invoked for the protection of the property of
and whatever affects the property of the corporation            corporations. And as no discriminating and partial
necessarily affects the commercial value of their interests.    legislation, imposing unequal burdens upon the property
If, for example, to take the illustration given by counsel, a   of individuals, would be valid under the fourteenth
corporation created for banking purposes acquires land,         amendment, so no legislation imposing such unequal
notes, stocks, bonds, and money, no stockholder can             burdens upon the property of corporations can be
claim that he owns any particular item of this property,        maintained. The taxation, therefore, of the property of
but he owns an interest in the whole of it which the courts     the defendant upon an assessment of its value, without a
will protect against unlawful seizure or appropriation by       deduction of the mortgage thereon, is to that extent
others, and on the dissolution of the company he will           invalid.
receive a proportionate share of its assets. Now, if a
                                                                     If there were no other objection to the assessment we
statute of the state takes the entire property, who suffers
                                                                might, perhaps, order judgment for the amount of taxes
loss by the legislation? Whose property is taken?
                                                                due upon the valuation of the property, after deducting
Certainly, the corporation is deprived of its property; but
                                                                therefrom the amount of the mortgage; [**50] but there
at the same time, in every just sense of the constitutional
                                                                is another objection, of equal significance, which goes to
guaranty, [**48] corporations are also deprived of their
                                                                the validity of the whole assessment. No opportunity was
property.
                                                                afforded to the defendant to be heard respecting it before
     The prohibition against the deprivation of life and        the state board of equalization. It was made by the board
liberty in the same clause of the fifth amendment does not      under the tenth section of article 13 of the constitution,
apply to corporations, because, as stated by counsel, the       which declares that [HN17] "the franchise, road-way,
lives and liberties of the individual corporators are not the   road-bed, rails, and rolling stock of all railroads operated
life and liberty of the corporation.                            in more than one county in this state shall be assessed by
                                                                the state board of equalization at their actual value, and
     [HN15] Nor do all the privileges and immunities of         the same shall be apportioned to the counties, cities and
citizenship attach to corporations. These bodies have           counties, cities, towns, townships, and districts in which
never been considered citizens for any other purpose than       such railroads are located, in proportion to the number of
the protection of the property rights of the corporators.       miles of railway laid in such counties, cities and counties,
The status of citizenship, entitling the citizen to certain     towns, townships, and districts."
privileges and immunities in the several states, does not
belong to corporations. The special privileges which                Other articles of the constitution, and laws
citizens acquire by becoming incorporated in one state          supplementing their directions, provide for the
cannot, therefore, be exercised in another state without        assessment by county officers of all property except "the
                                                                                                                  Page 18
                                  13 F. 722, *748; 1882 U.S. App. LEXIS 2045, **50;
                                                      8 Sawy. 238

franchise, road-way, road-bed, rails, and rolling stock" of    mail, express, baggage, freight, and other cars, or
railroads operated in more than one county, for a hearing      property used in operating or repairing [**53] the
by property holders respecting the assessment, and for its     railway in the state, and on railways which are parts of
equalization by county boards. Ample security is thus          lines extending beyond its limits, the amount of the
afforded to individuals [**51] against erroneous and           rolling stock in use during the year, the annual gross
arbitrary assessments. But the assessment of the property      earnings of the entire railway, and the proportionate
mentioned, of railroads operated in more than one county,      annual gross earnings of the same in the state, and such
is placed entirely with the state board.                       other facts as the board may in writing require; and that if
                                                               the officer or officers designated fail to make and furnish
    In People v. Sup'rs of Sacramento County the               such statement, the board shall proceed to assess the
supreme court of the state said that --                        property; and the valuation fixed shall be final and
                                                               conclusive. The law also provides that the property shall
     "It is the manifest intent of the constitution that the   be assessed at its actuul value; that the assessment shall
valuation of the railroad property mentioned in section 10     be made of the entire railway in the state, including the
of article 13 shall be finally fixed and determined by the     right of way, road-bed, track, bridges, culverts, and
state board of equalization. The state board has the           rolling stock; that the state board shall transmit to the
[*749] exclusive power to assess and equalize its value.       county assessor of each county through which the railway
Thus the constitution furnishes a system for the               runs, a statement showing the length of its main track
assessment of railroads operated in more than one county,      within the county, and its assessed value per mile, as
which is separate and distinct from that provided for the      fixed by a pro rata distribution per mile of the assessed
assessment of other property." And again: "The portion         value of the whole property; [*750] that this statement
of the section quoted (the portion above) is clearly           shall be entered on the assessment roll of the county, and
self-executing. We are at a loss to imagine how any            that at their first meeting after its receipt by the county
statute could make the duty of the state board any clearer     [**54] assessor the board of supervisors of the county
than does this distinct and positive mandate of the            shall cause an order to be entered in the proper record
constitution. If any doubt could possibly be built upon        book stating the length of the main track and the assessed
the words cited ti would be dispelled by the first clause of   value of the railway lying in each city, town, township,
the same section: 'All property, except as hereinafter in      school-district, or lesser taxing district in the county
this section provided, [**52] shall be assessed in the         through which the railway runs, as fixed by the state
county, city, city and county, town, township, or district     board, which shall constitute the taxable value of the
in which it is situated, in the manner prescribed by law.'     property for taxable purposes in the district, and that such
Thus by the very language of the constitution all other but    property shall be taxed at the same rates as the property
the railroad property mentioned must be assessed by local      of individuals.
assessors, in the manner prescribed by statute. The
railroad property must be assessed in the manner                    We have no doubt that further legislation might have
prescribed by the section of the constitution, that is, by     been adopted providing for notice the the company, and a
the state board, without the aid of statute." 8 Pac. Law J.    system of procedure by which it might have been heard
103.                                                           respecting the assessment. We do not understand that the
                                                               supreme court of the state intended by the decision cited
     The Political Code provides that the assessment shall     to hold that the tenth section of the thirteenth article is
be made by the state board on or before the first Monday       self-executing, except to the extent that it vests complete
in May of each year; that the president, secretary, cashier,   power in the state board to make the assessment of the
or managing agent, or such officer of the corporation as       property; not that legislation may not be had providing
the board may designate, shall furnish to the board, on or     for the mode in which the powers of the board shall be
before the first Monday of April of the year, a statement,     exercised. Indeed, the concluding section of the article
signed and sworn to by him, showing in detail the whole        authorizes any legislation necessary to give effect to
number of miles of railway owned, operated, or leased in       [**55] its provisions. Unfortunately, no such legislation
the state by the corporation, and the value thereof per        has been had. The attempted legislation failed, because it
mile, and all its property of every kind located in the        did not receive in the legislature the constitutional
state, the number and value of its engines, passenger,         majority, as is clearly shown by the circuit judge in his
                                                                                                                   Page 19
                                  13 F. 722, *750; 1882 U.S. App. LEXIS 2045, **55;
                                                      8 Sawy. 238

opinion. It is unnecessary to go over the ground he has        affected. It must be pursued in the ordinary mode
completely covered.                                            prescribed by the law; it must be adapted to the end to be
                                                               attained; and it must give to the party to be affected an
     [HN18] The presentation to the state board by the         opportunity of being heard respecting the justice of the
corporation of a statement of its property and of its value,   judgment sought. Without these conditions entering into
which it is required to furnish, is not the equivalent to a    the proceeding, it would be anything but due process. If
notice of the assessment made and of an opportunity to be      it touched life or liberty, it would be wanton punishment,
heard thereon. It is a preliminary proceeding, and until       or rather wanton cruelty; if it touched property, it would
the assessment the corporation cannot know whether it          be arbitrary exaction. It is significant that the guaranty
will have good cause of complaint. No hearing upon the         against the deprivation of property without due process of
statement presented is allowed, and when the assessment        law is contained in the clause which guaranties against a
is made the matter is closed; no opportunity to correct        like deprivation of life and liberty; and it means that there
any errors committed is provided. The presentation of          shall be no proceeding against either without the
the statement can no more supersede the necessity of           observance [**58] of all the securities applicable to the
allowing a subsequent hearing of the owners, than the          case recognized by the general law, by those principles
filing of a complaint in court can dispense with the right     which are established in all constitutional governments
of the suitor and his contestant to be there heard.            for the protection of private rights. Notice is absolutely
                                                               essential to the validity of the proceeding in any case; it
     There being, then, no provision of law giving to the      may be given by personal citation, and in some cases it
company notice of the action of the state board, and an        may be given by statute; but given it must be in some
opportunity [**56] to the heard respecting it, is the          form. If life and liberty are involved, there [*752] must
assessment valid? Would the taking of the company's            be a regular course of judicial proceedings; so, also,
[*751] property in the enforcement of the tax levied           where title or possession of property is in contention. But
according to the assessment be depriving it of its property    [HN20] in the taking of property by taxation the
without due process of law? It seems to us there can be        proceeding is more summary and stringent. The
but one answer to these questions. There is something          necessities of revenue for the support of government will
repugnant to all notions of justice in the doctrine that any   not admit of the delays attendant upon judicial
body of men can be clothed with the power of finally           proceedings in the courts of justice. The statute fixes the
determining the value of another's property, according to      rate of taxation upon the value of the property, and
which it may be taxed, without affording to him an             appoints officers to estimate and appraise the value. Due
opportunity of being heard respecting the correctness of       process of law in the proceeding is deemed to be pursued,
their action. And the injustice is strikingly apparent when    when, after the assessment is made by the assessing
the property consists of the great number of particulars       officers upon such information as they may obtain, the
which go to make up the taxable estate of a railroad           owner is allowed a reasonable opportunity, at a time and
company, requiring for any just estimate of their value        place to be designated, to be heard respecting the [**59]
accurate knowledge upon a multitude of subjects, not           correctness of the assessment, and to show any errors in
usually possessed without special study. We cannot             the valuation committed by the officers. Notice to him
assent to any such doctrine. It conflicts with the great       will be deemed sufficient, if the time and place of hearing
principle which lies at the foundation of all just             be designated by statute. But whatever the character of
government, that no one shall be deprived of his life, his     the proceeding, whether judicial or administrative,
liberty, or his property without an opportunity of being       summary or protracted, and whether it takes property
heard against the proceeding. The principle [**57] is as       directly, or creates a charge or liability which may be the
old as Magna Charta, and is embodied in all the state          basis of taking it, the law directing the proceeding must
constitutions, and in the fourteenth amendment of the          provide for some kind of notice, and offer to the owner an
federal constitution. [HN19] The provision in this             opportunity to be heard, or the proceeding will want the
amendment is in the form of an interdict upon the states       essential ingredient of due process of law. Nothing is
-- "Nor shall any state deprive any person of life, liberty,   more clearly established by a weight of authority
or property without due process of law." And by due            absolutely overwhelming than that notice and opportunity
process is meant one which, following the forms of law,        to be heard are indispensable to the validity of the
is appropriate to the case, and just to the parties to be      proceeding.
                                                                                                                   Page 20
                                  13 F. 722, *752; 1882 U.S. App. LEXIS 2045, **59;
                                                      8 Sawy. 238

     In Davidson v. New Orleans the supreme court of the       upon the question of the constitutionality of such a law,
United States assumed this position to be unquestionable.      that the assessment has in fact been fairly apportioned.
In that case an assessment levied on certain real estate in    The constitutional validity of a law is to be tested, not by
New Orleans for draining the swamps of that city was           what has been done under it, but what may, by its
resisted on the ground that the proceeding deprived the        authority, be done. The legislature may prescribe the
owners of their property without due process of law; and       kind of [**62] notice, and the mode in which it shall be
the court refused to disturb it for the reason that the        given, but it cannot dispense with all notice." And, again,
[**60] owners of the property had notice of the                that "no case, it is believed, and be found in which it was
assessment and an opportunity to contest it in the courts.     decided that this constitutional guaranty [against
After stating that much misapprehension prevailed as to        depriving one of his property without due process of law]
the meaning of the terms "due process of law," and that it     did not extend to cases of assessments; and yet we may
would be difficult to give a definition which would be at      infer, from certain dicta of judges, that their attention was
once perspicuous, comprehensive, and satisfactory, the         not called to it, or that they lost sight of it in the cases
court, speaking through Mr. Justice Miller, said that it       which they were considering. It has sometimes been
would lay down the following proposition as applicable         intimated that a citizen is not deprived of his property,
to the case:                                                   within the meaning of this constitutional provision, by the
                                                               imposition of an assessment. It might as well be said that
     "That whenever by the laws of a state, or by state        he is not deprived of his property by a judgment entered
authority, a tax, assessment, servitude, or other burden is    against him. A judgment does not take property until it is
imposed upon property for the public use, whether it be        enforced, and then it takes the real or personal property of
for the whole state or of some more limited portion of the     the debtor. So an assessment may generally be enforced,
community, and those laws provide for a mode of                not only against the real estate upon which it is a lien,
confirming or contesting the charge [*753] thus                but, as in this case, against the personal property of the
imposed, in the ordinary course of justice, with notice to     owner also; and by it he may just as much be deprived of
the person, or such proceeding in regard to the property       his property, and in the same sense, as the judgment
as is appropriate to the nature of the case, the judgment in   debtor is deprived of his by the judgment." 74 N.Y. 188,
such proceedings cannot be said to deprive the owner of        [**63] 195.
his property without due process of law, however
obnoxious it may be to other objections." 96 U.S. 104.             We concur fully in the views thus forcibly expressed.

     In Stuart v. Palmer the meaning of these terms is               It remains to consider the last position of counsel,
elaborately considered [**61] by the court of appeals of       that the provisions of article 13 of the constitution of the
New York with reference to numerous adjudications on           state, as to the taxation [*754] of railroad property, are
the subject. In that case a law of the state imposed an        to be treated as conditions upon the continued existence
assessment on certain real property for a local                of railroad corporations. On the hearing, this position
improvement without notice to the owner, and a hearing         seemed to us to possess some force, but on careful
or an opportunity to be heard by him, and the court held       consideration its supposed force is dissipated. The
that it had the effect of depriving him of his property        argument is that on the original creation of the
without due process of law, and was therefore                  corporation the state might have imposed any conditions
unconstitutional. Mr. Justice Earl, speaking for the court,    whatever as to the manner and the amount in which its
said:                                                          property should be taxed; that under the reserved power
                                                               of amendment of the law creating the corporation, the
     "I am of the opinion that the constitution sanctions      state could at any time afterwards impose such a
no law imposing such an assessment without a notice to,        condition; that the new constitution, in continuing the
and a hearing, or an opportunity of hearing, by the            defendant and other railroad corporations in existence,
owners of the property to be assessed. It is not enough        and at the same time authorizing the taxation of their
that the owners may by chance have notice, or that they        property upon a valuation different from that at which the
may, as a matter of favor, have a hearing. The law must        property of individuals is assessed, imposed that
require notice to them, and give them the right to a           condition upon them, and that the subsequent exercise of
hearing, and an opportunity to be heard. It matters not,       its franchises by the defendant implies an assent to such
                                                                                                                   Page 21
                                  13 F. 722, *754; 1882 U.S. App. LEXIS 2045, **63;
                                                      8 Sawy. 238

condition.                                                     reservation clause it retains power only over that which it
                                                               grants; it does not grant the rails on the road; it does not
     There are two answers [**64] to this argument. In         grant the depots along-side of it; it does not grant the cars
the first place, article 13 [HN21] is not intended to make     on the track, nor the engines which move them, and over
any change in the powers or rights of corporations under       them it can exercise no power except such as may be
the laws of the state. It treats entirely of revenue and       exercised through its control over the franchise, and such
taxation, and of the rules which shall govern the              as may be exercised with reference to all property used
assessment of the property of individuals, and of railroad     by carriers for the public. The reservation of power over
and other quasi public corporations. It is in another          the franchise, -- that is, over that which is granted, --
article that provisions are made for the control of railroad   makes its grant a conditional or revocable contract,
corporations; and the duties and responsibilities of           whose obligation is not impaired by its revocation or
corporations generally, and the power of the state over        change. The supreme court established, in the Dartmouth
them, are declared.                                            College Case, that [HN23] the charter of a private
                                                               corporation is a contract between the corporators and the
     In the second place, [HN22] the state, in the creation    state, and that it was, therefore, within the prohibition of
of corporations, or in amending their charters, or rather in   the federal constitution against the impairment of
passing or amending general laws under which                   contracts. To avoid this result the states have generally
corporations may be formed and altered, possesses no           inserted clauses in their constitutions reserving a right to
power to withdraw them when created, or by amendment,          repeal, alter, or amend charters granted by their
from the guaranties of the federal constitution. It cannot     legislatures, or to repeal, alter, or amend the [**67]
impose the condition that they shall not resort to the         general laws under which corporations are allowed to be
courts of law for the redress of injuries or the protection    formed. The reservation relates only to the contract of
of its property; that they shall make no complaint if their    incorporation, which, without such reservation, would be
goods are plundered and their premises invaded; that they      irrepealable. It removes the impediment to legislation
shall ask no indemnity if their lands be seized for public     touching the contract. It places the corporation in the
use, or be taken without due process of [**65] law, or         same position it would have occupied had the supreme
that they shall submit without objection to unequal and        court held that charters are not contracts, and that laws
oppressive burdens arbitrarily imposed upon them; that,        repealing or altering them did not impair the obligation of
in other words, over them and their property the state         contracts. The property of the corporation, acquired in
may exercise unlimited and irresponsible power.                the exercise of its faculites, is held independently of such
Whatever the state may do, even with the creations of its      reserved power, and the state can only exercise over it the
own will, it must do in subordination to the inhibitions of    control which it exercises over the property of individuals
the federal constitution. It may confer, by its general        engaged in similar business.
laws, upon corporations certain capacities of [*755]
doing business, and of having perpetual succession in               The case of Detroit v. Detroit & Howell Plank-road
their members. It may make its grant in these respects         Co., in the [*756] supreme court of Michigan, is in point
revocable at pleasure; it may make the grant subject to        on both of the propositions stated. An act of the
modifications and impose conditions upon its use, and          legislature of the state, amending the charter of the
reserve the right to change these at will. But whatever        company, required it to remove without the limits of the
property the corporations acquire in the exercise of the       city of Detroit a toll-gate on its road, then within the
capacities conferred, they hold under the same guaranties      limits. The effect of the act was to take from the
which protect the property of individuals from spoliation.     company about two and a half miles of its road, upon
It cannot be taken for public use without compensation.        which it collected tolls. The [**68] act under which the
It cannot be taken without due process of law, nor can it      company was incorporated reserved a power in the
be subjected to burdens different from those laid upon the     legislature to repeal and amend it at any time, and the
property of individuals under like circumstances.              question was whether, under this reservation, the
                                                               legislature could require the removal of the toll-gate out
    The state grants to railroad corporations formed           of the city; and it was held that it could not. Ordinarily a
under its laws a [**66] franchise, and over it retains         law requiring the removal of a toll-gate from one place to
control, and may withdraw or modify it. By the                 another on a road would be a mere police regulation, but
                                                                                                                   Page 22
                                  13 F. 722, *756; 1882 U.S. App. LEXIS 2045, **68;
                                                      8 Sawy. 238

here it was something more; it deprived the company of         corporations any property which they may rightfully have
compensation for the use of its road within the city limits;   acquired. In the most arbitrary times such an act was
that is, for a large part of the travel over it. The court,    recognized as pure tyranny, and it has been forbidden in
speaking through Mr. Justice Cooley, observed that there       England ever since Magna Charta, and in this country
were cases in which amendments to charters having some         always. It is immaterial in what way the property was
resemblance to this had been sustained, and cited several      lawfully acquired, -- whether by labor in the ordinary
which involved a mere police regulation, such as               avocations of life, by gift or descent, or by making
requiring a railroad company to build a station-house and      profitable use of a franchise granted by the state; it is
stop its trains at a certain locality; to permit and provide   enough that it has become private property, and it is then
for the crossing of its track; and to unite with others in a   protected by the 'law of the land.'" [**71] 43 Mich.
common passenger station for trains entering a city.           140-147; [S.C. 5 N.W. Rep. 275.]

     "But [the court added] there is no well-considered             We have already extended this opinion to a great
case in which it has been held that a legislature, under its   length, and we do not think it necessary or important to
power to amend a charter, might take from a [**69]             notice other positions urged by counsel with great
corporation any of its substantial property or property        learning and ability against the validity of the taxes for
rights. In some cases the power has been denied, where         which the present action is brought. We are satisfied that
the interest involved seemed insignificant. The case of        the assessment upon which they were levied is invalid
Albany, etc., R. Co. v. Brownell, 24 N.Y. 345, is an           and void, and judgment must be accordingly entered on
illustration. It was there decided that although the           the demurrer for the defendant, and, by stipulation of
legislature might require railroad companies to suffer         parties, the judgment must be made final.
highways to cross their tracks, they could not subject the
lands which the companies had acquired for other               CONCUR BY: SAWYER
purposes to the same burden, except in connection with
the provision for compensation. The decision was in            CONCUR
accord with that in Com. v. Essex Co. 13 Gray, 239, 253,
in which, while the power to alter, amend, or repeal the            SAWYER, C.J., concurring. The facts of this case
corporate franchises was sustained, it was at the same         are fully stated by Mr. Justice FIELD, and need not be
time declared that 'no amendment or alteration of the          repeated here. The questions presented are of the gravest
charter can take away the property or rights which have        character, and of the utmost importance to the people of
become vested under a legitimate exercise of the powers        California. While I concur, generally, in the conclusions,
granted.' The same doctrine is clearly asserted in             and in the line of argument adopted by my associate, I
Railroad Co. v. Maine, 96 U.S. 499, and is assumed to be       shall also state as briefly as I reasonably can, considering
unquestionable in the several opinions delivered in the        the gravity of the questions discussed, my conclusions
Sinking-fund Cases, 99 U.S. 700.                               upon the points involved.

     "But for the provision of the constitution of the              1. In my judgment, the word "person," in the clause
United States which forbids impairing the [**70]               of the fourteenth amendment to the national constitution,
obligation of contracts, the power to amend and repeal         "No state shall * * * deprive any person of life, liberty, or
corporate charters would be ample without being                [**72] property without due process of law, nor deny to
expressly reserved. The [*757] reservation of the right        any person the equal protection of the law," includes a
leaves the state where any sovereignty would be, if            private corporation. It must, at least, through the
unrestrained by express constitutional limitations and         corporation include the natural persons who compose the
with the powers which it would then possess. It might,         corporation, and who are the beneficial owners of all the
therefore, do what it would be admissible for any              property, the technical and legal title to which is in the
constitutional government to do when not thus restrained,      corporation in trust for the corporators. The fact that the
but it could not do what would be inconsistent with            corporators are united into an ideal legal entity, called a
constitutional principles. And it cannot be necessary at       corporation, does not prevent them from [*758] having
this day to enter upon a discussion in denial of the right     a right of property in the assets of the corporation which
of the government to take from either individuals or           is entitled to the protection of this clause of the
                                                               constitution. Nor does the intervention of this artificial
                                                                                                                   Page 23
                                  13 F. 722, *758; 1882 U.S. App. LEXIS 2045, **72;
                                                      8 Sawy. 238

being between the real beneficial owners and the state,        corporations are the parties to the record. The cases in
for the simple purpose of convenient management of the         the supreme court upon this point are numerous, and too
business, enable the state, by acting directly upon the        familiar to require further citation.
legal entity, to deprive the real parties beneficially
interested of the protection of these important provisions.         In Society, etc., v. New Haven, 8 Wheat. 464-489, it
In the language of Mr. Pomeroy, one of the counsel,            was held that a corporation was protected under the sixth
which I adopt:                                                 article of the treaty with [*759] England, of 1783, which
                                                               reads: "There shall be no confiscations made, nor any
     "Whatever be the legal nature of a corporation as an      prosecutions commenced [**75] against any person or
artficial, metaphysical being, separate and distinct from      persons for or by reason of the part which he or they may
the individual members, and whatever distinctions the          have taken in the present war, and that no person shall,
[**73] common law makes, in carrying out the technical         on that account, suffer any future loss or damage, either
legal conception, between property of the corporation and      in person, liberty, or property," etc. The word "person" in
that of the individual members, still, in applying the         the civil-rights act of congress of April 20, 1870, (17 St.
fundamental guaranties of the constitution, and in thus        13,) was held on the circuit to include a corporation.
protecting the rights of property, these metaphysical and      N.W. Fert. Co. v. Hyde Park, 3 Biss. 481.
technical notions must give way to the reality. The truth
cannot be evaded that, for the purpose of protecting               In Railroad Co. v. Richmond, 96 U.S. 529, the
rights, the property of all business and trading               supreme court assumes that a corporation is included in
corporations is the property of the individual corporators.    the word "person," as thus used in the fourteenth
A state act depriving a business corporation of its            amendment.
property without due process of law, does, in fact,
                                                                     The word "person" is, unquestionably, much broader
deprive the individual corporators of their property. In
                                                               in its signification than the word "citizen," and the change
this sense, and within the scope of these grand safeguards
                                                               from the word "citizen," in the first clause of the section,
of private rights, there is no real distinction between
                                                               to the word "person" of so much larger import, in the last,
artificial persons, or corporations, and natural persons."
                                                               must have been well considered, and have been intended
     This principle is recognized, and the question settled    to extend the shield of the constitution to all cases which
for all time, in an early case by Chief Justice Marshall, in   might require the protection of this wholesome and
which he says:                                                 greatly-needed guaranty. There is nothing in the context
                                                               to indicate a purpose to limit the meaning of the word
     "Aliens, or citizens of different states, are not less    "person" to a narrower sense than the word ordinarily and
susceptible of these apprehensions, nor can they be            naturally imports, or [**76] to make the application of
supposed to be less the objects of constitutional              the provision partial only. To exclude corporations from
provisions, because they are allowed to sue by a               its import, would be to leave, perhaps, at this day, the far
corporate name. That name, [**74] indeed, cannot be            larger portion of the vast capital of the country employed
an alien or a citizen; but the persons whom it represents      in great enterprises, either commercial, manufacturing,
may be the one or the other; and the controversy is, in        mining, or otherwise, beyond the pale of its protection.
fact and in the law, between those persons suing in their      There is no good reason for excluding the plroperty of
corporate character by their corporate name for a              corporations from the same protection extended to other
corporate right, and the individuals against whom the suit     property. It is subject to all the burdens, and it should be
may be instituted. Substantially and essentially the           entitled to all the immunities, of other property. It is, at
parties in such a case, where the members of the               last, the property of natural persons. The provision is
corporation are aliens or citizens of a different state from   protective and remedial, not punitive in character, and
the opposite party, come within the spirit and terms of the    should, therefore, be liberally, not strictly, construed. No
jurisdiction conferred by the constitution on the national     restriction should be put upon the term not called for by
tribunals." Bank U.S. v. Devaux, 5 Cranch, 87.                 the exigencies of the case, or by the public interest; and it
                                                               must be manifest that the public interest requires that the
     It is upon this principle that the national courts have   broadest signification should be adopted.
ever since entertained jurisdiction on the ground of
citizenship of the corporators in cases wherein                    Blackstone treats of corporations under the head of
                                                                                                                 Page 24
                                  13 F. 722, *759; 1882 U.S. App. LEXIS 2045, **76;
                                                      8 Sawy. 238

"Rights of Persons;" chapter 18 under this head being         but also because statutes violating their prohibitions, in
devoted to the subject. He says: "Persons, also, are          dealing with corporations, must necessarily infringe upon
divided by law into either natural persons or artificial;"    the rights of natural persons. In applying and enforcing
giving a definition [**77] of each. Book 1, p. 123. So,       these constitutional guaranties, corporations cannot be
also, does Kent, (2 Kent, 316.)                               separated from the natural persons who compose them."

     In U.S. v. Amedy, 11 Wheat, 412, wherein a person             It is upon this principle that the decision in Dodge v.
was indicted, under an act of congress, for destroying a      Woolsey, 18 How. 331, rests, which establishes the right
vessel belonging to a corporation, [*760] the supreme         of stockholders to maintain a suit against the directors of
court held that a corporation is a person within the          the corporation and state officers to restrain the payment
meaning of the act. The court, among other things, says:      by the one, and the collection by the other, of a tax
"The mischief intended to be reached by the statute is the    illegally assessed against the corporation. See, also,
same, whether it respects private or corporate persons.       Marshall [*761] v. B. & O.R. Co. 16 How. 327. But a
That corporations are in law, for civil purposes, deemed      corporation itself is, in my judgment, a "person," within
persons is unquestionable." And the court in this case        the meaning of the constitutional provision in question.
holds the same for criminal purposes also; and in criminal    Such has been the ruling in all cases under statutes
cases statutes are strictly construed. So, in regard to the   containing the word "person," unless the context clearly
provisions of the fourteenth amendment under                  indicated a more limited signification.
consideration, "the mischief intended to be reached" by
the amendment, "is the same, whether it respects private           2. I shall not spend much time in discussing the
or corporate persons." See, also, cases cited in the          question whether the fourteenth amendment applies only
opinion. The authorities to a similar effect are numerous.    to the African race. Undoubtedly, the negro furnished the
See, as examples, People v. Ins. Co. 15 Johns. 588;           immediate occasion and motive for [**80] adoption of
Planters' Bank v. Andrews, 8 Porter, 404; Kyd, Corp. 15;      the amendment; but its benefits could not have been
Douglas v. P.M.S. Co. 4 Cal. 304; State v. Nash.              intended to be limited to the negro. The protection
University, 4 Hum. 166. There are [**78] many other         afforded is as important to others as to him, as is clearly
cases affording support, more or less direct, to this view.   shown by experience under this provision. A whole race,
                                                              not african, large numbers of whom came to our shores
     In Ins. Co. v. New Orleans, 1 Woods, 85, it was held     under the solemn guaranties of stipulations in a treaty
on the circuit that a corporation is not embraced in the      suggested and sought, and in a great part framed, by
word "person," as used in the amendment under                 ourselves, to promote our then supposed interests, were
consideration, and the supreme court of California, upon      amoung the first to invoke this very provision of the
the authority of that case, made a similar ruling in C.P.R.   fourteenth amendment to protect them, under the word
Co. v. State Bd. of Equalization, 8 Pac. Coast Law J.         "person," in the right to earn an honest living, by honest
1155. But notwithstanding their high character for            labor; and its protecting power was not invoked in vain.
ability, and my respect for the decisions of the judges       Parrott's Chinese Case, 6 Sawy. 349; In re Ah Chong,
taking that view, I am compelled to adopt a different         (Chinese Fisherman Case,) Id. 451. Who, in view of past
conclusion. I think, both upon reason and authority, that     experience, shall say there was no occasion to extend the
the other is the better view. Again, with respect to          signification of the word "person" beyond the negro? And
corporate property, I adopt the language of counsel,          are all other races, including our own, to be now
which expresses my view accurately and clearly:               withdrawn from its protecting power by so narrow and
                                                              unnatural a construction. I apprehend not. It the line
     "The property of the corporation is in reality the       cannot be drawn at the negro, then no other can be
property of its individual corporators. A state statute       adopted that will not embrace every human being in his
depriving a corporation of its property does deprive the      individual character, or [**81] in his legal association
individual corporators of their property. These clauses of    with his fellows, for the more convenient administration
the fifth and fourteenth amendments, ans the similar          of his property, and more successful pursuit of happiness.
clauses of the state constitution, apply, therefore, to       I apprehend that it would have struck the world with
private corporations, not alone because such corporations     some astonishment, when this amendment was proposed
are 'persons,' [**79] within the meaning of that word,        to the people of the United States for adoption, if it had
                                                                                                                    Page 25
                                   13 F. 722, *761; 1882 U.S. App. LEXIS 2045, **81;
                                                       8 Sawy. 238

read: "Nor shall any state deprive any person of the negro      so. It is enough to say that it has been settled by judicial
race of life, liberty, or property without due process of       decision, as I think, that whether the proceeding be
law; nor deny to any person of the negro race within its        judicial, administrative, or executive, if it affects life or
jurisdiction the equal protection of the laws." Yet so it       liberty, or takes property directly, or imposes a charge
must, in effect, be read if its operation is to be limited to   which becomes the basis of taking property, some kind of
that race. The rights of the negro are, certainly, no more      notice, or opportunity to be heard on his own behalf, and
sacred or worthy of protection than the rights of the           to defend his rights, given to the person whose life or
Caucasian or other races; and the security of the rights of     liberty is to be affected, or whose property is to be taken,
corporations, and, through them, the rights of the real         or burdened with the liability, is an indispensable element
parties, -- the corporators, -- is as of great public           -- an essential ingredient -- of "due process of law." No
importance as the security of any other private interests.      one, I apprehend, would for a moment contend that a
                                                                man's life, or his liberty, could be legally taken away
      [*762] 3. Does the assessment in question, made in        without notice of the proceeding, or without being
strict pursuance of the provisions of the constitution of       offered an opportunity to be heard; or that a proceeding
California, violate that clause of the fourteenth               whereby his life or liberty should be forfeited, or
amendment of the national constitution which says that          permanently [**84] [*763] affected, without notice or
no state "shall deprive any [**82] person of life, liberty,     opportunity to be heard in his own defense, could, by any
or property without due process of law?"                        possibility, be by "due process of law." In such cases
                                                                there could be no just conception of "due process of law"
     The provision of the state constitution under which        that would not embrace these elements of notice and
the assessment was made is as follows:                          opportunity to be heard. Any conception excluding these
                                                                elements would be abhorrent to all our ideas of either law
    "The franchise, road-way, road-bed, rails, and rolling
                                                                or justice. If these elements must enter into and
stock of all railroads operated in more than one county in
                                                                constitute an essential part of due process of law, in
this state shall be assessed by the state board of
                                                                respect to life and liberty, they must also constitute
equalization at their actual value, and the same shall be
                                                                essential ingredients in due process of law, where
apportioned to the counties, cities and counties, cities,
                                                                property is to be taken; for the guaranty in the
towns, townships, and districts in which such railroads
                                                                constitution is found in the same provision in the same
are located, in proportion to the number of miles of
                                                                connection, and in the identical language applicable to
roadway laid in such counties, cities and counties, cities,
                                                                all. One meaning, therefore, cannot be attributed to the
towns, townships, and districts."
                                                                phrase with respect to property, and another with respect
    This is the only provision affecting this question.         to life and liberty.

     To take one's property by taxation is to take or                Having stated the principle, which I conceive to be
deprive one of his property; and if not taken in pursuance      established by an unbroken line of authorities, I shall
of the law of the land -- in some due and recognized            refer to some of them. One of the latest and most
course of proceedings, based upon well-recognized               instructive cases upon the subject was recently decided
principles in force before and at the time this clause was      by the court of appeals of the state of New York, from
first introduced into the various constitutions, and the        which I shall extract a passage which I [**85] adopt as
legislation of the country -- is to take it "without due        expressing my own views, and presenting the question in
process of law." The signification of these words has           a very clear and satisfactory light. It involved the validity
been the subject of judicial consideration and discussion       of an assessment for a public street improvement, and but
in [**83] a vast number of cases, and their import has          one question, which was decisive of the case, was
been determined to be the same as that of equivalent            examined or determined. The question was as to the
phrases in Magna Charta, from which the principle               validity of the law under which the assessment was made.
adopted was derived.                                            The court, by Mr. Justice Earl, says: "The latter
                                                                assessment could be made without any notice to or
     I shall not attempt to give an accurate definition of      hearing of any person. The law requires no notice, and a
the term "due process of law," applicable to all cases. It      provision for notice cannot be implied. Upon the
is not necessary for the determination of this case to do       assumption that the law was valid, there was ample
                                                                                                                    Page 26
                                   13 F. 722, *763; 1882 U.S. App. LEXIS 2045, **85;
                                                       8 Sawy. 238

authority for the commissioners to make the assessment          citizen is not deprived of his property, within the meaning
without any notice or hearing." Stewart v. Palmer, 74           of this constitutional provision, by the imposition of an
N.Y. 186. The judge proceeds:                                   assessment. It might as well be said that he is not
                                                                deprived of his property by a judgment entered against
     "I am of the opinion that the constitution sanctions       him. A judgment does not take property until it is
no law imposing such an assessment without a notice to          enforced, and then it takes the real or personal property of
and a hearing, or an opportunity of a hearing, by the           the debtor. So an assessment may generally be enforced,
owners of the property to be assessed. It is not enough         not only against the real estate [**88] upon which it is a
that the owners may by chance have notice, or that they         lien, but, as in this case, against the personal property of
may, as a matter of favor, have a hearing. The law must         the owner also, and by it he may just as much be deprived
require a notice to them, and give them a right to a            of his property, and in the same sense, as the judgment
hearing and an opportunity to be heard. It matters not,         debtor is deprived of his by the judgment." Id. 195.
upon [**86] the question of the constitutionality of such
law, that the assessment has in fact been fairly                    Much more is worth quoting, but it would extend this
apportioned. The constitutional validity of a law is to be      opinion to an unreasonable length.
tested, not by what has been done under it, but what may
by its authority be done. The legislature may prescribe              Thus, it is determined in the case cited that a party is
the kind of notice and the mode in which it shall be            not only entitled to notice and an opportunity to be heard,
given, but it cannot dispense with all notice. * * *" Id.       but that the law, or constitution itself, must expressly
188.                                                            provide for notice. This decision was approved by the
                                                                supreme court of California in October last, in Mulligan
     "The legislature can no more arbitrarily impose an         v. Smith, involving the validity of a tax. 8 Pac. Coast
assessment for which property may be taken or sold, than        Law J. 499. Said McKinstry, J.: "In my opinion the
it can render a judgment against a person without a             statute provides no notice or process by means of which
hearing. It is a rule founded on the first principles of        the property owners can be subjected to the judgment of
[*764] natural justice, older than written constitutions,       the county court. The act is therefore void;" citing
that a citizen shall not be deprived of his life, liberty, or   Stewart v. Palmer, supra, Cooley, Taxation, 266, and
property without an opportunity to be heard in defense of       other cases; and McKee, J., in the same case said:
his rights; and the constitutional provision that no person
shall be deprived of these without due process of law, has            "It is a principle which underlies all forms of
its foundation in this rule. This provision is the most         government by laws that a citizen shall not be deprived of
important guaranty of personal rights to be found in the        life, liberty, or property without due process of law. The
federal or state constitutions. It is a limitation upon         legislature [**89] has no power to take away any man's
arbitrary legislation. No citizen shall arbitrarily be          property, nor can it authorize its agents to do so, without
deprived of his life, liberty, or property. This the            first providing for personal notice to be given to him, and
legislature [**87] cannot do, nor authorize to be done.         for a full opportunity of time, place, and tribunal to be
'Due process of law' is not confined to any judicial            beard in defense of his rights. This constitutional
proceedings, but extends to every case which may                guaranty is not confined [*765] to judicial proceedings,
deprive a citizen of his life, liberty, or property, whether    but extends to every case in which a citizen may be
the proceedings be judicial, administrative, or executive       deprived of life, liberty, or property, whether the
in its nature. This great guaranty is always and                proceeding be judicial, administrative, or executive in its
everywhere present to protect the citizen against arbitrary     nature."
interference with these sacred rights. * * *" Id. 190.
                                                                     In Patten v. Green, 13 Cal. 329, Mr. Justice Baldwin,
     "No case, it is believed, can be found in which it was     all the justices, including Mr. Justice Field, concurring in
decided that the constitutional guaranty did not extend to      the opinion, said: "We think it would be a dangerous
cases of assessments, and yet we may infer from certain         precedent to hold that an absolute power resides in the
dicta of judges that their attention was not called to it, or   supervisors to tax land as they may choose, without
that they lost sight of it in the cases which they were         giving any notice to the owner. It is a power liable to
considering. It has sometimes been intimated that a             great abuse. The general principles of law applicable to
                                                                such tribunals oppose the exercise of any such power."
                                                                                                                    Page 27
                                   13 F. 722, *765; 1882 U.S. App. LEXIS 2045, **89;
                                                       8 Sawy. 238

The raising of the tax by the board of equalization was         manner he must be afforded an opportunity to defend his
held void for want of notice. Mr. Webster, in the               interests. In this case the [**92] constitution makes no
Dartmouth College Case, defined due process of law, or          provision for notice or a hearing, and the answer alleges
"the law of the land," as "the general law, which hears         that there was none, which is admitted by the demurrer.
before it condemns, [**90] which proceeds upon
inquiry, and renders judgment only after trial." He adds:             4. On behalf of the plaintiff, what purorts to be a
"Everything which may pass under the form of an                 statute passed March 14, 1881, (St. 1881, p. 83,) is cited,
enactment is not 'the law of the land.'"                        which, it is insisted, supplements the constitution, and
                                                                provides for a notice and hearing upon a petition filed
     In Cooper v. Board of Works, 108 Eng. C.L.R. 181,          within five days after the assessment is made upon a
in which was in question the action of the board of public      railroad. But it is claimed that, although published in the
works, in pursuance of a statute which did not require          volume of statutes for the year 1881 as a statute, the bill
notice, Willes, J., said: "I apprehend that a tribunal, which   never constitutionally passed, and that it is consequently
is by law invested with power to affect the property of         no law. Section 15 of article 4 of the constitution of
one of her majesty's subjects, is bound to give such            California provides that "on the final passage of all bills
subject an opportunity of being heard before it proceeds;       they shall be by yeas and nays upon each bill separately,
and that that rule is of universal application, and founded     and shall be entered on the journals, and no bill shall
upon the plainest principles of justice." In the same case,     become a law without the concurrence of a majority of
Byles, J., said: "The judgment of Mr. Justice Fortescue, in     the members elected to each house." Under section 5 of
Dr. Bentley's Case, is somewhat quaint, but it is very          the same article the house consists of 80 members, of
applicable, and has been the law from that time to the          whom it would require 41 to constitute a majority of the
present." He says: "The objection for want of notice can        members elected to the house. Upon reference to the
never be got over. The laws of God and man both give            published journals of the legislature it appears that the
the party an opportunity to make his defense, if he has         bill in question passed the house and was [**93] sent to
any. I remember to have heard it observed by a very             the senate, where it was amended by adding a long
learned man, upon such an occasion, that even God               provision, being the very provision, if any there is, which
himself did not pass sentence upon Adam before he               gives the owners of railroads of the class in question,
called upon [**91] him to make his defense. 'Adam,              dissatisfied with the assessment, a right to file a petition,
where art thou? Hast thou not eaten of the tree whereof I       "within five days after the assessment is made and
commanded thee that thou shouldst not eat?'" See, also,         entered of record on the books of the board," to have the
Philadelphia v. Miller, 49 Pa. 448; Matter of Ford, 6           assessment corrected, and providing for proceedings
Lans. 92; Overing v. Foote, 65 N.Y. 263; Westervelt v.          upon said petition. On March 4th the house considered
Gregg, 12 N.Y. 209; Cooley, Const. Lim. 355; Butler v.          the senate amendment, and upon a call of the yeas and
Sup'rs Saginaw, 26 Mich. 22, 29; Sedg. St. & Const.             nays, as required by the constitution, 39 members voted
Constr. (Pomeroy's Ed.) 474 et seq., and notes; Cooley,         for the amendment and 32 against it, there being four
Taxation, 266; 267.                                             paired and not voting. Thus the votes in favor of the
                                                                amendment were two less than a majority of members
     In Davidson v. New Orleans, 96 U.S. 97, it was not         elected to the house, and the bill failed. It does not
questioned, [*766] but assumed, that the party taxed            appear that the bill was "read [*767] at length." The
must have an opportunity to be heard, and decided upon          speaker declared that this was not the final action of the
that theory.                                                    house, and that the amendment concurred in ay a vote of
                                                                39 ayes to 32 nays was adopted. An appeal having been
     In my judgment the authorities establish beyond all        taken from this decision of the chair, it was afterwards
controversy that somewhere in the process of assessing a        laid upon the table. Thereupon two members filed each a
tax under a law, or a state constitution, at some point         separate protest against the decision of the speaker, and
before the amount of the assessment becomes finally and         the certificate that [**94] the bill had passed, on the
irrevocably fixed, the statute or the state constitution        expressed ground that it did not receive the vote of a
must provide for notice to be given to the owner of the         majority of the members elected to the house. All this
property taxed, and an opportunity to be afforded to make       appears upon the journal. If this was not the final action
objections, and to be heard upon them. In some form or          of the house, then, as there was no further action, the act
                                                                                                                  Page 28
                                   13 F. 722, *767; 1882 U.S. App. LEXIS 2045, **94;
                                                       8 Sawy. 238

never finally passed, even by the numbers indicated.            correct record of the proceedings of their respective
Assembly Journal, 24th Sess. pp. 472-475.                       houses." And sections 256 and 257 require the daily
                                                                proceedings to be recorded in the journals, and that they
      The bill, therefore, never was constitutionally passed,   "must be read by the secretary each day of meeting, and
and never became a law. Whether the bill became a law           then be authenticated by the signatures of the president
is a question of law of which the court will take judicial      and speaker of the respective houses." Section 1875,
notice. Sherman v. Storey, 30 Cal. 253; Ottawa v.               Code C.P., provides that "courts take judicial notice of
Perkins, 94 U.S. 268; Gardner v. The Collector, 6 Wall.         the following facts: * * * Public and private official acts
509, 510; Post v. Sup'rs, 105 U.S. Under the decisions of       of the legislative, executive, and judicial departments of
the courts upon constitutional provisions in all respects       this state, and of the United States," etc. * * * "In all
similar to that in the present constitution of California, it   these cases the court may resort for its aid to appropriate
is settled that the court, to inform itself, will look to the   books of documents of reference." Section 1888 provides
journals of the legislature. So the supreme court of the        that "public writings are (1) the written [**97] acts or
United States holds where it is so decided by the state         records of the acts of the sovereign authority of official
courts in construing their own constitutions and laws.          bodies and tribunals, and of public officers, legislative,
See cases last cited. I am not aware of any decision of         judicial, and executive, whether of this state or of the
the supreme court of California giving a different              United States," etc. And section 1918 provides that
construction to [**95] the state constitution as it now         "official documents may be proved as follows: * * * (2)
stands. Unless this mode is adopted of resorting to the         The proceedings of the legislature of this state, and of
journals to ascertain whether a statute has been legally        congress, by the journals of those bodies respectively, or
passed or not, experience, and the number of cases that         either house thereof, or by published statutes or
have already arisen under similar constitutional                resolutions." Thus the journals of the legislature are put
provisions, demonstrate that the requirement of the             upon the same footing as the statutes. We think there can
constitution that the vote shall be taken by yeas and nays,     be no doubt, under the constitution of the state and these
and a majority of the members required to vote in the           statutes, that we may look to the journals to see what
affirmative on the final passage of an act, would be of         action was in fact had with respect to any apparent law as
little avail.                                                   published in the volumes of the statutes of the state; and
                                                                looking to the journals it affirmatively appears that the
     While we think the case of Sherman v. Storey               act upon the statute book in question never did become a
correctly decided under the constitution as it then was, we     law.
are of the opinion that the change in the constitution
requires a change in the rule. When California adopted               Even if the act had passed, it is at least extremely
from other states the provision now found in its                doubtful whether the notice, or time for filing the
constitution substantially as found in the constitution of      petition, is sufficiently definite to be of any effect. The
Illinois, it must be deemed to have adopted with the            assessment, under the provision, might be made, even if
provision the settled construction put upon it by the           the party is bound to notice the state of the record [**98]
courts of the state from which it was taken. The leading        on the first Monday of May, the five days might elapse,
cases upon the point are Spangler v. Jacoby, 14 Ill. 278;       and the assessment be transmitted to the county, before
Prescott v. Board of Trustees, etc., 19 Ill. 326; Osborn v.     the party assessed would know, under the law, that it had
Staley, 5 W. Va. 89; and the cases cited in Sherman v.          been made. All the acts of assessment may have
Storey, [**96] and [*768] in those from the United              transpired, and the assessment become final, before the
States supreme court. In this case there is something           first Monday of May. The board, however, is not
more than an omission in the journals, for it affirmatively     required to make it before [*769] that day, although it
appears what the vote was, and that the bill did not pass       might do so, and the party assessed can scarcely be
by the vote required by the constitution.                       expected to watch its proceedings, from day to day,
                                                                before the time fixed by the law.
    Statutory provisions, also, have been adopted, which
appear to be designed to give effect to this change in the           There being, then, no such statute as is relied on in
constitution. Section 255 of the Political Code requires        existence, the validity of the assessment must rest alone
the minute clerks of the senate and assembly to "keep a         upon the constitutional provision quoted, and the act of
                                                                                                                      Page 29
                                    13 F. 722, *769; 1882 U.S. App. LEXIS 2045, **98;
                                                        8 Sawy. 238

1880, adding sections 3664 and 3665 to the Political             opportunity to be heard, other than to require him at some
Code; and neither provides for notice of any kind, or for        time, say a month anterior to the consideration and
an opportunity to be heard in any stage of the                   determination of the amount to be paid, to furnish such
proceedings. It was therefore made without due process           board or court a similar statement as to the description
of law, as we understand the meaning of that provision as        and value of the property to that required [**101] by
used in the fourteenth amendment in question.                    section 3664, which the party might do or omit to do;
                                                                 would a subsequent ex parte determination of the value,
      Section 3664 of the Political Code, as adopted in          by the board or court, be in pursuance of due process of
1880, requires the president, or some other designated           law within the meaning of the constitution? I apprehend
officer of the class of corporations in question, to furnish     that no court would sustain such a proceeding. I also
the state board of equalization, [**99] on or before the         think that a taking for the purposes of taxation under such
first Monday of April in each year, a detailed statement         an assessment, without notice or opportunity to be heard,
of the whole number of miles of road operated, the               would be equally without the protection of due process of
number of cars, amount of rolling stock, and their value,        law, and equally void.
the gross earnings, and various other particulars; and
requires the said board, on or before the first Monday in            The state supreme court has held the provision in the
May, to assess the franchise, road-way, road-bed, rails,         constitution of California, authorizing the state board of
and rolling stock. It is urged on the part of the plaintiff      equalization to assess, finally, the railroads of the class in
that this provision furnishes sufficient notice and              question, to be self-executing, requiring no legislation of
opportunity to be heard, to constitute due process of law        any kind to carry it into full effect; also that the provision
on this point, within the meaning of the constitutional          is mandatory, S.F. & N.P.R.Co. 8 Pac. Coast Law J.
provision. In our judgment, this position is clearly             1061.
untenable. This is simply a mode adopted for obtaining
information as to the amount and general value of the                 It is insisted by defendant that, this being so, it is
property of the corporation, as a basis in part, at least, for   incompetent for the legislature to add to or take from the
their future consideration and action in making the              requirements found in the constitution, and that the
assessment. It is but a preliminary step and not the             additional provision of section 3664, as adopted in 1880,
assessment, or any part of the assessment. The board is          is void. The view already expressed upon the section
under no obligation to adopt either the statement as to          renders it unnecessary now to determine that question,
what the property is, or its value. It may reject i              although presented [**102] by the record and argued by
altogether and adopt an entirely different basis. The party      counsel. It would seem, however, that there can be no
interested is entitled, at some point of the proceeding, to      constitutional objection to legislating upon details for the
[**100] know what action the board takes, or proposes            purpose of more effectually carrying out the scheme of
to take; and to an opportunity to be heard, as to its            the constitution, so far as the legislation is not
propriety, before the assessment becomes fixed and               inconsistent with any of its provisions. It is a general rule
irrevocable. Other classes of property holders, also, are        that a state legislature has all legislative power not
required to file a statement of their property under oath,       inhibited by the constitution, state or national. S.P.R. Co.
yet in the scheme provided for their assessment an               v. Orton, 6 Sawy. 186.
opportunity to be afterwards heard is provided for.
                                                                      This being so, it would seem that the legislature
     The constitutions of the state and nation provide that      might supplement the constitutional provision by
private property shall not be "taken for public use without      statutory provisions intended to more perfectly protect
just compensation." When parties cannot agree, there             the rights of the parties by other safeguards which are not
must be some mode provided for [*770] ascertaining the           inconsistent with the constitutional provision. But as this
value of property so proposed to be taken for public use         is a question more properly belonging to the state courts,
under the sovereign right of eminent domain. Suppose a           we do not deem it desirable to finally determine it now.
statute should provide a board, or even a court, to assess
                                                                       [*771] 5. Is the provision of the state constitution,
the value of property proposed to be taken under this
                                                                 under which the assessment in question was made, in
power for railroad purposes, or other public use, and
                                                                 conflict with the provision of the fourteenth amendment
should give the owner of the property no notice or
                                                                 to the national constitution which provides that no state
                                                                                                                   Page 30
                                  13 F. 722, *771; 1882 U.S. App. LEXIS 2045, **102;
                                                      8 Sawy. 238

"shall deny to any person the equal protection of the          value of the property, and the other party, who is
law?" The circuit justice has discussed this question so       interested to the extent of one-half, upon none. A., a
fully [**103] and satisfactorily that I shall have little to   natural person, has $50,000 in cash -- all the property he
add. The provision is:                                         has -- and purchases of B., another natural person, a piece
                                                               of real estate for $100,000, [*772] that being its actual
     "A mortgage, deed of trust, contract, or other            value, paying one-half down, and giving a mortgage for
obligation by which a debt it secured, shall for the           $50,000 to secure the balance of the purchase money.
purposes of assessment and taxation, be deemed and             The constitution in effect says -- and in this instance such
treated as an interest in the property affected thereby.       is the real, actual state of facts -- that A. and B. each has
Except as to railroad and other quasi public corporations,     $50,000 in the property, one-half not having been paid
in case of debts so secured, the value of the property         for by A., and each shall be assessed and pay a tax upon
affected by such mortgage, deed of trust, contract, or         his own interest in it, amounting to $50,000. A., in this
obligation, less the value of such security, shall be          instance, is worth only $50,000, and if he pays taxes upon
assessed to the owner of the property, and the value of        a larger amount he pays taxes upon property he does not
such security shall be assessed and taxed to the owner         own -- upon property owned by somebody else. This
thereof, in the county, city, or district in which the         seems to be a self-evident proposition.
property affected thereby is situate. The taxes so levied
shall be a lien upon the property and security, and may be          C., "a railroad or other quasi public corporation,"
paid by either party to such security. If paid by the owner    also has $50,000 cash, and purchases of B., for its proper
of such security, the tax so levied upon the property          use, an adjoining piece of real estate for $100,000, which
affected thereby shall become a part of the debt so            is also its actual value, paying [**106] $50,000, and
secured. If the owner of the property shall pay the tax so     giving a mortgage to secure the balance of the purchase
levied on such security, it shall constitute a payment         money. In this case, as in the other, the actual interest of
thereon, and to the extent of such payment a full              each in the property is $50,000. They stand upon
discharge thereof; provided, that if any such security or      precisely the same footing in all particulars with
indebtedness shall [**104] be paid by any such debtor or       reference to the property. C. has only $50,000 in the
debtors, after assessment and before the tax levy, the         property, -- it not having paid for the other half, -- and B.
amount of such levy may likewise be retained by such           the rest. But in this case the constitution says that C.
debtor or debtors, and shall be computed according to the      shall, nevertheless, be assessed for, and pay taxes upon,
tax levy for the preceding year."                              the whole property, double the amount he owns, and B.
                                                               shall not be required to pay anything; that is to say, that
     Whatever the property, then, real or personal,            C. shall not only pay the tax on its own property, but the
mortgaged to secure a debt, the value of the debt so           tax upon B's property; that money, to the amount of the
secured, in the case of everybody except "a railroad and       tax assessed upon $50,000 belonging to B., shall be taken
other quasi public corporations," is to be deducted from       by the state or county from C., and appropriated to the
the value of the property mortgaged; and the value only        use and for the benefit of B., to liquidate B.'s share of the
of the property mortgaged, "less the value of such             public burdens. This sum, being so much more than C.'s
security, shall be assessed and taxed to the owner of the      share of the public burdens, and being in fact B.'s share,
property, and the value of such security shall be assessed     the result of the operation is not only to take so much
and taxed to the owner thereof;" that is to say, that,         property from C. for public use without compensation,
whatever the property, it shall be taxed to the real owner.    but also to arbitrarily take it from C., and apply it to the
But in the case of "a railroad or other quasi public           use and benefit of another private party, B., [**107]
corporation," there is to be no reduction of the value of      without compensation. The result would be the same
the mortgaged property, and the whole is to be taxed to        whether the property of A., B., and C., thus situated and
one party, whether he owns the whole or not. In one            mortgaged is land, a railroad operated in one or more
case, if property is mortgaged to the extent of half its       counties, or any other kind of property. Does a law
value, the owner is assessed upon one-half the value, and      which      authorizes     such     proceedings     --    such
the owner of the debt secured is taxed upon the other half.    discriminations -- bear or press equally upon A. and C.,
But in the [**105] other case the owner of the legal title     or equally upon B. and C.? Is C. equally protected in his
to the property is assessed and taxed upon the whole           rights of property with A., or equally protected with B.?
                                                                                                                   Page 31
                                  13 F. 722, *772; 1882 U.S. App. LEXIS 2045, **107;
                                                      8 Sawy. 238

Although situated precisely alike with reference to their      well stated in Ah Kow v. Nunan, 5 Sawy. 562; In re Ah
property, do they feel the pressure of the public burdens      Fong, 3 Sawy. 144; Pearson v. Portland, 69 Me. 278;
equally and alike? The question does not appear to me to       Portland v. Bangor, 65 Me. 120; Missouri v. Lewis, 101
admit of argument. Upon the very statement of the              U.S. 22. See, also, Live Stock, etc., Ass'n, v. Crescent City
proposition it seems to me to be self-evident [*773] that      Co. 1 Abb. 398; Parrott's Chinese Case, 6 Sawy. 377.
a law authorizing and requiring such proceedings does          That inequality and different principles of taxation of
not afford, but expressly denies, the equal protection of      persons similarly [*774] situated, as in this case, is a
the law. The constitution in the one case says that "the       violation [**110] of this provision seems to be already
mortgage, deed of trust, contract, or obligation" shall be     determined by the supreme court of the United States.
"deemed and treated as an interest in the land affected        The civil-rights act, as re-enacted in 1870, and again in
thereby," which, in the cases supposed, together with the      the Revised Statutes, provides that --
debt secured, it undoubtedly in fact is; but in effect the
constitution says it is not so in the other case. Different         "All persons within the jurisdiction of the United
kinds of property [**108] may require to be taxed in           States shall have the same right in every state and
different forms and modes, in order to be equally taxed;       territory * * * to the full and equal benefit of all laws and
and classifications of property, for purposes of taxation,     proceedings for the security of persons and property as is
should have reference to the just equality of burdens, so      enjoyed by white citizens, and shall be subject to like
far as that is practically attainable. Classification should   punishment, pains, penalties, taxes, licenses, and
have reference to the different character, situation, and      exactions of every kind, and to no other." 16 St. p. 144. §
circumstances of the property, making a different form or      16; Rev. St. 1977.
mode of taxation proper, if not absolutely necessary. It
                                                                    The congress which passed this act embraced many
cannot be arbitrarily made with mere reference to the
                                                               of the members who were in the congress which framed
nationality, color, or character of the owners, whether
                                                               and proposed the fourteenth amendment, and they may be
natural or artificial persons, without any reference to a
                                                               supposed to be well informed as to the purpose and scope
difference in the character, situation, or circumstances of
                                                               of that amendment. This act was passed in pursuance of
the property. If the arbitrary discrimination and
                                                               the last clause of the amendment, as a part of the
classification found in this case can be legally made
                                                               appropriate legislation to enforce its provisions. It is
under the constitution and the law of the land, then the
                                                               therefore a legislative construction as to the scope of the
constitution or the law can be so framed as to dispose of a
                                                               provision inhibiting the states from denying to any person
man's rights in property of all kinds by arbitrary
                                                               the equal protection of the law. The United States
classification and definition, without regard to the real
                                                               supreme court gives the amendment a similar
facts, circumstances, or condition of the property. A
                                                               construction [**111] as to its scope. In Strauder v. West
person may be classified and defined out of the equal
                                                               Virginia the court says that sections 1977 and 1978 of the
protection of the law; and if so with reference to this
                                                               Revised Statutes "partially enumerate the rights and
provision, he can also be classified and [**109] defined
out of uniformity in the operation of the law in other         immunities intended to be granted by the constitution,"
                                                               and after quoting section 1977, as above set out, adds:
particulars; out of the protection of due process of law,
                                                               "This act puts in the form of a statute what had been
and of the provision forbidding a law impairing the
                                                               substantially ordained in the constitutional amendment.
obligation of contracts, or taking property for public use
                                                               It was a step towards enforcing the constitutional
without just compensation; and, indeed, out of all the
                                                               provision." 100 U.S. 311.
guaranties of the constitution, state or national. I am not
arguing that property of all kinds may not be taxed where          In Ex parte Virginia the court, referring to Tennessee
it is found; but in this case there is a personal liability    v. Davis and Strauder v. West Virginia, said:
sought to be enforced against the defendant for taxes not
imposed upon others in like circumstances, without any               "We held that the fourteenth amendment secures,
means provided for reimbursement, such as are                  among other civil rights, to colored men, when charged
applicable to others similarly situated, by the party who      with criminal offenses against a state, an impartial jury
ought to pay the tax.                                          trial, by jurors indifferently selected, or chosen without
                                                               discrimination against such jurors because of their color.
    What constitutes the equal protection of the law is        We held that immunity from any such discrimination is
                                                                                                                  Page 32
                                  13 F. 722, *774; 1882 U.S. App. LEXIS 2045, **111;
                                                      8 Sawy. 238

one of the equal rights of all persons, and that any           under the state constitution, the legislature is authorized
withholding it by a state is a denial of the equal             to alter or repeal the laws under which corporations are
protection of the laws, within the meaning of the              formed, -- they cannot be properly called charters, -- and
amendment. We held that such an equal right to an              that this [**114] mode of taxing corporations, in effect,
impartial jury trial, and such an immunity from                operates as an amendment of the act authorizing the
unfriendly discrimination, are [**112] placed by the           formation of corporations, and that corporations hold
amendment under the protection of the general                  their franchises in subordination to that provision.
government, and guarantied by it. We held, further, that
this protection and this guaranty, as the fifth section of          The proceeding in question is either taxation or
the amendment expressly ordains, may be enforced by            something else; either an exercise of the sovereign right
congress by means of appropriate legislation." 100 U.S.        of taxation, or the exercise of some other power; either
345.                                                           taxation or not taxation. The provision, in terms, purports
                                                               on its face to provide for taxation. The convention that
      [*775] If discrimination in fixing the qualifications    framed the article, and the people, when they adopted it,
of jurors inferentially violates the provisions of the         [*776] evidently must have supposed they were
fourteenth amendment, as denying the equal protection of       providing a scheme of taxation. The provision admits of
the law, it is not easy to perceive why discriminations in     no other construction.
the assessment and collection of taxes expressly made are
not equally so.                                                     The provision is found in the chapter entitled
                                                               "Revenue and Taxation," and the section says: "For the
     Thus it appears that the supreme court regards the        purpose of assessment and taxation," etc. If the
section quoted as within the scope of the fourteenth           proceeding is taxation, then it provides, and can only
amendment, and the act provides that every person "shall       provide, for taking from the defendant an amount of
be subject to like * * * taxes, licenses, and exactions of     money equal to its just share of the public burden relieved
every kind, and to no other," as "white citizens;" and this    by the taxation, and nothing more. Anything beyond that
is held to be appropriate legislation to enforce the           is taking private property for public use without
amendment. We have already seen that this defendant is         compensation. If the proceeding is taxation, there is no
subjected to taxes and exactions other than and different      necessity for resorting to any other provision [**115] of
from those imposed upon "white citizens." We have              the constitution. If it is not taxation, -- if the amount
already held that the word "person," as to property rights,    demanded, or the principle adopted, is imposed as a
as used in the amendment in question, includes [**113] a       condition of continued existence, or as a limitation of its
corporation, and, as used in the provision of the statute      rights to exercise its franchises, -- then it is an annual
cited, it includes a corporation by express definition of      bonus demanded for the franchise, or the privilege of
the statute itself, which says, in terms: "In determining      existence, such as was formerly often demanded and paid
the meaning of the Revised Statutes * * * the word             by corporations for the special privileges given by special
'person' may extend and be applied to partnerships and         charters, when there were no restrictions upon the
corporations." Page 1, tit. 1, c. 1, § 1.                      legislative power upon the subject, and is not taxation. If
                                                               it is a bonus demanded and paid for this right, then, in
     The provision of the constitution of the state of         addition, the corporation is subject to taxation upon its
California in question, therefore, violates the provision of   property; for under the constitution all property must be
the fourteenth amendment in denying to defendant the           taxed. "All property in the state," says the constitution,
equal protection of the law. "An unconstitutional law is       "not exempt under the laws of the United States, shall be
void, and is no law." Ex parte Siebold, 100 U.S. 376.          taxed in proportion to its value, to be ascertained as
"The constitution and laws of the United States are the        provided by law." Article 13, §§ 1, 6, says that "the
supreme law of the land, and to those every citizen of the     power of taxation shall never be surrendered or
United States owes obedience, whether in his individual        suspended by any grant or contract to which the state
or offical capacity. * * * The laws of the state, in so far    shall be a party." If, therefore, the provision of section 4
as they are inconsistent with the laws of congress on the      relative to "railroad or other quasi public corporations" is
same subject, cease to have effect as laws." Id. 392, 397.     a term or condition of the contract upon which its
                                                               existence [**116] and further exercise of its franchises
    6. It is further urged on the part of plaintiff that,
                                                                                                                    Page 33
                                    13 F. 722, *776; 1882 U.S. App. LEXIS 2045, **116;
                                                        8 Sawy. 238

depend, then it must still be liable to taxation on its           may, doubtless, grant to it, as well as to natural persons
property in the proper mode. By a contract authorizing            capable of taking, property rights; but such rights of
certain persons to form a corporation and exercise its            property, when once vested, can no more be withdrawn
franchises, however valuable the consideration received,          than the property acquired from other sources, or than
the state cannot, as we have seen, surrender or suspend its       property granted to, or acquired by, natural persons. The
rights to tax its property besides, as all other property is      property acquired in the exercise of its corporate
taxed. Other tax-payers are entitled to have the property         faculties, from whatever source derived, is the property of
of corporations properly taxed. Again, if the submission          the metaphysical being called the corporation, held,
to this mode of what is called taxation becomes a valid           however, in trust for the sole benefit of the corporators.
condition of the continuance of the further existence of          As such, it is protected like all other property, and can
the corporation, and the further exercise of its franchises,      only be taken by the law of the land, in some one of the
then a refusal to pay the tax is a violation of the               modes not inhibited by the constitution. It cannot, in my
conditions of its being, and the courts, upon a proceeding        judgment, be taken even as a further condition of
for the purpose by the state in the nature of a quo               corporate existence without the assent [**119] of the
warranto, would probably adjudge the forfeiture of its            corporation or its corporators. There is no consent in this
charter and wind up its affairs. This would be the                case to submit to any such conditions, and that is not the
appropriate remedy. [*777] I apprehend that no court              basis upon which the action is brought. There is no
would so adjudge under the present constitution on that           promise [*778] to pay a bonus set out in the complaint
ground. It is clear to me, therefore, from these                  upon which an action can be maintained. I apprehend
considerations and the express terms themselves of the            that a mere provision in the form of a statute, or a state
constitution, that the provision [**117] in question              constitution adopted after the formation of a corporation,
attempts to provide only for exercising the sovereign             that corporations under the laws should cease to exist
power of taxation, -- has no other end to accomplish, and         unless they surrender to the state all the property
accomplishes no other purpose, -- and that the rights of          theretofore acquired by the corporation, would be void.
the parties must be determined on that hypothesis alone.          And power to demand a part, as a condition of existence,
Again, the general act authorizing the formation of               however small, is power to demand all. Such a statutory
corporations confers upon those complying with its                demand would be but a flimsy guise or pretext for
provisions certain rights, franchises, and privileges. It         evading all the guaranties of the constitution, which
endows the parties as organized with certain faculties and        would not for a moment be tolerated. It would be to seek
capacities, the result being to give them in their united         indirectly what could not be attained directly; the
character, under a certain name, a capacity to do business        accomplishment of an unlawful end by what, at best, is
and acquire property. A law merely authorizing the                but apparently lawful means. See, on this point, Parrott's
formation of a corporation gives the corporation formed           Chinese Case, 6 Sawy. 349; Opinion of Hoffman, J. In
no property. That must be acquired by the corporation             that case I had occasion to say:
for itself. The legislature, under the various guaranties of
the constitution, state and national, can only take away,              "The end being unlawful and repugnant to the
limit, enlarge, or modify that which it gave. And what is         supreme law of the land, it is equally unlawful [**120]
given in the creative act is, simply, its capacities; its legal   and equally in violation of constitution and treaty
faculties, including all such as are essential to its             stipulations to use any means, however proper or within
corporate existence; all those powers which are strictly          the power of the state for lawful purposes, for the
corporate, being those powers which can only be given             attainment of that unlawful end, or accomplishment of
by legislative act; powers not possessed by natural               that unlawful purpose. It cannot be otherwise than
[**118] persons or partnerships, acting in their natural,         unlawful to use any means whatever to accomplish an
individual, or associate characters, independent of               unlawful purpose. This proposition would seem to be too
legislation. These strict corporate powers I attempted to         plain to require argument or authority. Yet there is an
define in Orton's Case, 6 Sawy. 187. The powers thus              abundance of authority on the point, although, perhaps,
given, essential or otherwise, and their future exercise,         not stated in this particular form. Brown v. Maryland, 12
may be modified, or otherwise affected, by subsequent             Wheat. 419; Ward v. Maryland, 12 Wall. 431; Woodruff
legislation. A corporation having been formed with                v. Parham, 8 Wall. 130-140; Hinson v. Lott, Id. 152;
capacity to acquire and hold property, the legislature            Welton v. Missouri, 91 U.S. 279-282; Cook v.
                                                                                                                     Page 34
                                  13 F. 722, *778; 1882 U.S. App. LEXIS 2045, **120;
                                                      8 Sawy. 238

Pennsylvania, 97 U.S. 573."                                          Again, this suit is for a tax and nothing else. It
                                                                proceeds upon that idea, and the idea alone, that a valid
    The observations of Mr. Justice Field in Cummings           tax has been assessed against the defendant, which this
v. Missouri, 4 Wall. 325, are pertinent in this connection.     action is brought under the statute to recover. The suit
He said:                                                        cannot be maintained upon a liability imposed under
                                                                other and different provisions of the constitution. If it
     "The deprivation is effected with equal certainty in       cannot be maintained as for a tax it must fail. The
the one case as it would be in the other, but not with          recovery, if [**123] any is had, must be upon the cause
equal directness. The purpose of the law-maker in the           of action alleged.
case supposed would be openly avowed; in the case
existing it is only disguised. The legal result must be the          We do not conceive that a provision for assessing
same; for what cannot [**121] be done directly cannot           railroads operated in more than one county, by the state
be done indirectly. The constitution deals with substance,      board of equalization, while other local property is
not shadows. Its inhibition was leveled at the thing, not       assessed by the local assessors, would be denying the
the name. It intended that the rights of the citizen should     equal protection of the law, provided the assessment in
be secure against deprivation for past conduct by               the former case is, in all respects, made upon the same
legislative enactment under any form, however disguised.        basis, under the same rules, and upon the same principles
If the inhibition can be evaded by the form of the              as to value, notice, opportunity to be heard, etc., as in the
enactment, its insertion in the fundamental law was a vain      latter. The presumption would be that all the officers
and futile proceeding." See, also, Henderson v. Mayor of        would perform their duties justly under the law, and that
N.Y. 92 U.S. 268; Chy Lung v. Freeman, Id. 279;                 the assessments so made upon property, differently
Railroad Co. v. Huson, 95 U.S. 472.                             circumstanced, would operate equally. Nor do we think
                                                                that the assessment of the "franchise, road-way, road-bed,
     The foregoing observations apply equally well to any       rails, and rolling stock of all railroads operated in more
effort to obtain the property of corporations by irregular      than one county in the state," "by the state board of
means not applicable to natural persons. It seems to be         equalization," as a unit, and apportioning the amount of
that under our general system embodied in the                   the assessed value to the several counties, etc., in
constitution, providing for corporations, which forbids         proportion to the number of miles in each, is
[*779] the granting of any special privileges not enjoyed       objectionable, on the ground that it denies the equal
by all other persons, it was intended to put corporations,      protection of the law to the owner of the road.
with respect to their property and to all other matters,
except what is in fact granted by the laws, in all                     [*780] Indeed, this seems to be the only [**124]
particulars upon the same footing as natural persons.           practicable way of assessing such a road. It is owned and
                                                                operated as a unit, and cannot be otherwise usefully
     In my judgment, the state constitutional provisions        employed. Its income, expenses, and management, and
under [**122] consideration, and the laws passed to             all its operations, are as a unit. Its rolling stock is at one
carry them out, violate the provision of the fourteenth         point at one moment, and at another at a different point of
amendment in question in two vital particulars: (1) They        time, but it is all working together as a unit to the
assess railroad and other quasi public corporations upon a      accomplishments of one end. In fragments and isolated
different basis from that adopted with respect to the           parts, the road would be comparatively valueless as
natural persons similarly situated, in the particulars herein   property. It is only as a unit that it can be properly
pointed out; (2) they provide, with respect to natural          considered or properly taxed. To tax it otherwise would
persons, notice and an opportunity to be heard in the           be to tax it upon principles materially different from
course of the proceeding to assess their property before        those applicable to other property necessarily considered
the assessment becomes fixed, while they afford no such         and used as a unit. The character and circumstances of
notice or opportunity to be heard to railroads and other        the property are such as seem to justify a classification
quasi public corporations; and in both these particulars
                                                                for this purpose. These points, also, seem to be
deny to the latter the equal protection of the law within       determined in favor of the plaintiff in the State Railroad
the meaning of the fourteenth amendment to the national         Tax Cases, 92 U.S. 575. The other points determined in
constitution.                                                   this case are not involved in those cases.
                                                                                                                   Page 35
                                  13 F. 722, *780; 1882 U.S. App. LEXIS 2045, **124;
                                                      8 Sawy. 238

Whatever public inconvenience may temporarily result                If the life, liberty, property, and happiness of all the
from our decision, -- and it must necessarily be great, --      people are to be preserved, then it is of the utmost
being satisfied, as we are, that the provisions of the state    importance to every man, woman, and child of this broad
constitution now in question [**125] violate the                land that every guaranty of our national constitution,
inhibitions of the fourteenth amendment, our duty is            [**127] whatever temporary inconvenience may be felt,
plain, and we cannot, if we would, shrink from its              be firmly and rigorously maintained at all times and
performance. There must be judgment for the defendant.          under all circumstances. In the language of the supreme
                                                                court of the United States:
     Since the argument in these cases commenced,
apparently in anticipation of what must necessarily be the           "The constitution of the United States is a law for
result, various means, more or less violent, have been          rulers and people, equally in war and in peace, and covers
suggested, through the public press and elsewhere, to           with the shield of its protection all classes of men, at all
prevent railroad corporations from escaping the payment         times, and under all circumstances. No doctrine
of their just share of the public burdens: such as taking       involving more pernicious consequences was ever
away their franchises; seizing and appropriating their          invented by the wit of man, than that any of its provisions
property first, and litigating the right afterwards; and        can be suspended during any of the great exigencies of
punishing by the severest penalties the officers of all such    government. Such a doctrine leads directly to anarchy or
corporations, in all cases where resistance to payment of       despotism." Milligan's Case, 4 Wall. 120.
a tax is made in the courts, however illegal the exaction
or whatever the ground of complaint on their part may be.            I concur in the judgment ordered by the circuit
Violent counsels of this character usually result in            justice.
constitutional and statutory provisions such as those we
                                                                    ORDER STAYING PROCEEDINGS.
have been considering and held void, which render it
necessary to seek the protection of our national magna               As the questions we have considered are of the
charta. It would be idle -- utterly futile -- to insert a       greatest importance, and their correct solution concerns
provision in the national constitution guarantying to           not merely the railroad corporation, which is the
every person within [**126] its jurisdiction his life, his      defendant, but corporations of every kind, other than
liberty, and his property, if certain classes can be selected   municipal, we shall order a stay in all the other cases (not
out in the subordinate legislation of the country to be         decided to-day) now pending in this court involving the
visited with condign punishment if they even seek to            same questions, until these cases can be brought before
invoke the protection of this beneficient guaranty against      the supreme court of the United States, and the questions
discriminating and wrongful [*781] legislation. If a            [**128] involved shall have received by its judgment
single individual can be deprived of the protection of this     their final and authoritative determination. If the decision
provision by such means, so can all. If such things can         now reached be there sustained, the state will be obliged
be, wherein does the protection of the guaranty consist?        to order a new assessment, in making which the
                                                                defendant will be allowed a deduction in the valuation of
     A far wiser and more statesmanlike proceeding
                                                                its property for the mortgage thereon, and also a hearing
would seem to be, to avoid all occasion for resistance to
                                                                before the state board of equalization with respect to the
wrong in the guise of void laws, by coolly and calmly
                                                                assessment. If, on the other hand, the decision be
re-examining the subject in the light of past experience,
                                                                reversed, [*782] the other cases can be at once disposed
and so amending our state constitution and statutes as to
                                                                of. By taking out a writ of error immediately on the
bring them into entire harmony with all the guaranties of
                                                                judgment now rendered, it is possible that the case may
the fourteenth amendment, "the crowning glory of our
                                                                be advanced on the calendar and be heard at the coming
national constitution" -- that noblest and best written
                                                                term.
constitution ever devised by the wisdom of man.
                                                                                                                  Page 1

                   RICK ALLAN RHOADES, Appellant v. THE STATE OF TEXAS, Appellee

                                                       No. 71,595

                                  COURT OF CRIMINAL APPEALS OF TEXAS

                                  934 S.W.2d 113; 1996 Tex. Crim. App. LEXIS 205

                                           October 2, 1996, DELIVERED
                                               October 2, 1996, filed

SUBSEQUENT HISTORY: Rehearing denied by,                      contended the trial court erred when it refused to admit
11/20/1996                                                    childhood photographs that depicted him as a normal,
Writ of habeas corpus denied Ex parte Rhoades, 2014           happy child. Appellant argued that the trial court's
Tex. Crim. App. Unpub. LEXIS 833 (Tex. Crim. App.,            preclusive ruling denied him the opportunity to present
Oct. 1, 2014)                                                 relevant, mitigating evidence in his defense. The court
                                                              held the photographs were irrelevant to appellant's moral
PRIOR HISTORY:             [**1] Appeal from the 179th        blameworthiness for the commission of the
District Court of Harris County.                              double-murder. The court affirmed the conviction. Other
                                                              assignments of error lacked merit, were not preserved for
DISPOSITION: AFFIRMED                                         review, or were inadequately briefed.

CASE SUMMARY:                                                 OUTCOME: The court affirmed appellant's conviction
                                                              for capital murder because several of appellant's 18
                                                              points of error were not preserved for review and
PROCEDURAL POSTURE: Appellant sought review                   appellant's other contentions were either not adequately
of a judgment rendered by the 179th District Court of         briefed or lacked merit.
Harris County (Texas) that convicted appellant of capital
murder and sentenced appellant to death.                      CORE TERMS: parole, prison, veniremember's,
                                                              eligible, life sentence, capital murder, juror, mitigating,
OVERVIEW: Appellant was convicted for capital                 commit, eligibility, special issue, sentencing, prosecutor,
murder. Appellant sought review of the conviction on 18       furlough, sentence, future dangerousness, sentenced, life
grounds. Appellant contended that his Sixth Amendment         imprisonment, voir dire, mitigating evidence, emergency,
right to counsel was impinged when the trial court            violence, death penalty, questioning, culpability,
precluded him from discussing, with veniremembers, the        mitigation, inform, capital case, voir dire, photographs
statutory 35-year minimum for individuals convicted of
capital murder that are given a life sentence. The court      LexisNexis(R) Headnotes
overruled this error as it was inadequately briefed.
Appellant claimed the trial court erred by providing false
and misleading information about parole eligibility,
during jury selection. Error was waived since appellant
raised the argument for the first time on appeal. Appellant   Criminal Law & Procedure > Criminal Offenses >
                                                                                                                    Page 2
                                934 S.W.2d 113, *; 1996 Tex. Crim. App. LEXIS 205, **1

Homicide > Murder > General Overview                            Governments > Legislation > Effect & Operation >
[HN1] See Tex. Penal Code Ann. § 19.03(a)(6).                   Amendments
                                                                [HN7] See Tex. Const. art. III, § 36.

Criminal Law & Procedure > Juries & Jurors > Voir
Dire > Questions to Venire Panel                                Governments > Legislation > Effect & Operation >
[HN2] A trial court commits error if it prohibits defense       Amendments
counsel from asking "proper" voir dire questions. A             [HN8] See Tex. Gov't Code Ann. § 311.025 (b) and (c).
natural corollary to the preceding rule is that a trial court
commits no error if it precludes improper voir dire
                                                                Criminal Law & Procedure > Juries & Jurors > Voir
questioning. A "proper" question is one which seeks to
                                                                Dire > Appellate Review
discover a veniremember's views on an issue applicable
                                                                Criminal Law & Procedure > Juries & Jurors > Voir
to the case.
                                                                Dire > Questions to Venire Panel
                                                                Criminal Law & Procedure > Appeals > Standards of
Criminal Law & Procedure > Juries & Jurors > Voir               Review > Abuse of Discretion > General Overview
Dire > Appellate Review                                         [HN9] When a defendant challenges a trial court's
Criminal Law & Procedure > Juries & Jurors > Voir               limitation on voir dire questioning on appeal, the
Dire > Questions to Venire Panel                                reviewing court must analyze the claim under an abuse of
Criminal Law & Procedure > Appeals > Standards of               discretion standard, the focus of which is whether
Review > Abuse of Discretion > General Overview                 appellant proffered a proper question. A proper question
[HN3] When an appellant challenges a trial court's voir         is one which seeks to discover a veniremember's views
dire limitation, the reviewing court must analyze the           on an issue applicable to the case. If a proper question is
claim under an abuse of discretion standard, the focus of       disallowed, harm to appellant is presumed because he has
which is whether the appellant proffered a proper               been denied the ability to intelligently exercise his
question.                                                       peremptory strikes. However, the trial court may restrict
                                                                questions in which counsel attempts to commit a
                                                                veniremember to a particular resolution based upon facts
Criminal Law & Procedure > Postconviction                       peculiar to the trial.
Proceedings > Parole
[HN4] Parole, and the issues surrounding the minimum
prison term necessary for parole eligibility, are not           Criminal Law & Procedure > Juries & Jurors >
matters for jury consideration in a capital murder              Challenges to Jury Venire > Equal Protection
prosecution.                                                    Challenges > General Overview
                                                                Criminal Law & Procedure > Juries & Jurors >
                                                                Peremptory Challenges > Proving Discriminatory Use
Civil Procedure > Appeals > General Overview                    [HN10] The procedure to determine an equal protection
[HN5] It is incumbent upon appellate counsel to cite            violation has three prongs in the context of racial
specific legal authority and to provide legal argument          discrimination: First, the opponent of the peremptory
based upon that authority.                                      challenge has to prove a prima facie case of racial
                                                                discrimination. If this burden is met, the burden of
Criminal Law & Procedure > Appeals > Reviewability >            production falls to the proponent of the strike to tender a
Preservation for Review > Failure to Object                     race-neutral explanation. If a race neutral explanation is
Criminal Law & Procedure > Appeals > Reviewability >            tendered, the trial court must then determine if the
Preservation for Review > Requirements                          opponent of the strike has proved purposeful racial
Criminal Law & Procedure > Appeals > Reviewability >            discrimination.
Waiver > General Overview
[HN6] For an issue to be preserved on appeal, there must        Criminal Law & Procedure > Appeals > Standards of
be a timely objection which specifically states the legal       Review > Clearly Erroneous Review > General
basis for that objection.                                       Overview
                                                                                                                    Page 3
                               934 S.W.2d 113, *; 1996 Tex. Crim. App. LEXIS 205, **1

[HN11] The court reviews the trial court's finding, vel        Criminal Law & Procedure > Sentencing > Capital
non, of purposeful discrimination under a clearly              Punishment > Mitigating Circumstances
erroneous standard.                                            Criminal Law & Procedure > Appeals > Standards of
                                                               Review > Abuse of Discretion > General Overview
                                                               Evidence > Demonstrative Evidence > Photographs
Criminal Law & Procedure > Juries & Jurors > Voir              [HN15] Photographs of a defendant which depict a
Dire > Appellate Review                                        cheerful early childhood are irrelevant to appellant's
Criminal Law & Procedure > Appeals > Standards of              moral blameworthiness for the commission of a violent
Review > Clearly Erroneous Review > General                    double-murder because such evidence has no relationship
Overview                                                       to appellant's conduct in those murders. That a defendant
[HN12] When applying the clearly erroneous standard,           was once a child does not diminish his moral culpability
the court will not disturb a trial court's ruling unless the   for the act of murder.
court is left with a definite and firm conviction that a
mistake has been committed. In making this
determination, the court will review voir dire, the state's    Civil Procedure > Judicial Officers > Judges > General
race-neutral explanations, the composition of the jury         Overview
panel, and appellant's rebuttal and impeachment                Criminal Law & Procedure > Sentencing > Forfeitures
evidence.                                                      > Proceedings
                                                               Evidence > Procedural Considerations > Objections &
                                                               Offers of Proof > Objections
Criminal Law & Procedure > Trials > Judicial                   [HN16] The court has identified the prerequisites to an
Discretion                                                     effective objection respecting the admissibility of
Criminal Law & Procedure > Sentencing > Capital                evidence. As regards specificity, all a party has to do to
Punishment > Mitigating Circumstances                          avoid the forfeiture of a complaint on appeal is to let the
[HN13] Within the meaning of Tex. Code Crim. Proc.             trial judge know what he wants, why he thinks himself
Ann. art. 37.071, § 2(a), evidence mitigates against the       entitled to it, and to do so clearly enough for the judge to
imposition of the death penalty if a reasonable juror could    understand him at a time when the trial court is in a
conclude that the evidence was a basis for a sentence less     proper position to do something about it. Of course, when
than death. Tex. Code Crim. Proc. Ann. art. 37.071, § 2(f)     it seems from context that a party failed effectively to
(4) provides further guidance when it defines mitigating       communicate his desire, then reviewing courts should not
evidence "to be evidence that a juror might regard as          hesitate to hold that appellate complaints arising from the
reducing the defendant's moral blameworthiness." If a          event have been lost.
reasonable juror could not conclude that the proffered
evidence reduced the defendant's moral blameworthiness,
then a trial court would be within its discretion to exclude   Criminal Law & Procedure > Appeals > Reviewability >
the evidence.                                                  Preservation for Review > Jury Instructions
                                                               Evidence > Procedural Considerations > Objections &
                                                               Offers of Proof > General Overview
Criminal Law & Procedure > Sentencing > Capital                [HN17] For an objection to be "timely", a party must
Punishment > Mitigating Circumstances                          invoke it as soon as the ground for it becomes manifest.
Evidence > Relevance > Relevant Evidence
[HN14] Evidence about the defendant's background and
character is relevant because of the belief, long held in      Criminal Law & Procedure > Trials > Burdens of Proof
society, that defendants who commit criminal acts that         > Prosecution
are attributable to a disadvantaged background, or to          Criminal Law & Procedure > Sentencing > Capital
emotional and mental problems, may be less culpable            Punishment > Mitigating Circumstances
than defendants who have no such excuse. The evidence          Criminal Law & Procedure > Sentencing > Imposition
is relevant because it relates to the moral culpability of a   > General Overview
defendant's act. By this logic, if evidence has no relation    [HN18] In cases where mitigating evidence is presented,
to a defendant's moral culpability for the charged crime,      all that is constitutionally required is a vehicle by which
then it is irrelevant to mitigation.                           the jury may give mitigating effect to appellant's
                                                                                                                   Page 4
                               934 S.W.2d 113, *; 1996 Tex. Crim. App. LEXIS 205, **1

evidence. No burden of proof exists for either the state or   further, declined to find mitigating circumstances under
defendant to prove or disprove the mitigation question.       Article 37.071 § 2(e). The trial court sentenced appellant
                                                              to death. We will affirm the judgment of the trial court.

Criminal Law & Procedure > Sentencing > Capital                       1 Appellant was convicted for violation of what
Punishment > Mitigating Circumstances                                 was then [HN1] Texas Penal Code § 19.03(a) (6),
Criminal Law & Procedure > Sentencing > Imposition                    which read in relevant part:
> General Overview
[HN19] There is no evidence that must be viewed by a                            (a) A person commits an offense
juror as having a definitive mitigating effect, per se.                      if he commits murder as defined
                                                                             under Section 19.02 (b) (1) and:
Criminal Law & Procedure > Jury Instructions >
                                                                                       ***
General Overview
[HN20] An appellant is not entitled to jury instructions
specifically informing the jury that certain evidence may
be considered or how it may be applied.
                                                                          (6) the person murders more than one person:
Criminal Law & Procedure > Sentencing > Capital
Punishment > Mitigating Circumstances                                            (A) during the same criminal
[HN21] Each juror may or may not believe certain                             transaction;
evidence is mitigating; however, the constitution only
requires that where a juror believes there is relevant        [**2]
mitigating evidence, that juror must have a vehicle to                2 All Article references are to those in the Texas
give his or her reasoned moral response to such evidence.             Code of Criminal Procedure then in effect.
The Federal Constitution does not require trial courts to
                                                                   Appellant raises eighteen points of error in his brief
instruct juries regarding how they should consider, or
                                                              on appeal. There are no evidentiary insufficiency points
apply what they may or may not deem mitigating
                                                              of error. Hence, we will address his points in
evidence.
                                                              chronological order where appropriate.
COUNSEL: James Stafford, Houston.
                                                                   In point number one, appellant contends the trial
Dan McCrory, Assist. DA, Houston.                             court impermissibly restricted his right to intelligent and
                                                              effective use of peremptory challenges, when it
JUDGES: Opinion Judge Mansfield (Judge Baird                  prohibited voir dire discussion of the statutory thirty-five
concurs with note, Judge Maloney and Judge Meyers             year minimum for Individuals sentenced to life
concur in the result). Dissenting opinion Judge Clinton       imprisonment. The substance of appellant's argument is
(Judge Overstreet joins). Dissenting opinion Judge            that his right to counsel -- as guaranteed by Article I,
Overstreet                                                    Section 10, of the Texas Constitution -- was impinged
                                                              when the trial court precluded voir dire discussion of the
OPINION BY: MANSFIELD                                         minimum calendar years appellant would have to serve
                                                              before being eligible to parole were he sentenced to life
OPINION                                                       imprisonment instead of death. See Ex parte McKay, 819
S.W.2d 478, 482 (Tex.Crim.App. 1990); Shipley v. State,
                                                              790 S.W.2d 604 (Tex.Crim.App. 1990).
[*118] OPINION
                                                                  We have held that [HN2] a trial court commits error
    A Harris County jury convicted appellant, Rick            if [**3] it prohibits defense counsel from asking
Allan Rhoades, of capital murder. 1 At the punishment         "proper" voir dire questions. Caldwell v. State, 818
phase of the trial, the jury unanimously found appellant to   S.W.2d 790, 793 (Tex.Crim.App. 1991), cert. denied, 503
be a future danger under Article 37.071 § 2(b), 2 and,        U.S. 990, 118 L. Ed. 2d 399, 112 S. Ct. 1684 (1992). A
                                                                                                                     Page 5
                              934 S.W.2d 113, *118; 1996 Tex. Crim. App. LEXIS 205, **3

natural corollary to the preceding rule is that a trial court          argued the Sixth Amendment issue, his position is
commits no error if it precludes improper voir dire                    largely untenable. The federal constitutional right
questioning. A "proper" question is one which seeks to                 to counsel has never been extended to provide
discover a veniremember's views on an issue applicable                 such broad voir dire protection. For a discussion
to the case. Id. [HN3] When an appellant challenges a                  of the cases in this area, see Ex parte McKay, 819
trial court's voir dire limitation, the reviewing court must           S.W.2d 478, (Tex.Crim.App. 1991) (Clinton, J.,
analyze the claim under an abuse of discretion standard,               dissenting to denial of rehearing).
the focus of [*119] which is whether the appellant
proffered a proper question. Id.                                       In point three, appellant claims the trial court
                                                                committed error by providing false and misleading
     We have held that [HN4] parole, and the issues             information about parole eligibility, during the jury
surrounding the minimum prison term necessary for               selection process. We note that, in appellant's brief, the
parole eligibility, are not matters for jury consideration in   argument and authority for this point was combined with
a capital murder prosecution. Smith v. State, 898 S.W.2d        the argument and authority for points one, two, and four.
838, 846 (Tex.Crim.App. 1995) (plurality opinion), cert.        Hence, it is difficult for [**6] this Court to ascertain
denied, 116 S. Ct. 131 (1995); Broxton v. State 909             what information appellant believes the trial court
S.W.2d 912, 919 (Tex.Crim.App. 1995); Sonnier v. State,         erroneously     provided     to   the    veniremembers.
913 S.W.2d 511, 521 (Tex.Crim.App. 1995). Given that            Nevertheless, appellant apparently complains of two
juries are not to consider any aspect [**4] of parole, a        instances.
reasonable trial court could find that parole was not an
issue applicable to the case. If parole was not an issue             First, appellant complains the trial court, in response
applicable to the case, a reasonable trial court could          to a question from a veniremember, informed the
correctly conclude that parole was not a "proper" area of       veniremember that the decision regarding parole
voir dire inquiry. Ford v. State, 919 S.W.2d 107                eligibility was within the exclusive jurisdiction of the
(Tex.Crim.App. 1996). Point of error number one is              Board of Pardons and Paroles. The exchange follows:
overruled.
                                                                         THE COURT: Did you have a question?
     In his second point, appellant avers that his Sixth
Amendment right to counsel was impinged when the trial                     VENIREMEMBER: Yes. When will
court precluded him from discussing, with the                          they be eligible for parole?
veniremembers, the statutory thirty-five year minimum
                                                                            THE COURT: I can't answer that.
for individuals convicted of capital murder who are given
a life sentence. Appellant simply declares that his right to               APPELLANT: I ask the court to
counsel was violated, and presents no argument or                      answer that.
authority for this contention.
                                                                            THE COURT: I am not going to
     It is not sufficient that appellant globally cite the             answer it. It's within the exclusive
"Sixth Amendment," and nothing else, in support of his                 jurisdiction of the Board of Pardons and
request for reversal. See Vuong v. State, 830 S.W.2d 929,              Paroles and the governor of the State of
940 (Tex.Crim.App. 1992), cert. denied, 113 S. Ct.                     Texas.
(1992). [HN5] It is incumbent upon counsel to cite
specific legal authority and to provide legal argument                      PROSECUTOR: Shall I continue?
based upon that authority. Id.; Tex.R.App.Proc. 74(f) and
210(b); Ex parte Granger, 850 S.W.2d [**5] 513, 515,                        THE COURT: Please.
fn. 6 (Tex.Crim.App. 1993). This is especially important
where, as in the case at bar, the relevant area of law is not   Appellant contends that the time for parole eligibility is
well defined. 3 This Court will not make novel legal            not within the jurisdiction of the parole board at all.
arguments for appellant. Point of error two is                  Rather, appellant avers, under the current statutory
inadequately briefed, and it is, therefore, overruled.          scheme, parole eligibility is within the jurisdiction of the
                                                                Legislature. See Article 42.18. However, whether the trial
       3    We note that, even if counsel had properly
                                                                                                                       Page 6
                              934 S.W.2d 113, *119; 1996 Tex. Crim. App. LEXIS 205, **6

court's response constituted error is [**7] not an issue               you overrule the State's motion [in limine
before this Court because appellant failed to object to the            regarding parole questions] and inform her
statement. We have long held that, [HN6] for an issue to               fully as to the full ramifications of it.
be preserved on appeal, there must be a timely objection
which specifically states the legal basis for that objection.                THE COURT: No. At no time during
Rezac v. State, [*120] 782 S.W.2d 869, 870                             this exchange did appellant lodge an
(Tex.Crim.App. 1990). Since, appellant is raising this                 objection claiming the trial court misled
argument for the first time on appeal, any error is waived.            Adams. Rather, appellant simply asked the
4                                                                      trial court to overrule the State's motion in
                                                                       limine. In his brief, appellant now seems
       4 Appellant does not assert a right to present an               to argue that the trial court misled Adams
       untimely objection under the guise of an "absolute              by apprising her of the existence of parole
       right" or a claim of a "waivable-only right." See               without then informing her of the intricacy
       Marin v. State, 851 S.W.2d 275 (Tex.Crim.App.                   of its operation.
       1993).

      As his second basis for error, appellant contends the         We do not have to address the merits of this [**9]
trial court misled veniremember Adams when it told her          point because the State exercised a peremptory challenge
that a person sentenced to death was not eligible for           against veniremember Adams. The alleged error could
parole, while also stating that a defendant sentenced to        not have influenced the trial in any conceivable manner.
life in prison was eligible for parole. The relevant voir       Point of error three is overruled.
dire exchange follows:
                                                                     In his fourth point, appellant claims that Article
          VENIREMEMBER: . . . is he eligible                    37.071 is unconstitutional if it is interpreted to deny a
       for parole?                                              jury information of the thirty-five year minimum before
                                                                parole eligibility. Appellant specifically claims that his
           THE COURT: Well I think it's                         due process rights protected under both the Fourteenth
       obvious [**8] if somebody is assessed the                Amendment, and Article I, Section 19 of the Texas
       death penalty you don't get paroled on a                 Constitution, were violated when the trial court refused to
       death penalty.                                           provide the jury with information of the minimum
                                                                sentence before parole eligibility. See Smith; Broxton;
           VENIREMEMBER: That doesn't                           Sonnier, supra.
       seem to be what is happening, though. Or
       are we not knowing the full story when we                     Appellant also contends, under this point, that his
       hear things?                                             Article I, Section 13 rights guaranteed by the Texas
                                                                Constitution were violated. As to the latter argument,
            THE COURT: You probably don't                       appellant is presumably referring to the Texas right
       know the full story, but you aren't paroled              against cruel or unusual punishment. In any event,
       on a death penalty. I think that is obvious.             appellant does not designate in his brief, and we cannot
       I don't think anybody is going to object at              find in the record, where appellant lodged his Article I,
       this point to my telling you that, which                 Section 13 objection in the trial court. Without such an
       leaves you with the other option, a life                 objection, any error in this regard has [**10] been
       sentence.                                                forfeited. Rezac v. State, 782 S.W.2d at 870.

           VENIREMEMBER: And that's the                             As to appellant's federal due process claim, this
       one that you are eligible for parole at some             Court has settled the issue unfavorably to appellant.
       stage, perhaps?                                          Broxton, supra. With regard to his Texas due course of
                                                                law contention, appellant presents no argument or
            THE COURT: Yes.                                     authority as to how the protection offered by the Texas
                                                                Constitution differs from the protection guaranteed by the
            APPELLANT: I would request that
                                                                Federal Constitution. His claim is, therefore, inadequately
                                                                                                                    Page 7
                            934 S.W.2d 113, *120; 1996 Tex. Crim. App. LEXIS 205, **10

briefed and presents nothing for our review.                  in this context, that an untimely objection -- under the
Tex.R.App.Proc. 74(f) and 210(b); Smith v. State, supra,      guise of an "absolute right" or a claim of a
at 847; Ex parte Granger, supra, at 515, fn. 6.               "waivable-only right" -- is applicable in this case. See
                                                              Marin v. State, 851 S.W.2d 275 (Tex.Crim.App. 1993). 5
     Appellant finally claims, under this point, that his
right to equal protection, as protected by the Fourteenth            5 Appellant cites Almanza v. State, 686 S.W.2d
Amendment, was violated. Appellant specifically claims               157 (Tex.Crim.App. 1984), for the proposition
that capital defendants are treated disparately from                 that an objection is unnecessary if error is
non-capital defendants. Appellant's argument [*121]                  egregious or fundamental. However, the Almanza
was rejected in Smith v. State, supra. Point of error four           holding is limited to charge error; Almanza has no
is overruled.                                                        application to this context.

     In point eleven, appellant contends that two                    [**13] Appellant seems to argue -- for the first time
inconsistent versions of Article 37.071, as enacted by the    on appeal -- that even without a trial objection, this Court
Texas Legislature, were in effect during the time of          can review the jury charge to determine if there was a
appellant's trial. Appellant argues that the existence of     defect so egregious that it deprived appellant of a fair
these two [**11] versions resulted in a conviction which      trial. Appellant is correct. Almanza v. State, 686 S.W.2d
violated his rights under the Fifth, Sixth, Eighth, and       157, 171 (Tex.Crim.App 1984). However, there was no
Fourteenth Amendments to the Federal Constitution, and        error in the Article 37.071 charge because it is plain that
his rights under Article I, Sections 10 and 19 of the Texas   there were never two versions of Article 37.071 in
Constitution.                                                 existence. If there is no charge error, Almanza has no
                                                              application.
     Specifically, appellant complains that two legislative
amendments -- Senate Bill 880 and House Bill 9 -- both            The Texas Constitution contains a provision which
effective on September 1, 1991, are conflicting. See Tex.     governs the amendment of statutes:
H.B. 9, 72nd Leg., R.S. Ch. 652 and Tex. S.B. 880, 72nd
Leg., R.S., Ch. 838. To establish this purported conflict,             [HN7] Sec. 36. No law shall be revived
appellant notes that Senate Bill 880 amended Article                 or amended by reference to its title; but in
37.071 so as to delete the special punishment issues                 such case the act revived, or the section or
concerning "deliberateness" and "provocation," while                 sections amended, shall be re-enacted and
such a deletion was not reflected in House Bill 9.                   published at length. Tex. Const. art. III, §
Appellant argues that there is an "irreconcilable conflict"          36.
between the two enactments such that the following
rights were violated: First, appellant did not have           Hence, to amend a statute, the Legislature must indicate
effective assistance of counsel because he could not know     changes by interlineating the modifications onto the text
which enactment applied. Second, appellant claims he          of the statute as the text was prior to amendment. The
was unable to effectively prepare and conduct voir dire       purpose of this requirement is straightforward:
because of improper statutory uncertainty. Although                      An amendment which sought to insert
appellant, in this appeal, presents a "laundry list" of              words or substitute phrases by reference
alleged constitutional violations, [**12] we will address            with no publication could well mislead as
only the two claims specifically argued in his brief.                to its effect. [**14] Such was sometimes
                                                                     the intention. Great confusion was
    Appellant has failed to indicate in his brief, and we            introduced into the law, and to eliminate
cannot find in the record, where he lodged an objection to           the uncertainty and confusion, the
Article 37.071 in which he claimed "irreconcilable                   constitution wisely requires amended
conflict." These objections were not raised with the trial           statutes to be re-enacted and published so
court; they are raised for the first on appeal. As we held,          that their meaning may be known without
supra, for an issue to be preserved on appeal, there must            the necessity of examining the statute
be a timely objection which specifically states the legal            amended.
basis for that objection. Rezac v. State, 782 S.W.2d at
870. Appellant has failed to argue, and we decline to hold                Tex. Const. art. III, § 36 interp.
                                                                                                                  Page 8
                            934 S.W.2d 113, *121; 1996 Tex. Crim. App. LEXIS 205, **14

       commentary (Vernon 1984).
                                                              Upon review of House Bill 9, and Senate Bill 880, we
                                                              find [**16] the two enactments are perfectly
     House Bill 9 made a single substantive change to         reconcilable. Each makes substantive changes the other
Article 37.071. That change was the addition of Section       does not; there is no conflict when one comprehends how
One, in which the [*122] State might elect to decline         statutory amendments are achieved. There being no
pursuit of a death sentence in a capital case. Tex. H.B. 9,   conflict, appellant's argument that there were two
72nd Leg., R.S. Ch. 652, § 4. To indicate this change, the    inconsistent versions of Article 37.071 in effect during
Legislature was compelled to "re-enact" the entire statute    his trial is without basis. Point of error eleven is
as it was before amendment. Article 37.071 did not yet        overruled.
contain the changes made by Senate Bill 880 because
these changes were made during the same legislative                In point seventeen, appellant claims the trial court
session and had not yet taken effect. Hence, House Bill 9     erroneously restricted voir dire questioning regarding
does not contain the changes made by Senate Bill 880.         factors that particular veniremembers considered
                                                              mitigating. Appellant simply cites page references where
     Senate Bill 880 made more extensive amendments.          he claims such a restriction occurred and provides no
These changes essentially involved the elimination of the     argument or analysis in support.
"deliberate" and "provocation" prongs of the jury charge,
and the addition of the mitigation finding. To [**15]              [HN9] When a defendant challenges a trial court's
signify these changes, the Legislature was required to        limitation on voir dire questioning on appeal, the
"re-enact" the entire statute, as it was before amendment.    reviewing court must analyze the claim under an abuse of
House Bill 9 was not yet part of Article 37.071.              discretion standard, the focus of which is whether
                                                              appellant proffered a proper question. Caldwell v. State,
     The Legislature, anticipating appellant's argument,      818 S.W.2d 790, 793 (Tex.Crim.App. 1991), cert. denied,
enacted the following provision in the Code Construction      503 U.S. 990, 118 L. Ed. 2d 399, 112 S. Ct. 1684 (1992).
Act:                                                          A proper question is one which seeks to discover a
                                                              veniremember's views on an issue applicable to the case.
          [HN8] (b) . . . If amendments to the                818 S.W.2d at 794. If a proper question [**17] is
       same statute are enacted at the same                   disallowed, harm to appellant is presumed because he has
       session of the legislature, one amendment              been denied the ability to intelligently exercise his
       without reference to the other, the                    peremptory strikes. Id. However, the trial court may
       amendments shall be harmonized, if                     restrict questions in which counsel attempts to commit a
       possible, so that effect may be given each.            veniremember to a particular resolution based upon facts
                                                              peculiar to the trial. Coleman v. State, 881 S.W.2d 344,
            (c)     In    determining      whether            350-51 (Tex.Crim.App. 1995), cert. denied, 130 L. Ed.
       amendments are irreconcilable, text that is            2d 660, 115 S. Ct. 763 (1995).
       reenacted because of the requirements of
       Article III, Section 36, of the Texas                       In appellant's first contention, he claims an improper
       Constitution is not considered to be                   voir dire restriction in the following exchange:
       irreconcilable with additions or omissions
       in the same text made by another                                 APPELLANT: Drug usage, could that
       amendment. Unless clearly indicated to                        ever be mitigating factor to you in the
       the contrary, an amendment that reenacts                      proper situation?
       text in compliance with that constitutional
       requirement does not indicate legislative                         PROSECUTOR: Your Honor, again I
       intent that the reenacted text prevails over                  have to object to trying to commit Mr.
       changes in the same text made by another                      Tomlinson to exactly what things he
       amendment, regardless of the relative                         would consider mitigating . . .
       dates of the amendment.
                                                                          THE COURT: Okay. Let me reiterate.
            Tex.Gov't Code § 311.025 (b) and (c).
                                                                                                                    Page 9
                            934 S.W.2d 113, *122; 1996 Tex. Crim. App. LEXIS 205, **17

            APPELLANT: Can I ask the court to                           THE COURT: I understand. I don't
       rule on her motion so I could respond?                       understand the question to be trying to
                                                                    commit her. . . . So if you just want to talk
            THE COURT: I am sustaining it as                        about in general terms.
       far as committing. . . .
                                                             The trial court then permitted appellant to continue
This questioning occurred just after appellant told the      questioning the veniremember in general terms. There
veniremember that the law required him to consider drug      was no voir dire limitation.
use to be mitigating. Appellant was not asking whether
[*123] the veniremember could consider drug [**18]                Our review of appellant's fourth claim again
usage in the punishment portion of the trial; rather,        indicates that the trial court reasonably restrained
appellant was asking whether the veniremember believed       appellant's questioning. Appellant was attempting to
it to be mitigating. See Penry v. State, 903 S.W.2d 715,     commit the veniremember to drug use as a mitigating
736 (Tex.Crim.App. 1995). Indeed, the evidence adduced       factor. As we held, supra, given the nature of this case,
at trial indicated that appellant was intoxicated when he    such a restriction was reasonable. Finally, upon review of
committed the murders. In this context, the trial court      appellant's final contention, we fail to find a voir dire
could reasonably find such a question to be an               [**20] restriction. Although the State objected to
impermissible effort to commit the veniremember to a         appellant's mitigation question, the trial court did not rule
particular set of facts. Coleman v. State, supra.            on the objection. Hence, appellant was permitted to ask
                                                             the question.
     Upon review of appellant's second claimed voir dire
restriction, we find the limitation to be within the trial       The trial court legitimately exercised its discretion
court's discretion. Appellant asked veniremember             when it prevented appellant from asking questions which
Tomlinson whether he thought good conduct in prison to       committed veniremembers to particular factual findings
be an aggravating factor or a mitigating factor. Appellant   which were peculiar to the case on trial. Point of error
was attempting to elicit, not whether the veniremember       seventeen is overruled.
could consider good conduct in prison at mitigation, but
whether the veniremember would find good conduct in               In point nine appellant claims the trial court erred
prison to be mitigating. There was evidence presented at     when it permitted the State to exercise a peremptory
trial that appellant was a good prisoner before the          challenge against veniremember Berniece Holiday, in
killings. A rational trial court could find that such        that the challenge was racially motivated and a violation
questioning was an improper attempt to bind the              of Batson v. Kentucky, 476 U.S. 79, 90 L. Ed. 2d 69, 106
veniremember to a particular finding based [**19] upon       S. Ct. 1712 (1986). [HN10] Under Batson, the procedure
the facts presented at trial. Id .                           to determine an equal protection violation has three
                                                             prongs in the context of racial discrimination: First, the
    Our review of appellant's third claim fails to uncover   opponent of the peremptory challenge has to prove a
a voir dire limitation. The following exchange occurred:     prima facie case of racial discrimination (step one). If this
                                                             burden is met, the burden of production falls to the
              APPELLANT: What would be                       proponent of the strike to tender a race-neutral
       mitigating at the time of punishment? You             explanation (step two). If a race neutral explanation is
       kind of ruled out bad childhood in a way.             tendered, the trial court must then determine if the
                                                             opponent [**21] of the strike has proved purposeful
            VENIREMEMBER: Oh, no, I mean,                    racial discrimination (step three). See also Purkett v.
       there could be a combination of things.               Elem, 514 U.S. 765, 131 L. Ed. 2d 834, 115 S. Ct. 1769,
                                                             1770-71 (1995). [HN11] This court reviews the trial
           PROSECUTOR: Your Honor, I have                    court's finding, vel non, of purposeful discrimination
       to object to trying to commit Ms. Jones as
                                                             under a clearly erroneous standard. Wheatfall v. State,
       to exactly what she would consider as                 882 S.W.2d 829, 835 (Tex.Crim.App. 1994), cert. denied,
       mitigating. As long as she would consider             130 L. Ed. 2d 644, 115 S. Ct. 742 (1995). [HN12] When
       any mitigating evidence.                              applying the clearly erroneous standard, this Court will
                                                                                                                   Page 10
                             934 S.W.2d 113, *123; 1996 Tex. Crim. App. LEXIS 205, **21

not disturb a trial court's ruling unless we are left with a    ever determined that appellant met his prima facie
definite and firm conviction that a mistake has been            burden. In Texas, however, once a party articulates the
committed. Vargas [*124] v. State, 838 S.W.2d 552,              reasons for a peremptory challenge, and the trial court has
554 (Tex.Crim.App. 1992). In making this determination,         ruled on the ultimate question of intentional
this Court will review voir dire, the State's race-neutral      discrimination, the preliminary issue of whether the
explanations, the composition of the jury panel, and            defendant had made a prima facie showing becomes
appellant's rebuttal and impeachment evidence. Id.              moot. Wheatfall v. State, 882 S.W.2d at 835.

     To make his prima facie case at trial, appellant made           Upon review of the record, this Court is not left with
several observations to the trial court. First, appellant       a definite and firm conviction that error was committed.
confirmed that veniremember Holiday was black.                  Appellant's showing of purposeful discrimination was
Second, appellant noted that Holiday was the first black        minimal. The State's race-neutral explanations were not
veniremember to be interviewed from the fourth jury             whimsical, Purkett, [**24] supra, and the record does
panel. Appellant also noted that Holiday's [**22]               not reflect that the State demonstrated a disparate pattern
answers seemed very State-oriented. Finally, appellant          of strikes against any suspect class. Point of error nine is
contended that the State used a peremptory strike against       overruled.
Holiday only two minutes into appellant's voir dire
questioning. Appellant claims that the State, by                     In point ten, appellant claims Batson error as to
interrupting his voir dire examination to lodge a               veniremember Gregory Randle. To support his prima
peremptory strike, changed its pattern of asserting             facie claim, appellant stated into the record that: (a)
peremptory strikes. These were the only arguments               Randle was black; (b) the Harris County District
appellant advanced in his effort to demonstrate a prima         Attorney's Office has had a history of trying to exclude
facie case.                                                     blacks from juries; (c) Randle was observant and
                                                                intelligent, and considerate of the prosecution; (d) Randle
     The State contested the legitimacy of appellant's          was "protective as to society." The trial court ordered the
prima facie case. The trial court, nevertheless, ordered the    State to provide its race-neutral reasons without ruling
State to provide its race-neutral reasons for the strike. The   upon whether appellant properly made a prima facie case.
State provided several race-neutral reasons: (a) Holiday
"dozed off" during the State's group voir dire                       The State's explanations were: (a) Randle had a
examination; (b) Holiday's answers were very succinct, in       brother in prison, and although Randle had visited him
a way which demonstrated a lack of candor; (c) Holiday          recently, Randle professed that he did not know what
only answered three of seventeen questions on a                 crime his brother committed. The prosecutor professed
particular page of her juror questionnaire; (d) Holiday's       that she was concerned Randle was being disingenuous,
facial expressions led the prosecutor to believe that she       and down-playing the effect his relationship with his
was saying what she believed the prosecutor wanted to           brother would have on him; (b) Randle vacillated on the
hear; (e) Holiday was an elementary school teacher and          kind of evidence he would require to find future danger.
might identify too closely with evidence of appellant's         Although this vacillation was not legally sufficient to
difficult childhood; (f) Holiday indicated, with [**23] a       [**25] subject Randle to a challenge for cause, he
tone of pride, that, while previously serving on a jury, she    nevertheless occasionally articulated that he would prefer
"set free" the defendant; (g) Holiday had a first cousin        evidence of past violent behavior to find future danger
who was in prison. In addition, the State noted that over       (the [*125] State had no evidence of past violent
64 veniremembers had been questioned to that point, and         behavior); (c) Randle indicated during voir dire that he
of those 64 this was the first black veniremember the           thought the death penalty was wrong, although he
State peremptorily challenged.                                  conceded that it might be necessary for some crimes.

      The trial court, noting that it too had observed               Appellant then disputed the State's interpretation of
Holiday napping during voir dire, declared the State's          Randle's voir dire answers. The judge found the State's
rationale for striking Holiday to be racially neutral. The      reasons to be race-neutral and overruled appellant's
trial court then overruled appellant's Batson motion.           objection. Given the utter lack of any real evidence that
                                                                the State purposefully discriminated against Randle in the
    The record does not manifest whether the trial court        record, and the relative strength of the State's
                                                                                                                 Page 11
                             934 S.W.2d 113, *125; 1996 Tex. Crim. App. LEXIS 205, **25

explanations, we are not left with a definite and firm         the evidence. Alvarado v. State, 912 S.W.2d at 217.
conviction that a mistake was committed. Point of error
ten is overruled.                                                   The U.S. Supreme Court has never suggested that
                                                               sentencers be given -- in the context of mitigation --
     In point eighteen, appellant contends the trial court     "unbridled discretion in determining the fates of those
erred when it refused to admit, during punishment, eleven      charged with capital offenses." Franklin v. Lynaugh, 487
childhood photographs which depicted him as a normal,          U.S. 164, 108 S. Ct. 2320, 101 L. Ed. 2d 155 (1988)
happy child. Appellant argues that the trial court's           (plurality opinion). As the Supreme Court observed in
preclusive ruling denied him the opportunity to present        Franklin, supra:
relevant, mitigating evidence in his defense. When the
trial court asked appellant to demonstrate [**26]                        We find unavailing petitioner's reliance
relevance, he made the following argument:                            on this Court's statement in Eddings v.
                                                                      Oklahoma, 455 U.S. 104, 114, 71 L. Ed.
           My point is the State has introduced                       2d 1, 102 S. Ct. 869, that the sentencing
       photographs throughout the dehumanizing                        jury may not be precluded from
       stage of their punishment hearing,                             considering "any relevant, mitigating
       showing various photographs of him when                        evidence."     This     statement     leaves
       he was arrested at the time of seventeen,                      unanswered the question: relevant to
       eighteen, throughout, mug shots. To aid                        what? While [**28] Lockett, supra,
       the jury to understand the development of                      answers this question at least in part --
       the defendant though his various stages of                     making it clear that a State cannot take out
       his life, we also have the right to show the                   of the realm of relevant sentencing
       human side of the defendant as much as                         considerations the questions of the
       the State has attempted to dehumanize and                      defendant's "character," "record," or the
       turn him into some sort of monster. I                          "circumstances of the offense" -- Lockett
       think, under Penry and under the                               does not hold that the State has no role in
       mitigation portion stage of the trial, the                     structuring or giving shape to the jury's
       jury should be entitled to see the defendant                   consideration of these mitigating factors.
       grow and what various stages [sic].                            Franklin v. Lynaugh, 108 S. Ct. at 2330.
       Talking about elementary school and how                        [citations omitted].
       he appeared, et cetera, et cetera. And let
       them give whatever weight they think is                 The Franklin plurality recognized a relevance
       necessary. It's very material to our lawsuit.           requirement to evidence bearing on the jury's mitigation
                                                               determination.
Thus, appellant was trying to "humanize" his client by
demonstrating that he was once a normal child.                      Indeed, Justice O'Connor provides further guidance
                                                               to the issue of relevancy by [*126] placing a limit on the
     [HN13] Within the meaning of Article 37.071, §            categories of evidence which are conceivably mitigating.
2(a), evidence "mitigates against the imposition of the        She provides a prism with which to determine the
death penalty" if a reasonable juror could conclude that       relevance of proposed mitigating evidence: the
the evidence was a basis for a sentence less than death.       culpability of the defendant. As she explained in
Alvarado v. [**27] State, 912 S.W.2d 199, 217                  Franklin, supra, and later in Penry v. Lynaugh, 492 U.S.
(Tex.Crim.App. 1995) (plurality opinion). Article 37.071,      302, 109 S. Ct. 2934, 106 L. Ed. 2d 256 (1989):
§ 2(f) (4) provides further guidance when it defines
mitigating evidence "to be evidence that a juror might                   [HN14] Evidence about the defendant's
regard      as    reducing    the      defendant's     moral          background and character is relevant
blameworthiness." As we observed in Alvarado, if a                    because of the belief, long held in society,
reasonable juror could not conclude that the proffered                that defendants who commit criminal acts
evidence reduced the defendant's moral blameworthiness,               that [**29] are attributable to a
then a trial court would be within its discretion to exclude          disadvantaged background, or to
                                                                                                            Page 12
                            934 S.W.2d 113, *126; 1996 Tex. Crim. App. LEXIS 205, **29

       emotional and mental problems, may be                     could I have a running objection to all of
       less culpable than defendants who have no                 this?
       such excuse. Franklin, 108 S. Ct. at 2333.
       [citing California v. Brown, 479 U.S. 538,                   THE COURT: Just a              moment.
       93 L. Ed. 2d 934, 107 S. Ct. 837 (1987)]                  Approach the bench, please.
       [emphasis added].
                                                                      (Counsel went to the bench for an
                                                                 off-the-record conference; then the
To Justice O'Connor, the evidence is relevant because it
                                                                 reporter was called to the bench, and the
relates to the moral culpability of a defendant's act. By
                                                                 following proceedings were had:)
this logic, if evidence has no relation to a defendant's
moral culpability for the charged crime, then it is                  DEFENSE COUNSEL: Judge, to
irrelevant to mitigation.                                        allow her to go into this stuff and not let
                                                                 me allude to -- let the jury know he is
     [HN15] In our view, photographs of appellant which
                                                                 going to stay locked up for thirty-five
depict a cheerful early childhood are irrelevant to
                                                                 years is a gross miscarriage of justice.
appellant's moral blameworthiness for the commission of
a violent double-murder because such evidence has no                 THE COURT: I [**31] don't know
relationship to appellant's conduct in those murders. That       where your objection is in there. I
appellant was once a child does not diminish his moral           understand what your previous objection
culpability for the act of murder. Thus, we find no abuse        was. She has been admonished.
of discretion on the part of the trial court in refusing to
admit these photographs. Point of error eighteen is                  DEFENSE COUNSEL: I object to
overruled.                                                       any further questions along this line.

     In point five, appellant claims the trial court erred           THE COURT: I am going to allow
when it admitted evidence, during the punishment phase           her to complete her line of questioning.
of the trial, that appellant would be [**30] eligible for        That is all I am going to say.
unaccompanied emergency furlough from prison if he
were assessed a life sentence for the offense of capital            Q: I am not even sure I remember
murder. The State elicited this evidence from Roy                what the last question was.
Smithy, who was employed by the Huntsville prison:
                                                                      DEFENSE COUNSEL: Talking about
          Q: If an inmate is in prison and behaves               furlough.
       himself for a certain period of time, even
                                                                    Q: Thank you. I think I had asked you
       if he has been convicted of capital murder,
                                                                 what is a furlough?
       and of course, is there on just a life
       sentence, is there an opportunity for him to                   A: A furlough is when an inmate is
       get furloughed?                                           allowed to leave the prison unit unescorted
                                                                 to attend whatever reason it is that he has
            A: If he obtains SAT status, state
                                                                 requested to leave the unit, things such as
       approved trustee 3 status, then he is
                                                                 funeral, family emergency and things of
       eligible for furloughs.
                                                                 that sort where he, in essence, signs a
          Q: Just exactly what does a furlough                   piece of paper that says that he is going to
       mean?                                                     be released a certain time and that he will
                                                                 go to wherever this emergency is and that
           A: You have different types. You                      he promises that he will be back and turn
       have emergency furloughs. You have                        himself back into the unit.
       other --.
                                                                    Q: Like just for the weekend or
            DEFENSE COUNSEL: Your Honor,                         something or for a day or so?
                                                                                                                     Page 13
                              934 S.W.2d 113, *126; 1996 Tex. Crim. App. LEXIS 205, **31

              [*127] A: Yes, ma'am. It may not be                     In point six, appellant again contends error resulting
        just a weekend. It could very well be for a              from the admission of evidence with respect to
        three day period in the middle of the week.              unescorted emergency furlough. In this point, however,
                                                                 appellant claims the trial court erred when it overruled
            Q: Depending on the circumstances?                   appellant's motion for new trial based upon the admission
                                                                 of such evidence. As we held in point five, appellant
            A: Yes, ma'am.                                       waived his objection to evidence of unescorted
                                                                 emergency furlough. Appellant, by failing to object
This [**32] discussion encompasses the entire testimony          correctly, waived his right to complain of the admission
regarding furlough.                                              of this evidence. Hence, the admission of evidence
                                                                 regarding [**34] unescorted emergency furlough could
     We do not have to address the merits of appellant's
                                                                 not form the basis of a motion for new trial. Point of error
contention because he failed to object to the line of
                                                                 six is overruled.
questioning with ample specificity to notify the trial court
of his contention. See Zillender v. State, 557 S.W.2d 515,            In point seven, appellant again contends error
517 (Tex.Crim.App. 1977). [HN16] This Court has                  resulting from the admission of evidence with respect to
identified the prerequisites to an effective objection           unescorted emergency furlough. However, in this point,
respecting the admissibility of evidence. As we held in          appellant claims the trial court erred when it overruled his
Lankston v. State, 827 S.W.2d 907, 909 (Tex.Crim.App.            requested jury instruction at punishment that the jury not
1992):                                                           consider the possibility of furlough during deliberations.
                                                                 Appellant is again attempting to avoid the consequence of
           As regards specificity, all a party has to            his procedural default regarding emergency furlough.
        do to avoid the forfeiture of a complaint                Appellant failed to object to, or request the court to limit,
        on appeal is to let the trial judge know                 the jury's consideration of this evidence. Indeed,
        what he wants, why he thinks himself                     appellant also failed to request that the trial court strike
        entitled to it, and to do so clearly enough              the evidence at the time it was offered, waiting until the
        for the judge to understand him at a time                jury charge was prepared.
        when the trial court is in a proper position
        to do something about it. Of course, when                     The motion to strike is itself subject to a requirement
        it seems from context that a party failed                of timeliness. See S. Goode, et al., Guide to the Texas
        effectively to communicate his desire, then              Rules of Evidence: Civil and Criminal § 103.2 at 18 (2nd
        reviewing courts should not hesitate to                  ed. 1993). [HN17] For an objection to be "timely", a
        hold that appellate complaints arising from              party must invoke it as soon as the ground for it becomes
        the event have been lost.                                manifest. Id. In the case at bar, the basis for a motion to
                                                                 strike became manifest as soon [**35] as the State
In the instant case, appellant objected only to the trial        elicited the testimony regarding emergency furlough. Yet,
court's decision to preclude issues of parole eligibility        appellant failed to request that the jury be instructed not
from the trial; appellant [**33] did not actually object to      to consider the evidence when it was elicited. The motion
the State's question regarding emergency furlough.               to strike, in the guise of a requested jury instruction, was
                                                                 untimely. The trial court therefore did not err when it
     Indeed, the trial court flatly told appellant that it did   overruled appellant's requested instruction. Point of error
not comprehend the nature of appellant's objection.              seven is overruled.
Rather than rephrasing the objection in a way that the
trial court could fathom, appellant lodged another                     [*128] In point eight, appellant avers that the trial
non-specific objection. Appellant failed to effectively          court erred when it overruled his requested jury
communicate his objection. Appellant then declined to            instruction regarding the minimum time served on a life
rephrase it when the trial court informed him that it did        sentence before parole eligibility. At the outset we note,
not understand his objection. We therefore hold that             that this Court has considered this argument in prior cases
appellant's complaint regarding the State's questioning is       and ruled unfavorably to appellant. Smith; Broxton,
waived for failure to object with specificity. Point of error    supra. Appellant, however, contends that the parole
five is overruled.
                                                                                                                 Page 14
                             934 S.W.2d 113, *128; 1996 Tex. Crim. App. LEXIS 205, **35

instruction became necessary when evidence respecting          (Tex.Crim.App. 1994), cert. denied, U.S. , 130 L. Ed.
unescorted emergency furlough was introduced to the            2d 110, 115 S. Ct. 174 (1994). No burden of proof exists
jury:                                                          for either the State or defendant to prove or disprove the
                                                               mitigation question. Id; Penry v. State, 903 S.W.2d 715,
         The trial court erred in allowing the jury            765 (Tex.Crim.App. 1995). Point of error thirteen is
       to consider testimony regarding the                     overruled.
       procedures applicable to discretionary
       prison release. This is the type of evidence                 In point fourteen, appellant claims the trial court
       which courts have consistently ruled                    erred when it refused to give a punishment instruction
       inadmissible and which the legislature                  which accurately placed the burden of proof as to
       would still keep from jury deliberation.                mitigation on the State. As we held in the prior point of
                                                               error, no burden of proof exists for either the State or
The essence [**36] of appellant's argument is that he          defendant to prove or disprove the mitigating question.
should be permitted to notify the jury regarding               Barnes v. State, [**38] supra. Hence, the trial court did
procedures surrounding discretionary prison release if the     not err when it overruled appellant's erroneous request to
State is permitted to do so. However, the jury was             instruct the jury that the burden of proof was on the State
authorized to consider evidence of unescorted emergency        to prove mitigation. Point of error fourteen is overruled.
furlough because appellant failed to object properly to its
                                                                    In point sixteen, appellant contends the trial court
admission. That the jury could consider emergency
                                                               erred when it overruled his objection to the punishment
furlough does not necessitate that it be informed of the
                                                               charge. In his objection, appellant claimed that the charge
factors surrounding parole eligibility. This is because the
                                                               failed to identify and define which factors presented by
jury's knowledge of whether appellant was eligible for
                                                               the evidence could be considered mitigating. Indeed,
parole in thirty-five years does not serve to rebut the
                                                               appellant bases this contention upon the notion that there
possibility that appellant could be released on emergency
                                                               are some factors which are mitigating as a matter of law.
furlough within two days of entering prison. The two
issues are unrelated. Hence, the trial court did not err            [HN19] There is no evidence that must be viewed by
when it refused to give a parole instruction. Point of error   a juror as having a definitive mitigating effect, per se.
eight is overruled.                                            Robertson v. State, 871 S.W.2d 701, 712 (Tex.Crim.App.
                                                               1994), cert. denied, 130 L. Ed. 2d 94, 115 S. Ct. 155
     In point thirteen, appellant contends that Article
                                                               (1994). As we have previously held: [HN20] "[Appellant]
37.071 is unconstitutional because it fails to place the
                                                               is not entitled to jury instructions specifically informing
burden of proof, with respect to mitigation, upon the
                                                               the jury that certain evidence may be considered or how it
State. Appellant's argument follows:
                                                               may be applied." Id. Hence, appellant's request for an
                                                               instruction informing the jury that certain evidence was
          [Article 37.071] limits and inhibits the
                                                               mitigating, [*129] per se, was properly denied. Point of
       jury's consideration of mitigating evidence
                                                               error sixteen is [**39] overruled.
       in violation of the Eighth and Fourteenth
       Amendments of the [**37] United States                       In point fifteen, appellant claims Article 37.071
       Constitution. Said infirmity results by the             violates the Eighth and Fourteenth Amendments to the
       statute's failure to place the burden of                U.S. Constitution because it fails to direct or inform the
       proof on the State for the mitigation                   jury regarding the nature of mitigating or aggravating
       special issue as mandated by Art. 37.071                evidence that would call for or against the application of
       (e).                                                    the death penalty. As we held in Robertson, supra:

[HN18] In cases where mitigating evidence is presented,                   [HN21] Each juror may or may not
all that is constitutionally required is a vehicle by which           believe certain evidence is mitigating;
the jury may give mitigating effect to appellant's                    however, the constitution only requires
evidence. Penry v. Lynaugh, supra; Walton v. State, 497               that where a juror believes there is
U.S. 639, 110 S. Ct. 3047, 3055, 111 L. Ed. 2d 511                    relevant mitigating evidence, that juror
(1990); Barnes v. State 876 S.W.2d 316, 330                           must have a vehicle to give his or her
                                                                                                                  Page 15
                             934 S.W.2d 113, *129; 1996 Tex. Crim. App. LEXIS 205, **39

       reasoned moral response to such evidence.               DISSENT BY: CLINTON; OVERSTREET

 Robertson v. State, 871 S.W.2d at 712. (citing Johnson        DISSENT
v. Texas, 509 U.S. 350, 113 S. Ct. 2658, 125 L. Ed. 2d
290 (1993). The Federal Constitution does not require
trial courts to instruct juries regarding how they should      DISSENTING OPINION
consider, or apply what they may or may not deem
                                                                   CLINTON, Judge
mitigating evidence. Point of error fifteen is overruled.
                                                                     I dissent to the majority's dogged determination to
     In point twelve, appellant claims the trial court erred
                                                               give the slip to Simmons v. South Carolina, 512 U.S.
when it overruled his contention that Article 37.071 was
                                                               154, 114 S. Ct. 2187, 129 L. Ed. 2d 133 (1994). In my
unconstitutional, in violation of the Eighth and
                                                               view a requirement that trial courts inform juries about
Fourteenth amendments to the U.S. constitution.
                                                               the earliest possible release date attached to a life
Appellant specifically [**40] asserts that an untrained
                                                               sentence obtains if a defendant has shown other evidence
jury was incapable of predicting whether a defendant
                                                               that, in combination with the information about release
might commit future acts of violence which would
                                                               dates, tends to show that a capital defendant will not be a
constitute a continuing threat to society. Appellant,
                                                               future danger to society. Willingham v. State, 897
therefore, argues that Article 37.071 fails "to meet the
                                                               S.W.2d 351, 359 (Tex.Cr.App. 1995) (Clinton, J.,
constitutional requirement that the death penalty not be
                                                               concurring). Unlike most appellants raising Simmons
arbitrarily or capriciously rendered." This Court
                                                               claims, appellant here offered precisely such evidence at
addressed and rejected appellant's argument in Lackey v.
                                                               trial.    During     punishment,     appellant     adduced
State, 819 S.W.2d 111, 121 (Tex.Crim.App. 1989). Point
                                                               uncontroverted expert testimony from a psychologist to
of error twelve is overruled.
                                                               the effect that his tendency to violence would be greatly
    Having found no reversible error, we AFFIRM the            mollified by the time he reached the age of sixty-three.
judgment of the trial court.                                   Of course the full significance of this testimony will be
                                                               lost on a jury that does not know that appellant cannot be
    MANSFIELD, J.                                              released into society until at least that age. It escapes
                                                               [**42] me how this Court can gainsay the force of the
    DELIVERED OCTOBER 2, 1996                                  reasoning in Simmons when presented with such
                                                               evidence, evidence that in my view makes information
    EN BANC                                                    about the earliest potential release date available to
                                                               appellant should he be sentenced to life imprisonment
    BAIRD, J., concurring
                                                               unquestionably relevant to future dangerousness. 1
    MALONEY and MEYERS, JJ., concur in the result.
                                                                      1 My resolution of this point of error casts doubt
                                                                      on the propriety of the trial court's refusal to
CONCUR BY: BAIRD
                                                                      permit appellant to question members of the
CONCUR                                                                venire panel on the issue of earliest possible
                                                                      release dates. But if this is indeed voir dire error,
     BAIRD, J., concurring with the following note: I am              it is no doubt error affecting punishment only and
sympathetic to the views expressed in Judge Overstreet's              thus requires a remand only for a new punishment
well reasoned dissent. Post, 934 S.W.2d at 131                        hearing. See Article 44.29(c); Ransom v. State,
(Overstreet, J., dissenting). However, for the reasons                920 S.W.2d 288 (Tex.Cr.App. 1996). As my
stated in Smith v. State, 898 S.W.2d 838, 856                         resolution of the predicate issue would already
(Tex.Cr.App. 1993) (Baird, J., concurring), and because               require the Court to remand for a new punishment
the Supreme Court has not revisited its opinion in                    hearing, however, there is no need to resolve the
Simmons v. South Carolina, 512 U.S. 154, 114 S. Ct.                   voir dire question.
2187, 129 L. Ed. 2d 133 (1994), I am [**41] constrained
to join only the judgment of the Court.                             [*130] I also write to express disagreement with
                                                               the majority's discussion of appellant's eighteenth point
                                                                                                                Page 16
                            934 S.W.2d 113, *130; 1996 Tex. Crim. App. LEXIS 205, **43

[**43] of error. At punishment, the trial court refused to           jury instruction called for by § 2(f) (4) on the
admit eleven photographs presented by appellant                      definition of mitigating evidence in § 2(e)
depicting him at various points throughout his childhood.            presents a problem that has not been resolved by
The majority affirmed the trial court's decision on                  the Court. Article 37.071 § 2(e) arguably allows a
grounds that I find unnecessary, inadequately discussed,             much broader range of mitigating evidence than §
and simply wrong.                                                    2(f) (4). Though it has been presented to the Court
                                                                     on prior occasions, the issue has not yet been
     The majority states that mitigating evidence must               decided in my opinion. The Court has touched on
relate to a defendant's personal moral culpability. It thus          it, though incompletely and even inconsistently.
holds that the trial court was correct in refusing to admit          See Lawton v. State, 913 S.W.2d 542, 555-6
the photographs because they do not reflect upon                     (Tex.Cr.App. 1995); McFarland v. State, 928
appellant's moral culpability. As I have iterated                    S.W.2d 482, 1996 Tex. Crim. App. LEXIS 19
previously, I do not believe that Supreme Court caselaw              (Tex.Cr.App., 1996); Alvarado v. State, 912
answers this very difficult question as the majority, in a           S.W.2d 199, 217 (Tex.Cr.App. 1995) (plurality
few brief paragraphs, does.                                          opinion); Goff v. State, 931 S.W.2d 537, 1996
                                                                     Tex. Crim. App. LEXIS 68 (Tex.Cr.App., 1996).
     By way of the majority's discussion in this regard we
essentially revisit the nexus requirement, Lackey v. State,          [**45] Moreover, other portions of the Penry
819 S.W.2d 111 (Tex.Cr.App. 1991) (On appellant's             opinion support my long-held belief -- based on my
motion for rehearing), in a new setting. This court-created   reading of the Court's caselaw -- that there can be no such
admissibility threshold is again urged by the majority,       limitation on the scope of mitigating evidence. For
though not in the precise terms. In my opinion, the           instance, the Court cited the holding in Lockett v. Ohio,
fundamental problem with such a relevancy requirement         438 U.S. 586, 98 S. Ct. 2954, 57 L. Ed. 2d 973 (1978),
persists. Lackey, 819 S.W.2d at 136 (Clinton, J.,             "that the Eighth and Fourteenth Amendments require that
dissenting); Goss v. State, 826 S.W.2d 162, 169               the sentencer 'not be precluded from considering, as a
(Tex.Cr.App. [**44] 1992) (Clinton, J., dissenting); see      mitigating factor, any aspect of a defendant's character or
also Ex parte Bower, 823 S.W.2d 284, 288-295                  record and any of the circumstances of the offense that
(Tex.Cr.App. 1991) (Clinton, J., dissenting). By              the defendant proffers as a basis for a sentence less than
upholding the trial court's exclusion of the eleven           death.'" Id., 492 U.S. at 317, 109 S. Ct. at 2946, 106 L.
photographs on the basis that the photographs do not          Ed. 2d at 277 (emphasis in original) (citation omitted)
pertain to appellant's moral culpability, the majority        The Court also cited Eddings v. Oklahoma, 455 U.S. 104,
continues to ignore the Supreme Court's jurisprudence to      102 S. Ct. 869, 71 L. Ed. 2d 1 (1982), for the proposition
the contrary. For the same reasons I criticized the nexus     that "[a] State may not by statute preclude the sentencer
requirement, I dissent in this cause as well.                 from considering any mitigating factor . . ." Penry, 492
                                                              U.S. at 318, 109 S. Ct. at 2946, 106 L. Ed. 2d at 278.
    To justify its position, the majority has seized on       Indeed, as Penry noted, our death penalty scheme
language in Franklin v. Lynaugh, 487 U.S. 164, 108 S.         survived constitutional scrutiny in Jurek because this
Ct. 2320, 101 L. Ed. 2d 155 (1988) (plurality opinion),       Court "broadly interpreted the second [special issue] . . .
and Penry v. Lynaugh, 492 U.S. 302, 109 S. Ct. 2934,          so as to permit [**46] the sentencer to consider whatever
106 L. Ed. 2d 256 (1989), that indicates that the             mitigating circumstances the defendant might be able to
appropriate punishment in a capital trial is purely a         offer." Id., 492 U.S. at 317, 109 S. Ct. at 2946, [*131]
function of the defendant's personal moral culpability. 2     106 L. Ed. 2d at 277 (internal quotations and citations
Slip op., at 15-16. While this language indicates that        omitted) (emphasis added).
mitigating evidence is relevant only if it reflects on the
moral culpability of the defendant, the comments only             In any event, the Supreme Court has never
appear to be dicta. The Supreme Court has never               renounced its decision in Skipper v. South Carolina, 476
explicitly arrived at that conclusion in a holding of a       U.S. 1, 106 S. Ct. 1669, 90 L. Ed. 2d 1 (1986). In
majority opinion.                                             Skipper, the Court held that it violates the Eighth and
                                                              Fourteenth Amendments for the trial court to refuse to
       2 The majority also cites Article 37.071 § 2(f)        admit evidence of the petitioner's post-arrest, pre-trial
       (4) to support its conclusion. Yet the effect of the
                                                                                                                    Page 17
                              934 S.W.2d 113, *131; 1996 Tex. Crim. App. LEXIS 205, **46

good conduct and adjustment during incarceration. The            capital murder." Point number four asserts that if Article
Court arrived at this conclusion even though expressly           37.07, V.A.C.C.P. "was properly interpreted as
recognizing that the mitigating effect of the evidence did       preventing the trial court from fully informing the jury of
not derive from its relation to the petitioner's culpability     the statutory sentencing provisions for capital murder, the
for the offense he committed. Despite language to the            section violated the due process rights afforded by the
contrary in Penry, supra, I continue to believe that:            Fourteenth Amendment to the United States Constitution
                                                                 and Article I, Sections 13 and 19 of the Texas
           "the principle of Skipper [that proffered             Constitution." Both points complain about the trial court's
        evidence does not necessarily have to                    refusal to inform the jury that a life sentence after
        relate specifically to culpability for the               conviction of capital murder statutorily required service
        charged crime to be relevant to serve as a               of 35 years incarceration before becoming eligible for
        valid basis for a sentence less than death]              parole. The majority concludes that "the trial court did
        remains intact . . . and applies beyond the              not err when it refused give a parole instruction."
        context of good conduct [**47] in jail."                 Rhoades v. State, 934 S.W.2d 113, 1996 Tex. Crim. App.
                                                                 LEXIS 205 (Tex.Cr.App. 1996). I respectfully disagree
Lackey, 819 S.W.2d at 137 (Clinton, J., dissenting).             and believe that appellant was entitled to his requested
                                                                 instruction informing the jury that he would not be
     Accordingly, the photographs adduced by appellant           eligible for parole for 35 years if he received a life
should have been admitted by the trial court, even if the        sentence.
only purpose of their introduction was to solicit the
mercy of the jury. The dispensation of mercy is a                     Appellant sought to inform veniremembers about the
"fundamental tradition of our system of criminal                 statutory requirement of 35 [**49] years incarceration
jurisprudence," and one of the jury's core prerogatives.         before becoming eligible for parole, but the trial court
Boyd v. State, 811 S.W.2d 105, 130 n.5 (Tex.Cr.App.              refused to allow such and instead granted the State's
1991) (Clinton, J., dissenting) (citations omitted). The         motion in limine restricting the discussion of such during
majority is wrong to conclude that the photographs are           voir dire. Appellant points out that he presented
inadmissible on the rationale that they do not relate to         testimony from a psychologist that the risk level for
appellant's personal moral culpability. Moreover, the            violence decreases with age and that a 65-year-old
majority decides this intractable, complicated, very             inmate's risk level would have gone way down from
important constitutional question with but a wave of a           whatever it may have been before and should
hand and a brushing aside of Supreme Court precedent             approximate that of the general population. He suggests
inconsistent with its holding.                                   that such testimony had no relevant meaning to the jury
                                                                 on the issue of future dangerousness, nor could it be
    To the short-shrift the majority gives a pair of             given any mitigating effect, without the jury's knowledge
Supreme Court cases from South Carolina, I dissent.              of the mandatory 35 years.
    CLINTON, Judge                                                    After the close of evidence at punishment, appellant
                                                                 requested that the jury charge include an instruction
    (Delivered: October 2, 1996)                                 informing the jury that he would have to serve a
                                                                 mandatory 35 years [*132] before becoming eligible for
    EN BANC
                                                                 parole and objected to the jury charge not including an
    Overstreet, J., joins.                                       instruction as to such. The trial court refused to include
                                                                 such an instruction.
DISSENTING OPINION
                                                                      The State does not specifically dispute the fact that
    OVERSTREET, JUDGE                                            pursuant to Article 42.18, § 8(b) (2), V.A.C.C.P., had
                                                                 appellant been sentenced to life rather than death [**50]
     Appellant's eighth point of error alleges that "the trial   for the instant offense he would indeed have been legally
court erred in overruling appellant's requested [**48]           required to serve 35 years incarceration before becoming
instruction in the jury charge regarding the minimum             eligible for parole. However, the State asserts that the law
time served for a life sentence assessed for the offense of
                                                                                                                 Page 18
                            934 S.W.2d 113, *132; 1996 Tex. Crim. App. LEXIS 205, **50

prohibits a jury from being informed of the                   Additionally, we determined that an instruction on parole
statutorily-mandated minimum amount of time that a            in a capital case would violate Article 4, section 11, of
person convicted of capital murder, who receives a life       the Texas Constitution. Elliott, 858 S.W.2d at 489, n.7;
sentence, must serve before becoming eligible for parole.     see also Garcia v. State, 887 S.W.2d 846, 860
However, while Art. 37.07, § 4, V.A.C.C.P., provides for      (Tex.Cr.App. 1994), cert denied,     U.S. , 115 S. Ct.
the jury to be informed of various matters as to parole       1317, 131 L. Ed. 2d 198 (1995).
eligibility in non-capital punishment proceedings, by its
language it does not even apply to capital punishment                1 Actually, in King v. Lynaugh the en banc court
proceedings; thus it does not prohibit such information              did not decide the issue of whether a parole
from being provided to juries in capital proceedings.                instruction should have been given. The en banc
Appellant correctly notes that Art. 37.07, § 4 does not              court held that this issue was procedurally barred
prohibit the trial court from including information about            because King did not request such a charge at
the requirement of serving 35 calendar years before                  trial. King v. Lynaugh, 850 F.2d at 1056 n.1. The
becoming eligible for parole in the punishment jury                  issue addressed by the en banc court was whether
charge of a capital murder case, but rather requires an              King should have been allowed to voir dire the
appropriate instruction in non-capital felony cases.                 jury on the twenty-year requirement for parole
                                                                     eligibility under a life sentence for capital murder.
A. Texas cases                                                       Id. at 1058.

     First, I shall examine Texas cases, prior to Smith v.          [**53] Even before Elliott this Court consistently
State, 898 S.W.2d 838 (Tex.Cr.App. 1995) (plurality           rejected arguments that the trial court should instruct the
opinion), cert. denied, [**51]    U.S. , 116 S. Ct. 131,      jury about parole in the context of a life sentence for
133 L. Ed. 2d 80 (1995), on this and related issues. This     capital murder. Boyd v. State, 811 S.W.2d 105, 130
Court has held that a trial court properly refused to         (Tex.Cr.App. 1991), cert. denied, 502 U.S. 971, 112 S.
instruct the jury at the punishment stage of a capital        Ct. 448, 116 L. Ed. 2d 466 (1991); Knox v. State, 744
murder trial on the parole laws in Texas. Elliott v. State,   S.W.2d 53, 62-64 (Tex.Cr.App. 1987), cert. denied, 486
858 S.W.2d 478, 490 (Tex.Cr.App. 1993), cert. denied,         U.S. 1061, 108 S. Ct. 2834, 100 L. Ed. 2d 934 (1988);
510 U.S. 997, 114 S. Ct. 563, 126 L. Ed. 2d 463 (1993);       Andrade v. State, 700 S.W.2d 585, 587-88 (Tex.Cr.App.
see also Hughes v. State, 897 S.W.2d 285 (Tex.Cr.App.         1985), cert. denied, 475 U.S. 1112, 106 S. Ct. 1524, 89 Lans. Ch.
1994). In Elliott the defendant claimed the denial of the     Ed. 2d 921 (1986).
instruction violated the Eighth and Fourteenth
Amendments to the United States Constitution, relying               [*133] Similarly we have held that a defendant in a
on California v. Ramos, 463 U.S. 992, 103 S. Ct. 3446,        capital case is not permitted to present evidence of parole
77 L. Ed. 2d 1171 (1983), and King v. Lynaugh, 828 F.2d       procedures applicable to life sentences for capital murder.
257 (5th Cir. 1987), vacated in part, 850 F.2d 1055 (5th      Jones v. State, 843 S.W.2d 487, 495 (Tex.Cr.App. 1992).
Cir. 1988) (en banc). We observed that neither this Court     See also Stoker v. State, 788 S.W.2d 1, 16 (Tex.Cr.App.
nor the Fifth Circuit had interpreted California v. Ramos     1989), cert. denied, 498 U.S. 951, 111 S. Ct. 371, 112 L.
as requiring an instruction on parole laws in the             Ed. 2d 333 (1990) (no error in failing to appoint expert to
punishment phase of a capital case. Elliott, 858 S.W.2d       testify on issue of parole in a capital case). In Jones the
at 490. While recognizing that Fifth Circuit opinions have    defendant sought to introduce evidence that he would be
no precedential value for this Court, we were persuaded       confined a minimum of twenty years. 2 Jones argued that
by the en banc opinion in King v. Lynaugh which found         the [**54] jury should be aware of the length of time he
[**52] no federal constitutional requirement for such an      would have to be confined in prison so the jury could
instruction. 1 Elliott, 858 S.W.2d at 490. This Court         intelligently decide whether he was a continuing threat to
quoted from the Fifth Circuit's en banc opinion stating       society. 3 This Court stated that a jury should not
that in California v. Ramos the Supreme Court                 consider parole during punishment deliberation in a
determined that a jury instruction on a capital defendant's   capital murder case. Jones, 843 S.W.2d at 495. Jones
eligibility for parole or commutation of sentence does not    also attempted to present expert testimony showing he
raise a constitutional issue. Elliott, 858 S.W.2d at 490,     would never be paroled, arguing that he would never be a
citing King v. Lynaugh, 850 F.2d 1055, 1061.                  threat to society. We observed that "society" includes
                                                                                                                 Page 19
                            934 S.W.2d 113, *133; 1996 Tex. Crim. App. LEXIS 205, **54

prison inmates as well as free citizens, so the length of            Legislature enacted Art. 37.07, § 4, V.A.C.C.P.,
time a person remains incarcerated was not relevant to               which provides for such instruction by the courts,
the special issue on future dangerousness. Id.                       but does not mention capital cases. See Boyd, 811
                                                                     S.W.2d at 121; Felder, 758 S.W.2d at 762 (both
       2 See former Art. 42.18, § 8(b), V.A.C.C.P.                   cases construing former Art. 37.07, § 4).
       3 See former Art. 37.071(b) (2), V.A.C.C.P.,
       now Arts. 37.0711, § 3(b) (2), and 37.071, § 2(b)      B. Simmons v. South Carolina
       (1) ("whether there is a probability that the
       defendant would commit criminal acts of violence            In a supplemental brief appellant points out that the
       that would constitute a continuing threat to           Supreme Court recently issued its opinion in Simmons v.
       society").                                             South Carolina, 512 U.S. 154, [**57] 114 S. Ct. 2187,
                                                              129 L. Ed. 2d 133 (1994). Appellant argues that under
      We have held that a trial court does not err in a       Simmons the failure to inform the jury of when he would
capital murder [**55] trial by instructing the jury not to    be eligible for parole violated the Due Process Clause and
consider how long a defendant would be required to serve      the Eighth Amendment of the United States Constitution.
to satisfy a life sentence, because parole is not a proper
consideration for the jury's deliberations at punishment.          In Simmons, because of prior convictions for violent
Ramirez v. State, 815 S.W.2d 636, 653 (Tex.Cr.App.            crimes, the defendant would have been ineligible for
1991); Williams v. State, 668 S.W.2d 692, 701                 parole if he were given a life sentence. Simmons, U.S.
(Tex.Cr.App. 1983), cert. denied, 466 U.S. 954, 104 S.        at , 114 S. Ct. at 2191 n.2, 129 L. Ed. 2d at 139 n.2.
Ct. 2161, 80 L. Ed. 2d 545 (1984).                            Before jury selection, the trial court granted the
                                                              prosecutor's motion, over Simmons' objection, and
     In voir dire, prospective jurors may not be told about   ordered the defense not to voir dire the venire about
the specifics of parole law relating to life sentences for    parole or even mention the subject of parole. In the
capital murder. Boyd, 811 S.W.2d at 118-19. A potential       punishment phase, the prosecutor asked the jury to
juror who is unable to disregard parole in determining the    consider Simmons' future dangerousness. In response,
special issues is challengeable for cause. Felder v. State,   Simmons presented evidence [*134] that he would not
758 S.W.2d 760, 762-67 (Tex.Cr.App. 1988), cert.              commit acts of violence once he was isolated in a prison
denied, 510 U.S. 829, 114 S. Ct. 95, 126 L. Ed. 2d 62         setting. Simmons' attorney asked the trial court to instruct
(1993).                                                       the jury that Simmons would be ineligible for parole and,
                                                              if sentenced to life imprisonment, he in actuality would
     The constant in these Texas cases has been that          be sentenced to imprisonment for the balance of his
parole is not a proper matter for consideration in the        natural life.
jury's deliberation in the punishment stage of a capital
murder trial. This was due primarily to two reasons: (1)           Outside the presence of the jury, Simmons [**58]
prior to the 1989 amendment of Art. IV, § 11 of the           presented evidence showing he was ineligible for parole.
Texas Constitution, parole was never a proper matter for      There was evidence from Simmons and the prosecution
the jury to consider in Texas; 4 and (2) [**56] until         about furloughs and early release programs. Simmons
recently, the United States Supreme Court had never held      offered results of a survey showing that few people in
that there was a federal constitutional requirement that      South Carolina believed that a person sentenced to life
the jury ever be given any information about parole. See      imprisonment actually would spend the rest of his life in
California v. Ramos, supra.                                   prison; that almost half believed a convicted murderer
                                                              might be paroled within twenty years; that almost
       4 "The Legislature shall have authority to enact       three-fourths believed a convicted murderer would be
       parole laws and laws that require or permit courts     released within thirty years; and that more than
       to inform juries about the effect of good conduct      three-fourths said that if they had to decide a sentence in
       time and eligibility for parole or mandatory           a capital case, the amount of time the defendant actually
       supervision on the period of incarceration served      would have to spend in prison would be either extremely
       by a defendant convicted of a criminal offense."       important or very important in choosing between life and
       Tex.Const., Art. IV, § 11(a). As a result of the       death. The trial court denied Simmons' request for an
       1989 amendment to Art. IV, § 11(a), the                instruction.
                                                                                                                 Page 20
                            934 S.W.2d 113, *134; 1996 Tex. Crim. App. LEXIS 205, **58

     During deliberation the jury sent a note to the judge          information that the sentencing authority
inquiring about the possibility of parole for a life                considered, and upon which it may have
sentence. Over Simmons' objection the trial court                   relied, in imposing the sentence of death.
instructed the jury not to consider parole or parole                The State raised the specter of petitioner's
eligibility. The court also informed the jury that life             future dangerousness generally, but then
imprisonment and death sentence were to be understood               thwarted all efforts by petitioner to
in their plain and ordinary meaning. The jury [**59]                demonstrate that, contrary to the
returned a sentence of death.                                       prosecutor's intimations, he never would
                                                                    be released on parole and thus, in his view,
     The Supreme Court held that when a defendant's                 would not pose a future danger to society.
future dangerousness is an issue and the defendant is               The logic and effectiveness of petitioner's
ineligible for parole, due process requires that the jury           argument naturally depended on the fact
assessing punishment be told that about the defendant's             that he was legally ineligible for parole
parole ineligibility. 5 Simmons, U.S. at , 114 S. Ct. at            and thus would remain [**61] in prison if
2190, 129 L. Ed. 2d at 138. "The Due Process Clause                 afforded a life sentence. Petitioner's efforts
does not allow the execution of a person 'on the basis of           to focus the jury's attention on the question
information which he had no opportunity to deny or                  whether, in prison, [*135] he would be a
explain.'" Simmons, .S. at , 114 S. Ct. at 2192, 129 L.             future danger were futile, as he repeatedly
Ed. 2d at 141, citing Gardner v. Florida, 430 U.S. 349,             was denied any opportunity to inform the
362, 51 L. Ed. 2d 393, 97 S. Ct. 1197 (1977). The Court             jury that he never would be released on
observed that the jury may have believed Simmons could              parole. The jury was left to speculate
be released on parole if he were not executed. The Court            about petitioner's parole eligibility when
noted:                                                              evaluating          petitioner's        future
                                                                    dangerousness, and was denied a straight
            To the extent this misunderstanding                     answer about petitioner's parole eligibility
       pervaded the jury's deliberations, it had the                even when it was requested.
       effect of creating a false choice between
       sentencing petitioner to death and                    Simmons, 512 U.S. at , 114 S. Ct. at 2194-95, 129 L.
       sentencing him to a limited period of                 Ed. 2d at 143-44 (footnote omitted).
       incarceration. This grievous misperception
       was encouraged by the trial court's refusal                  5 The Supreme Court declined to decide whether
       to provide the jury with accurate                            appellant's rights under the Eighth Amendment
       information regarding petitioner's parole                    were also violated. Simmons, 512 U.S. at , 114
       ineligibility, and by the [**60] State's                     S. Ct. at 2193 n.4, 129 L. Ed. 2d at 141 n.4. But
       repeated suggestion that petitioner would                    see Simmons, 512 U.S. at , 114 S. Ct. at 2198,
       pose a future danger to society if he were                   129 L. Ed. 2d at 147 (Souter, J., concurring).
       not executed. . . . The State thus succeeded
       in securing a death sentence on the                         The Supreme Court observed in Simmons that
       ground, at least in part, of petitioner's             "prosecutors in South Carolina, like those in [**62] other
       future dangerousness, while at the same               States that impose the death penalty, frequently
       time concealing from the sentencing jury              emphasize a defendant's future dangerousness in their
       the true meaning of its non-capital                   evidence and argument at the sentencing phase; they urge
       sentencing alternative, namely, that life             the jury to sentence the defendant to death so that he will
       imprisonment meant life without parole.               not be a danger to the public if released from prison."
       We think it is clear that the State denied            Simmons, 512 U.S. at , 114 S. Ct. at 2193, 129 L. Ed.
       petitioner due process.                               2d at 142, citing Eiseberg & Wells, "Deadly Confusion:
                                                             Juror Instructions in Capital Cases," 79 Cornell L.Rev. 1,
Simmons, 512 U.S. at , 114 S. Ct. at 2193, 129 L. Ed. 4 (1993). Moreover, "in assessing future dangerousness,
2d at 141. The Court further observed:                       the actual duration of the defendant's prison sentence is
          Petitioner was prevented from rebutting            indisputably relevant. Holding all other factors constant,
                                                                                                                Page 21
                            934 S.W.2d 113, *135; 1996 Tex. Crim. App. LEXIS 205, **62

it is entirely reasonable for a sentencing jury to view a            instruction from the court.
defendant who is eligible for parole as a greater threat to
society than a defendant who is not. Indeed, there may be     Simmons,      U.S. at   , 114 S. Ct. at 2196, 129 L. Ed. 2d
no greater assurance of a defendant's future                  at 145-46.
nondangerousness to the public than the fact that he never
will be released on parole." Simmons, U.S. at , 114 S.             Consequently, the Supreme Court found Simmons'
Ct. at 2194, 129 L. Ed. 2d at 142.                            right to due process was violated because his future
                                                              dangerousness was at issue but he was not allowed to
     The Supreme Court noted in Simmons that the State        inform the jury of his parole ineligibility. Simmons,
may still argue that a parole ineligible defendant would      U.S. at , 114 S. Ct. at 2198, 129 L. Ed. 2d at 147.
be a future danger to others in prison, "but the State may
[**63] not mislead the jury by concealing accurate                C. Applicability of Simmons to Texas Capital
information about the defendant's parole ineligibility. The   Punishment Scheme
Due Process Clause will not tolerate placing a capital
                                                                  i. Statutes
defendant in a straitjacket by barring him from rebutting
the prosecution's arguments of future dangerousness with
                                                                         In Texas, the jury must answer the
the fact that he is ineligible for parole under State law."
                                                                     following special issue:
Simmons, 512 U.S. at , 114 S. Ct. at 2194-95 n.5, 129
L. Ed. 2d at 143-44 n.5.                                                 Whether there is a probability that the
                                                                     defendant [**65] would commit criminal
     South Carolina argued in Simmons that there was no
                                                                     acts of [*136] violence that would
statutory prohibition of Simmons' eventual release into
                                                                     constitute a continuing threat to society.
society and that he could be released through legislative
reform, commutation, and clemency. Simmons, U.S. at
                                                              Art. 37.071, § 2(b) (1), V.A.C.C.P. 6 Under the statute in
   , 114 S. Ct. at 2195, 129 L. Ed. 2d at 144. The Court
                                                              effect for the date of this offense:
rejected this argument because the instruction sought by
                                                                        If a prisoner is serving a life sentence for
Simmons was legally accurate and was certainly more
                                                                      a capital felony, the prisoner is not eligible
accurate than no instruction at all. Simmons, U.S. at ,
                                                                      for release on parole until the actual
114 S. Ct. at 2195, 129 L. Ed. 2d at 144.
                                                                      calendar time the prisoner has served,
     The Court distinguished Simmons from California v.               without consideration of good conduct
Ramos. The Court explained that Ramos indicates the                   time, equals 35 calendar years.
Supreme Court generally defers to a State's determination
about what parole information should be provided to a         Former Art. 42.18, § 8(b) (2), V.A.C.C.P. 7
jury. The Court [**64] continued:
                                                                     6 The offense in this case occurred on September
                                                                     13, 1991.
            But if the State rests its case for
                                                                     7 The minimum amount of time a person serving
       imposing the death penalty at least in part
                                                                     a life sentence for capital murder must serve
       on the premise that the defendant will be
                                                                     before becoming eligible for parole has evolved
       dangerous in the future, the fact that the
                                                                     from twenty (20) years, to fifteen (15) years, to
       alternative sentence to death is life without
                                                                     thirty-five (35) years, and to forty (40) years. See
       parole will necessarily undercut the State's
                                                                     Act 1985, ch. 427, 1985 Tex. Gen. Laws 1531;
       argument regarding the threat the
                                                                     Act 1987, ch. 384, 1987 Tex. Gen. Laws 1887;
       defendant poses to society. Because
                                                                     Act 1991, ch. 652, 1991 Tex. Gen. Laws 2394;
       truthful information of parole ineligibility
                                                                     Act 1993, ch. 900, 1993 Tex. Gen. Laws 3586.
       allows the defendant to "deny or explain"
       the showing of future dangerousness, due                    ii. Discussion of Texas [**66] Capital Sentencing
       process plainly requires that he be allowed            in Simmons
       to bring it to the jury's attention by way of
       argument by defense counsel or an                          In Simmons the Supreme Court noted that Texas
                                                                                                                 Page 22
                            934 S.W.2d 113, *136; 1996 Tex. Crim. App. LEXIS 205, **66

does not have a life-without-parole sentencing alternative                These questions are rhetorical, but they
to capital punishment. Simmons, 512 U.S. at , 114 S.                  underscore the ambivalence of a bright-line rule.
Ct. at 2196 n.8, 129 L. Ed. 2d at 145 n.8. The Court said,
"In a State in which parole is available, how the jury's            [**67] iii. "Society" under the Texas Special Issue
knowledge of parole availability will affect the decision
                                                                    The Supreme Court has observed that "the question
whether or not to impose the death penalty is speculative,
                                                               of a defendant's likelihood of injuring others in prison is
and we shall not lightly second-guess a decision whether
                                                               precisely the question posed by the second Texas Special
or not to inform a jury of information regarding parole."
                                                               Issue." Franklin v. Lynaugh, 487 U.S. 164, 169 n.9, 108
Simmons, U.S. at , 114 S. Ct. at 2196, 129 L. Ed. 2d
                                                               S. Ct. 2320, 2330, 101 L. Ed. 2d 155, 169 (1988).
at 145. Justice O'Connor's concurring opinion observed
                                                               According to Justice O'Connor, a Texas capital
that in a State in which parole is available there is no
                                                               sentencing jury may give mitigating effect to evidence of
constitutional requirement that the jury be informed about
                                                               the lack of any prison disciplinary record, as this is
the parole law. Simmons, U.S. at , 114 S. Ct. at 2200,
                                                               evidence that the defendant exist in the highly structured
129 L. Ed. 2d at 150. 8
                                                               environment of a prison without endangering others.
       8 Of course, the Supreme Court in Simmons was           Franklin v. Lynaugh, 487 U.S. at 186, 108 S. Ct. at
       not concerned with a situation in which a               2333-34, 101 L. Ed. 2d at 174 (O'Connor, J., concurring).
       defendant was eligible for parole, albeit after         However, this is only one facet of the term "society" in
       serving a substantial period of time. The Supreme       the special issue.
       Court remarked it would not lightly second-guess
                                                                    This Court has examined the meaning of "society" as
       a state's decision whether or not a jury should be
                                                               used in the special issue in several cases. See, e.g.,
       informed about parole. The Court did not opine
                                                               Rougeau v. State, 738 S.W.2d 651 (Tex.Cr.App. 1987),
       that the United States Constitution did not require
                                                               cert. denied, 485 U.S. 1029, 108 S. Ct. 1586, 99 L. Ed. 2d
       the jury to be provided with parole eligibility
                                                               901 (1988), overruled on other grounds, Harris v. State,
       information.
                                                               784 S.W.2d 5 (1989). The defendant in Rougeau
            If there were a bright-line rule that such         contended the prosecutor was improperly allowed to
       information is available only if the sole alternative   comment that society [**68] within the meaning of the
       to death were life without parole, then several         special issue includes [*137] prison society. We stated
       questions would be raised. What of a sentencing         that a juror is free to give the term "society" the meaning
       scheme in which there are three alternatives:           that is ordinarily acceptable in common language. 738
       death; life without parole; and life with parole, in    S.W.2d at 660. This Court held that "society" includes the
       which the precise date of parole eligibility would      penitentiary, and the prosecutor properly attempted to
       be relevant? See Simmons, U.S. at , 114 S. Ct.          learn whether prospective jurors would exclude from
       at 2202, 129 L. Ed. 2d at 152 (Scalia, J.,              "society" inmates and non-inmates within the Texas
       dissenting). Suppose a state wished to provide          Department of Corrections. Id. In this context we
       assurance that capital murder prisoners serving         observed, "It is obvious to us that in deciding whether to
       life sentences would never be released on parole,       answer the second special issue in the negative the jury
       but did not want to have the jury instructed on         would clearly focus its attention on the 'society' that
       that matter. Could the state accomplish this by         would exist for the defendant and that 'society' would be
       requiring such a prisoner to serve ninety-nine          the 'society' that is within the Texas Department of
       years before attaining parole eligibility? If a         Corrections." Id. (emphasis in original). See also Boyd,
       defendant is sixty years old and would have to          811 S.W.2d at 118 n.12.
       serve forty years before being eligible for parole,
                                                                   In another case, the defendant contended the
       could the jury constitutionally be kept from
                                                               prosecutor's argument, that the defendant would commit
       knowing the unlikelihood that he could ever be
                                                               another murder, was a comment that the defendant would
       released on parole, even though the defendant
                                                               be paroled at some point. Sterling v. State, 830 S.W.2d
       might argue this is tantamount to life without
                                                               114 (Tex.Cr.App. 1992), cert. denied, 506 U.S. 1035, 113
       parole?
                                                               S. Ct. 816, 121 L. Ed. 2d 688 (1992). This Court held that
                                                               the argument [**69] did not necessarily imply that the
                                                                                                                   Page 23
                             934 S.W.2d 113, *137; 1996 Tex. Crim. App. LEXIS 205, **69

defendant would be paroled, but that he would commit           (1993).
another murder in prison. 830 S.W.2d at 120-21.
However, we noted that the term "society" as used in the            In answering the special issue, a Texas jury must
special issue includes both inmate and non-inmate              determine whether the defendant would, more likely than
populations. Id. at 120 n.5. See also Boyd, 811 S.W.2d at      not, commit violent criminal acts in the future so as to
121 ("Appellant fails to cite us to a single case which        constitute a continuing threat to society whether in or out
arguably supports his theory that a potential juror's 'view    of prison. Muniz, 851 S.W.2d at 250. "Society" means
is supposed to be that a defendant sentenced to life will      both free citizens and people in prison. Jones, 843
serve the rest of his life in prison.'").                      S.W.2d at 495.

     "'Society' includes not only free citizens but also            Under the facts of a given case, the jury may well
inmates in the penitentiary. Jones, 843 S.W.2d at 495.         believe that a defendant does not pose a threat to prison
Under the special issue, the State must show the               society due to the regimented environment, but that the
defendant "would, more likely than not, commit violent         defendant may be a future danger to society outside of
criminal acts in the future so as to constitute a continuing   prison. However, under our previous case law, the jury is
threat to society whether in or out of prison." Muniz v.       not allowed to know that such a defendant would not be
State, 851 S.W.2d 238, 250 (Tex.Cr.App. 1993)                  released into society outside of prison for a minimum of
(emphasis added), cert. denied, 510 U.S. 837, 114 S. Ct.       thirty-five years. This would be particularly useful
116, 126 L. Ed. 2d 82 (1993).                                  information if a jury believed a defendant would not be a
                                                               future danger to society [*138] within prison, would
    iv. Application of Simmons' Rationale to Texas             currently present a threat to society outside of prison if he
Capital Sentencing Scheme                                      were eligible for release [**72] anytime soon, but could
                                                               be rehabilitated in prison to where he would not be a
     There is an obvious distinction between the facts in      danger to society outside of prison thirty-five years in the
Simmons and in the present case. In Simmons the                future. Without knowing that a capital murderer
defendant [**70] was not eligible for parole under a life      sentenced to life is ineligible for parole until serving at
sentence, whereas in this case had appellant received a        least thirty-five years, the jury does not have all of the
life sentence, he would have been eligible for parole after    relevant information available on the issue. "In assessing
thirty-five years. 9 However, a review of Simmons leads        future dangerousness, the actual duration of the
me to conclude that the underlying rationale of that case      defendant's prison sentence is indisputably relevant."
compels a similar result under our statutory sentencing        Simmons, 512 U.S. at , 114 S. Ct. at 2194, 129 L. Ed.
scheme.                                                        2d at 142.

       9 Another distinction is that in Texas, unlike               When the prosecution relies on the future
       South Carolina, a jury must answer a special issue      dangerousness of the defendant to seek the death penalty,
       about whether there is a probability that a             elemental due process requires that the defendant be
       defendant would commit criminal acts of violence        given an opportunity to introduce evidence on this point.
       that would constitute a continuing threat to            Skipper v. South Carolina, 476 U.S. 1, 5 n.1, 106 S. Ct.
       society. Thus, future dangerousness is always an        1669, 1671, 90 L. Ed. 2d 1, 7 (1986). In Skipper the
       issue in a Texas capital case.                          Court also found an Eighth Amendment requirement.
                                                               "Evidence that the defendant would not pose a danger if
      In a capital trial, a defendant is entitled to offer     spared (but incarcerated) must be considered potentially
evidence concerning recidivism rates relating to length of     mitigating." Skipper, 476 U.S. at 5, 106 S. Ct. at 1671, 90
incarceration and age of the offender, along with expert       L. Ed. 2d at 7. "[A] defendant's disposition to make a
opinion through hypothetical questions based on the            well-behaved and peaceful adjustment [**73] to life in
particular circumstances of the individual defendant.          prison is itself an aspect of his character that is by its
Matson v. State, 819 S.W.2d 839, 848-54 (Tex.Cr.App.
                                                               nature relevant to the sentencing determination." Skipper,
1991). Rehabilitation is obviously [**71] a proper             476 U.S. at 7, 106 S. Ct. at 1672, 90 L. Ed. 2d at 8. If a
consideration under the pertinent special issue. Jackson       rule has "the effect of precluding the defendant from
v. State, 822 S.W.2d 18, 25 (Tex.Cr.App. 1990), cert.          introducing otherwise admissible evidence for the explicit
denied, 509 U.S. 921, 113 S. Ct. 3034, 125 L. Ed. 2d 722
                                                                                                                      Page 24
                              934 S.W.2d 113, *138; 1996 Tex. Crim. App. LEXIS 205, **73

purpose of convincing the jury that he should be spared                  reality, known to the 'reasonable juror,'
the death penalty because he would pose no undue danger                  that, historically, life-term defendants have
to his jailers or fellow prisoners and could lead a useful               been eligible for parole."
life behind bars if sentenced to life imprisonment, the rule
would not pass muster under Eddings [v. Oklahoma, 455                         An instruction directing juries that life
U.S. 104, 102 S. Ct. 869, 71 L. Ed. 2d 1 (1982)]."                       imprisonment should be understood in its
Skipper, 476 U.S. at 7, 106 S. Ct. at 1672, 90 L. Ed. 2d at              "plain and ordinary" meaning does
8.                                                                       nothing to dispel the misunderstanding
                                                                         reasonable jurors may have about the way
     The Texas death penalty statute is constitutional,                  in which any particular State defines "life
premised on the jury having all possible relevant                        imprisonment." See Boyde v. California,
information about the individual defendant. Matson, 819                  494 U.S. 370, 380, 108 L. Ed. 2d 316, 110
S.W.2d at 850, citing Jurek v. Texas, 428 U.S. 262, 96 S.                S. Ct. 1190 (1990) (where there is a
Ct. 2950, 49 L. Ed. 2d 929 (1976). A jury must not be                    "reasonable likelihood that the jury has
instructed to disregard relevant mitigating evidence.                    applied the [*139] challenged instruction
Matson, 819 S.W.2d at 850 n.8, citing Eddings v.                         in a way that prevents the consideration of
Oklahoma, 455 U.S. 104, 102 S. Ct. 869, 71 L. Ed. 2d 1                   constitutionally relevant evidence," the
(1982). "Clearly then, for the [**74] Texas death penalty                defendant is denied due process).
statutes to meet constitutional muster, the sentencing
authority in a capital case must be allowed to consider           Simmons, 512 U.S. at , 114 S. Ct. at 2197, 129 L. Ed.
and give effect to all relevant mitigating evidence."             2d at 146 (citations omitted).
Matson, 819 S.W.2d at 851.
                                                                      The Supreme Court addressed South Carolina's
     It would be difficult at best for a jury to give effect to   argument that the jury was not misled, as the trial court
the type of evidence authorized in Matson, rehabilitation         admonished the jury not to consider parole and that
and recidivism rates, without knowing that the defendant          parole is not a proper issue [**76] for the jury's
will remain incarcerated for at least thirty-five years           consideration.
before even being considered for placement back into
society outside of prison. The problem associated with                      Far from ensuring that the jury was not
this lack of information provided to a jury is exacerbated               misled, however, this instruction actually
by general, though not always accurate, knowledge of the                 suggested that parole was available but
existence of parole.                                                     that the jury, for some unstated reason,
                                                                         should be blind to this fact. Undoubtedly,
     In Simmons the Supreme Court reviewed the                           the instruction was confusing and
question of whether the trial court's Instruction, that life             frustrating to the jury, given the arguments
imprisonment was to be understood in its plain and                       by both the prosecution and the defense
ordinary meaning, adequately instructed the jury about                   relating      to      petitioner's     future
Simmons' parole ineligibility. The Court capsulized the                  dangerousness, and the obvious relevance
history of parole and juries in the United States:                       of petitioner's parole ineligibility to the
                                                                         jury's formidable sentencing task. While
            It can hardly be questioned that most                        juries ordinarily are presumed to follow
        juries lack accurate information about the                       the court's instructions, we have
        precise meaning of "life imprisonment" as                        recognized that in some circumstances
        defined by the States. For much of our                           "the risk that the jury will not, or cannot,
        country's history, [**75] parole was a                           follow instructions is so great, and the
        mainstay of state and federal sentencing                         consequences of failure so vital to the
        regimes, and every term (whether a term                          defendant, that the practical and human
        of life or a term of years) in practice was                      limitations of the jury system cannot be
        understood to be shorter than the stated                         ignored."
        term. . . . It is impossible to ignore "the
                                                                                                                   Page 25
                             934 S.W.2d 113, *139; 1996 Tex. Crim. App. LEXIS 205, **76

Simmons, 512 U.S. at , 114 S. Ct. at 2197, 129 L. Ed.                  allowed to serve such a short period of
2d at 147 (citations omitted).                                         time, and if people like that can do -- go to
                                                                       that point, people that have already
     Although Simmons involved the failure to inform                   committed horrendous crimes, it just
jurors that the defendant would not be eligible for parole             seems a little scary that they might do the
under a life sentence, a jury in Texas faces a similar                 same thing again, or be a hazard to
dearth of information when it comes to intelligently                   society.
answering the special [**77] issue referencing the
probability that a defendant would commit criminal acts         Another veniremember discussed the matter as follows:
of violence that would constitute a continuing threat to                  DEFENSE COUNSEL: The way the
society outside of prison.                                            question reads: Do you agree or disagree
                                                                      that life imprisonment is more effective
     In Texas, this Court has observed it is common                   than capital punishment? And you
knowledge that from time to time inmates of the Texas                 disagreed with that statement. . . . Could
Department of Criminal Justice are released on parole.                you share with me why?
Felder, 758 S.W.2d at 762. Experience demonstrates the
best likelihood is that a jury will consider the existence of              VENIREMEMBER: I guess the
parole. Arnold v. State, 786 S.W.2d 295, 300                           reason I answered it in that response
(Tex.Cr.App. 1990), cert. denied, 498 U.S. 838, 111 S.                 [**79] was that basically [*140] we
Ct. 110, 112 L. Ed. 2d 80 (1990). Jurors often succumb to              know that even though they get life
the temptation to consider parole. 786 S.W.2d at 311.                  imprisonment they are up for parole within
While jurors conceive of parole, they can, and often do,               ten or twenty years and that life
misperceive its application. "It can hardly be questioned              imprisonment     doesn't     mean      life
that most juries lack accurate information about the                   imprisonment. Basically the words don't
precise meaning of 'life imprisonment.'" Simmons, 512                  mean anything.
U.S. at     , 114 S. Ct. at 2197, 129 L. Ed. 2d at 146.
Portions of the voir dire involving several veniremembers       In response to a veniremember's concern about early
in the present case are illustrative. 10                        release, the trial court responded, "Question relating to
                                                                leniency within the penal institution or criminal laws, and
          VENIREMEMBER: Life is life: correct?                  you mentioned early release. Almost everybody does.
       It's not what we hear on TV?                             That is one of the most popular answers."
                                                                             VENIREMEMBER: What does life
The trial court told the panel that it would instruct them              mean? Can they get out in three years or
not [**78] to consider the issue of parole in making their              four years with life?
decision.
          PROSECUTOR: Does anything pop into                    The trial court explained to this veniremember that this
       your mind that is important, or I mean                   was not something that could be considered in the
       why that must be, why we need the death                  punishment phase. 11 The colloquy continued:
       penalty, if we do?                                                   VENIREMEMBER: I don't think I
                                                                       really got an answer.
            VENIREMEMBER: I just -- there is
       so much about people that are turned loose                            COURT: You didn't get a correct
       after serving such a short period of time in                    answer because I can't tell you. All I can
       a prison for minor crimes and then go out                       tell you is you can't consider it.
       and commit murder, and it's just really
       scary to hear things like that, that they are            Another veniremember was asked about the potential for
       put away for not so serious crimes and                   a person being a continuing threat to society.
       then turn around and do much worse                                 VENIREMEMBER: Most of them do.
       crimes after being just sentenced for such                      Most of them -- I watch the news every
       a short period, or not sentenced but                            night. Early parolees and everything, they
                                                                                                             Page 26
                            934 S.W.2d 113, *140; 1996 Tex. Crim. App. LEXIS 205, **79

       get out of jail and they commit [**80]              when a person sentenced to life could be paroled, but the
       another crime the next day.                         court declined to answer.

Another veniremember expressed a problem with a                   10 These are quoted for illustrative purposes.
person convicted of a crime who was suddenly released             This is not to suggest that these veniremembers
to commit another crime. She asked if that were possible          were unqualified.
in a capital murder case.                                         11 I point out that there is indeed a statutory
            COURT: Well I think it is obvious if                  definition of what life means for "a prisoner
        somebody is assessed the death penalty                    serving a life sentence for a capital felony" per
        you don't get paroled on a death penalty.                 Art. 42.18, § 8(b) (2), V.A.C.C.P. - "life" means
                                                                  the prisoner is not eligible for release on parole
           VENIREMEMBER: That doesn't                             until the actual calendar time the prisoner has
       seem to be what is happening, though. Or                   served, without consideration of good conduct
       are we not knowing the full story when we                  time, equals 35 calendar years. The trial court
       hear things?                                               could have answered the veniremember's question
                                                                  about what life means by relating the statutory
            COURT: You probably don't know                        language; and could have excised the word
       the full story, but you aren't paroled on a                "parole" in phrasing the answer, e.g., "Per our
       death penalty. I think that is obvious. I                  statutes, a life sentence for capital murder means
       don't think anybody is going to object at                  that the defendant is not eligible for release until
       this point to my telling you that, which                   he has served 35 years of actual calendar time
       leaves you with the other option, a life                   without consideration of good conduct time."
       sentence.                                                  There is absolutely nothing statutory or
                                                                  constitutional, state or federal, that requires such
           VENIREMEMBER: And that's the                           information to remain a "state secret" hidden from
       one that you are eligible for parole at some               jurors - and as I discuss further, there are indeed
       stage perhaps?                                             constitutional considerations that in some
                                                                  situations require that jurors be informed of such.
           COURT: Yes.
                                                                 [**82] The voir dire in this case exemplifies the
                                                           difficulties and misperceptions potential jurors have with
     This veniremember was told that she would be
                                                           parole, especially in the context of a life sentence for
instructed not to consider parole.
                                                           capital murder. Thirty-five years is not an insubstantial
                                                           length of time. A jury reasonably may believe [*141]
          VENIREMEMBER: See I think that is
                                                           that a person convicted of capital murder could be
       wrong. I think that if -- I think that if the
       sentence I am going to -- if the way I vote         released on parole long before he serves thirty-five years
                                                           if he were not executed. Cf. Simmons, 512 U.S. at , 114
       on this affects whether he is going to be
                                                           S. Ct. at 2193, 129 L. Ed. 2d at 141. To the extent this
       out in two years versus thirty years, then I
                                                           misperception pervades the jury's deliberation, it would
       think I should really have the right to
                                                           have the effect of creating a false choice between
       know that up front [**81] because I think
                                                           sentencing the defendant to death and sentencing him to a
       that changes can occur and sometimes
                                                           relatively short period of incarceration. Cf. Simmons,
       changes don't occur, and if they get back
                                                              U.S. at , 114 S. Ct. at 2193, 129 L. Ed. 2d at 141. This
       out again and they repeat the offense then
                                                           misunderstanding would be heightened by the
       I am really angry about that.
                                                           prosecutor's urging the jury that the defendant would be a
                                                           danger to society on the streets if he were not executed.
A veniremember was concerned that a "person is put in
                                                           Simmons, U.S. at , 114 S. Ct. at 2193, 129 L. Ed. 2d
prison and he is released within just a few months for a
                                                           at 141.
crime that he should be in there for a number of years."
Several other veniremembers expressed concerns about           "There may be no greater assurance of a defendant's
parole and early release. Other veniremembers asked
                                                                                                                 Page 27
                            934 S.W.2d 113, *141; 1996 Tex. Crim. App. LEXIS 205, **82

future nondangerousness to the public than the fact that      Constitution prohibits a parole instruction in a capital
he never will be released on [**83] parole." Simmons,         murder trial. Garcia, 887 S.W.2d at 860; Elliott, 858
512 U.S. at , 114 S. Ct. at 2194, 129 L. Ed. 2d at 142. It    S.W.2d at 489 n.7; but see discussion of the 1989
stands to reason that the fact that a capital murder          amendment to Tex.Const. Art. IV, § 11(a) and Art. 37.07.
defendant in Texas would not be considered for release        V.A.C.C.P., supra at p. 5 n.4. However, it is a firmly
on parole for thirty-five years would provide greater         entrenched pillar of federalism that when there is a
assurance of the defendant's future nondangerousness to       constitutional conflict, a federal constitutional right
society outside of prison than any misunderstanding that      prevails over a state constitutional restriction. Since I
he would be eligible for parole considerably earlier.         believe that in the instant cause the failure to inform the
When a defendant presents evidence that he could be           jury about the thirty-five year parole eligibility plateau
rehabilitated in prison and that the risk of violence is      violated appellant's federal constitutional right to due
substantially reduced when the defendant reaches an           process, such federal right prevails.
advanced age, and the prosecutor argues that the
defendant would be a danger to society on the streets, the    D. Application to Present Case
fact that the defendant could not be released from prison
                                                                   Previously I have set out illustrative portions of the
for thirty-five years will often be the only way that a
                                                              jury voir dire wherein parole was discussed.
violent criminal can successfully rebut the State's case.
                                                              Veniremembers were very interested in parole. In fact,
Cf. Simmons, U.S. at , 114 S. Ct. at , 129 L. Ed. 2d
                                                              several of the veniremembers who ultimately served as
at 150-51 (O'Connor, J., concurring).
                                                              jurors in this case inquired about parole during voir dire.
     Without being allowed to have the jury informed of       Specifically, I observe that during questioning Juror
the thirty-five year requirement for parole eligibility, a    Flanakin said,
defendant may be prohibited from rebutting information
that the jury considers in answering the special [**84]                 [*142] I just [**86] -- there is so much
issue. Cf. Simmons, 512 U.S. at , 114 S. Ct. at 2194,                about people that are turned loose after
129 L. Ed. 2d at 143. The risk that the jury may consider            serving such a short period of time in a
misinformation about parole eligibility is great, and the            prison for minor crimes and then go out
consequences are vital to the defendant. Simmons, U.S.               and commit murder, and it's just really
at , 114 S. Ct. at 2197, 129 L. Ed. 2d at 146-47.                    scary to hear things like that, that they are
                                                                     put away for not so serious crime and then
     A jury's task at the punishment phase of a capital              turn around and do much worse crimes
murder trial is to answer the special issues. Stoker, 788            after being just sentenced for such a short
S.W.2d at 16. Generally, parole is a matter within the               period, or not sentenced but allowed to
exclusive jurisdiction of the Board of Pardons and                   serve such a short period of time, and if
Paroles and is not a matter of concern for the jury.                 people like that can do -- go to that point,
Felder, 758 S.W.2d at 762. However, the relevance of                 people that have already committed
parole information in a capital case is not so the jury can          horrendous crimes, it just seems a little
determine a number of years to assess as punishment to               scary that they might do the same thing
circumvent the Executive branch and ensure the                       again, or be a hazard to society.
defendant remains incarcerated for a period of time the
jury deems proper. Information concerning the thirty-five     Juror Garcia said that he watched the news every night
year parole eligibility requirement is directly relevant to   and that "early parolees and everything, they get out of
the special issue about whether the defendant would be a      jail and they commit another crime the next day." He
continuing threat to society, notwithstanding our             indicated that he guessed that he could follow the judge's
statement to the contrary in Jones, 843 S.W.2d at 495.        instructions that the early parole thing should not be
                                                              considered in reaching the sentence.
    v. The Texas Constitutional Question
                                                                  Juror Strohbeck stated that she had "a problem with
    Returning [**85] to the matter of the Texas               so many people who have thirty-five years and spend a
Constitution mentioned previously, 129 L. Ed. 2d at 138,      few years, and because of overcrowding, they are let
I again note that prior cases hold that the Texas
                                                                                                                    Page 28
                             934 S.W.2d 113, *142; 1996 Tex. Crim. App. LEXIS 205, **86

out." Juror Mallard, expressing concern about parole, said             point by holding that appellant failed to correctly
he felt "like that it would [**87] serve the criminal and              object to such evidence, thus waiving his right to
rehabilitation system better if generally fines were fixed             complain of its admission. Rhoades, supra, 934
or sentences were fixed within a very narrow range, . . .;             S.W.2d at 126, 128.
but, . . . that should be up to the sentencing at the time of
sentence, not necessarily probation later, or parole later."           [**89] At punishment phase jury argument, the
Jurors Mitchell, Wilkinson, Englund and Miller, when            prosecutor encouraged the jury to consider appellant's
asked about having previously mentioned concerns about          risk to society on the streets. The prosecutor argued:
the revolving door and early parole and about how long
somebody would be locked away, indicated that they                         [Defense counsel] wants you -- and I
could follow the judge's instructions to not consider such.            understand what he wants you -- to focus
Thus 8 jurors, i.e. two-thirds of the jury that would decide           only on prison society, and I am not
whether appellant lived or died, expressed a keen interest             suggesting that society does not include
in the amount of time that this capital defendant would                prison society. It includes all. He wants
have to serve if he were sentenced to life rather than                 you to forget society on the street; and I'm
death.                                                                 saying, no, don't do that. This question
                                                                       doesn't say, "if he gets a life sentence."
     In the punishment phase of the trial, the State                   That's getting the cart before the horse.
presented evidence of prisoners' eligibility for release on            [*143] You answer this question to
furlough under a life sentence for capital murder. 12 Also             determine what the sentence is going to
at the punishment stage, appellant submitted evidence                  be. You determine, whether it's today or
that he would not be a danger to prison society. Appellant             tomorrow, next week, next year, inside
was twenty-eight years old at the time of his trial.                   prison, outside prison, wherever he may
Appellant also presented expert testimony from a                       be, in whatever aspect of society he may
psychologist, who had been the chief [**88] mental                     find himself: Is there a probability that he's
health officer for the entire Texas Department of                      going to commit future acts of violence
Corrections system, that indicated that when a person                  that would constitute a continuing threat?
grows older his risk level for violence decreases and that
the risk level of violence for a sixty-five-year-old inmate     The prosecutor also argued that appellant would be a
is significantly lower than that for a eighteen to              danger to people in prison.
twenty-five-year old. That psychologist specifically
testified that he did not want to see appellant on the               Another prosecutor argued, "Now we have to look at
street, and that he did not think that it was in their or       society's rights, and we look at how that defendant
appellant's interest to be on the street, but that he did not   functions in society. The prosecutor traced appellant's
believe that he would be a danger in prison society. The        history, pointing out the numerous crimes appellant had
State in rebuttal presented testimony from an officer who       [**90] committed. The prosecutor argued, unless than
investigated offenses within the prison system about how        24 hours after his release from prison he slaughters two
a capital murderer who received a life sentence would be        men." This prosecutor also argued that appellant would
classified upon entry into the system and would be              be violent in prison.
reclassified, depending upon behavior, with such
                                                                     "In assessing future dangerousness, the actual
classifications depending "on the amount of time that
                                                                duration of the defendant's prison sentence is indisputably
they are pulling good time" and that it basically depended
                                                                relevant." Simmons, 512 U.S. at , 114 S. Ct. at 2194,
on disciplinary history while in the penitentiary that
                                                                129 L. Ed. 2d at 142. The jury reasonably may have
determined how one was assigned, "either to your trustee
                                                                believed appellant would be released on parole well
status or whether you remain line class and not pull any
                                                                before serving thirty-five years if he were not executed.
good time."
                                                                Cf. Simmons, U.S. at , 114 S. Ct. at 2193, 129 L. Ed.
12 Appellant raises a separate point of error            2d at 141. The trial court did not allow appellant an
       contending that this furlough evidence should not        opportunity to deny or explain whatever misinformation
       have been admitted. The majority overrules that          the jury had about the operation of the parole laws. Cf.
                                                                                                                  Page 29
                            934 S.W.2d 113, *143; 1996 Tex. Crim. App. LEXIS 205, **90

Simmons, U.S. at , 114 S. Ct. at 2192-94, 129 L. Ed.          time, the jury was required to answer the pertinent special
2d at 140-44. The State argued that appellant would be a      issue with the State urging the jury to find that appellant
danger to prison society. Cf. Simmons, U.S. at , 114          would be a threat in and out of prison and appellant
S. Ct. at 2194-95 n.5, 129 L. Ed. 2d at 143-44 n.5.           contending that, although he would be a threat out of
However, the State also argued that appellant would be a      prison anytime soon, he would pose no danger in prison
threat to society outside of prison. The State urged the      and he would not be a threat in his sixties.
jury to answer the special issue "whether it's today or
tomorrow, [**91] next week, next year, inside prison,              In this context, appellant's parole eligibility was
outside prison, wherever he may be, in whatever aspect        obviously [**93] relevant to the jury's sentencing task in
of society he may find himself." The State reminded the       answering the future dangerousness special issue. "In
jury that appellant "slaughtered two men" less than           some circumstances, 'the risk that the jury will not, or
twenty-four hours after he was released from prison.          cannot, follow instructions is so great, and the
Appellant was not allowed to rebut the State's argument       consequences of failure so [*144] vital to the defendant,
that he would commit criminal acts of violence that           that the practical and human limitations of the jury
would constitute a continuing threat to society outside of    system cannot be ignored.'" Simmons, 512 U.S. at , 114
prison with information that the earliest he could even be    S. Ct. at 2197, 129 L. Ed. 2d at 147 (citations omitted).
considered for release into society outside of prison was     As this Court has observed, experience demonstrates the
in thirty-five years when he would be in his sixties.         best likelihood is that a jury will consider the existence of
                                                              parole. Arnold, 786 S.W.2d at 300. Moreover, even if the
     Appellant's efforts to convince the jury that he would   instruction kept the jury from considering parole, it
not be a danger to society beyond the prison walls were       would not have satisfied due process as appellant was
thwarted, as he was prevented from allowing the jury to       entitled to have the jury consider all relevant information
know that under Texas law he could not be released on         in answering the special issue. Cf. Simmons, U.S. at ,
parole until he was at an age when, according to defense      114 S. Ct. at 2198, 129 L. Ed. 2d at 147. While being
evidence, he would not endanger that society. Cf.             incarcerated until reaching over sixty years of age
Simmons, 512 U.S. at , 114 S. Ct. at 2194, 129 L. Ed.         certainly does not preclude a finding of future
2d at 142-43. This effectively limited appellant's attempts   dangerousness, the fact of such a lengthy incarceration is
to focus the jury's attention on whether he would be a        evidence which, in the instant case, would be very
future danger in prison. Cf. Simmons, U.S. at , 114 S.        relevant to the jury's answering of the future
Ct. at 2195, 129 [**92] L. Ed. 2d at 144. The jury was        dangerousness special [**94] issue.
left to speculate about the date of appellant's parole
eligibility when evaluating the special issue. Cf.            E. Conclusion
Simmons, 512 U.S. at , 114 S. Ct. at 2195, 129 L. Ed.
                                                                   Under the record in this case, and in light of
2d at 144.
                                                              Simmons, I believe that the trial court's failure to allow
     In the punishment charge the trial court instructed      appellant to have the jury informed at some point that a
the jury:                                                     person sentenced to life for capital murder would not be
                                                              eligible for parole until he serves thirty-five years
         During your deliberations, you are not to            violated appellant's right to due process. I do not believe
       consider or discuss any possible action of             that a capital murder defendant is always entitled to have
       the Board of Pardons and Paroles Division              the jury so informed; this issue is case specific to the
       of the Texas Department of Criminal                    facts of each particular case. But based upon the evidence
       Justice or of the Governor, or how long                presented in this particular case, I believe that appellant
       the Defendant would be required to serve               has shown a due process violation. 13 Accordingly, I
       to satisfy a sentence of life imprisonment.            respectfully dissent to the majority holding of no error in
                                                              refusing to give a parole instruction as was requested by
This instruction suggested to the jury that parole was        appellant. Such a holding is particularly ironic in these
available, but that the jury should be blind to when          days of clamor for "truth-in-sentencing" - it would seem
appellant could be released. Cf. Simmons,   U.S. at ,         that the majority, in violation of constitutional due
114 S. Ct. at 2197, 129 L. Ed. 2d at 147. At the same         process, is approving and encouraging "untruth" or
                                                                                                   Page 30
                           934 S.W.2d 113, *144; 1996 Tex. Crim. App. LEXIS 205, **94

"ignorance" in sentencing in situations involving the           the facts of the instant offense, would be
ultimate punishment, death. I respectfully refuse to go         considered in making such a determination.
along with such ignorance.
                                                              [**95] OVERSTREET, JUDGE
       13 Even such a constitutional error is subject to a
       harmless error analysis per Tex.R.App.Pro. 81(b)       Delivered: October 2, 1996
       (2). Of course all of the evidence, including
                                                              EN BANC
       appellant's prior criminal record and offenses and
                                                                                                                    Page 1

                   EDMUND F. SHEEHY, CATHERINE N. SHEEHY, JUNIUS CHADWICK,
                LILLIAN PAUL, and BEN JOHNS, on behalf of themselves, and all other similarly
                    situated taxpayers, Plaintiffs and Appellants, v. PUBLIC EMPLOYEES
                     RETIREMENT DIVISION, TEACHERS RETIREMENT DIVISION,
                    DEPARTMENT OF ADMINISTRATION; STATE OF MONTANA; and
                   DEPARTMENT OF REVENUE, STATE OF MONTANA, Defendants and
                     Respondents, v. ASSOCIATION OF MONTANA RETIRED PUBLIC
                               EMPLOYEES, et al., Defendants and Respondents.

                                                         No. 92-499

                                          SUPREME COURT OF MONTANA

                    262 Mont. 129; 864 P.2d 762; 1993 Mont. LEXIS 358; 50 Mont. St. Rep. 1477

                                April 28, 1993, Heard on; July 27, 1993, Submitted on
                                             November 23, 1993, Decided

SUBSEQUENT HISTORY:               Rehearing Denied              violated 4 U.S.C.S. § 111; and that the retirement
December 23, 1993. Released for Publication December            adjustment payment of 1991 Mont. Laws ch. 823 violated
27, 1993.                                                       4 U.S.C.S. § 111. The trial court granted the state
                                                                summary judgment. The court affirmed the trial court's
PRIOR HISTORY:                 [***1] APPEAL FROM:              judgment in part and reversed it in part. The court held
District Court of the First Judicial District, In and for the   that state employees who retired prior to the effective
County of Lewis and Clark, The Honorable Thomas C.              date of 1991 Mont. Laws ch. 823 did not have a
Honzel, Judge presiding.                                        contractual right to continued exemption from state
                                                                taxation because the statute the retirees relied upon
CASE SUMMARY:                                                   contained no manifestation of legislative intent to create
                                                                private and enforceable contract rights. The provision of
                                                                ch. 823 phasing out the exemption did not violate 4
PROCEDURAL POSTURE: Appellant taxpayers and                     U.S.C.S. § 111 because it did not discriminate as to
intervenor retiree association challenged the judgment of       source of income; however, an adjustment payment to
the First Judicial District, In and for the County of Lewis     state retirees did violate § 111 because it constituted
and Clark (Montana), which granted summary judgment             discriminatory taxation based solely on the source of their
to respondent state in the taxpayers' declaratory judgment      retirement income. The court concluded that the invalid
action challenging the validity of 1991 Mont. Laws ch.          provisions of 1991 Mont. Laws ch. 823 could be severed.
823, which brought all income, including state and
federal pensions, within the Montana income tax.                OUTCOME: The court affirmed the grant of summary
                                                                judgment to the state in the taxpayers' declaratory
OVERVIEW: The taxpayers contended that ch. 823                  judgment action as to the trial court's findings that the
impaired private contractual rights that exempted their         challenged legislation did not impair private contractual
pensions from state taxation in violation of Mont. Const.       rights and that a provision phasing out a tax exemption
art. II, § 35; that a provision phasing out an exemption
                                                                                                                    Page 2
                                         262 Mont. 129, *; 864 P.2d 762, **;
                                  1993 Mont. LEXIS 358, ***1; 50 Mont. St. Rep. 1477

did not violate federal law. The court reversed the finding     In addition, 1991 Mont. Laws ch. 823, § 5 grants to state
that a retirement adjustment payment did not violate            retirees who are Montana residents, and who are now to
federal law, but the court found that the provision was         be taxed, an annual retirement adjustment payment.
severable.

CORE TERMS: retiree, taxation, retirement benefits,             Constitutional Law > Congressional Duties & Powers >
exemption, pension, retirement, severable, retired,             Contracts Clause > General Overview
invalid, income tax, teacher, Montana Laws, legislative         Governments > State & Territorial Governments >
intent, severability, significant differences, equalization,    Employees & Officials
contractual right, discriminatory, discriminate, resident,      Pensions & Benefits Law > Governmental Employees >
retirement income, severability clause, phase-out,              State Pensions
retirement systems, pension benefits, sovereign, severed,       [HN3] Mont. Const. art. II, § 31 (1972) prohibits the
invalid part, inducement, remainder                             legislature from passing any law impairing the obligation
                                                                of contracts.
LexisNexis(R) Headnotes
                                                                Evidence > Inferences & Presumptions > General
                                                                Overview
                                                                Governments > Legislation > Interpretation
Governments > Federal Government > Employees &                  Governments > State & Territorial Governments >
Officials                                                       Employees & Officials
Governments > State & Territorial Governments >                 [HN4] When the legislature enacts a statute fixing certain
Employees & Officials                                           terms and conditions of public employment, such as
Pensions & Benefits Law > Governmental Employees >              salaries and compensation, it is presumed that the statute
State Pensions                                                  does not create contractual rights, but is intended merely
[HN1] 4 U.S.C.S. § 111 waives the immunity retired              to declare a policy to be pursued until the legislature
federal employees otherwise would enjoy from state              declares otherwise.
taxation of retirement benefits received as a result of their
employment with the federal government, except to the
                                                                Governments > Legislation > Interpretation
extent such state taxation discriminates on the basis of the
                                                                [HN5] If contractual rights are to be created by statute,
source of the retirement benefits.
                                                                the language of the statute and the circumstances must
                                                                manifest a legislative intent to create private rights of a
Pensions & Benefits Law > Governmental Employees >              contractual nature enforceable against the State.
State Pensions
Tax Law > Federal Taxpayer Groups > Individuals >
                                                                Tax Law > State & Local Taxes > Income Tax >
Adjustments to Income (IRC secs. 62, 71, 215, 911) >
                                                                Individuals, Estates & Trusts > General Overview
General Overview
                                                                [HN6] The United States consents to the taxation of pay
Tax Law > State & Local Taxes > Income Tax >
                                                                or compensation for personal service as an officer or
Individuals, Estates & Trusts > General Overview
                                                                employee of the United States, a territory or possession or
[HN2] 1991 Mont. Laws ch. 823 restructures the income
                                                                political subdivision thereof, the government of the
tax on pension benefits by equalizing the taxation of all
                                                                District of Columbia, or an agency or instrumentality of
pension benefits. In lieu of extending the total exemption
                                                                one or more of the foregoing, by a duly constituted taxing
from taxation previously available to state retirement
                                                                authority having jurisdiction, if the taxation does not
income to federal retirement income, the legislature opted
                                                                discriminate against the officer or employee because of
in ch. 823 to bring all retirement income - including both
                                                                the source of the pay or compensation. 4 U.S.C.S. § 111.
state and federal pensions - within the Montana income
tax. Chapter 823 exempts from taxation the first $ 3,600
of all pension and annuity income received, except that         Tax Law > State & Local Taxes > Income Tax >
the exemption is reduced or phased out by $ 2 for every $       Individuals, Estates & Trusts > General Overview
1 of federal adjusted gross income in excess of $ 30,000.       [HN7] A taxation exemption truly intended to account for
                                                                                                                       Page 3
                                          262 Mont. 129, *; 864 P.2d 762, **;
                                   1993 Mont. LEXIS 358, ***1; 50 Mont. St. Rep. 1477

differences in retirement benefits would not discriminate        Overview
on the basis of the source of those benefits; rather, it         Governments > Legislation > Interpretation
would discriminate on the basis of the amount of benefits        Governments > Legislation > Severability
received by individual retirees.                                 [HN12] The presumption is against the mutilation of a
                                                                 statute, and that the legislature would not have enacted it
                                                                 except in its entirety. The incorporation of a severability
Pensions & Benefits Law > Governmental Employees >               clause creates a presumption to the contrary; namely, that
State Pensions                                                   the legislature would have enacted the law without its
Tax Law > State & Local Taxes > Income Tax >                     invalid portions being incorporated therein.
Individuals, Estates & Trusts > General Overview
[HN8] To determine if disparate state taxation of pension        COUNSEL: For Plaintiffs and Appellants: Edmund F.
benefits is justified requires a two-pronged analysis of the     Sheehy, Jr. (argued); Cannon & Sheehy, Helena.
legislation at issue: 1) Does it constitute discriminatory
taxation against federal retirees or in favor of state           For Defendants and Respondents: David W. Woodgerd,
retirees on the basis of source of income? and 2) If so, is      Dep't of Revenue, R. Bruce McGinnis (argued), Tax
the different treatment directly related to, and justified by,   Counsel, Brenda Nordlund (argued), Dep't of
significant differences between the two classes?                 Administration; Leo Berry, Browning, Kaleczyc, Berry
                                                                 & Hoven, (Association of Montana Retired Public
                                                                 Employees), Helena.
Governments > Legislation > Expirations, Repeals &
Suspensions
                                                                 JUDGES: KARLA M. GRAY, J. A. TURNAGE,
[HN9] 1991 Mont. Laws ch. 823, § 20 provides that if a
                                                                 BYRON L. ROBB District Judge, sitting for Justice John
part of the legislation is invalid, all valid parts that are
                                                                 C. Harrison, JOHN WARNER District Judge, sitting in
severable from the invalid part remain in effect.
                                                                 the seat vacated by the retirement of Justice R.C.
                                                                 McDonough, PETER L. RAPKOCH District Judge,
Governments > Legislation > Expirations, Repeals &               sitting for Justice William E. Hunt, Sr., TERRY N.
Suspensions                                                      TRIEWEILER, FRED J. WEBER
Governments > Legislation > Interpretation
Governments > Legislation > Severability                         OPINION BY: KARLA M. GRAY
[HN10] The inclusion of a severability clause is an
indication that the drafters desired judicial severability       OPINION
policy to apply.
                                                                       [*131] [**764] This is an appeal from the grant of
                                                                 summary judgment to defendants by the First Judicial
Governments > Legislation > Expirations, Repeals &               District Court, Lewis and Clark County. We affirm in
Suspensions                                                      part and reverse in part.
Governments > Legislation > Interpretation
Governments > Legislation > Severability                             We consider the following issues on appeal:
[HN11] If an invalid part of a statute is severable from
the rest, the portion which is constitutional may stand                       1. Did the District Court err in
while that which is unconstitutional is stricken out and                concluding that no contractual right
rejected. A statute is not destroyed in toto because of an              existed [***2] in certain state retirees to
improper provision, unless such provision is necessary to               continued exemption from taxation of
the integrity of the statute or was the inducement to its               state retirement benefits, and that Ch. 823,
enactment. If, when an unconstitutional portion of an act               1991 Mont. Laws, does not violate Article
is eliminated, the remainder is complete in itself and                  II, Sec. 31 of the Montana Constitution?
capable of being executed in accordance with the
apparent legislative intent, it must be sustained.                          2. Did the District Court err in
                                                                        concluding that the provision of Ch. 823,
                                                                        1991 Mont. Laws, phasing out the $ 3,600
Evidence > Inferences & Presumptions > General                          exemption does not violate 4 U.S.C. §
                                                                                                                   Page 4
                                       262 Mont. 129, *131; 864 P.2d 762, **764;
                                  1993 Mont. LEXIS 358, ***2; 50 Mont. St. Rep. 1477

       111?                                                          The Montana legislature subsequently passed [HN2]
                                                               Chapter 823, 1991 Montana Laws, which, according to
              [*132]                                           its title, restructures the income tax on pension benefits
                                                               by equalizing the taxation of all pension benefits. In lieu
           3. Did the District Court err in                    of extending the total exemption from taxation previously
       concluding that the retirement adjustment               available to state retirement income to federal retirement
       payment contained in Ch. 823, 1991 Mont.                income, the legislature opted in Chapter 823 to bring all
       Laws, does not violate 4 U.S.C. § 111?                  retirement income -- including both state and federal
                                                               pensions -- within the Montana income tax. Chapter 823
           4. Are the retirement adjustment
                                                               does exempt from taxation the first [*133] $ 3,600 of all
       payment and related implementation
                                                               pension and annuity income received, except that the
       provisions severable from Ch. 823, 1991
                                                               exemption is reduced or phased out by $ 2 for every $ 1
       Mont. Laws?
                                                               of federal adjusted gross income in excess of $ 30,000.
                                                               In addition, section 5 of Chapter 823 grants to state
     For many years, the State of Montana exempted from        retirees who are Montana residents, and who now were to
income taxation all retirement benefits paid through its       be taxed in response to Davis, an annual retirement
various retirement systems to teachers and state               adjustment payment.
government retirees, while taxing retirement benefits paid
                                                                   Appellants, who are primarily federal retirees but
by the United States to federal retirees. In 1989, the
                                                               who include one or more state and teacher retirees
United States Supreme Court decided Davis v. Michigan
                                                               (hereafter Taxpayers), filed the instant declaratory
Dep't of Treasury (1989), 489 U.S. 803, 109 S. Ct. 1500,
                                                               judgment action against two state retirement divisions
103 L. Ed. 2d 891. The Supreme Court determined that
                                                               [***5] [**765] of the Montana Department of
[HN1] 4 U.S.C. § 111 waives the immunity retired
                                                               Administration and the Montana Department of Revenue
federal employees otherwise would enjoy from state
                                                               (hereafter the State), challenging Chapter 823 on a
taxation [***3] of retirement benefits received as a result
                                                               number of grounds. The Association of Montana Retired
of their employment with the federal government, except
                                                               Public Employees was allowed to intervene. The parties
to the extent such state taxation discriminates on the basis
                                                               entered into an agreed statement of facts and submitted
of the source of the retirement benefits. Because the
                                                               the case to the District Court on cross motions for
Michigan tax at issue favored retired state employees
                                                               summary judgment.
based on the source of their retirement benefits, the
Supreme Court concluded that the tax violated principles            The District Court granted summary judgment to the
of intergovernmental tax immunity. Davis, 489 U.S. at          State on all issues. Taxpayers appeal from portions of
810, 817, 109 S.Ct. at 1505, 1509, 103 L.Ed.2d at 901,         that judgment.
906.
                                                                   I
     Although Davis was decided during Montana's 1989
legislative session, the legislature did not amend                  Did the District Court err in concluding that no
Montana's tax laws in response to Davis prior to               contractual right existed in certain state retirees to
adjourning. As a result, a group of federal retirees filed a   continued exemption from taxation of state retirement
declaratory judgment action to have the existing taxation      benefits, and that Ch. 823, 1991 Mont. Laws, does not
scheme declared unconstitutional; they also sought a           violate Article II, Sec. 31 of the Montana Constitution?
retroactive application of Davis for purposes of
entitlement to a refund of taxes illegally collected by the         Taxpayers argue that as to state employees who
State. By the time that case reached this Court, the           retired on or before the effective date of Chapter 823 and
district court had adopted the parties' stipulation that the   began receiving retirement benefits at a time when those
tax was invalid for tax years beginning after December         benefits were fully exempt from taxation, Chapter 823
31, 1988; only the issue of retroactive application of         violates [HN3] Article II, Section 31 of the 1972
Davis was before us. See [***4] Sheehy v. State, Dep't         Montana Constitution, which prohibits the legislature
of Revenue (1991), 250 Mont. 437, 820 P.2d 1257.               from passing any law impairing the obligation of
                                                               contracts. The thrust of the argument is that, by taxing
                                                                                                                     Page 5
                                       262 Mont. 129, *133; 864 P.2d 762, **765;
                                  1993 Mont. LEXIS 358, ***6; 50 Mont. St. Rep. 1477

[***6] these retirees' state pensions, Chapter 823 impairs      Taxpayers assert that the provisions of §§ 19-4-706 and
private contractual rights codified at §§ 19-4-706 and          19-3-105, MCA (1989), clearly manifest legislative intent
19-3-105, MCA (1989), that exempted their pensions              to create private contractual rights enforceable against the
from taxation.                                                  State. We disagree.

     The State counters that the pre-Chapter 823 statutes            Notwithstanding their bald assertion of clearly
did not create private contractual rights, and could not        manifested legislative intent, Taxpayers offer no analysis
create a right in state retirees never to be taxed because it   of the statutes to support the assertion. Thus, it is
is prohibited from surrendering or contracting away its         necessary only to point out that § 19-4-706, MCA (1989),
taxing power by Article VIII, Section 2 of the 1972             provides that state retirement benefits are exempted from
Constitution. Thus, the State contends, Article II, Section     state tax. The use of the present tense "are" indicates that
31 is inapplicable here.                                        the statute is a statement of current policy regarding
                                                                public [***8] employment. The statute contains no
     The District Court correctly relied on Wage Appeal         manifestation of legislative intent to create private and
v. Board of Personnel Appeals (1984), 208 Mont. 33, 676         enforceable contractual rights as contemplated in Wage
P.2d 194, in concluding that §§ 19-4-706 and 19-3-105,          Appeal; nor does it make or imply any promises
MCA (1989), constituted current policy [*134]                   regarding ongoing or future tax treatment of state
statements regarding public employment, rather than a           retirement benefits. Taxpayers have not met their burden
contract providing that state retirement benefits would         under Wage Appeal.
never be taxed. In Wage Appeal, a statewide pay plan was
challenged on the basis that it impaired employment                   [**766] Moreover, Taxpayers' reliance on Clarke v.
contracts entered into before it took effect. We stated:        Ireland (1948), 122 Mont. 191, 199 P.2d 965, and State
                                                                ex rel. Sullivan v. State (1977), 174 Mont. 482, 571 P.2d
793, as support for their theory that §§ 19-4-706 and
                                                                19-3-105, MCA (1989), created a contract right to
       [HN4] [W]hen the Legislature enacts a                    continued exemption from taxation of state retirement
       statute fixing certain terms and conditions              benefits is misplaced. Both cases involved an effort to
       of public employment, such as salaries and               deny the plaintiffs therein an actual retirement benefit
       compensation, it is presumed that [***7]                 provided by the Teachers' Retirement Act at the time the
       the statute does not create contractual                  plaintiffs became members of the teachers' retirement
       rights, but is intended merely to declare a              system; [*135] our conclusions in Clarke and Sullivan
       policy to be pursued until the Legislature               that contract rights existed were based on those facts.
       declares otherwise.
                                                                     Here, we have no issue concerning efforts to deny or
                                                                limit state retirees' actual retirement benefits. The
                                                                question before us relates to a taxation provision entirely
Wage Appeal, 676 P.2d at 199 (citations omitted). While         separate from state [***9] retirement programs and
recognizing the "presumption" language in Wage Appeal,          entitlements thereunder. Furthermore, the taxation
Taxpayers rely on additional language therein:                  characteristic which distinguishes this case from Clarke
                                                                and Sullivan also brings into play Article VIII, Section 2
                                                                of the 1972 Constitution, which prohibits the state from
       [HN5] If contractual rights are        to be             surrendering or contracting away the power to tax. Under
       created by statute, the language       of the            that constitutional provision, the state cannot promise any
       statute and the circumstances            must            group of taxpayers that it will never tax them.
       manifest a legislative intent to        create
       private rights of a contractual        nature                 We hold that the District Court correctly concluded
       enforceable against the State.                           that state employees retiring prior to the effective date of
                                                                Chapter 823 did not have a contractual right to continued
                                                                exemption from taxation of their state retirement benefits.
                                                                On that basis, the District Court also correctly determined
 Wage Appeal, 676 P.2d at 199 (citations omitted).              that Chapter 823 does not violate Article II, Section 31 of
                                                                                                                   Page 6
                                       262 Mont. 129, *135; 864 P.2d 762, **766;
                                  1993 Mont. LEXIS 358, ***9; 50 Mont. St. Rep. 1477

the Montana Constitution.                                         When Davis was decided, it became clear that
                                                             Montana's income tax statutes regarding state versus
    II                                                       federal retirement benefits also violated federal law. In
                                                             responding to Davis and restructuring the taxation of
     Did the District Court err in concluding that the       pension benefits in Chapter 823, the Montana legislature
provision of Ch. 823, 1991 Mont. Laws, phasing out the       provided a $ 3,600 exemption from taxation to all
$ 3,600 exemption does not violate 4 U.S.C. § 111?           retirees; the exemption is phased out beginning at the $
                                                             30,000 income level. Taxpayers contend that the
     Prior to adoption of the Public Salary Tax Act of
                                                             phase-out violates 4 U.S.C. § 111 by discriminating
1939 (the Act), compensation of both state and federal
                                                             against federal retirees [**767] based on the source of
employees generally was thought to be exempt from
                                                             their income. This is so, they contend, because federal
taxation by another sovereign under the doctrine of
                                                             pensions are larger than state pensions and, as a result,
intergovernmental tax immunity. [***10] The purpose
                                                             federal retirees will lose all or part of the exemption. The
of the Act was to impose federal income tax on the
                                                             State contends that the phase-out exemption treats state
salaries of all state and local government employees. In
                                                             and federal retirees' pensions equally and that any
order to ensure that federal employees did not remain
                                                             difference is based [***12] on amount, not source, of
immune from state taxation while state employees were
                                                             income.
being required to pay federal income taxes, Congress
enacted § 4 of the Act -- now 4 U.S.C. § 111 -- waiving           As discussed above, the controlling federal statute
immunity which might otherwise have shielded federal         does not prohibit all differences in state taxation of state
employees from state taxation, but retaining immunity        and federal pensions. Rather, it precludes taxation which
from discriminatory taxation based on the source of the      discriminates against federal retirees because of the
income:                                                      source of the pension. 4 U.S.C. § 111. Here, the
                                                             phase-out exemption is neutral on its face; it applies to all
           [HN6] The United States consents to the           taxpayers equally. Any difference in impact on federal
         taxation of pay or compensation for                 and state retirees is based entirely on the amount of
         personal service as an officer or employee          income received by each individual taxpayer, without
         of the United States, a territory or                regard to the source of that income.
         possession or political subdivision thereof,
         the government of the District of                        Indeed, the Supreme Court in Davis tacitly approved
         Columbia, or an agency or instrumentality           differences in taxation such as the phase-out exemption
         of one or more of the foregoing, by a duly          before us:
         constituted taxing authority having
         jurisdiction, if the taxation does not
         discriminate [*136] against the officer or
         employee because of the source of the pay                  [HN7] A taxation exemption truly
         or compensation.                                           intended to account for differences in
                                                                    retirement benefits would not discriminate
4 U.S.C. § 111 (emphasis added).                                    on the basis of the source of those benefits
                                                                    . . .; rather, it would discriminate on the
     In 1989, the United States Supreme Court decided               basis of the amount of benefits received by
Davis, which involved a Michigan income tax system                  individual retirees.
discriminating in favor of state retirees [***11] and
against federal retirees by exempting only state
retirement benefits from taxation. The Supreme Court
determined that the discriminatory tax was based on the       Davis, 489 U.S. at 817, 109 S.Ct. at 1508, 103 L.Ed.2d
source of the retirement benefits and was not justified by   at 906 (emphasis added). The phase-out exemption
significant differences between the two classes of           contained in Chapter 823 treats individual retirees
retirees. Davis, 489 U.S. at 817, 109 S.Ct. at 1509, 103     differently based on differences in the [*137] amount of
L.Ed.2d at 906.                                              retirement [***13] income received. Taxpayers' strained
                                                                                                                      Page 7
                                      262 Mont. 129, *137; 864 P.2d 762, **767;
                                 1993 Mont. LEXIS 358, ***13; 50 Mont. St. Rep. 1477

interpretation that because federal pensions generally are      part:
larger than state pensions and, thus, that the phase-out
discriminates as to source rather than amount, simply                      An Act to Restructure the Income Tax
does not square with Davis.                                             on Pension Benefits by Equalizing the
                                                                        Taxation of All Pension [***15] Benefits;
     We conclude that the phase-out exemption does not                  To Provide an Exemption of $ 3,600 from
discriminate as to source of income. Therefore, we hold                 Taxation of Benefits from Federal, State,
that the District Court correctly concluded that the                    [*138] [**768] and Private Retirement,
provision of Chapter 823 phasing out the $ 3,600                        Annuity, Pension, and Endowment Plans
exemption does not violate 4 U.S.C. § 111.                              or Systems; To Provide That the Amount
                                                                        of the Exemption be Reduced by $ 2 for
    III                                                                 Every $ 1 of Federal Adjusted Gross
                                                                        Income Received by the Taxpayer in
     Did the District Court err in concluding that the
                                                                        Excess of $ 30,000; To Provide for an
retirement adjustment payment contained in Ch. 823,
                                                                        Adjustment Payment to Retirees of State,
1991 Mont. Laws, does not violate 4 U.S.C. § 111?
                                                                        Local, and Teacher Retirement Systems
     Observing that Davis does not limit the State's ability            Who are Montana Residents. . . .
to set the terms and conditions of public employment, the
District Court concluded that the adjustment constitutes a      Reading the title makes it clear that the overall purpose of
legitimate increased retirement benefit to state retirees. It   this bill was to tax state and federal pensions in a manner
relied primarily on Clark v. United States (7th Cir. 1982),     that does not violate 4 U.S.C. § 111 as interpreted in
691 F.2d 837.                                                   Davis. Rather than comply with 4 U.S.C. § 111 by
                                                                extending the total exemption from state income taxation
     Taxpayers argue that the adjustment is part of the         previously granted to state retirement benefits to include
taxation scheme and that it impermissibly discriminates         federal retirement benefits, the legislature chose to
against them. They also argue that Clark is inapplicable.       equalize the burden by taxing all retirement benefits,
The State contends that the adjustment is unrelated to the      subject to the phase-out exemption discussed above.
[***14] tax and that, pursuant to Clark, it is a valid          Within the same legislative enactment, the legislature
retirement benefit.                                             provided for an adjustment payment to state retirees who
                                                                are Montana residents. The State's argument that the two
     [HN8] Davis requires a two-pronged analysis of the         portions of the bill are not related defies [***16] logic.
legislation at issue here: 1) Does it constitute
discriminatory taxation against federal retirees or in favor         Moreover, the relationship between the tax
of state retirees on the basis of source of income? and 2)      equalization provisions of the bill, with their negative
If so, is the different treatment "directly related to, and     impacts on state retirees, and the adjustment intended to
justified by, 'significant differences between the two          make up, in part, for that equalization cannot be gainsaid.
classes'"? Davis, 489 U.S. at 816, 109 S.Ct. at 1508, 103       The adjustment -- while purporting to be an adjustment to
L.Ed.2d at 905 (citation omitted). Application of Davis         state retirement benefits -- is, in fact, an adjustment to the
to the case before us mandates our conclusion that the          equalization achieved via the first sections of Chapter
retirement adjustment payment (hereafter adjustment)            823. This conclusion is inescapable given the inclusion
contained in section 5 of Chapter 823 violates 4 U.S.C. §       of the adjustment in, and as part of, the tax equalization
111.                                                            program. No other interpretation of these two portions of
                                                                Chapter 823 comports with our duty to construe statutes
     It is clear that the revenue, equalization and             in a reasonable manner.
adjustment provisions of Chapter 823 are related parts of
a comprehensive income tax program encompassing all                  It is clear that the adjustment is not an actual and
pension income. The provisions were all included in and         legitimate pension or retirement benefit. If it were a
part of the same bill, originally introduced as Senate Bill     pension benefit, the State would have provided it to all of
226 in the 1991 Montana legislature. The title of the bill,     its retirees in recognition of their years of public service
subsequently enacted as Chapter 823, reads in pertinent         rather than just those living in Montana. There was no
                                                                                                                      Page 8
                                      262 Mont. 129, *138; 864 P.2d 762, **768;
                                 1993 Mont. LEXIS 358, ***16; 50 Mont. St. Rep. 1477

need to do so because the sole purpose of the adjustment       Montana residents. Further, the adjustment provided in
was to partially recompense state retirees living in           Clark was entirely independent of, and unrelated to, any
Montana for the tax they now must pay under the                tax provisions. [***19] Here, it is part of a tax
equalizing provisions of Chapter 823.                          equalization scheme mandated by federal law.

     Further evidence that the adjustment is not an actual          Because the adjustment contained in section 5 of
[***17] increased retirement benefit for retired state         Chapter 823 violates 4 U.S.C. § 111, the disparate tax
employees is the fact that the funding of the section 5        treatment of state and federal retirement income is
adjustment bears no resemblance to the funding of actual       justified only if it is "directly related to, and justified by,
state retirement benefit adjustments previously enacted        'significant differences between the two classes.'" Davis,
by the legislature. Such actual retirement adjustments as      489 U.S. at 816, 109 S.Ct. at 1508, 103 L.Ed.2d at 905.
those contained in the Public Employees' Retirement            Application of this test mandates the conclusion that the
System at § 19-3-1603, MCA, and in the Teachers'               adjustment contained in Chapter 823 cannot stand.
Retirement System at § 19- [*139] 20-713, MCA, are
funded by investment income produced by the retirement              The State makes no real argument that significant
fund made up of employee and employer contributions.           differences in fact exist between the two classes of
See §§ 19-3-1602 and 19-20-712, MCA. Here, the                 retirees that justify the discriminatory adjustment.
funding for the so-called retirement adjustment payment        Perhaps this is to the State's credit, since it is [*140]
is statutorily appropriated from the general fund pursuant     clear that no such articulable differences exist which
to section 4 of Chapter 823 -- that is, from the taxes         could withstand Davis scrutiny. The most obvious
collected from all Montana taxpayers. The money to pay         contention to be made regarding differences between the
the adjustment never goes into the state retirement funds,     classes is the State's interest in inducing and retaining
but is simply paid by the state treasurer to the retirement    qualified state government workers. While this position
boards, to be distributed by the boards in accordance with     is not asserted here, it is precisely the argument made by
the provisions of Chapter 823. While this evidence is not      the state of Michigan in Davis to justify the preferential
conclusive as to the nature of the adjustment at issue         treatment of its retired employees, and is the argument
here, it undercuts any notion that the adjustment is a         [***20] squarely rejected by the Davis Court:
legitimate increase in retirement benefits [***18] for
state retirees.

     We conclude that the adjustment is a partial tax                  This argument is wholly beside the point,
rebate denominated otherwise in an attempt to evade the                however, for it does nothing to
requirements of federal law. The discriminatory aspect                 demonstrate that there are "significant
of the adjustment is clear: the adjustment favors state                differences between the two classes"
retirees living in Montana based solely on the source of               themselves; rather, it merely demonstrates
their retirement income; that is, those retirees living in             that the State has a rational reason for
Montana and receiving state retirement income receive                  discriminating between two similar groups
the adjustment, while federal retirees living in Montana               of employees. The State's interest in
and receiving federal retirement income do not. Thus,                  adopting the discriminatory tax, no matter
the adjustment constitutes discriminatory taxation based               how substantial, is simply irrelevant to an
solely on the source of the respective retiree's income, in            inquiry into the nature of the two classes
violation of 4 U.S.C. § 111.                                           receiving inconsistent treatment.

      [**769] The State's reliance on Clark for the
proposition that the adjustment is merely an allowable
increased retirement benefit is misplaced. Clark involved       Davis, 489 U.S. at 816, 109 S.Ct. at 1508, 103 L.Ed.2d
a cost-of-living adjustment provided to all federal retirees   at 905 (emphasis added).
as an actual and legitimate pension adjustment. Clark,
691 F.2d at 841. Here, the adjustment was provided not              Moreover, no reasonable argument can be made that
to all state retirees, but only to state retirees who are      the adjustment is necessary or intended (a) to retain
                                                               retired residents in Montana in order to provide a critical
                                                                                                                      Page 9
                                      262 Mont. 129, *140; 864 P.2d 762, **769;
                                 1993 Mont. LEXIS 358, ***20; 50 Mont. St. Rep. 1477

mass of retired people to use those services and facilities    desired judicial severability policy to apply. Montana
that are important to retired people; or (b) to entice other   Automobile Assoc. v. Greely (1981), 193 Mont. 378, 399,
retired people into the state. Such arguments would            632 P.2d 300, 311. Thus, we begin our analysis with
apply to all retired people and would support the              stated legislative intent favoring severability. We then
similarities between state and federal retirees rather than    apply severability principles in determining whether the
establishing any significant differences between the two       invalid provisions can be severed or whether the entire
classes.                                                       legislative act must be stricken:

     Here, as noted, the State does not address or attempt               [HN11] If an invalid part of a statute is
to meet [***21] the Davis requirement that it justify                 severable from the rest, the portion which
disparate treatment on the basis of significant differences           is constitutional may stand while that
between the two classes of retirees. The reason is clear:             which is unconstitutional is stricken out
the "adjustment" is not based on any difference in the                and rejected. . . . A statute "is not [***23]
nature of the two classes before us. The disparate                    destroyed in toto because of an improper
treatment is based entirely on the State's desire to                  provision, unless such provision is
continue to provide an advantage to those of its own                  necessary to the integrity of the statute or
retirees losing a pre-Davis advantage -- namely, state                was the inducement to its enactment." . . .
retirees who reside in Montana and whose state pensions               If, when an unconstitutional portion of an
are now subject to income tax pursuant to Chapter 823.                act is eliminated, the remainder is
While the desire is understandable and perhaps even                   complete in itself and capable of being
laudable, it is legally insufficient under Davis as a                 executed in accordance with the apparent
justification for taxation which discriminates against                legislative intent, it must be sustained.
federal retirees.

     We conclude that the adjustment contained in section
5 of Chapter 823 constitutes discriminatory taxation           Greely, 632 P.2d at 311 (citations omitted).
which is not related to, or justified by, significant
differences between state and federal retirees. [*141]              Here, the income tax provisions of Chapter 823
We hold that the District Court erred in determining that      clearly are not destroyed in toto by striking the
the retirement adjustment payment does not violate 4           adjustment provisions contained in sections 4 and 5;
U.S.C. § 111.                                                  indeed, they are not impacted in any way. The income
                                                               tax still may be imposed and the exemption may be given
    IV                                                         effect without the adjustment for state retirees living in
                                                               Montana. Nor was the adjustment the inducement for
    Are the retirement adjustment payment and related          enacting the legislation; the "inducement" for Chapter
implementation provisions severable from Chapter 823,          823 was 4 U.S.C. § 111 and the Supreme Court's Davis
1991 Mont. Laws?                                               decision.
      [***22] Having concluded that the adjustment                   [*142] The income taxes and exemption contained
provision contained in section 5 of Chapter [**770] 823        in Chapter 823 remain complete in themselves and
violates 4 U.S.C. § 111, it is necessary to determine          capable of being executed in accordance with the overall
whether that provision and related implementing                legislative intent, which was to equalize taxes. Granted,
provisions can be severed from Chapter 823, or whether         the legislature also intended to continue an advantage for
the entirety of Chapter 823 must be stricken. We               certain [***24] state retirees through the adjustment.
conclude that the invalid provisions can be severed.           But where we have invalidated the adjustment portion of
                                                               Chapter 823, it is clear that the legislature intended,
     [HN9] Section 20 of Chapter 823 provides that if a
                                                               through the severability clause it included in Chapter 823,
part of the legislation is invalid, all valid parts that are
                                                               to preserve all valid parts.
severable from the invalid part remain in effect. We
previously have concluded that [HN10] the inclusion of a           Our earlier determination that the revenue,
severability clause is an indication that the drafters         equalization and adjustment provisions of Chapter 823
                                                                                                                  Page 10
                                      262 Mont. 129, *142; 864 P.2d 762, **770;
                                 1993 Mont. LEXIS 358, ***24; 50 Mont. St. Rep. 1477

are related parts of a comprehensive income tax program        provisions excepted, Chapter 823, 1991 Montana Laws,
encompassing all pension income does not negate our            remains valid and in full force and effect.
conclusion here regarding severability. The fact that the
provisions are related from the standpoint of whether they         Affirmed in part and reversed in part.
can withstand 4 U.S.C. § 111 and Davis scrutiny does not
mean that they are not, and cannot be, separate and            CONCUR BY: PETER L. RAPKOCH (In Part); FRED
independent from a severability standpoint. From an            J. WEBER
administrative and operational perspective, it is clear that
sections 4 and 5 are segregable from the income tax and        DISSENT BY: PETER L. RAPKOCH (In Part); FRED
exemption provisions.                                          J. WEBER

    Finally, and returning again to the legislature's          DISSENT
specific intent that invalid portions of Chapter 823 be
severed, we note that, absent a severability clause:                DISTRICT JUDGE RAPKOCH specially concurring
                                                               in part and dissenting in part.

                                                                    I concur in the majority opinion on Issue I, that state
                                                               employees retiring before the effective date of Chapter
       [HN12] [T]he presumption is against the
                                                               823, 1991 Laws of Montana, did not have a contractual
       mutilation of a statute, and that the
                                                               right to continued exemption from taxation of their state
       legislature would not have enacted it
                                                               retirement benefits.
       except in its entirety. The incorporation of
       a provision [***25] such as section 20                      I also agree that the provision of Chapter 823
       [severability clause] creates a presumption             phasing out the $ 3600 exemption does not violate 4
       to the contrary; namely, that the legislature           U.S.C. § 111 (1966).
       would have enacted the law without its
       invalid portions being incorporated                         Nor do I disagree with the majority that the
       therein.                                                adjustment contained in section 5 of Chapter 823
                                                               constitutes discriminatory taxation and therefore violates
                                                               4 U.S.C. § 111 (1966).

 State v. Holmes (1935), 100 Mont. 256, 291, 47 P.2d               It is, however, my opinion that the adjustment
624, 636 (citation omitted). See also Ingraham v.              payment provision is not severable from the rest of
Champion Int'l (1990), 243 Mont. 42, 49, 793 P.2d 769,         Chapter 823, and therefore, I dissent from the majority's
773. The presumption operates here in support of the           opinion on that point.
legislature's intent that the remainder of Chapter 823
remains valid even where the adjustment provisions are              Section 20 of Chapter 823 is the severability
determined to be invalid. Nothing in Chapter 823               provision here. The incorporation of that provision raises
indicates any intent that the tax and exemption provisions     a presumption that the Legislature would have [***27]
are dependent on the validity of the adjustment for state      enacted the law without its invalid portions. Williams v.
retirees living in [**771] Montana; thus, no                   Standard Oil Co. (1929), 278 U.S. 235, 241-42, 49 S.Ct.
inconsistency between such a provision and the contrary        115, 116-17, 73 L. Ed. 287; State v. Holmes (1935), 100
and clearly-stated severability clause exists in Chapter       Mont. 256, 291, 47 P.2d 624, 636; Ingraham v.
823 which might require us to depart from the plain            Champion Int'l. (1990), 243 Mont. 42, 49, 793 P.2d 769,
language used by the legislature and delve into the            773.
legislative history to resolve the issue before us.
                                                                   That is a rebuttable presumption though, and a weak
     We conclude that sections 4 and 5 are severable from      one at that; rebuttable by the nature of the statute being
Chapter 823, 1991 Montana Laws. We hold that those             considered: its purpose manifested by its provisions
sections are severed and [*143] excised from Chapter           before severance as compared to its apparent purpose, as
823 and, with those invalid [***26] and severed                manifested by the provisions remaining after amputation.
                                                               Can it be said that the purpose is the same after surgery as
                                                                                                                     Page 11
                                       262 Mont. 129, *143; 864 P.2d 762, **771;
                                  1993 Mont. LEXIS 358, ***27; 50 Mont. St. Rep. 1477

it was before?                                                       (4) the remainder is capable of being executed in
                                                                 accordance with the apparent legislative intent. Greely,
    The majority cites and quotes Montana Automobile             632 P.2d at 311.
Association v. Greely (1981), 193 Mont. 378, 399, 632
P.2d 300, 311 as follows:                                             I submit that the surgery here performed on Chapter
                                                                 823 fails to meet condition 1 above in that sections 4 and
                                                                 5, the adjustment provisions, are necessary to the
                                                                 integrity of the entire Chapter 823 as originally enacted.
        A statute "is not destroyed in toto because              It is correct that the equalization provisions may be
        of an improper provision, unless such                    imposed and the exemption given effect without the
        provision is necessary to the integrity of               adjustment to income for Montana resident retirees. But
        the statute or was the inducement to its                 what would then be imposed and given effect would be a
        enactment." If, when an unconstitutional                 law completely different from what is clearly intended in
        portion [*144] of an act is eliminated, the              the original act. It may even be a better law, but that is
        remainder is complete in itself and capable              not our business; such would be judicial legislation.
        of being executed in accordance with the
        apparent legislative intent, it must be                       It also seems that the adjustment provision is part of
        sustained. [Citation omitted; [***28]                    an enactment that is a byzantine effort to avoid Davis v.
        emphasis added].                                         Michigan Department of Treasury (1989), 489 U.S. 803,
                                                                 109 S. Ct. 1500, 103 L. Ed. 2d 891. I stand in awe and
                                                                 admiration of such effort, but we are subject to 4 U.S.C. §
     This cannot be done here. "Apparent legislative             111 (1966) and Davis and must apply logic to the
intent" must be that intent manifested by the language of        premises therein set forth. I, therefore, believe that the
the statute before severance. It is true that neither the        adjustment provision is an [***30] inseparable
income tax provisions nor the equalization parts are not         inducement to the enactment of Chapter 823, thereby
themselves destroyed or affected by striking the                 failing the second condition above.
adjustment provisions. But the former cannot in this case
be considered separate and apart from the amputated                     [*145] The remainder of the statute, after
adjustment provision. And "amputated" is the right word.         eliminating the adjustment provision is complete in itself,
What remains and will be enforced under the majority             but only in itself. It is not what the Legislature enacted or
opinion will not be the same as what clearly appears to be       intended. There go conditions 3 and 4 above.
the intent of the Legislature in the original enactment.
                                                                      What remains after our decision is not, as stated ad
The Legislature did not, in enacting Chapter [**772]
                                                                 nauseam above, capable of being executed in accordance
823, set out to do no more than equalize the income tax
                                                                 with the apparent legislative intent. We cannot cut out a
on all retirees. It went on and set out, by the adjustment
                                                                 third of the legislation where that third completely
provision, to remove or lessen that impact on resident
                                                                 changes the effect of the whole enactment and say that
Montana retirees.
                                                                 what is left is what the Legislature started with.
    The general statement of the severability rule in
                                                                      Greely is not on point. There the purpose of the Act
Greely is an accurate statement. Portions of a statute are
                                                                 was to regulate lobbying. The Legislature indulged in
severable if:
                                                                 overkill by, for instance, defining the proscribed practice
     (1) the invalid part is not necessary to the integrity of   so a person of normal intelligence could not figure out
the statute; or                                                  what he could not do. Several sections were therefore
                                                                 held void; others, because the subject matter of some of
    (2) the invalid part was not the inducement to its           the sections was not embraced in the title of the Initiative,
enactment;                                                       contrary to Article V, Section 11, Clause 3, of the
                                                                 Montana Constitution.
      (3) the remainder of the statute is complete [***29]
in itself; and (conjunctive)                                         This Court stated:
                                                                                                                    Page 12
                                        262 Mont. 129, *145; 864 P.2d 762, **772;
                                   1993 Mont. LEXIS 358, ***30; 50 Mont. St. Rep. 1477

            The Initiative, while being lengthy, is               enacting the statute, the purpose of the statute, as
        basically [***31] amendatory in nature.                   indicated by its provisions. The intent to make portions
        Its purpose was to expand Chapter 7, Title                severable is an interim intention, a procedural means, not
        5, of Montana's Lobbying Act, to provide                  the end. This Court has stated:
        for the disclosure of money spent to
        influence action of public officials and to
        require elected officials to disclose their
        business interests. This purpose is not                          The inclusion of a severability clause in
        frustrated by our limitations of the                             the Initiative is an indication that its
        Initiative. Even after our excisions,                            drafters [***33] and the voters desired
        Chapter 7, Title 5, as amended by the                            this judicial policy [the severability rule]
        Initiative is complete in itself and capable                     to be applied to the Initiative. [Emphasis
        of being executed in accordance with the                         added].
        intention of the people of Montana.
        [Emphasis added].

                                                                  Greely, 632 P.2d at 311.

Greely, 632 P.2d at 311-12.                                           Lastly, section 20, Chapter 823, reads as follows:

    The legislation there considered is of a different                       Severability. If a part of [this act] is
nature than Chapter 823, where the parts are meaningful                  invalid, all valid parts that are severable
only in internal conjunction with each other. The whole                  from the invalid part remain in effect. If a
of Chapter 823 was enacted as a unit.                                    part of [this act] is invalid in one or more
                                                                         of its applications, the part remains in
     I must disagree with the view expressed that the                    effect in all valid applications that are
legislative intent is clearly expressed in section 20,                   severable from the invalid applications.
Chapter 823, which is the severability clause, and                       [Emphasis added].
provides that if a part of the Act is invalid, all invalid
parts of the Act are severable, and valid parts remain in
effect. This is not the legislative intent that is relevant            That language, I think, is clear. That section speaks
here. In fact, it is [**773] not the legislative intent at all    not of physical parts of provisions. It speaks of
that the act is severable; [***32] the intent is that if the      applications of those parts. To apply the equalization
act is severable. . . . By use of the word "if" the               portions without the adjustment portion is to apply the
Legislature recognizes the fact that severance, or                former portions at a divergence of 180 degrees, more or
declaration of severability is a judicial act, not legislative.   less, from the application intended by the Legislature as
If the Legislature had intended the severed statute, it           the act is presently constituted. A severability clause is
could and should and would have legislated accordingly.           an appeal to the judiciary.

      [*146] This may, as is stated and shown earlier,                It is, therefore, my opinion that the whole of Chapter
raise a presumption that the Legislature would have               823 is invalid and the adjustment provisions are not
enacted the law without its invalid portions being                severable.
incorporated. But that presumption is, I believe, a
rebuttable presumption, here rebutted. Also, the                       JUSTICE WEBER specially concurs and dissents as
inclusion of a severability provision is to seek a judicial       follows:
act. Before it can be given effect, the judicial branch
                                                                      I concur with issues I and II of [***34] the majority,
must do the severing.
                                                                  but dissent on issues III and IV. Issue III asks if the
    The relevant intent for the judiciary to look at in           District Court erred in concluding that the retirement
considering severability is not the legislative intent to         adjustment payment contained in Chapter 823, 1991
provide for severability, but the legislative intent in           Montana Laws, violates 4 U.S.C. § 111. I do not find
                                                                                                                   Page 13
                                       262 Mont. 129, *146; 864 P.2d 762, **773;
                                  1993 Mont. LEXIS 358, ***34; 50 Mont. St. Rep. 1477

such discrimination.                                                    employees who become superannuated or
                                                                        incapacitated to retire and, to that end, to
    The majority states:                                                provide sufficient benefits to provide for
                                                                        retirement; and
          [*147]
                                                                             WHEREAS, the Legislature wishes to
            It is clear that the revenue,                               encourage all retired persons to remain
        equalization and adjustment provisions of                       within Montana to provide a critical mass
        Chapter 823 are related parts of a                              of retired persons who use certain services
        comprehensive income tax program                                and facilities that are important to retired
        encompassing all pension income.                                persons and that may keep and perhaps
                                                                        [***36] entice other retired persons into
I agree that Chapter 823 is a comprehensive income tax                  the state; and
program; however, this does not preclude this statute
from encompassing other issues. The majority quotes                          WHEREAS, the Legislature has in the
verbatim the "pertinent" part of the bill's title. The first            past granted increases in retirement
part of the title of the restructuring plan indicates that the          benefits in a manner designed to provide
legislature attempted to "equalize" the taxes on all                    relatively greater increases to those
pension benefits. Although, listed after this in sequence,              retirees who were employed during the
the provision indicating the legislature's intent to provide            years of low wages and whose benefits are
the adjustment payment to State retirees living in                      relatively small; and
Montana is an integral part of the Act as seen by the
title's wording:                                                              [*148] WHEREAS, the Legislature
            . . . . To Provide for an Adjustment                        therefore grants an increase in benefits to
         Payment to Retirees of State, Local, and                       its former public employees who are
         Teacher Retirement Systems Who are                             residents of the state to provide
         Montana Residents . . . .                                      compensation to encourage them to
                                                                        remain in Montana. (Emphasis added.)
  [***35] It is not necessary to rely upon the title to
determine the intent of the legislature. The chapter starts      The above statement of intent was added because the
with the following list of seven WHEREAS'S, and with             legislature knew that the Davis decision mandated that all
the exception of the taxation of benefits referred to in the     pension holders must be taxed equally. The Act does
first WHEREAS, all of the remaining WHEREAS's set                that. At the same time, the legislature knew that such an
forth an intent directly [**774] relating to the                 increase in taxes on State pensions could create a
adjustment payment and the reasons for the adjustment            situation where many retirees would leave the State.
payment:                                                         Acting through its legislature and governor, Montana as a
             WHEREAS, the State of Montana                       sovereign and as an employer expressed a desire to
       desires to tax federal, state, and private                provide an incentive for Montana retirees to remain in the
       retirement benefits equally; and                          State. Without subterfuge of any type the legislature
                                                                 declared this intent. Unfortunately, that openness appears
             WHEREAS, the State of Montana has                   to have been a basis for the majority to conclude [***37]
        in the past provided its employees with a                there was discrimination.
        benefit of employment through its tax
        system; and                                                   If the same adjustment payment provided in the Act
                                                                 were provided in another act in some future year, and
            WHEREAS, the Legislature desires                     denominated a cost of living, no one would even raise the
        and encourages qualified employees to                    discrimination argument. I do not find a basis to
        enter and remain in public service; and                  condemn the adjustment merely because it is included
                                                                 with the tax.
             WHEREAS, it is the policy of the
        State of Montana to encourage public                         The adjustment payment is paid to State retirees who
                                                                                                                     Page 14
                                      262 Mont. 129, *148; 864 P.2d 762, **774;
                                 1993 Mont. LEXIS 358, ***37; 50 Mont. St. Rep. 1477

already are receiving retirement benefits. I find nothing in            public instruction, a public institution of
the record which demonstrates a corresponding obligation                the state of Montana, a unit of the
by the State of Montana to make some sort of payment to                 Montana university system, or the
federal retirees whose retirement benefits are paid by the              Montana state school for the deaf and
United States. I do not understand how the payment by                   blind, the legislature shall appropriate to
the State to its retirees can lead to a "clear" determination           the employer an adequate amount to allow
of discrimination, as compared to a federal increase to                 payment of the employer's contribution.
federal retirees which would not be such discrimination.                (Emphasis added.)

    The fact that federal retirees do not get this              Section 3, amended § 19-20-605(3), MCA. With this
adjustment is not discrimination as to source. The same         annuity type system, the employers' part of the cost of
adjustment is not given to private retirees either.             living increase for "certain" retirees is paid by the State of
                                                                Montana. How is that different from the present Act?
     The basic intent of 4 U.S.C. § 111 has been lost.
That intent is that the income taxation of Montana should            I conclude there is no discrimination "as to source"
tax federal and State retirement benefits at the same rates.    within the 1991 Act. As a matter of policy, Montana
The Act does that. An increase in pay to encourage              provides its own retirees an "incentive" without an
[***38] State retirees to remain in the state is not            intention to discriminate in any manner.
discrimination as contemplated in § 111. An incentive to
stay is not discrimination as to source. There is a                  The Davis test of significant differences between the
recognition on the part of the legislature that the new tax     classes is not even reached here. One only has to
on Montana public employee pensions might cause them            determine the significant [***40] difference between
to leave the State. Such a recognition, stated up front and     classes if discrimination has occurred. Here, there is no
in the open, does not equal the discrimination that the         agreement as to even what the appropriate classes are.
majority characterizes as "clear."                              The only classes that are pertinent to 4 UCS § 111 are
                                                                "state retirees" and "federal retirees." Both of these
      [*149] The fact that this adjustment payment comes        classes are taxed equally under this Act. It is only the
from the general fund is also of no consequence. Any            segment of State retirees that receive the benefit.
other cost of living increase for State public employees
comes from the same source. This adjustment payment is               While the majority merely mentions that the
no different than any other [**775] benefit which the           discrimination is "clear" it does not go on to explain how
State as an employer has a right to offer a group of its        the "incentive" or "adjustment" is discriminatory. Nor
retirees.                                                       does it explain how the Davis quote applies to what we
                                                                have before us:
     The majority refers to § 19-20-713, MCA, which
provides a cost of living increase for teachers in the
Teachers' Retirement System. The title of Chapter 658 of
Montana Laws 1985 shows that only "certain" teachers                    Under our precedents, "[t]he imposition of
within the retirees from this system would be benefitted                a heavier tax burden on [those who deal
by the increase. I do not understand how the majority                   with one sovereign] than is imposed on
condemns the 1991 Act because it is made applicable to                  [those who [*150] deal with the other]
"certain" retirees and yet refers to the Teachers' [***39]              must be justified by significant differences
Retirement Act as nondiscriminatory where it also                       between the two classes." (Emphasis
benefits only "certain" teacher retirees.                               added.)

    In addition, the Teachers' Retirement Act uses the
"general fund" as the source of funds with which to pay
teachers who retired from the various units of the               Davis, 489 U.S. at 815-816, 109 S.Ct. at 1508. The
University System and other schools, stating:                   federal retirees have no heavier "tax burden" than do
                                                                State retirees. The tax burden on both State and federal
          If the employer is the superintendent of              retirees is identical. The exemption of $ 3,600 is
                                                                                                                Page 15
                                     262 Mont. 129, *150; 864 P.2d 762, **775;
                                1993 Mont. LEXIS 358, ***40; 50 Mont. St. Rep. 1477

identical as are the tax rates applicable to both State and   this was done.
federal retirees. The range at which the exemption begins
[***41] is $ 30,000 for both State and federal retirees.             [**776] I also disagree with the [***42]
The only difference is that State retirees who reside in      conclusion that the adjustment is severable from the Act.
Montana are given an "incentive" to stay within the State     Both the title and the statement of intent make it obvious
that has employed them and from whom their pensions           that the adjustment or incentive to stay in Montana is an
are derived. I point out here that the "incentive" is still   integral part of this Act. The incentive, based upon the
subject to tax at the same rates as any amounts received      fact that public retirees will now be receiving less money
by the retirees.                                              because of the mandatory taxation, should not be
                                                              divorced from the tax plan itself. The tax plan explains
     The District Court determined that the adjustment        why the employer State of Montana is granting this
was part of a policy decision on the part of the State        incentive. I do not believe the intention of granting some
toward its employees. I would affirm the court on this        additional monies can be divorced from the taxation
analysis. The State acting as an employer has every right     which applies to the retiree benefits and the adjustment.
to act in concert with the sovereign and the legislature to   As demonstrated clearly in the WHEREAS clauses at the
provide an incentive to retired public employees to stay      beginning of the Act, the taxation and the granting of the
within the State that has been their home for years. This     adjustment are not severable. The action of the majority
policy decision does not constitute discrimination against    is punitive in nature, taxing all benefits equally while
the retirees of any other sovereign or any other group of     eliminating the additional benefit awarded under the Act.
retirees. In this case, the other sovereign's retirees are
taxed identically with those of the State sovereign. I            I also concur in the portion of Judge Rapkoch's
conclude that instead of condemning the legislature and       concurrence and dissent in which he concludes that the
the governor for their openness in enacting the Act, they     adjustment payment is not severable from the rest of
should be commended for the forthright way in which           Chapter 823.
                                                                                                                       Page 1

                  STANDARD OIL COMPANY OF CALIFORNIA (a Corporation), Appellant, v.
                       CHARLES G. JOHNSON, as State Treasurer, etc., Respondent

                                                    Sac. Nos. 5144, 5145

                                               Supreme Court of California

                                   10 Cal. 2d 758; 76 P.2d 1184; 1938 Cal. LEXIS 256

                                                     February 25, 1938

SUBSEQUENT HISTORY:                      [***1] Rehearing        jurisdiction of the park lands back to the federal
Denied.                                                          government by 1905 Cal. Stat. 54, the State reserved its
                                                                 taxing power in 1919 Cal. Stat. 74 and an acceptance of
PRIOR HISTORY: APPEALS from judgments of the                     the act by congress in 41 Stat. 731 (1920). The court held
Superior Court of Sacramento County. Dal M. Lemmon,              that the express recognition by both sovereigns clearly
Judge.                                                           established the existence of the right of the State to tax in
                                                                 the areas designated in accordance with the power as
DISPOSITION: Affirmed.                                           reserved and defined in both acts.The court also held that
                                                                 the exercise of the reserved power by the imposition of
CASE SUMMARY:                                                    retail sales and gasoline taxes did not create an
                                                                 interference with the exercise of the jurisdiction acquired
                                                                 by the United States pursuant to the grants.
PROCEDURAL POSTURE: Plaintiff oil company
appealed from judgments of the Superior Court of                 OUTCOME: The court affirmed the trial court
Sacramento County (California) that sustained defendant          judgments that were entered in favor of the State in the
State's demurrers and entered judgment for the State in          oil company's action to recover gasoline taxes paid under
the oil company's actions seeking to recover gasoline            protest which were imposed for the distribution and sale
taxes paid under protest, which were imposed for the             of gasoline within the boundaries of national parks
distribution and sale of gasoline within the boundaries of       located within the territorial limits of California.
national parks located within the territorial limits of
California.                                                      CORE TERMS: national park, exclusive jurisdiction,
                                                                 ceded, reservation, taxing power, reserved, cession,
OVERVIEW: An oil company filed several actions                   valley, recession, taxation, license fees, fishing, right to
seeking to recover gasoline taxes paid under protest,            fix, gasoline taxes, reserved power, enumerated,
which were imposed by the Motor Vehicle Fuel License             franchises, saving, public lands, territorial limits, right to
Tax Act, 1923 Cal. Stat. 577, for the distribution and sale      tax, federal government, territory, gasoline, retail, excise,
of gasoline within the boundaries of national parks              national government, legislative act, sales tax, comprising
located within the territorial limits of California. The trial
court entered judgment for the State and the oil company         LexisNexis(R) Headnotes
appealed. The court affirmed the trial court judgments.
The court held that although the State ceded exclusive
                                                                                                                    Page 2
                                           10 Cal. 2d 758, *; 76 P.2d 1184, **;
                                               1938 Cal. LEXIS 256, ***1

Environmental Law > Natural Resources & Public                 [HN4] The legislative act, 1919 Cal. Stat. 54 in part
Lands > Public Trust Doctrine                                  provides: Exclusive jurisdiction shall be and the same is
Governments > Federal Government > Property                    hereby ceded to the United States over and within all of
Governments > Public Lands > National Parks                    the territory which is now or may hereafter be included in
[HN1] On June 30, 1864, in 13 Stats. 325 (1864), that          those several tracts of land in the State of California set
portion of Yosemite National Park designated in the act        aside and dedicated for park purposes by the United
as the "Cleft" or "George" in the Granite Peak of the          States as "Yosemite National Park," "Sequoia National
Sierra Nevada mountains situated in the county of              Park" and "General Grant National Park" respectively;
Mariposa and the headwaters of the Merced River, and           saving, however, to the State of California the right to
known as the Yosemite valley, was granted to the State of      serve civil or criminal process within the limits of the
California upon the express condition that the premises        aforesaid parks and saving further, to the said State the
shall be held for public use, resort, and recreation. By the   right to tax persons and corporations, their franchises and
same act "Mariposa Big Tree Grove", comprising four            property on the lands included in said parks, and the right
sections of land, was granted upon like conditions.            to fix and collect license fees for fishing in said parks.

Estate, Gift & Trust Law > Trusts > General Overview           Governments > Public Lands > National Parks
Governments > Public Lands > National Parks                    Tax Law > State & Local Taxes > Franchise Tax >
Real Property Law > Trusts > Holding Trusts                    Imposition of Tax
[HN2] On March 3, 1905, in 1905 Cal. Stat. 54,                 Tax Law > State & Local Taxes > Real Property Tax >
California receded and re-granted to the United States         Collection > Methods & Timing
without reservation the "Cleft" or "Gorge" known as            [HN5] The 1920 Act of Acceptance, 41 Stat. 731 (1920),
Yosemite Valley, and the "Mariposa Big Tree Grove",            reads: Be it enacted by the Senate and House of
and resigned the trusts created and granted by the act of      Representatives of the United States of America in
congress of June 30, 1864, upon condition that the lands       Congress assembled, That the provisions of the act of the
be held by the United States for public use, resort and        legislature of the State of California (approved April 15,
recreation. This recession was accepted by congress on         1919), ceding to the United States exclusive jurisdiction
June 11, 1906, in 34 Stat. 831, and the areas by the same      over the territory embraced and included within the
act were included as part of Yosemite National Park.           Yosemite National Park, Sequoia National Park, and
                                                               General Grant National Park respectively, are hereby
                                                               accepted and sole and exclusive jurisdiction is hereby
Civil Procedure > Jurisdiction > Subject Matter                assumed by the United States over such territory, saving,
Jurisdiction > Jurisdiction Over Actions > General             however, to the said State of California, the right to serve
Overview                                                       civil or criminal process within the limits of the aforesaid
Governments > State & Territorial Governments >                parks and saving further to the said State the right to tax
Property                                                       persons and corporations, their franchises and property on
[HN3] 1891 Cal. Stat. 262 provides: The State of               the lands included in said parks, and the right to fix and
California hereby cedes to the United States of America        collect license fees for fishing in said parks.
exclusive jurisdiction over such piece or parcel of land as
may have been or may be hereafter ceded or conveyed to
the United States, during the time the United States shall     Civil Procedure > Jurisdiction > Subject Matter
be or remain the owner thereof, for all purposes except        Jurisdiction > Jurisdiction Over Actions > General
the administration of the criminal laws of this State and      Overview
the service of civil process therein.                          Governments > Federal Government > Property
                                                               Military & Veterans Law > Servicemembers > General
                                                               Overview
Governments > Public Lands > National Parks                    [HN6] U.S. Const. art. I, § 8, cl. 17 provides: Congress
Real Property Law > Ownership & Transfer > Transfer            shall have power to exercise exclusive legislation in all
Not By Deed > Dedication > General Overview                    cases whatsoever over all places purchased by the
Tax Law > State & Local Taxes > Franchise Tax >                consent of the legislature of the State in which the same
Imposition of Tax                                              shall be, for the erection of forts, magazines, arsenals,
                                                                                                                   Page 3
                                          10 Cal. 2d 758, *; 76 P.2d 1184, **;
                                              1938 Cal. LEXIS 256, ***1

dockyards, and other needful buildings.                       of Guadalupe Hidalgo, by which the Republic of Mexico
                                                              ceded to the United States government all the lands
                                                              within the territorial limits of California, the United
Tax Law > State & Local Taxes > Administration &              States government became vested with the title to all such
Proceedings > General Overview                                lands not held in private ownership, and it retained title to
[HN7] Colo. Const. art. XIII, § 6 provides that the power     these public lands upon the admission of California to
of taxation shall never be surrendered or suspended by        statehood.
any grant or contract to which the State shall be a party.
                                                              (2)            Id.--Cession             to          United
                                                              States--Jurisdiction--Limitation--Taxation--Constitutional
Civil Procedure > Jurisdiction > Subject Matter
                                                              Law. -- --There exists no constitutional inhibition upon
Jurisdiction > Jurisdiction Over Actions > Exclusive
                                                              the power of the state to cede or the right of the United
Jurisdiction
                                                              States to receive limited jurisdiction of lands for park
Governments > Federal Government > Property
                                                              purposes, reserving to the state the right to serve civil or
Governments > State & Territorial Governments >
                                                              criminal process within the limits of such parks, and also
Property
                                                              saving to the state the right to tax persons and
[HN8] The Supreme Court of the United States
                                                              corporations, their franchises and property on lands
recognized that exclusive jurisdiction could be acquired
                                                              included in said parks, and the right to fix and collect
otherwise than by purchase with the consent of the State
                                                              license fees for fishing in said parks.
legislature, namely by cession, if for one or more of the
purposes enumerated in the federal constitutional             (3)                                           Id.--Limited
provision.                                                    Jurisdiction--Modification--Agreement.          --    --The
                                                              United States may hold limited jurisdiction of land for
Civil Procedure > Jurisdiction > Subject Matter               other than the purposes enumerated in clause 17 of
Jurisdiction > General Overview                               section 8 of article I of the federal Constitution; and the
Tax Law > State & Local Taxes > Administration &              extent of such limited jurisdiction may be the subject of
Proceedings > General Overview                                change by mutual agreement between the state and the
[HN9] The taxing power of the State is never presumed         United States.
to have been relinquished unless the language in which
                                                              (4) Id.--Cession--Modification--Taxation. -- --The
the surrender is made is clear and unmistakable.
                                                              legislative act of 1919 (Stats. 1919, p. 74), re-ceding to
                                                              the national government jurisdiction over Yosemite
Governments > Federal Government > Property                   national park, Sequoia national park and General Grant
Tax Law > State & Local Taxes > Administration &              national park for park purposes, reserving to the state,
Proceedings > General Overview                                among other things, the right to tax persons and
[HN10] The right of a State to tax the property of others     corporations, their franchises and property on the lands
located upon lands owned by the United States, although       included in said parks, and the right to fix and collect
it cannot tax such lands, will not be held to be abandoned    license fees for fishing in said parks, and the
by the State, except for the most compelling reasons, is      congressional acceptance of 1920, subject to such
quite manifest from several decisions of the Supreme          reservation, operate to reserve to the state the powers
Court of the United States. To be accorded immunity           stated in said enactments, notwithstanding a prior
from State taxation it must be shown not only that the        recession of one of said parks to the United States, to be
land was acquired by the United States, but also that it      held for public use, resort and recreation, and the
was acquired and used for one of the purposes indicated       acceptance thereof by congress, did not reserve to the
in U.S. Const. art. I, § 8, cl. 17.                           state any taxing power.

HEADNOTES                                                     (5) Id.--Sales Taxes--Gasoline Taxes--Reserved
                                                              Powers--Statutory Construction. -- --The taxing power
CALIFORNIA OFFICIAL REPORTS HEADNOTES                         reserved in said act of 1919 must be construed most
                                                              strongly in favor of the state in order to preserve its
(1) Public Lands--Treaties--Title. -- --Under the treaty      jurisdiction as to matters with which it is directly and
                                                                                                                    Page 4
                                           10 Cal. 2d 758, *; 76 P.2d 1184, **;
                                               1938 Cal. LEXIS 256, ***1

immediately concerned, and as to which jurisdiction has        to the effect of the retail sales tax will be deemed
not been ceded or granted to the federal government; and       sufficient for that purpose.
the imposition by the state of the retail sales and gasoline
taxes in said national park areas is within the taxing              Standard Oil Company by its several actions sought
power expressly reserved by the state and creates no           to recover gasoline taxes paid under protest, which were
interference with the exercise of the jurisdiction acquired    imposed for the distribution and sale of gasoline within
by the United States.                                          the boundaries of Yosemite national park, Sequoia
                                                               national park and General Grant national park, located
(6)          Id.--Privileges--Sales--Taxation--Statutory       within the territorial limits of California.
Construction. -- --The mere fact that, by said act of
1919, the taxing power for all general purposes has been            The plaintiff is a private corporation authorized to do
reserved by the state with the consent of congress is a        business in California. The problem revolves around the
recognition by the latter that the granting of privileges      question whether the state of California ceded exclusive
such as the making of sales within the re-ceded areas          jurisdiction to the United States government of the areas
emanates from the state as well as the national                comprising the various national parks in such a way as to
government; and there is no merit in the contention that       divest itself of jurisdiction to impose and collect the taxes
the privilege which lessees and concessioners of the           so paid under protest.
United States government have of making sales within
                                                                   Demurrers to the various complaints were sustained
said areas emanates solely from the national government.
                                                               and judgment entered for the defendants. The plaintiff
SYLLABUS                                                       appeals.

    The facts are stated in the opinion of the court.               (1) On February 2, 1848, by the treaty of Guadalupe
                                                               Hidalgo, the Republic of Mexico ceded to the United
COUNSEL: Pillsbury, Madison & Sutro, Felix T. Smith            States government all the lands within the territorial
and Sigvald Nielson, for Appellant.                            limits of California. The United States thereby became
                                                               vested with the title to all such lands not held in private
U. S. Webb, Attorney-General, and H. H. Linney and             ownership. ( Thompson v. Doaksum [***3] , 68 Cal.
James J. Arditto, Deputies Attorney-General, for               593, 596 [10 P. 199].) The areas now comprising the
Respondent.                                                    national parks hereinbefore mentioned were therefore
                                                               then public lands. The United States retained title to these
JUDGES: In Bank.                                               public lands upon the admission of California to
                                                               statehood. (9 Stats. 452.)
OPINION BY: THE COURT
                                                                    [HN1] On June 30, 1864 (13 Stats. 325), that portion
OPINION                                                        of Yosemite national park designated in the act as the
                                                               "'Cleft' or 'George' in the Granite Peak of the Sierra
      [*759] [**1185] The appeals in several actions           Nevada mountains situated in the county of Mariposa . . .
brought by the plaintiff, Standard Oil Company of              and the headwaters of the Merced River, and known as
California, involve the question whether sales of gasoline     the Yo-Semite valley", was granted to the state of
in certain national parks [**1186] are subject to the tax      California upon the express condition that the "premises
imposed by the Motor Vehicle Fuel License Tax Act              shall be held for public use, resort, and recreation". By
(Stats. 1923, p. 577, as amended Stats. 1933, p. 1643).        the same act "Mariposa Big Tree Grove", comprising
These appeals have been consolidated for determination.        four sections of land, was granted upon like conditions.
A related question is presented in the companion case of
Yosemite Park & Curry Co. v. Johnson, post, p. 770 [76             On October 1, 1890 (26 Stats. 650), congress set
Pac. (2d) 1191], wherein the Sales Tax Act (Stats. 1933,       apart as a national forest and withdrew from sale and
p. 2599, as amended), is involved. The determination           occupancy certain tracts of the public lands in the Sierra
herein will control the disposition of the same questions      Nevada, but expressly excepted therefrom the Yosemite
presented in the Yosemite Park and Curry Company case,         Valley and Mariposa big tree grove theretofore granted to
and the discussion herein with [*760] [***2] reference         California. A [*761] portion of those reserves
                                                                                                                     Page 5
                                       10 Cal. 2d 758, *761; 76 P.2d 1184, **1186;
                                                1938 Cal. LEXIS 256, ***3

surrounding Yosemite Valley was later, on February 7,               [HN4] The legislative act of 1919 in its pertinent
1905, designated [***4] as "Yosemite National Park".           parts provides: "Exclusive jurisdiction shall be and the
(33 Stats. 702.)                                               same is hereby ceded to the United States over and within
                                                               [***6] all of the territory which is now or may hereafter
     [HN2] On March 3, 1905 (Stats. 1905, p. 54),              be included in those several tracts of land in the State of
California receded and regranted to the United States          California set aside and dedicated for park purposes by
without reservation the "Cleft" or "Gorge" known as            the United States as 'Yosemite national park, Sequoia
Yosemite Valley, and the "Mariposa Big Tree Grove",            national park' and 'General Grant national park'
and resigned the trusts created and granted by the act of      respectively; saving, however, to the state of California
congress of June 30, 1864, upon condition that the lands       the right to serve civil or criminal process within the
be held by the United States for public use, resort and        limits of the aforesaid parks . . . and saving further, to the
recreation. This recession was accepted by congress on         said state the right to tax persons and corporations, their
June 11, 1906 (34 Stats. 831), and the areas by the same       franchises and property on the lands included in said
act were included as part of Yosemite National Park.           parks, and the right to fix and collect license fees for
                                                               fishing in said parks. . . ."
    The area comprising Sequoia national park was
withdrawn from occupancy and sale and dedicated as a                [HN5] The 1920 Act of Acceptance reads: "Be it
public park on September 24, 1890 (26 Stats. 478). An          enacted by the Senate and House of Representatives of
act of congress (26 Stats. 651), enacted on October 1,         the United States of America in Congress assembled,
1890, established General Grant national park.                 That the provisions of the act of the legislature of the
                                                               State of California (approved April 15, 1919), ceding to
     At the time of the recession to the United States of      the United States exclusive jurisdiction over the territory
the Yosemite Valley and Mariposa big tree grove there          embraced and included within the Yosemite National
was in effect a statute passed by the legislature of           Park, Sequoia National Park, and General Grant National
California in [HN3] 1891 (Stats. 1891, p. 262),                Park respectively, are hereby accepted and sole and
providing: "The State of California hereby cedes to the        exclusive jurisdiction is hereby assumed by the United
United States of America exclusive jurisdiction over such      States over such [***7] territory, saving, however, to the
piece or parcel of land as may have been [***5] or may         said State of California, the right to serve civil or criminal
be hereafter ceded or conveyed to the United States,           process within the limits of the aforesaid parks . . . and
during the time the United States shall be or remain the       saving further to the said State the right to tax persons
owner thereof, for all purposes except the administration      and corporations, their franchises and property on the
of the criminal laws of this state and the service of civil    lands included in said parks, and the right to fix and
process therein."                                              collect license fees for fishing in said parks. . . ."
     The plaintiff relies upon the foregoing quoted statute,        The contention of the plaintiff is that the state,
together with the act of recession of 1905, as supporting      having by the 1905 act of recession, granted exclusive
its claim that the state of California by the regrant had      jurisdiction of Yosemite Valley to the United States, had
relinquished exclusive jurisdiction to the United States in    nothing more to grant, and that the attempted cession of
the area known as Yosemite [**1187] Valley, wherein            1919 with reservations was an empty gesture. Answering
occurred most of the transactions upon which the taxes         this argument the defendant asserts that the 1905 act of
involved were imposed and collected.                           recession did not vest exclusive jurisdiction in the United
                                                               States, because, so he claims, such exclusive jurisdiction
     The defendant, however, contends that the act of the
                                                               can be acquired only pursuant to [HN6] clause 17, section
California legislature approved April 15, 1919 (Stats.
                                                               8, article I of the Constitution of the United States, which
1919, p. 74), ceding to the national government
                                                               provides: "Congress shall have [*763] power to exercise
jurisdiction over Yosemite national park, Sequoia
                                                               exclusive legislation in all cases whatsoever . . . over all
national park and General Grant national park, and the act
                                                               places purchased by the consent of the legislature of the
of acceptance by congress on June [*762] 2, 1920 (41
                                                               state in which the same shall be, for the erection of forts,
Stats. 731), constitute the basis upon which depend the
                                                               magazines, [***8] arsenals, dockyards, and other
rights of the state herein.
                                                               needful buildings." In this connection reliance is also
                                                                                                                       Page 6
                                         10 Cal. 2d 758, *763; 76 P.2d 1184, **1187;
                                                  1938 Cal. LEXIS 256, ***8

placed on [HN7] section 6 of article XIII of the state            the United States by the state of Montana for park
Constitution, providing that the power of taxation shall          purposes. The opinion shows that no concurrent
never be surrendered or suspended by any grant or                 jurisdiction or taxing power was reserved and that the
contract to which the state shall be a party.                     express grant of powers to the United States was
                                                                  inconsistent with the reservation of any concurrent
      However, we deem it unnecessary to pursue the               jurisdiction. The court supported its statement that
inquiry into the constitutional question whether exclusive        "Cessions of exclusive jurisdiction such as that made by
jurisdiction may be ceded to or acquired by the United            the Legislature of Montana, have been very common in
States of lands within the territorial limits of a state solely   the history of this country, and their effect is well
for recreational and park purposes. We need note only             settled", by the single reference to the Arlington Hotel
that the history and reasons for the vesting in the United        decision. The other case, Yosemite Park & Curry Co. v.
States of the power to hold exclusive jurisdiction for the        Collins, 20 Fed. Supp. 1009 (Circuit Court of Appeals,
enumerated purposes, and many aspects of the                      Southern Div., Northern Dist. of California, No. 4165)
controversial question relating to acquisition of exclusive       [***11] will be later discussed.
jurisdiction for other purposes, have been stated in the
following cases, among others, and do not require                      If the legislative act of recession of 1905, the
repetition here: Fort Leavenworth R. R. Co. v. Lowe, 114          congressional acceptance thereof, and the related acts
U.S. 525, 533 [5 Sup. Ct. 995, 29 L. Ed. 264]; Benson v.          prior to that time, were alone to be considered, it might
United States, 146 U.S. 325 [13 Sup. Ct. 60, 36 L. Ed.            be said that the constitutional question is squarely
991]; Arlington Hotel Co. v. Fant, 278 U.S. 439 [49 Sup.          presented for determination. But as applied to all the
Ct. 227, 73 L. Ed. 447]; Surplus Trading Co. [***9] v.            territory named, we have a subsequent act of the
Cook, 281 U.S. 647 [50 Sup. Ct. 455, 74 L. Ed. 1091]; In          legislature ceding title to the United States and expressly
re Kelly, 71 Fed. 545; People v. Mouse, 203 Cal. 782              reserving, among other matters, the right to exercise in
[265 P. 944]; Silas Mason, Inc., v. State Tax Com., 188         the territory ceded the power to tax persons and
Wash. 98 [61 Pac. (2d) 1269], (affirmed 302 U.S. 186 [58          corporations, their franchises and property, together with
Sup. Ct. 233, 82 L. Ed. ]; Ryan v. State, 188 Wash. 115           a congressional acceptance in the same express terms. It
[61 Pac. (2d) 1276], (affirmed 302 U.S. 186 [58 Sup. Ct.          is not a matter of necessary judicial inquiry as to what
233, 82 L. Ed. ].) Beginning at least as early as the       prompted these new acts of cession and acceptance,
decision in Fort Leavenworth R. R. Co. v. Lowe, supra,            covering public lands reserved to the United States when
the [HN8] Supreme Court of the United States recognized           California was admitted as a state, and lands formerly
that exclusive jurisdiction could be acquired otherwise           receded to the United States without the special
than by purchase with the consent of the state legislature,       reservation. It may be that the respective legislative
namely by cession, if for one or more of the purposes             bodies deemed that, except for the purposes enumerated
enumerated in the federal constitutional [**1188]                 in clause 17, section 8 of article I of the Constitution, and
provision. (See Ryan v. State, supra, 61 Pac. (2d) at             in accord with the declaration of section 6, article XIII of
1281.) But whether exclusive jurisdiction by any means            the state Constitution, the power had not been
may be acquired for a purpose not so enumerated may               constitutionally delegated [***12] to the United States to
still be an open question. (See Arlington Hotel Co. v.            hold land for other purposes exclusive of any dominion
Fant, 278 U.S. 439 [49 Sup. Ct. 227, 73 L. Ed. 447]; In           of the state, and that they therefore desired to reframe
re Kelly, 71 Fed. 545.) The controversial point that the          their agreement [*765] to accord with the relative
United States has the constitutional power to acquire             existing rights of the respective sovereigns. (2) In any
exclusive [***10] jurisdiction within state [*764]                event, there exists no constitutional inhibition upon the
territorial limits of an area devoted solely to park and          power of the state to cede or the right of the United States
recreational purposes was expressly left open in the              to receive limited jurisdiction of lands for the purposes
Arlington Hotel case at page 454. So far as we know               and with the reservations stated in the grant herein. The
only two cases have since attempted to resolve the                only proper function of the court, therefore, is to
question. In Yellowstone Park Transp. Co. v. Gallatin             recognize and give effect to the act of recession of 1919
County, 31 Fed. (2d) 644, (petition for writ of certiorari        and the act of acceptance of 1920 which appear to
denied, 280 U.S. 555 [50 Sup. Ct. 16, 74 L. Ed. 611]), the        constitute a binding and valid definition and mutual
court upheld the exclusive jurisdiction of lands ceded to         recognition of the rights and powers of the respective
                                                                                                                        Page 7
                                        10 Cal. 2d 758, *765; 76 P.2d 1184, **1188;
                                                1938 Cal. LEXIS 256, ***12

sovereign parties. All other related considerations fade         1923, p. 571), was attempted to be laid on deliveries to
away when it is realized that, whatever had taken place          the Post Exchange within the Presidio in San Francisco, a
before, the taxing power of the state was reserved by the        military reservation over which the United States [***15]
act of 1919 and that congress, by the acceptance act of          was held to have been vested with exclusive jurisdiction
1920, recognized the continuance of that power in the            under the constitutional section.
state. This express recognition by both sovereigns clearly
establishes the existence of the right of the state to tax in         (4) We conclude that the legislative act of 1919 and
the areas designated in accordance with the power                the congressional acceptance of 1920 operate to reserve
[***13] as reserved and defined in both acts.                    to the state the powers stated in the respective
                                                                 enactments.
      (3) It is not questioned that the United States may
hold limited jurisdiction of land for other than the                   (5) Another ground of resistance to the imposition
purposes enumerated in clause 17 of section 8 of article I       of the sales and gasoline taxes in the national park areas
of the Constitution; and the cases relied upon do not            is that such taxes, being in their nature excise taxes rather
preclude a holding that the extent of such limited               than taxes on persons or property, are not within the
jurisdiction for other than the specified purposes may be        express reserved power.
the subject of change by mutual agreement between the
                                                                      The reserved taxing power is couched in the
state and the United States.
                                                                 following language: "and saving further to the said State
     In Fort Leavenworth R. R. Co. v. Lowe, supra, at            the right to tax persons and corporations, their franchises
page 539, we find this statement: "It not being a case           and property on the lands included in said parks, and the
where exclusive legislative authority is vested by the           right to fix and collect license fees for fishing in said
Constitution of the United States, that cession could be         parks". It is asserted that inasmuch as a tax such as the
accompanied with such conditions as the State might see          retail sales tax or gasoline tax is in its nature an excise tax
fit to annex not inconsistent with the free and effective        ( People v. Ventura Refining Co., 204 Cal. 286, 294 [268
use of the fort as a military post." In that case the state by   Pac. 347, 283 P. 60]; Roth Drug, Inc., v. Johnson, 13
the act of cession of land to be used as a military post had     Cal. App. (2d) 720, 730 [57 Pac. (2d) 1022]), and being
reserved [**1189] the power to tax railroad and other            neither a tax on persons, such as a poll tax, nor a tax on
corporations. It was held that the reservation of the            tangible property, the power to impose it is not [***16]
taxing power did not interfere with the use of the area as       within the express reservation. The plaintiff misconceives
a military post and that there was no constitutional             the meaning and purpose of the phraseology employed.
prohibition against the exercise of the reserved power.          Contrary to its contention, the rule of strict construction
(See, also, [***14] Chicago & Pacific Ry. Co. v.                 does not necessarily apply. The pertinent considerations
McGlinn, 114 U.S. 542, 545, 546 [5 Sup. Ct. 1005, 29 L.          are stated in Ryan v. State, supra, 61 Pac. (2d) at 1283, as
Ed. 270]; United States v. Unzeuta, 281 U.S. 138, 142            follows: "But, since self-preservation is the first [*767]
[50 Sup. Ct. 284, 74 L. Ed. 761].) The holding in the case       law of nations and states, as well as of individuals, it will
of United [*766] States v. Unzeuta, supra, p. 143, that          not be presumed, in the absence of clearly expressed
ceded jurisdiction which had been accepted could not be          intent, that the state has relinquished its sovereignty . . .
recaptured by the action of the state alone (which sought        [HN9] The taxing power of the state is never presumed to
to amend the act of cession), is consistent with our             have been relinquished unless the language in which the
conclusions herein. So, also, is the statement in In re          surrender is made is clear and unmistakable." And the
Ladd, 74 Fed. 31, at page 38 (wherein a state amendatory         following is also pertinent: "This is not a contest between
act was held to be ineffective to abrogate the existing          the federal government and the state as to jurisdiction. It
contract, and there was no express acceptance), that a           is a contest between the state, asserting its concurrent, or
ceded exclusive jurisdiction continues until "terminated,        partial, jurisdiction, and an individual who asserts that
either by the United States ceasing to own and occupy the        exclusive jurisdiction rests in the federal government. So
reservation, or by the United States retroceding its             far from there being any contest as to jurisdiction
exclusive jurisdiction to the state". Nor is Standard Oil        between the two sovereign powers, the record discloses
Co. v. California, 291 U.S. 242 [54 Sup. Ct. 381, 78 L.          that they are working in harmony and accord, each
Ed. 775], in conflict. There the tax on gasoline (Stats.         exercising the field for which it is the [***17] better
                                                                                                                       Page 8
                                        10 Cal. 2d 758, *767; 76 P.2d 1184, **1189;
                                                1938 Cal. LEXIS 256, ***17

equipped and each, at the same time, recognizing the             reservation to the state of the general taxing power
field of the other. The federal government, therefore,           without any exceptions other than that necessarily arising
cannot possibly be prejudiced by the result of this              from the ownership of the land and property by the
action."                                                         United States government. There is no inconsistency
                                                                 created by the express inclusion in the reserved power of
     So, in line with the applicable principle, the reserved     the "right to fix and collect license fees for fishing in said
power must be construed most strongly in favor of the            parks". Because of the nature of the privilege specially
state in order to preserve its jurisdiction as to matters with   singled out, its express inclusion does not necessarily
which it is directly and immediately concerned, and as to        indicate that the taxing of all other privileges was
which jurisdiction has not been ceded or granted to the          intended to be excluded from the reservation. On the
federal government. We find support also in Nikis v.             contrary it would seem that it was deemed necessary
Commonwealth, 144 Va. 618 [131 S.E. 236, 46 A. L. R.            expressly to refer to that subject-matter, as otherwise it
219], where it was said: [HN10] "That the right of a state       might be claimed that the cession carried the exclusive
to tax the property of others located upon lands owned by        supervision and regulation of fishing privileges in the
the United States, although it cannot tax such lands, will       streams included in the ceded areas.
not be held to be abandoned by the state, except for the
most compelling reasons, is quite manifest from several                (6) There is no merit in the contention that the
decisions of the Supreme Court of the United States." It         privilege of making sales in the ceded areas emanate
may be noted that it was there held that to be accorded          solely from the national government. [***20] The mere
immunity from [**1190] state taxation it must be shown           fact that the taxing power for all general purposes has
not only that the land was acquired by the United States,        been reserved by the state with the consent of congress is
but also that it was acquired and used for one of the            a recognition by the latter that the granting of such
purposes indicated in article I, section 8, clause [***18]       privileges emanates as well from the state.
17 of the Constitution.
                                                                      The main contentions urged to establish the
     A consideration of the taxing statutes shows that the       invalidity of the reserved taxing power as here exercised
tax is imposed respectively "upon retailers" (sec. 3, Stats.     by the state are answered adversely to the claims in the
1933, p. 2599, Stats. 1935, p. 1252) and upon                    recent case of Rainier Nat. Park Co. v. Martin, 18 Fed.
"distributors" of gasoline, and it has so been held. ( Roth      Supp. 481 (affirmed 302 U.S. 661 [58 Sup. Ct. 478, 82 L.
Drug, Inc., v. Johnson, supra, p. 736; People v. Herbert's       Ed.     ]). There [*769] the power, exercised under a
of Los Angeles, Inc., 3 Cal. App. (2d) 482 [39 Pac. (2d)         similar reservation, to impose on and collect a state retail
829]; People v. Ventura Refining Co., supra, at page 294;        sales tax from the Rainier National Park Company was
Rio Grande Oil Co. v. Los [*768] Angeles, 6 Cal. App.            held to be valid and was sustained.
(2d) 200, 201 [44 Pac. (2d) 451].) This language in the
statutes will not, of course, be construed to disturb the             In Yosemite Park & Curry Co. v. Collins, supra, it
classification of taxable subjects -- persons, property and      was held that the state of California had at one time ceded
business ( State Tax on Foreign-Held Bonds, 82 U.S. (15          exclusive jurisdiction of Yosemite Valley to the United
Wall.) 300, 319 [21 L. Ed. 179]; 26 Rawle C. L., p. 34; 1           States, that the subsequent legislation attempting to
Cooley on Taxation, p. 172.) Neither does it mean that           reserve the taxing power was ineffective, and therefore
the excise taxes imposed should be considered as a tax           that the state had no reserved power to enforce in
"on persons" as a subject of taxation. The language of           Yosemite Valley the Alcoholic Beverage Control Act
the statutes and the decisions still leaves the sales and        (1935 Stats., chap. 330). That act was there declared to
gasoline taxes in the category of "excises" or tax on            be a complete liquor control measure, [***21] including
business. Nevertheless, as stated in volume 1, Cooley on         provisions for license fees and excise taxes. Relative to
Taxation, pages 68, 69, taxes are contributions from             the balance of Yosemite park, the court held that the
persons or [***19] property, and "whether a tax be               reservation of the taxing power did not include the power
considered as imposed on the person or on the property, it       to impose a license tax. For the reasons hereinabove
is clear that all taxes are imposed either upon the one or       stated, we are led to disagree with those conclusions of
the other". It seems obvious that the language of the            the court in that case. Nor do we perceive that they were
reservation of the taxing power contemplated the                 necessary to its decision. The result in that case, if it be
                                                                                                                    Page 9
                                       10 Cal. 2d 758, *769; 76 P.2d 1184, **1190;
                                               1938 Cal. LEXIS 256, ***21

correct, is adequately supported by the final ground stated     power which is beyond the jurisdiction of the state, the
by the court, as follows: "While a revenue measure does         [***22] measure cannot bestow upon California the
not preclude the possibility of a clash between                 power to collect license taxes from plaintiff for the
sovereignties, it does not invite one as a regulatory           importation and sale of liquors."
measure does. California has ceded the park to the
United States, which has agreed to police it. Now by                 However the exercise of the reserved power by the
reason of the Alcoholic Beverage Control Act, California        imposition of retail sales and gasoline taxes creates no
evidently claims the retention of her police power. Such        interference with the exercise of the jurisdiction acquired
a claim is violative of the police jurisdiction placed in the   by the United States pursuant to the grants herein
hands of the national government, and is void. Since the        involved.
primary purpose of California's tax measure is the
                                                                    The judgment in each case is affirmed.
[**1191] regulation of the intoxicating liquor business;
since such regulation constitutes an exercise of the police
                                                                                                                     Page 1

                    THE PIQUA BRANCH OF THE STATE BANK OF OHIO, PLAINTIFF IN
                      ERROR, v. JACOB KNOOP, TREASURER OF MIAMI COUNTY.

                                   SUPREME COURT OF THE UNITED STATES

                           57 U.S. 369; 14 L. Ed. 977; 1850 U.S. LEXIS 1558; 16 HOW 369

                                     May 24, 1854, Decided; December 1850 Term

PRIOR HISTORY:            [***1] THIS case was brought          year 1851, other or greater than six per cent. on its
up from the Supreme Court of Ohio, by a writ of error,          dividends or profits, as provided by the sixtieth section of
issued under the twenty-fifth section of the Judiciary Act.     the said act of February 24th, 1845. And it is further
                                                                certified, that there was drawn in question in said cause
     In the record there was the following certificate from     the validity of the said statute of the State of Ohio, passed
the Supreme Court of Ohio, which explains the nature of         March 21st, 1851, herein before mentioned, the said
the case:                                                       defendant claiming that it was a violation of the said
                                                                alleged agreement and contract between the State of Ohio
     And thereupon, on motion of the defendant, it is           and the said defendant, and on that account repugnant to
hereby certified by the court, and ordered to be made a         the Constitution of the United States, and void; but the
part of the record herein, that in the above entitled cause     court here held and decided: 1st. That the sixtieth section
the petitioner claimed to collect, and prayed the aid of the    of said act of February 24th, 1845, to incorporate the
court to enforce the payment of, the tax in the petition        State Bank of Ohio, and other banking companies,
mentioned, under an act of the General Assembly of the          contains [***3] no pledge or contract on the part of the
State of Ohio, passed March 21st, 1851, entitled "An act        State not to alter or change the mode or amount of
to tax banks, and bank and other stocks, the same as other      taxation therein specified; but the taxing power of the
property is now taxable by the laws of this State," a           General Assembly of the State of Ohio over the property
certified copy of which is filed as an exhibit in this cause,   of companies formed under that act is the same as over
marked "A." The said defendant, by way of defence to            the property of individuals. And, 2d. That whether the
the prayer of said petitioner, &c., set up on act, entitled     franchises of such companies may be revoked, changed,
"An act to incorporate the State Bank of Ohio, and other        or modified, or not, the act of March 21st, 1851, upon
banking companies," enacted by the General Assembly of          any construction, does not impair any right recurred to
the State of Ohio, February 24th, 1845, a certified copy        them by the act of 1845, and is a constitutional and valid
of which is filed as an exhibit in this cause, marked "B;"      law. And it is further certified, that the decision of the
under which act the defendants [***2] organized, and            question as to the validity of the said statute of 1851, was
became and was a branch of the State Bank of Ohio,              necessary to the decision of said cause, and the decision
exercising the franchises of such bank prior to and ever        in the premises was in favor of the validity of said statute.
since the year 1847; and that the defendant claimed that,       The court do further certify, that this court is the highest
by virtue of the operation of said act last mentioned, the      court of law and equity of the State of Ohio in which a
State of Ohio had entered into a binding contract and           decision of this suit could be held. And it is ordered, that
obligation, whereby the State of Ohio had agreed and            said exhibits A and B be made parts of the complete
bound herself not to impose any tax upon the defendant,         record in this cause.
and not to require the defendant to pay any tax for the
                                                                                                                    Page 2
                                          57 U.S. 369, *; 14 L. Ed. 977, **;
                                      1850 U.S. LEXIS 1558, ***3; 16 HOW 369

    The contends of exhibits A and B are stated in the        preceding, declaring, surrender
opinion of the court.
                                                              LexisNexis(R) Headnotes
CASE SUMMARY:

PROCEDURAL POSTURE: Plaintiff in error bank
sought review of a decision of the Supreme Court of Ohio      Banking Law > Bank Activities > Expenses & Income
that entered judgment in favor of defendant in error          Banking Law > Bank Expansion > Branch Banking >
county treasurer for a tax assessed against plaintiff in      General Overview
error, pursuant to an act of the General Assembly, passed     [HN1] The 16th section of the act of February 24, 1845
March 21, 1851.                                               provides that each banking company under the act, or
                                                              accepting thereof, and complying with its provisions,
OVERVIEW: Plaintiff in error bank was incorporated            shall, semiannually, on the days designated for declaring
under the act of February 24, 1845, in which any number       dividends, set off to the State of Ohio 6 percent on the
of individuals were entitled to form banking associations     profits, deducting therefrom the expenses and ascertained
to carry on the business of banking in the State of Ohio.     losses of the company for the six months next preceding,
Section 16 of the act provided that each bank would pay       which sum or amount so set off shall be in lieu of all
six percent, semi-annually, to the state on the dividends     taxes to which the company, or the stockholders therein,
they declared. Defendant in error county treasurer sought     would otherwise be subject. The sum so set off to be paid
to enforce the provisions of the tax law enacted in the       to the treasurer, on the order of the auditor of State.
1851, which plaintiff in error contended was in violation
of its charter. The state supreme court affirmed the          Banking Law > Bank Activities > Expenses & Income
assessment of the taxes, and plaintiff in error obtained      [HN2] The taxes required by the act of February 24,
review by writ of error in the United States Supreme          1845, are to be in lieu of other taxes -- that is, to take the
Court. The Court reversed the lower court's decision          place of other taxes.
when the Court found that the charter between the state
and plaintiff constituted a contract between the parties.
Further, under a provision of the contract, plaintiff was     Governments > Legislation > Expirations, Repeals &
only required to pay the six percent semi-annually to the     Suspensions
State in lieu of other taxes. The act of March 21, 1851,      [HN3] In Ohio, the repeal of an act shall not revive any
under which the higher tax was assessed against plaintiff     act which had been previously repealed.
in error, impaired the obligation of the contract and was
therefore declared void.
                                                              Banking Law > Bank Expansion > Bank Creations &
                                                              Reorganizations
OUTCOME: The Court reversed the lower court's
                                                              [HN4] Every valuable privilege given by the charter, and
decision that affirmed the assessment of the tax against
                                                              which conduced to an acceptance of it and an
plaintiff in error bank when the Court found that
                                                              organization under it, is a contract which cannot be
plaintiff's charter, which provided that 6 percent would be
                                                              changed by the legislature, where the power to do so is
paid semi-annually on dividends made in lieu of all taxes,
                                                              not reserved in the charter. The rate of discount, the
was a contract that was binding on the State and on
                                                              duration of the charter, the specific tax agreed to be paid,
plaintiff. The tax law passed in 1851 impaired the
                                                              and other provisions essentially connected with the
obligation of the contract and was therefore void.
                                                              franchise, and necessary to the business of the bank,
                                                              cannot, without its consent, become a subject for
CORE TERMS: taxation, charter, banking, stock,
                                                              legislative action.
stockholder, dividend, taxed, sovereignty, exemption,
sovereign power, franchise, exempt, general assembly,
sovereign, compact, repeal, binding, dollar, bridge,          Governments > Local Governments > Charters
repealed, taxing power, declare, presumed, hundred            [HN5] A municipal corporation, in which is vested some
dollars', power of taxation, designated, succeeding,          portion of the administration of the government, may be
                                                                                                                  Page 3
                                          57 U.S. 369, *; 14 L. Ed. 977, **;
                                      1850 U.S. LEXIS 1558, ***3; 16 HOW 369

changed at the will of the legislature. Such is a public      General Overview
corporation, used for public purposes. But a bank, where      [HN10] Any ambiguity in the terms of the contract must
the stock is owned by individuals, is a private               operate against the adventurers, and in favor of the
corporation.                                                  public.

Business & Corporate Law > Corporations > Governing           Contracts Law > Formation > Capacity of Parties >
Documents & Procedures > Articles of Incorporation &          General Overview
Bylaws > General Overview                                     [HN11] A state has power to make a contract which shall
Business & Corporate Law > Nonprofit Corporations &           bind it in future.
Organizations > General Overview
[HN6] Because the action of a corporation may be
                                                              Business & Corporate Law > Corporations > Governing
beneficial to the public does not mean that it is a public
                                                              Documents & Procedures > Articles of Incorporation &
corporation. This may be said of all corporations whose
                                                              Bylaws > Amendments to Articles of Incorporation
objects are the administration of charities. But these are
                                                              Contracts Law > Formation > Capacity of Parties >
not public, though incorporated by the legislature, unless
                                                              General Overview
their funds belong to the government. Where the property
                                                              [HN12] A charter is a contract, to the validity of which
of a corporation is private, it gives the same character to
                                                              the consent of both parties is essential, and therefore it
the institution, and to this there is no exception.
                                                              cannot be altered or added to without consent.

Business & Corporate Law > Corporations > Governing
                                                              Banking Law > Bank Activities > Expenses & Income
Documents & Procedures > Articles of Incorporation &
                                                              Business & Corporate Law > Corporations > Governing
Bylaws > General Overview
                                                              Documents & Procedures > Articles of Incorporation &
[HN7] The charter of a private corporation is in the
                                                              Bylaws > General Overview
nature of a contract between the state and the corporation.
                                                              [HN13] A state, in granting privileges to a bank, with a
                                                              view of affording a sound currency, or of advancing any
Governments > Legislation > Expirations, Repeals &            policy connected with the public interest, exercises its
Suspensions                                                   sovereignty, and for a public purpose, of which it is the
Governments > Legislation > Types of Statutes                 exclusive judge. Under such circumstances, a contract
[HN8] One legislature is competent to repeal any act          made for a specific tax is binding. This tax continues,
which a former legislature was competent to pass, and         although all other banks should be exempted from
one legislature cannot abridge the powers of a succeeding     taxation. Having the power to make the contract, and
legislature. The correctness of this principle, so far as     rights becoming vested under it, it can no more be
respects general legislation, can never be controverted.      disregarded nor set aside by a subsequent legislature, than
But if an act be done under a law, a succeeding               a grant for land.
legislature cannot undo it. When, then, a law is in its
nature a contract, a repeal of the law cannot divest those
                                                              Contracts Law > Formation > Capacity of Parties >
rights; and the act of annulling them, if legitimate, is
                                                              General Overview
rendered so by a power applicable to the case of every
                                                              [HN14] A sovereign state may make a binding contract
individual in the community.
                                                              with one of its citizens, and, in the exercise of its
                                                              sovereignty, repudiate it.
Governments > Legislation > Enactment
[HN9] No state shall pass any bill of attainder, ex post
                                                              Constitutional Law > Congressional Duties & Powers >
facto law, or law impairing the obligations of contracts. A
                                                              Contracts Clause > General Overview
bill of attainder may affect the life of an individual, or
                                                              [HN15] The United States Supreme Court has power only
may confiscate his property, or may do both.
                                                              to deal with contracts under U.S. Const. art. I, § 10
                                                              whether made by a state or an individual; if such contract
Contracts Law > Defenses > Ambiguity & Mistake >              be impaired by an act of the state such act is void, as the
                                                                                                                    Page 4
                                           57 U.S. 369, *; 14 L. Ed. 977, **;
                                       1850 U.S. LEXIS 1558, ***3; 16 HOW 369

power is prohibited to the state. This is the extent of the    required the officers to make semi-annual dividends, and
Court's jurisdiction.                                          the sixtieth required them to set off six per cent. of such
                                                               dividends for the use of the State, which sum or amount
                                                               so set off should be in lieu of all taxes to which the
Civil Procedure > U.S. Supreme Court Review > State            company, or the stockholders therein, would otherwise be
Court Decisions                                                subject.
[HN16] The rule observed by the United States Supreme
Court to follow the construction of the statute of the state        This was a contract fixing the amount of taxation,
by its supreme court is strongly urged.                        and not a law prescribing a rule of taxation until changed
                                                               by the legislature.
LAWYERS' EDITION HEADNOTES:
                                                                    In 1851, an act was passed entitled, "An act to tax
                                                               banks, and bank and other stocks; the same as property is
     Municipal corporations -- private -- difference
                                                               now taxable by the laws of this State." The operation of
explained -- General Banking Law of Ohio is contract as
                                                               this law being to increase the tax, the banks were not
to taxes -- obligation of. --
                                                               bound to pay that increase.
    Headnote:
                                                                    A municipal corporation, in which is vested some
     In 1845 the Legislature of Ohio passed a general          portion of the administration of the government, may be
banking law, the fifty-ninth section of which required the     changed at the will of the legislature. But a bank, where
officers to make semi-annual dividends, and the sixtieth       the stock is owned by individuals, is a private
required them to set off six per cent. of such dividends for   corporation. Its charter is a legislative contract, and
the use of the State, which sum or amount so set off           cannot be changed without its assent.
should be in lieu of all taxes to which the company, or the
                                                                    The preceding case upon this subject, examined, and
stockholders therein, would otherwise be subject.
                                                               the case of the Providence Bank v. Biling, 4 Peters, 561,
     This was a contract fixing the amount of taxation,        explained.
and not a law prescribing a rule of taxation, until changed
                                                               COUNSEL: The case was argued by Mr. Stanberry and
by the Legislature.
                                                               Mr. Veriton, for the plaintiff in [***5] error, and by Mr.
     In 1851 an Act was passed entitled, "An Act to tax        Spalding and Mr. Pugh, for the defendant in error.
banks, and bank and other stocks, the same as property is
                                                               The points made by the counsel for the plaintiff in error
now taxable by the laws of this State. The operation of
                                                               were the following:
this law being to increase the tax, the banks were not
bound to pay that increase.                                    1st. That the Piqua branch of the State Bank of Ohio is a
     A municipal corporation, in which is vested some          private corporation.
portion of the administration of the government, may be        The principle governing this point is, that if the whole
changed at the will of the Legislature. But a bank, where      interest of corporation do not belong to the public, it is a
the stock is owned by individuals, is a private                private corporation. Angell & Ames on Corporations, §§
corporation. Its charter is a legislative contract, and        31 to 36 inclusive; Dartmouth College v. Woodward, 4
cannot be changed without its assent.                          Wheat. 636; Baily v. Mayor of New York, 3 Hill, 531;
                                                               Bank United States v. Planters' Bank of Georgia, 9
     The preceding case upon this subject, examined, and
                                                               Wheat. 907; Miners' Bank v. United States, 1 Greene,
the case of The Providence Bank v. Billings, 4 Pet. 561,
                                                               553; Bonaparte v. Camden & Amboy R.R. Co. 1 Bald.
explained.
                                                               222.
SYLLABUS
                                                               2d. The act of the 24th of February, A.D. 1845,
    In 1845, the Legislature of Ohio passed a general          providing for the creation of this private corporation,
banking law, the fifty-ninth section [***4] of which           became, by its acceptance, a contract between the State
                                                                                                                  Page 5
                                          57 U.S. 369, *; 14 L. Ed. 977, **;
                                      1850 U.S. LEXIS 1558, ***5; 16 HOW 369

and the corporators, which contract is entitled to the        Cincinnati, 7 Ohio Rep. 125.
protection of that clause of the Constitution of the United
States which prohibits the States from passing any law        In the absence of adjudicated cases to establish the right
impairing the obligation of contracts.                        of the legislature of a State thus to relinquish, commute,
                                                              or limit the amount of taxation, it might and ought to be
Angell & Ames on Corp. §§ 31, 469, 767; Dartmouth             inferred from the uniformity and extent of its exercise by
College v. Woodward, 4 Wheat. 636; Gordon v. Appeal           the States from their earliest history to the present time.
Tax Court, 3 How. 145; West River Bridge v. Dix, 6
How. [***6] 531; Planters' Bank of Mississippi v.              [***8] In the case of Briscoe v. Bank of Kentucky, 11
Sharp. 6 How. 326-7; East Hartford v. Hartford Bridge         Pet. 318, the court say, "that a uniform course of action
Company, 17 Conn. 93; New Jersey v. Wilson, 7 Cranch,         involving the right to the exercise of an important power
164; Flether v. Peck, 6 Cranch, 88; Terrett v. Taylor, 9      by the State governments for half a century, and this
Cranch, 43; Town of Pawlett v. Clarke, 9 Cranch, 292;         almost without question, is no unsatisfactory evidence
Wales v. Stetson, 2 Mass. 143; Enfield Toll Bridge v.         that the power is rightly exercised. Cin., Wil. &
Conn. River Co. 7 Conn. R. 53; McLoren v. Pennington,         Zanesville R.R. Co. v. Com'rs. Clinton Co. 21 Ohio Rep.
1 Paige, Ch. R. 107; 2 Kent's Com. 305, 306; Greene v.        95.
Biddle, 8 Wheat. 1; University of Maryland v. Williams,
                                                              In accomplishing the lawful purposes of legislation, the
9 Gill. & Johns. 402; Bayne v. Baldwin, 3 Smedes &
                                                              choice of means adapted the the end must be left
Marsh. (Miss.) R. 661; Aberdeen Academy v. Mayor of
                                                              exclusively to the discretion of the legislature, provided
Aberdeen, 13 Smedes & Marsh. R. 645; Young v.
                                                              the means used are not prohibited by the Constitution.
Harrison, 6 Georgia R. 130; Coles v. Madison county,
                                                              Cin., Wil. & Zanesville R.R. Co. v. Com'rs. Clinton Co.,
Breese (Ill.) Rep. 120; Bush v. Shipman, 4 Scam. (Ill). R.
                                                              21 Ohio Rep. 95.
190; The People v. Marshall, 1 Gilman (Ill.) R. 672; state
v. Hayward, 3 Richardson (S.C.) R. 389; Baily v.              4th. The plaintiff in error claims that by the sixtieth
Railroad Co. 4 Harrington (Del) R. 389; LeClercq v.           section of the act of 24th of February, 1845, the State, by
Gallipolis, 7 Ohio, 217; State v. Com'l Bank of               contract, (and not by legislative command) fixed and
Cincinnati, 7 Ohio, 125; State v. Wash. Soc. Library, 9       agreed upon the time, manner, and amount of taxation to
Ohio, 96; Michigan Bank v. Hastings, 1 Doug. (Mich.) R.       be imposed upon and paid by said bank, which contract is
225; Bank of Pennsylvania v. Commonwealth, 19                 mutually binding on the parties, and cannot be changed or
Pennsylvania Rep. 151; Hardy v. Waltham, 9 Pick. 108.         abrogated by either without the consent of the other.
3d. The right of a State to tax the property [***7] of a      This last proposition involves an into pretation of so
private corporation (such as a bank) or to tax any            much of said law as relates to the subject of taxation in
specified property of private persons may, by legislative     two aspects:
contract, be wholly relinquished, commuted, or limited to
an agreed amount, and no State law can impair the              [***9] 1. Whether the sixtieth section be a contract on
validity of such contract.                                    the subject of taxation, as claimed by the plaintiff in
                                                              error, or a law dictating and commanding the amount of
Angell & Ames on Corp. §§ 469-472 inclusive; Gordon           taxation, as claimed by the defendant in error.
v. Appeal Tax Court, 3 How. 133; Gordon's Ex'rs v.
Baltimore, 5 Gill, 231; Bank of Cape Fear v. Edwards, 5       2. If it be a contract, whether it was temporary and
Iredell, 516; Bank of Cape Fear v. Deming, 7 Iredell,         depending on the will of the legislature, or permanent,
516; Union Bank of Tennessee v. State, 9 Yerger, 490,         and to remain in force during the term of the charter.
State of New Jersey v. Bury, 2 Harris, 84; Gordon v.
State, 1 Zabriskie, 527; Johnson v. Commonwealth, 7           The court lay down the doctrine in Charles River Bridge
Dana, 342; Bank of Illinois v. The People, 4 Scam. 304;       v. Warren Bridge, 11 Pet. 545, that in the construction of
Williams v. Union Bank of Tennessee, 2 Hump. 339;             statutes creating corporations, the rules of the common
Atwater v. Woodbridge,6 Conn. 223; Osborne v.                 law must govern in this country; and in the same opinion,
Humphrey, 7 Conn. 335; East Hartford v. Hartford              at page 548, the court say, that the rules of construing a
Bridge Company, 17 Conn. 93; State v. Com'l Bank of           statutes which surrenders the taxing power, are the same
                                                                                                                        Page 6
                                              57 U.S. 369, *; 14 L. Ed. 977, **;
                                          1850 U.S. LEXIS 1558, ***9; 16 HOW 369

as those that apply to any other affecting the public               follows:
interest.
                                                                    "That it shall be the duty of the president and cashier of
In the case of the Sutton Hospital, Lord Coke lays down             each and every banking institution incorporated by the
the rule of the common law in the construction of charters          laws of this State, and having the right to issue bills or
in the following terms, namely, "That the best exposition           notes for circulation, at the time for listing personal
of the King's charter is upon the consideration of the              property under the laws of this State, to list the capital
whole charter to expound the charter by the charter itself,         stock of such banking institution, under oath, at its true
every material part thereof being explained according to            value in money, and return the same, with the amount of
the true and genuine sense, which is the best method."              surplus and contingent fund belonging to such banking
The rule [***10] of interpretation is laid down by the              institution, to the assessor of the township or ward in
Supreme Court in Charles River Bridge v. Warren                     which such banking institution is located; and the amount
Bridge, 11 Pet. 549. Also, by Judge Story, in his                   so returned shall be placed on the grand duplicate of the
dissenting opinion, at page 600. Also, in case of                   proper county, (and upon the city duplicate for city taxes,
Richmond Railroad Co. v. Louisa Railroad Company, 13                [***12] in cases where such city tax does not go upon
How. 81.                                                            the grand grand duplicate, but is collected by the city
                                                                    officers,) and taxed for the same purposes and to the
Where a right is not given in express words by the                  same extent that personal property is or may be required
charter, it may be deduced by interpretation, if it is              to be taxed in the place where such bank is located; and
clearly inferrible from some of its provisions.                     such tax shall be collected and paid over in the same
Stourbridge Canal v. Wheely, 2 Barn. & Adol. 792;                   manner that taxes on other personal property are required
Union Bank of Tennessee v. The State, 9 Yer. 495.                  by law to be collected and paid over: Provided, however,
                                                                    that the capital stock of any bank shall not returned or
In adopting the rule of expounding the charter by the               taxed for a less amount than its capital stock paid in."
charter itself, the court is referred to all that part of the act
of incorporation which is subsequent to the forty-fifth             The single question presented in this case is the
section.                                                            following:

In construing statutes making grants for private                    Has the Legislature of Ohio, in the enactment last recited,
enterprise, it is a settled principle,                              impaired the obligation of a contract, within the meaning
                                                                    of the prohibition contained in the tenth section of the
1st. That all grants for purposes of this sort are to be            first article of the Constitution of the United States?
construed as contracts between the government and the
grantee, and not as mere laws. 11 Pet. 660. Judge Story's           I maintain that it has not; and, in support of my position,
opinion.                                                            respectfully advance, for the consideration of the court,
                                                                    the following propositions:
2d. That they are to receive a reasonable construction.
And if from the express words of the act, or just and plain         1st. The act of the General Assembly of the State of
inference from the terms used, the intent can be                    Ohio, entitled "An act to incorporate the State Bank of
satisfactorily made out, it is to prevail and be carried into       Ohio, and other banking companies," passed February 24,
effect. [***11] But if the language be ambiguous, or the            1845, is not a contract in the sense [***13] in which that
intent cannot be satisfactorily made out from the terms             term is used in the Constitution.
used, then the act is to be taken most strongly against the
grantee and most beneficially to the public. 11 Pet. 600.           It is a system of rules and regulations prescribed by the
                                                                    lawmaking power in the State for the government of all
The following points made on behalf of the defendant in             the citizens of Ohio who may choose, within certain
error, are copied from the brief of Ms. Spalding.                   limits, to embark in the business of banking. It is as
                                                                    mandatory in its character as any law upon the statute
The first section of the "act to tax banks, and bank and            book, and some of its mandates are enforced under the
other stocks, the same as other property is now taxable by          severest penalties known to the law. See § 67.
the laws of this State," passed March 21, 1851, reads as
                                                                                                                  Page 7
                                          57 U.S. 369, *; 14 L. Ed. 977, **;
                                     1850 U.S. LEXIS 1558, ***13; 16 HOW 369

It is susceptible of amendment, and it has been amended,     5th. The Supreme Court of Ohio has done nothing more
without objection, in its most important features. 46        than give a construction to a statute law of the State, (the
Ohio Laws, 92; 48 Ib. 35. At the time of its enactment,      act of 1845), that is, to say the least, somewhat
February 24, 1845, there was a general law in force in       ambiguous.
Ohio, providing that all subsequent corporation, whether
possessing banking powers or not, were to hold their         By this construction, the act of March 21, 1851, does no
charters subject to alteration, suspension, and repeal, in   violence to the Constitution of the United States. This
the discretion of the legislature. Ohio Laws, vol. 40, p.    court is in the habit of adopting the interpretation given
70. The bank of Toledo v. The City of Toledo, 1 Ohio         by the State courts to the statutes of their own State.
State Reports, 622, 696.                                     Surely it will not, in this instance, undertake to give a
                                                             construction counter to that of the State court, when that
2d. "With the sole exception of duties on imports and        counter construction will bring subsequent legislation of
exports, the individual States possess an independent and    the State into conflict with the Federal Constitution. 10
uncontrollable authority to raise their own revenues for     Wheat. 159; 11 Ib. 361; 4 Pet. 137; 6 Ib. 291; 16 Ib. 18; 7
the supply of their own wants; and any attempt on the        How. 40, 219, 818; 13 Ib. 271; 14 Ib. 78, 79.
part of the [***14] national government to abridge them
in the exercise of it would be a violent assumption of       Upon the 3d point [***16] the counsel cited these further
power unwarranted by any article or clause of its            authorities: 16 Pet. 281; 8 How. 584; 10 Ib. 402; 4
Constitution." Alexander Hamilton, No. 32, Federalist, p.    Comstock, 423; 2 Denio, 474; 5 Cow. 538; 7 Ib. 585; 1
140.                                                         El. & Black, 858.

3d. The taxing power is of such vital importance, and is     And read the following extract from Local Laws of Ohio,
so essentially necessary to the very existence of a State    vol. 43, p. 51:
government, that its relinquishment cannot be made the
                                                             An act to incorporate the Milan and Richland Plank Road
subject-matter of a binding contract between the
                                                             Company, passed January 31, 1845:
legislature and individuals or corporations. It is a
prerogative of sovereignty that must necessity always be     SEC. 9. "That in consideration of the expenses which
exerted according to present exigencies, and                 said company will necessarily incur in constructing said
consequently must of necessity continue to be held by        road, with the appurtenances thereof, and in keeping the
each succeeding legislature, undiminished and                same in repair, the said road and its appurtenances,
unimpaired. The Mechanics and Traders Bank v. Henry          together with all tolls and profits arising therefrom, are
Debolt, 1 Ohio State Rep. 591; Brewster v. Hough, 10         hereby vested in said corporation, and the same shall be
New Hamp. Rep. 138; The Providence Bank v. Billings,         forever exempt from any tax, imposition, or assessment
4 Pet. 541; The Proprietors of the Charles River Bridge v.   whatever."
The Proprietors of the Warren Bridge, 11 Pet. Rep. 420,
and cases therein cited; The West River Bridge Company       An act to incorporate the Huron Plank Road Company,
v. Dix, 6 How. Rep. 507; The Richmond Railroad               passed February 19, 1845. Local Laws, vol. 43d. pp.
Company v. The Louisa Railroad Company, 13 Howard,           111, 114. The ninth section is copied exactly from the
71.                                                          ninth section of the Miland and Richland charter.

4th. The sixtieth section of the "Act to incorporate the     On the 4th point: 8 How. 581; 9 Ib. 185; 19 Ohio Rep.
State Bank of Ohio, and other [***15] banking                110; 1 Ohio State Rep. 313; 4 Wheat. 235; 4. Cranch,
companies," passed February 24, 1845, provides only a        397; 7 How. 279; 10 Ib. 396.
measure of taxation for the time being, and does not
relinquish the right to increase the rate at the future      On the 5th point: 5 How. 342.
exigencies of the State may require. Debolt v. The Ohio
Life Insurance and Trust Company, 1 Ohio State Rep.          OPINION BY: McLEAN
576; 10 Penn. State Rep. 442; 10 New Hamp. Rep. 138;
13 How. Rep. 71; 9 Georgia Rep. 517; 2 Barn. & Adol.         OPINION
793; 3 Pet. Rep. 289; Ib. 168, 514, 11 Ib. 544.
                                                                  [*376] [**980] Mr. Justice McLEAN delivered
                                                                                                                     Page 8
                                         57 U.S. 369, *376; 14 L. Ed. 977, **980;
                                       1850 U.S. LEXIS 1558, ***16; 16 HOW 369

the opinion of the [***17] court.                               The sum so set off to be paid to the treasurer, on the order
                                                                of the auditor of State.
     This is a writ of error to the Supreme Court of the
State of Ohio.                                                        The Piqua Branch Bank was organized in the year
                                                                1847, [***19] under the above at; and still continues to
     The proceeding was instituted to reverse a decree of       carry on the business of banking, and continued to set off
that court, entered in behalf of Jacob Knoop, treasurer,        and pay the semiannual amount as required; and on the
against the Piqua Branch of the State Bank of Ohio, for a       first Mondays of May and November, in 1851, there was
tax of twelve hundred and sixty-six dollars and                 set off to the State six per cent. of the profits, deducting
sixty-three cents, assessed against the said branch bank        expenses and ascertained losses for the six months next
for the year 1851.                                              preceding each of those days, and the cashier did, within
                                                                ten days thereafter, inform the auditor of State of the
     By the act of 1845, under which this bank was              amount so set off on the 15th of November, 1851, the
incorporated, any number of individuals, not less than          same amounting to $862.50; which sum was paid to the
five, were authorized to form banking associations to           treasurer of State, on the order of the auditor; which
carry on the business of banking in the State of Ohio, at a     payment the bank claims was in lieu of all taxes to which
place designated; the aggregate amount of capital stock in      the company or its stockholders were subject for the year
all the companies not to exceed six millions one hundred        1851.
and fifty thousand dollars.
                                                                     On the 21st of March, 1851, an act was passed
     In the fifty-first section it is provided that every       entitled "An act to tax banks and bank and other stocks,
banking company authorized under the act to carry on the        the same as property is now taxable by the laws of the
business of banking whether as a branch of the State            State."
Bank of Ohio, or as an independent banking association,
"shall be held and adjudged to be a body corporate, with             This act provides that the capital stock of every
succession, until the 1st of May, [*377] 1866; and              banking company incorporated by the laws of the State,
thereafter until its affairs shall be closed." It was made      and having the right to issue bills or notes for circulation,
subject to the restrictions of the act.                         shall be listed at its true value in money, with the amount
                                                                of the surplus and contingent fund belonging to such
      The fifty-ninth section requires "the [***18]             bank; and that the amount [***20] of such capital stock,
directors of each banking company, semiannually, on the         surplus, and contingent fund, should be taxed for the
first Mondays of May and November, to declare a                 same purposes and to the same extent that personal
dividend of so much of the net profits of the company as        property was or might be required to be taxed in the place
they shall judge expedient; and on each dividend day the        [*378] where such bank is located; and that such tax
cashier shall make out and verify by oath, a full, clear,       should be collected and paid over in [**981] the same
and accurate statement of the condition of the company          manner that taxes on other personal property are required
as it shall be on that day, after declaring the dividend, and   by law to be collected and paid over.
similar statements shall also be made on the first
Mondays of February and August in each years." This                  In pursuance of this act there was assessed, for the
statement is required to be transmitted to the auditor of       year 1851, on the capital stock, contingent and surplus
State.                                                          fund of the Piqua Bank, a tax amounting to the sum of
                                                                twelve hundred and sixty-six dollars and sixty-three
     [HN1] The sixtieth section provides that each              cents. The bank refused to pay this tax on the ground that
banking company under the act, or accepting thereof, and        it was in violation of its charter. Suit was brought by the
complying with its provisions, shall, semiannually, on the      State against the bank for this tax. The defence set up by
days designated for declaring dividends, set off to the         the bank was, that the tax imposed was in violation of its
State six per cent. on the profits, deducting therefrom the     charter, which fixed the rate of taxation at six per cent. on
expenses and ascertained losses of the company for the          its dividends, deducting expenses and losses; but the
six months next preceding, which sum or amount so set           Supreme Court of the State sustained the act of 1851,
off shall be in lieu of all taxes to which the company, or      against the provision of the charter by which, it is
the stockholders therein, would otherwise be subject.           insisted, the contract in the charter was impaired.
                                                                                                                     Page 9
                                         57 U.S. 369, *378; 14 L. Ed. 977, **981;
                                       1850 U.S. LEXIS 1558, ***20; 16 HOW 369

    We will first consider whether the specific mode of         there? [***23] We think it should be regarded as a law
taxation, provided [***21] in the sixtieth section of the       prescribing a rule of taxation, until changed, and not a
charter, is a contract.                                         contract stipulating against any change: a legislative
                                                                command and not a legislative compact with these
     The operative words are, that the bank shall,              institutions." And the court further say, [HN2] "the taxes
"semiannually on the days designated in the fifty-ninth         required by this act are to be in lieu of other taxes -- that
section for declaring dividends, set off to the State six per   is, to take the place of other taxes. What other taxes?
cent. on the profits, deducting therefrom the expenses and      The answer is, such as the banks or the stockholders
ascertained losses of the company for the six months next       'would otherwise be subject to pay. The taxes to which
preceding, which sum or amount so set off shall be in lieu      they would be otherwise subject were prescribed by
of all taxes to which such company, or the stockholders         existing laws, and this, in effect, operated as a repeal of
thereof, on account of stock owned therein, would               them, so far as these institutions were concerned.'"
otherwise be subject."
                                                                     With great respect, it may be suggested there was no
     This sentence is so explicit, that it would seem to be     general tax law existing, as supposed by the court, under
susceptible of but one construction. There is not one           which the banks chartered by the act of 1845 could have
word of doubtful meaning when taken singly, or as it            been taxed, and on which the above provision could, "in
stands connected with the sentence in which it is used.         effect, operate to repeal."
Nothing is left to inference. The time, the amount to be
set off, the means of ascertaining it, to whom it is to be          The general tax law of the 12th of March, 1831,
paid, and the object of the payment, are so clearly stated,     which raised the tax to five per cent. on dividends, and
that no one who reads the provision can fail to understand      which operated on all the banks of Ohio, except the
it. The payment was to be in lieu of all taxes to which the     "Commercial Bank of Cincinnati," was repealed by the
company or stockholders would otherwise be subject.             small note act of 1836, and that could operate only on
This is the full measure of taxation on the bank. It is the     banks doing business at the time [***24] of its passage.
place of any other tax which, had it not [***22] been for
this stipulation, might have been imposed on the                     The act of the 13th of March, 1838, repealed the act
company or stockholder.                                         of 1836, so far "as it restricts or prohibits the issuing and
                                                                circulation of small bills." The act of 1836 authorized the
     This construction, I can say, was given to the act by      treasurer of State to draw upon the banks for the amount
the executive authorities of Ohio, by those who were            of twenty per cent. upon their dividends, as their
interested in the bank, and generally by the public, from       proportion of the State tax; and provided that if any bank
the time the bank was organized down to the tax law of          should relinquish its charter privilege of issuing bills of
1851.                                                           less denomination than three and five dollars, the tax
                                                                should be reduced to five per cent. upon its dividends. As
     In the case of Debolt v. The Ohio Insurance and            the prohibition of circulating small notes was repealed,
Trust Company, 1 Ohio Rep. 563, new series, the                 the tax necessarily fell. Neither the twenty nor the five
Supreme Court, in considering the 60th section now              per cent. could be exacted. The five per cent. was a
before us, say: "It must be admitted the section contains       compromise for the twenty; as the twenty was repealed
no language importing a surrender [*379] of the right to        by the repeal of the prohibition of small notes, neither the
alter the taxation prescribed, unless it is to be inferred      one nor the other could be collected.
from the words, 'shall be in lieu of all taxes to which such
company, or the stockholders thereof, on account of stock            But if this were not so, the Bank Act of 1842, which
owned therein, would otherwise be subject;' and it is           imposed [*380] a tax of one half per cent. on the capital
frankly conceded that if these words had occurred in a          stock of the bank, repealed, by its repugnancy, any part of
general law they would not be open to such a                    the act of 1836 which, by construction or otherwise,
construction. If the place where they are found is              could be considered in force. And the act of 1842 was
important, we have already seen this law is general in          repealed by the act of 1845. There is a general act in
many of its provisions, and upon a general subject. Why         [***25] Ohio declaring that [HN3] the repeal of an act
may not this be classed with these provisions, especially       shall not revive any act which had been previously
in view of the fact, that in its nature it properly belongs     repealed. Swan's Stat. 59.
                                                                                                                     Page 10
                                          57 U.S. 369, *380; 14 L. Ed. 977, **981;
                                        1850 U.S. LEXIS 1558, ***25; 16 HOW 369

     If this statement be correct, as it is believed to be, the   he says, may be affirmed of insurance, canal, bridge, and
legislature could not have intended, by the special               turnpike companies. There can be no doubt that these
provision in the sixtieth section, to exempt the bank from        definitions are sound, and are sustained by the settled
tax by the existing law, as no such law existed, but to           principles of law."
exempt from the operation of tax laws subsequently
passed. This is the clear and fair import of the compact,              [HN6] It by no means follows that because the action
which we think would not be rendered doubtful if a tax            of a corporation may be beneficial to the public, therefore
law had existed at the time the act of 1845 was passed.           it is a public corporation. This may be said of all
                                                                  corporations whose objects are the administration of
      The 60th section is not found in a general law, as is       charities. But these are not public, though incorporated
intimated by the Supreme Court of the State. The act of           by the legislature, unless their funds belong to the
1845 is general only in the sense, that all banking               government. Where the property of a corporation is
associations were permitted to organize under it; but the         private it gives the same character to the institution, and
act is as special to each bank as if no other institution         to this there is no exception. Men who are engaged in
were incorporated by it. We suppose this cannot be                banking understand the distinction above stated, and also
controvered by any one. This view [**982] is so clear             that privileges granted in private corporations are not a
in itself that no illustration can make it clearer.               legislative command, but a legislative contract, not liable
                                                                  to be changed.
     [HN4] Every valuable privilege given by the charter,
and which conduced to an acceptance of it and an                       This fact is shown by the following circumstances:
organization under it, is a contract which cannot be              "An act to regulate banking in Ohio," passed the 7th of
changed by the legislature, where the [***26] power to            March, [***28] 1842. The 1st section provided, "that
do so is not reserved in the charter. The rate of discount,       all companies or associations of persons desiring to
the duration of the charter, the specific tax agreed to be        engage in and carry on the business of banking within
paid, and other provisions essentially connected with the         this State, which may hereafter be incorporated, shall be
franchise, and necessary to the business of the bank,             subject to the rules, regulations, limitations, conditions,
cannot, without its consent, become a subject for                 and provisions contained in this act, and such other acts
legislative action.                                               to regulate banking as are now in force, or may hereafter
                                                                  be enacted, in this State."
     [HN5] A municipal corporation, in which is vested
some portion of the administration of the government,                  The 20th section of that act provided that a tax of one
may be changed at the will of the legislature. Such is a          half per cent. per annum on its capital should be paid, and
public corporation, used for public purposes. But a bank,         such other tax upon its capital or circulation as the
where the stock is owned by individuals, is a private             general assembly may hereafter impose. An amendment
corporation. This was not denied or questioned by the             to this act was passed the 21st February, 1843; but the act
counsel in argument, although it has been controverted in         and the amendment remained a dead letter upon the
this case elsewhere. But this court and the courts of the         statute book. No stock was subscribed under them, and
different States, not excepting the Supreme Court of              they were both repealed by the act of 1845, under which
Ohio, have so universally held that banks, where the              nearly three fourths of the banks in Ohio were organized.
stock is owned by individuals, are private corporations,          There act contained the express stipulation that "six per
that no legal fact is susceptible of less doubt. Mr. Justice      cent. on the dividends, after deducting expenses and
Story, in his learned and able remarks in the Dartmouth           losses, should be paid in lieu of all taxes."
College case, says: "A bank created by the government
for its own uses, where the stock is exclusive owned by                This compact was accepted, and on the faith of it
the government is, in the strictest sense, a public               fifty banks were organized, which are still in operation.
corporation."                                                     Up to the year 1851, [***29] I believe, the banks, the
                                                                  profession, and the bench, considered this as a contract,
      [***27] "But a bank whose stock is owned by                 and binding upon the State and the banks. For more than
private persons is a [*381] private corporation, although         thirty-five years this mode of taxing the dividends of
it is erected by the government, and its objects and              banks had been sanctioned in the State of Ohio. With
operations partake of a public nature. The same doctrine,         few exception the banks were so taxed, where any tax on
                                                                                                                    Page 11
                                         57 U.S. 369, *381; 14 L. Ed. 977, **982;
                                       1850 U.S. LEXIS 1558, ***29; 16 HOW 369

them was imposed. In the case of the State of Ohio v.                Can the compact in the 60th section be "regarded as
The Commercial Bank of Cincinnati, 10 Ohio Rep. 535,            a law prescribing a rule of taxation until changed, and not
the Supreme [*382] Court of Ohio say, we take it to be          a contract stipulating against any change; a legislative
well settled, that [HN7] the charter of a private               command, and not a legislative compact with these
corporation is in the nature of a contract between the          institutions?" We cannot but treat with great respect the
State and the corporation. Had there ever been any              language of the highest judicial tribunal of a State, and
doubts upon this subject, those doubts must have been           we would say, that in our opinion it does [*383] not
removed by the decision of the Supreme Court of the             import to be a legislative command nor a rule of taxation
United States, in the case of Woodward v. Dartmouth             until changed, but a contract stipulating against any
College. And the court remark, "the general assembly            change, from the nature of the language used and the
say to such persons as may take the stock, you may enjoy        circumstances under which it was adopted. According to
the privileges of banking, if you will consent to pay to the    our views, no other construction can be given to the
State of Ohio, for this privilege, four per cent. on your       contract, then that the tax of six per cent. on the dividends
dividends, as they shall from time to time be made. The         is in lieu of all [***32] subsequent taxes which might
charter is accepted, the stock is subscribed, and the           otherwise be imposed; in other words, taxes to which the
corporation pays, or is willing to pay, the consideration       company or the stockholders would have been liable, had
stipulated, to wit, [***30] the four per cent. c And the        the specific tax on the dividends on the terms stated not
court say, "here is a contract, specific in its terms, and      been enacted.
easy to be understood." "A contract between the State and
individuals is as obligatory as any other contract. Until a          In the opinion of the Supreme Court of the State, it is
State is lost to all sense of justice and propriety, she will   said, the 60th section, in effect, repealed the existing law
scrupulously abide by her contracts more scrupulously           under which the bank would have been taxed, and that
than she will exact their fulfillment by the opposite           this is the obvious application of the language used; and
contracting party."                                             they add, "that the General Assembly intended only this,
                                                                and did not intend it to operate upon the sovereign power
    This opinion commends itself to the judgment, both          of the State, or to tie up the hands of their successors, we
on account of its sound constitutional views and its            feel fully assured. To suppose the contrary would be to
elevated morality. It was pronounced at December term,          impeach them of gross violation of public duty, if not
1835. That decision was calculated to give confidence to        usurpation of authority."
those who were desirous to make investments in banking
operations, or otherwise, in the State of Ohio.                      So far as regards the effect of the 60th section to
                                                                repeal existing laws, if no such laws existed, it would
     Ten years after this opinion, and after an ineffectual     follow that no such effect was produced, and we may
attempt had been made by the act of 1842, and its               presume that this was in the knowledge of the legislature
amendment in 1843, to organize banks in Ohio, without a         of 1845; and in saying that the compact was intended to
compact as to taxation, the act of 1845 was passed,             run with the charter, we only impute to the legislature a
containing a compact much more specific than that which         full knowledge of their own powers, and the highest
had been sustained by the Supreme Court of the State.           regard to the public interest. The idea that a State, by
Under such circumstances, can the intentions of the             [***33] exempting from taxation certain property, parts
Legislature of Ohio, in passing the act of 1845, be             with a portion of its sovereignty, is of modern growth;
doubted, or the inducements of the stockholders to              and so is the argument that if a State may part with this in
[***31] vest their money under it. Could either have            one instance it may in every other, so as to divest itself of
supposed that the 60th section proposed a temporary             the sovereign power of taxation. Such an argument would
taxation? Such a supposition does great injustice to the        be as strong and as conclusive against the exercise of the
legislature of 1845. It is against the clear language of the    taxing power. For if the legislature may levy a tax upon
section, which must ever shield [**983] them from the           property, they may absorb the entire property of the
imputation of having acted inconsiderately or in bad            tax-payer. The same may be said of every power where
faith. They passed the charter of 1845, which they knew         there is an exercise of judgment.
would be accepted, as it removed the objections to the act
of 1842.                                                            The Legislature of Ohio passes a statute of
                                                                                                                   Page 12
                                        57 U.S. 369, *383; 14 L. Ed. 977, **983;
                                      1850 U.S. LEXIS 1558, ***33; 16 HOW 369

limitations to all civil and criminal actions. Is there no     inducements must be held out to capitalists to invest their
danger that in the exercise of this power it may not be        funds. They must know the rate of interest to be charged
abused? Suppose a year, a month, a week, or a day should       by the bank, the time the charter shall run, the liabilities
be fixed as the time within which all actions shall be         of the company, the rate of taxation, and other privileges
brought on existing demands, and if not so brought, the        necessary to a successful banking operation.
remedy should be barred. This is a supposition more
probable under circumstances of great embarrassment,                These privileges are proffered by the State, accepted
when the voice of the debtor is always potent, than that       by the stockholders, and in consideration funds are
the legislature will inconsiderately exempt property from      invested in the bank. Here is a contract by the State and
taxation.                                                      the bank, a contract founded upon considerations of
                                                               policy requires by the general interests of the community,
     Under a statute of limitation, as supposed, the           a contract [***36] protected by the laws of England and
remedy of the [*384] creditor would be cut [***34] off,        America, and by all civilized States where the common or
unless the courts should decide that a limitation to bar the   the civil law is established. In Fletcher v. Peck, 6
right must be reasonable, but this power could not be          Cranch, 135, Chief Justice Marshall says, "The principle
exercised under any constitutional provision. It could         asserted is, that [HN8] one legislature is competent to
rest only on the great and immutable principles of justice,    repeal any act [*385] which a former legislature was
unless the time was so short as manifestly to have been        competent to pass, and that one legislature cannot abridge
intended to impair or destroy the contract. To carry on a      the powers of a succeeding legislature."
government, a more practical view of public duties must
be taken.                                                           "The correctness of this principle," he says, "so far as
                                                               respects general legislation, can never be controverted.
     When the State of Ohio was admitted into the Union        But if an act be done under a law, a succeeding
by the act of the 30th of April, 1802, it was admitted         legislature cannot undo it. When, then, a law is in its
under a compact that "the lands within the State sold by       nature a contract, a repeal of the law cannot divest those
Congress shall remain exempt from any tax laid by or           rights; and the act of annulling them, if legitimate, is
under the authority of the State, whether for state, county,   rendered so by a power applicable to the case of every
township, or any other purpose whatever, for the term of       individual in the community."
five years from and after the day of sale." And yet by the
same law the State "was admitted into the Union upon the             [**984] And in another part of the opinion he says,
same footing with the original States in all respects          "Whatever respect might have been felt for the State
whatever."                                                     sovereignties, it is not to be disguised that the framers of
                                                               the Constitution viewed, with some apprehension, the
     Now, if this new doctrine of sovereignty be correct,      violent acts which might grow out of the feelings of the
Ohio was not admitted into the Union on the footing of         moment, and that the people of the United States, in
the other sovereign States. Whatever may be considered         adopting that instrument, have [***37] manifested a
of such a compact now, it was not held to be                   determination to shield themselves and their property
objectionable at the time it was made.                         from the effects of those sudden and strong passions to
                                                               which men are exposed. The restrictions on the
     The assumption [***35] that a State, in exempting         legislative power of the States are obviously founded on
certain property from taxation, relinquishes a part of its     this sentiment; and the Constitution of the United States
sovereign power, is unfounded. The taxing power may            contains what may be deemed a bill of rights for the
select its objects of taxation; and thus is generally          people of each State."
regulated by the amount necessary to answer the purposes
of the State. Now the exemption of property from                   [HN9] "No State shall pass any bill of attainder,     ex
taxation is a question of policy and not of power. A           post facto law, or law impairing the obligations          of
sound currency should be a desirable object to every           contracts. A bill of attainder may affect the life of     an
government; and this in our country is secured generally       individual, or may confiscate his property, or may        do
through the instrumentality of a well-regulated system of      both."
banking. To establish such institutions as shall meet the
public wants and secure the public confidence,                     In this form he says, "the power of the legislature
                                                                                                                  Page 13
                                        57 U.S. 369, *385; 14 L. Ed. 977, **984;
                                      1850 U.S. LEXIS 1558, ***37; 16 HOW 369

over the lives and fortunes of individuals is expressly        not taxable as such, if a price has been paid for it, which
restrained. What motive, then, for implying, in words          the legislature accepted. But that the corporate property
which import a general prohibition to impair the               of the bank, being separable from the franchise, may be
obligation of contracts, an exception in favor of the right    taxed, unless there is a special agreement to the contrary."
to impair the obligations of those contracts into which the
State may enter."                                                   And the court say, the language of the eleventh
                                                               section of the act of 1821 is, "And be it enacted, that
    The history of England affords melancholy instances        upon any of the aforesaid banks accepting and complying
where bills of attainder were prosecuted in parliament to      with the terms and conditions of this act, the faith of the
the destruction of the lives and fortunes of some of its       State is hereby pledged not to impose any further tax or
most eminent subjects. A knowledge of this caused a            burden upon them during the continuance of their
prohibition in the Constitution against such [***38] a         charters under this act." [***40] This, the court say, is
procedure by the States.                                       the language of grave deliberation, pledging the faith of
                                                               the State for some purpose, some effectual purpose. Was
     In the case of the State of New Jersey v. Wilson, 7       that purpose the protection of the banks from what that
Cranch, 164, it was held, "that a legislative act, declaring   legislature and succeeding legislatures could not do, if the
that certain lands, which should be purchased for the          banks accepted the act, or from what they might do in the
Indians, should not thereafter be subject to any tax,          exercise of the taxing power. The terms and conditions of
constituted a contract which could not be rescinded by a       the act were, that the banks should construct the road and
subsequent legislative act. Such repealing act being void      pay annually a designated charge upon their capital
under that clause of the Constitution of the United States     stocks, as the price of the prolongation of their franchise
which prohibits a State from passing any law impairing         of banking. The power of the State to lay any further tax
the obligation of contracts."                                  upon the franchise was exhausted. That is the contract
                                                               between the State and the banks. It follows, then, as a
     In 1758 the government of New Jersey purchased the        matter of course, when the legislature go out of the
Indians' [*386] title to lands in that State, in               contract, proposing to pledge its faith, if the banks shall
consideration of which the government bought a tract of        accept the act not to impose any further tax or burden
land on which the Indians might reside, an act having          upon them, that it must have meant by these words an
previously been passed that "the lands to be purchased for     exemption [*387] from some other tax than a further tax
them shall not hereafter be subject to any tax, any law,       upon the franchise of the banks. The latter was already
usage, or custom to the contrary thereof in any wise           provided against; and the court held that the exemption
notwithstanding." The Indians continued in possession of       extended to the respective capital stocks of the banks as
the lands purchased until 1801, when they applied for and      an aggregate, and to the stockholders, [***41] as
obtained an act of the legislature, authorizing a sale of      persons on account of their stocks. The judgment of the
their lands. This act contained no provision in regard to      Court of Appeals of Maryland, which sustained the act
taxation; under it the Indian lands were sold.                 imposing an additional tax on the banks, was reversed.
     In October, 1804, the legislature [***39] repealed            It will be observed that the above compact was
the act of August, 1758, which exempted these lands            applied to the stocks of the bank and the interest of the
from taxes; the lands were then assessed, and the taxes        stockholders by construction.
demanded. The court held the repealing law was
unconstitutional, as impairing the obligation of the                The Supreme Court of Ohio say in relation to this
contract, although the land was in the hands of the            case, that "the power to tax and the right to limit the
grantee of the Indians. This case shows that although a        power were both admitted by counsel, and taken for
State government may make a contract to exempt                 granted in the consideration of the case; and that a very
property from taxation, yet the sovereignty cannot annual      large consideration had been paid for the extension of the
that contract.                                                 franchise and the exemption of the stock from taxation."

    In the case of Gordon v. The Appeal Tax, 3 How.                 In relation to the admissions of the counsel it may be
133, Mr. Justice Wayne, giving the opinion of the court,       said that they were men not likely to admit any thing to
held, "that the charter of a bank is a franchise, which is     the prejudice of their clients, which could be successfully
                                                                                                                   Page 14
                                         57 U.S. 369, *387; 14 L. Ed. 977, **984;
                                       1850 U.S. LEXIS 1558, ***41; 16 HOW 369

opposed; nor would the court, on a constitutional                    But suppose, in the language of that great man, "a
question, rest their judgment on the admissions of              consideration sufficiently valuable to induce a partial
counsel. Whether the consideration paid by the banks            release of it, and such release had been contained in the
was large or small, we suppose was not a matter for the         charter; would not that have been held sufficient? And of
court, as the motives or consideration which induced a          the sufficiency of the consideration, whether it was a
sovereign State to make a contract, cannot be inquired          bonus paid by the bank, or in supplying a sound currency,
into as affecting the validity of the act.                      [***44] the legislature would be the exclusive judges.
                                                                This would constitute a contract which a legislature could
     In the argument, the [***42] case of the Providence        not impair.
Bank v. Billing, was referred to, 4 Peters, 561. This
reference impresses me with the shortness [**985] and                The above case is a strong authority against the
uncertainty of human life. Of all the judges on this            defendants. The Chief Justice further says, "any
bench, when that decision was given, I am the only              privileges which may exempt the corporation from the
survivor. From several circumstances the principles of          burdens common to individuals, do not flow necessarily
that case were strongly impressed upon my memory; and           from the charter, but must be expressed in it, or they do
I was surprised when it was cited in support of the             not exist." But if so expressed, do they not exist?
doctrines maintained in the case before us. The principle
held in that case was, that where there was no exemption             A case is cited from the Stourbridge Canal v.
from taxation in the charter, the bank might be taxed.          Wheely, 2 Barn. & Adol. 793, to show that no
This was the unanimous opinion of the judges, but no one        implications in favor of chartered rights are admissible.
of them doubted that the legislature had the power, in the      Lord Tenterden says, "that [HN10] any ambiguity in the
charter or otherwise, from motives of public policy, to         terms of the contract must operate against the
exempt the bank from taxation, or by compact to impose          adventurers, and in favor of the public; and the plaintiffs
a specific tax on it. And this is clear from the language of    can claim nothing that is not clearly given then by the
the court.                                                      act." In the same opinion his lordship said: "Now, it is
                                                                quite certain that the company have no right expressly to
     The chief justice in that case says: "that the taxing      receive any compensation, except the tonnage paid for
power is of vital importance, that it is essential to the       goods carried through some of the canals or the locks on
existence of government, are truths which it cannot be          the canal, or the collateral cuts, and it is therefore
necessary to reaffirm. They are acknowledged and                incumbent upon them to show that they have a right
asserted by all. It would seem that the relinquishment of       clearly given by inference from some of the other
such a power is never to be presumed. No one can                clauses."
[***43] controvert the correctness of these axioms."
[*388] The relinquishment of such a power is never to be             Neither [***45] this, the Rhode Island Bank case,
presumed; but this implies it may be relinquished, or           nor the Charles River Bridge case, affords any aid to the
taxable objects may be exempted, if specially provided          doctrines maintained, with the single exception, that a
for in the charter. And this is still more clearly expressed,   right set up under a grant must clearly appear, and cannot
as follows: "We will not say that a State may not               be presumed; and this has not been controverted.
relinquish it; that a consideration sufficiently valuable to
                                                                      [*389] That [HN11] a State has power to make a
induce a partial release of it may not exist; but as the
                                                                contract which shall bind it in future, is so universally
whole community is interested in retaining it
                                                                held by the courts of the United States and of the States,
undiminished, that community has a right to insist, that
                                                                that a general citation of authorities is unnecessary on the
its abandonment ought not to be presumed, in a case in
                                                                subject. Dartmouth College v. Woodward, 4 Wheat. 518;
which the deliberate purpose of a State to abandon it does
                                                                Terrett v. Taylor, 9 Cranch, 43; Town of Pawlett, 9
not appear."
                                                                Cranch, 292.
    Such a case was not then before the court. There
                                                                    Mr. Justice Blackstone says, 2 Bl. Com. 37, "that the
was no provision in the Providence Bank charter which
                                                                same franchise that has before been granted to one,
exempted it from taxation, and in that case the court
                                                                cannot be bestowed on another, because it would
could presume no such intention.
                                                                prejudice the former grant. In the King v. Pasmore, 3
                                                                                                                 Page 15
                                        57 U.S. 369, *389; 14 L. Ed. 977, **985;
                                      1850 U.S. LEXIS 1558, ***45; 16 HOW 369

Term, 246, Lord Kenyon says, that an existing                  indefinable notion, that every exemption from taxation or
corporation cannot have another charter obtruded upon it,      a specific tax, which withdraws certain objects from the
or accept the whole or any part of the new charter. The        general tax law, affects the sovereignty of the State, is
reason of this, it is said, is obvious. [HN12] A charter is    indefensible.
a contract, to the validity of which the consent of both
parties is essential, and therefore it cannot be altered or         There has been rarely, if ever, it is believed, a tax
added to without consent."                                     law passed by any State in the Union, which did not
                                                               contain some [***48] exemptions from general taxation.
     There is no constitutional [***46] objection to the       The act of Ohio of the 25th of March, 1851, in the
exercise of the power to make a binding contract by a          fifty-eighth section, declared that "the provisions of that
State. It necessarily exists in its sovereignty, and it has    act shall not extend to any joint-stock company which
been so held by all the courts in this country. A denial of    now is, or may hereafter be organized, whose charter or
this is a denial of State sovereignty. It takes from the       act of incorporation shall have guaranteed to such
State a power essential to the discharge of its functions as   company an exemption from taxation, or has prescribed
sovereign. If it do not possess this attribute, it could not   and other as the exclusive mode of taxing the same."
communicate it to others. There is no power possessed          Here is a recognition of the principle now repudiated. In
by it more essential than this. Through the                    the same act, there are eighteen exemptions from
instrumentality of contracts, the machinery of the             taxation.
government is carried on. Money is borrowed, and
obligations given for payment. Contracts are made with              The federal government enters into an arrangement
individuals, who give bonds to the State. So in the            with a foreign State for reciprocal duties on imported
granting of charters. If there be any force in the argument,   merchandise, from the one country to the other. Does
it applies to contracts made with individuals, the same as     this affect the sovereign power of either State? The
with corporations. But it is said the State cannot barter      sovereign power in each was exercised in making the
away any part of its sovereignty. No one ever contended        compact, and this was done for the mutual advantage of
that it could.                                                 both countries. Whether this be done by treaty, or by
                                                               law, is immaterial. The compact is made, and it is
     [HN13] A State, in granting privileges to a bank,         binding on both countries.
with a view of affording a sound currency, or of
advancing any policy connected with the public interest,           The argument is, and must be, that [HN14] a
exercises its sovereignty, and for a public purpose, of        sovereign State may make a binding contract with one of
which it is the exclusive judge. Under such                    its citizens, and, in the exercise of its sovereignty,
circumstances, [***47] a contract made for a specific          repudiate it.
tax, as in the case before us, is binding. This tax
                                                                   The Constitution of the Union, when first adopted,
continues, although all other banks should be exempted
                                                               [***49] made States subject to the federal judicial
from taxation. Having the power to make the contract,
                                                               power. Could a State, while this power continued, being
and rights becoming vested under it, it can no more be
                                                               sued for a debt contracted in its sovereign capacity, have
disregarded nor set aside by a subsequent legislature, than
                                                               repudiated it in the same capacity? In this respect the
a grant for land. This act, so far from parting with any
                                                               Constitution was very properly changed, as no State
portion of the sovereignty, is an exercise of it. Can any
                                                               should be subject to the judicial power generally.
one deny this power to the legislature? Has it not a right
to select the objects of taxation and determine the                Much stress was laid on the argument, and in the
amount? To deny either of these, is to take away State         decisions of the Supreme Court, on the fact that the banks
sovereignty.                                                   paid no bonus for their charters, and that no contract can
                                                               be binding which is not mutual.
     [*390] [**986] It must be admitted that the State
has the sovereign power to do this, and it would have the          This is a matter which can have no influence in
sovereign power to impair or annul a contract so made,         deciding the legal question. The State did not require a
had not the Constitution of the United States inhibited the    bonus, but other requisitions are found in the charter,
exercise of such a power. The vague and undefined and          which the legislature deemed sufficient, and this is not
                                                                                                                    Page 16
                                         57 U.S. 369, *390; 14 L. Ed. 977, **986;
                                       1850 U.S. LEXIS 1558, ***49; 16 HOW 369

questionable by any other authority. The obligation is as       case before us not to carry into effect a law of the State,
strong on the State, from [*391] the privileges granted         but to test the validity of such a law by the Constitution
and accepted, as if a bonus had been paid.                      of the Union. We are exercising an appellate jurisdiction.
                                                                The decision of the Supreme Court of the State is before
    Another assumption is made, that the banks are taxed        us for revision, and if their construction of the contract in
as property is taxed in the hands of individuals. No            question impairs its obligation, we are required to reverse
deduction, it appears, is made from banks on account of         their judgment. To follow the [***52] [*392]
debts due to depositors or others, whilst debts due by an       construction of a State court in such a case, would be to
individual are deducted from this credits. If this be so, it    surrender one of the most important provisions in the
places banks [***50] on a very different footing from           federal Constitution.
individuals.
                                                                     There is no jurisdiction which we are called to
     The power of taxation has been compared to that of         exercise of higher importance, nor one of deeper interest
eminent domain, and it is said, as regards the question         to the people of the States. It is, in the emphatic language
before us, they are substantially the same. These powers        of Chief Justice Marshall, a bill of rights to the people of
exist in the same sovereignty, but their exercise involves      the States, incorporated into the fundamental law of the
different principles. Property may be appropriated for          Union. And whilst we have all the respect for the
public purposes, but it must be paid for. Taxes are             learning and ability which the opinions of the judges of
assessed on property for the support of the government          the Supreme Court of the State command, we are called
under a legislative act.                                        upon the exercise our own judgments in the case.

     We were not prepared for the position taken by the             In the discussion of the principles of this case, we
Supreme Court of Ohio, that "no control over the right of       have not felt ourselves at liberty to indulge in general
taxation by the States was intended to be conferred upon        remarks on the theory of our government. That is a
the General Government by the section referred to, or any       subject which belongs to a convention for the formation
other, except in relation to duties upon imports and            of a constitution; and, in a limited view, to the
exports." This has never been pretended by any one. The         law-making power. Theories depend so much on the
section referred to gives the federal government no power       qualities [**987] of the human mind, and these are so
over taxation by a State. Such an idea does not belong to       diversified by education and habit as to constitute an
the case, and the argument used, we submit, is not              unsafe rule for judicial action. Our prosperity,
legitimate. [HN15] We have power only to deal with              individually and nationally, depends upon a close
contracts under the tenth section of the first article of the   adherence to the settled [***53] rules of law, and
Constitution, whether made by a State or an individual; if      especially to the great fundamental law of the Union.
such contract be impaired by an act of the State such act
is void, as [***51] the power is prohibited to the State.            Having considered this case in its legal aspects, as
This is the extent of our jurisdiction. As well might it be     presented in the arguments of counsel, and in the views
contended under the above section that no power was             of the Supreme Court of the State, and especially as
given to the federal government to regulate the                 regards the rights of the bank under the charter, we are
numberless internal concerns of a State which are the           brought to the conclusion, that in the acceptance of the
subjects of contracts. With those concerns we have              charter, on its terms, and the payment of the capital stock,
nothing to do; but when contracts growing out of them           under an agreement to pay six per cent. semi-annually on
are impaired by an act of the State, under the federal          the dividends made, deducting expenses and ascertained
Constitution we inquire whether the act complained of is        losses, in lieu of all taxes, a contract was made binding
in violation of it.                                             on the State and on the bank; and that the tax law of
                                                                1851, under which a higher tax has been assessed on the
    [HN16] The rule observed by this court to follow the        bank than was stipulated in its charter, impairs the
construction of the statute of the State by its Supreme         obligation of the contract, which is prohibited by the
Court is strongly urged. This is done when we are               Constitution of the United States, and, consequently, that
required to administer the laws of the State. The               the act of 1851, as regards the tax thus imposed, is void.
established construction of a statute of the State is           The judgment of the Supreme Court of Ohio, in giving
received as a part of the statute. But we are called in the
                                                                                                                  Page 17
                                          57 U.S. 369, *392; 14 L. Ed. 977, **987;
                                        1850 U.S. LEXIS 1558, ***53; 16 HOW 369

effect to that law, is, therefore, reversed.                   portion of her banking institutions, organized under a
                                                               general banking law, passed in 1845. She was then a
     Mr. Justice CATRON, Mr. Justice DANIEL, and Mr.           wealthy and prosperous community, and had numerous
Justice CAMPBELL, dissented.                                   banks which employed a large capital, and were taxed by
                                                               the general laws five per cent. on their dividends, being
       [**996contd] [EDITOR'S NOTE: The page                   equal to thirty cents on each hundred dollars' worth of
numbers of this document may appear to be out of               stock, supposing it to be at par value. But this was
sequence; [***54] however, this pagination accurately          merely a State tax, payable into the State treasury. The
reflects the pagination of the original published              old banks were liable to taxes for county purposes,
document.]                                                     besides; and when located in cities or towns, for
                                                               corporation taxes also. These two items usually
    Order.
                                                               amounted to much more than the State tax.
     This cause came on to be heard on the transcript of
                                                                    Such was the condition of Ohio when the general
the record from the Supreme Court of [**997] Ohio, and
                                                               banking law was passed in 1845. By this act, any number
was argued by counsel. On consideration whereof, it is
                                                               of persons not less than five might associated together, by
now here ordered and adjudged by this court that the
                                                               articles, to carry on banking.
judgment of the said Supreme Court of Ohio in this cause
be, and the same is hereby reversed with costs, and that            The State was laid off into districts, and the law
this cause be and the same is hereby remanded to the said      prescribes the amount of [***56] stock that may be
Supreme Court of Ohio for further proceedings to be had        employed in each. Every county was entitled to one
therein in conformity of the opinion of this court.            bank, and some to more. Commissioners were appointed
                                                               to carry the law into effect. It was the duty of this Board
CONCUR BY: TANEY
                                                               of Control to judge of the articles of association, and
                                                               other matters necessary to put the banks into operation.
CONCUR
                                                               Any company might elect to become a branch of the State
     Mr. Chief Justice TANEY gave a separate opinion,          Bank, or to be a separate bank, disconnected with any
as follows:                                                    other. Fifty thousand dollars was the minimum, and five
                                                               hundred thousand the maximum, that could be employed
     I concur in the judgment in this case. I think that by    in any one proposed institution.
the sixtieth section of the act of 1845, the State bound
itself by contract to levy no higher tax than the one               By the fifty-first section, each of the banking
therein mentioned, upon the banks or stocks in the banks       companies authorized to carry on business was declared
which organized under that law during the continuance of       to be a body corporate with succession to the first day of
their charters. In my judgment [*393] the words used           May, 1866, with general banking powers; with the
are too plain to admit of any other construction.              privilege to issue notes of one dollar and upwards, to one
                                                               hundred dollars; and each bank was required to have "on
    But I do not assent altogether to the principles or        hand in gold, and silver coin, or their equivalent, one half
reasoning contained in the opinion just delivered. The         at least of which shall be in gold and silver coin in its
grounds [***55] upon which I hold this contract to be          vault, an amount equal to thirty per cent. of its
obligatory on the State, will appear in my opinion in the      outstanding notes of circulation;" and whenever the
case of the Ohio Life Insurance and Trust Company, also        specie on hand, or its equivalent, shall fall below twenty
decided at the present term.                                   per cent. of the outstanding [*394] [***57] notes, then
                                                               no more notes shall be circulated." The equivalent to
DISSENT BY: CATRON; DANIEL; CAMPBELL                           specie, meant deposits that might be drawn against in the
                                                               hands of eastern banks, or bankers of good credit. In this
DISSENT                                                        provision constituted the great value of the franchise.

    Mr. Justice CATRON.                                             The 59th section declares that semiannual dividends
                                                               shall be made by each bank of its profits, after deducting
    This is a contest between the State of Ohio and a          expenses; and the 60th section provides, that six per cent.
                                                                                                                  Page 18
                                         57 U.S. 369, *394; 14 L. Ed. 977, **997;
                                       1850 U.S. LEXIS 1558, ***57; 16 HOW 369

per annum of these profits shall be set off to the State,       case of Debolt v. The Ohio Life Insurance and Trust
"which sum or amount so set off shall be in lieu of all         Company, 1 Ohio State Reports, 564, with a fairness,
taxes to which such company, or the stockholders thereof        ability, and learning, calculated to command the respect
on account of stock owned therein, would otherwise be           of all those who have his opinion to review; and which
subject." This was equal to thirty-six cents per annum on       opinion has, as I think, construed the 60th section truly.
each hundred dollars of stock subscribed, supposing it to       But, as my brother Campbell has rested his opinion on
yield six per cent. interest.                                   this section without going beyond it, and as I concur in
                                                                his views, I will not further examine that question, but
     By an act of 1851, it was declared that bank stock         adopt his opinion in regard to it.
should be assessed at its true value, and that it should be
taxed for State, county, and city purposes, to the same              The next question, decided by the State court is of
extent that personal property was required to be taxed at       most grave importance; I give it in the language of the
the place where the bank was located. As this rate was          State court: "Had the general assembly power, under the
much more than that prescribed by the 60th section of the       constitution then in force, permanently to surrender, by
act of 1845, the bank before us refused to pay the excess,      contract, within the meaning and under the protection of
and suffered herself [***58] to be sued by the tax              the Constitution [***60] of the United States, the right of
collector, relying on the 60th section, above recited, as an    taxation over any portion of the property of individuals,
irrepealable contract, which stood protected by the             otherwise subject to it?" On which proposition the court
Constitution of the United States.                              proceeds to remark:

     It is proper to say that the trifling sum in dispute in          "Our observations and conclusions upon this
this cause is the mere ground of raising the question           question, must be taken with reference to the
between the State of Ohio and some fifty of her banks,          unquestionable facts, that the act of 1851 was a bona fide
claiming exemption under the act of 1845.                       attempt to raise revenue by an equal and uniform tax
                                                                upon property, and contained no covert attack upon the
     The taxable property of these banks is about eighteen      franchises of these institutions. That the surrender did
millions of dollars, according to the auditor's report of       not relate to property granted by the State, so as to make
last year, and which was used on the argument of this           it a part of the grant for which a consideration was paid;
cause, by both sides. Of course, the State officers, and        the State having granted nothing but the franchise, and
other tax payers, assailed the corporations claiming the        the tax being upon nothing but the money of individuals
exemption, and various cases were brought before the            invested in the stock; and that no bonus or gross sum was
Supreme Court of Ohio, drawing in question the validity         paid in hand for the surrender, so as to leave it open to
of the act of 1851 in so far as it increased the taxes of the   controversy, that reasonable taxes, to accrue in future,
banks beyond the amount imposed [**988] by the 60th             were paid in advance of their becoming due. What effect
section of the act of 1845. The State court sustained the       a different state of facts might have, we do not stop to
act of 1851, from which decision a writ of error was            inquire. Indeed, if the attempt has here been made, it is a
prosecuted, and the cause brought to this court.                naked release of sovereign power without any
                                                                consideration or attendant circumstance to give it strength
     The opinions of the State court have been laid before      or color; and, so far as we are [***61] advised, is the
us, for our consideration; and on our assent or dissent to      first instance where the rights and interests of the public
them, the case depends.                                         have been entirely overlooked."
     The first [***59] question made and decided in the              "Under these circumstances, we feel no hesitation in
Supreme Court of Ohio was, whether the 60th section of          saying the general assembly was incompetent to such a
the act of 1845, purported to be in its terms, a contract not   task. This conclusion is drawn from a consideration of
further to tax the banks organized under it during the          the limited authority of that body, and the nature of the
entire term of their existence? The court held that it
                                                                power claimed to be abridged.
imported no such contract; and with this opinion I concur.
                                                                     "That political sovereignty, in its true sense, exists
     [*395] The question was examined by the judge              only with the people, and that government is "founded on
who delivered the unanimous opinion of the court, in the        their sole authority," and subject to be altered, reformed,
                                                                                                                    Page 19
                                        57 U.S. 369, *395; 14 L. Ed. 977, **988;
                                      1850 U.S. LEXIS 1558, ***61; 16 HOW 369

or abolished only by them, is a political axiom upon           nature of the power, connected with the manner and
which all the American [*396] governments have been            purpose of its exercise. What, then, is the taxing power?
based, and is expressly asserted in the bill of rights. Such   And to what extent, and for what purposes has it been
of the sovereign powers with which they were invested,         conferred upon the legislature? That it is a power incident
as they deem necessary for protecting their rights and         to sovereignty -- "a power of vital importance to the very
liberties, and securing their independence, they have          existence of every government" -- has been as often
delegated to governments created by themselves, to be          declared as it has been spoken [*397] of. Its importance
exercised in such manner and for such purposes as were         is not too strongly represented by Alexander Hamilton, in
contemplated in the delegation. That these powers can          the 30th number of the Federalist, [***64] when he
neither be enlarged or diminished by these repositories of     says: "Money is with propriety considered as the vital
delegated authority, would seem to result, inevitably,         principle of the body politic; as that which sustains its life
from the fundamental maxim referred to, and to be too          and motion, and enables it to perform its most important
[***62] plain to need argument or illustration.                functions. A complete power, therefore, [**989] to
                                                               procure a regular and adequate supply of revenue, as far
     "If they could be enlarged, government might              as the resources of the community will permit, may be
become absolute; if they could be diminished or                regarded as an indispensable ingredient in every
abridged, it might be stripped of the attributes               constitution. From a deficiency in this particular, one of
indispensable to enable it to accomplish the great             two evils must ensue; either the people must be subjected
purposes for which it was instituted. And, in either event,    to continual plunder, as a substitute for a more eligible
the constitution would be made, either more or less, than      mode of supplying the public wants, or the government
it was when it came from the hands of its authors; being       must sink into a fatal atrophy, and in a short course of
changed and subverted without their action or consent. In      time perish."
the one event its power for evil might be indefinitely
enlarged; while in the other its capacity for good might be         "This power is not to be distinguished, in any
entirely destroyed; and thus become either an engine of        particular material to the present inquiry, from the power
oppression, or an instrument of weakness and                   of eminent domain. Both rest upon the same foundation
pusillanimity.                                                 -- both involve the taking of private property -- and both,
                                                               to a limited extent, interfere with the natural right
     "The government created by the constitution of this       guaranteed by the constitution, of acquiring and enjoying
State, (Ohio,) although not of enumerated, is yet one of       it. But, as this court has already said, in the case referred
limited powers. It is true, the grant to the general           to, "neither can be classed amongst the independent
assembly of legislative authority" is general; but its         powers of government, or included in its objects and
exercise within that limit is necessarily restrained by the    [***65] ends." No government was ever created for the
previous grant of certain powers to the federal                purpose of taking, taxing, or otherwise interfering with
government, and by the express limitations to be found in      the private property of its citizens. "But charged with the
other parts of the instrument. Outside of that boundary, it    accomplishment of great objects necessary to the safety
needed no express limitations, for nothing was granted.        and prosperity of the people, these rights attach as
[***63] Hence this court held, in Cincinnati,                  incidents to those objects, and become indispensable
Wilmington, &c. R.R. v. Clinton Co. 1 Ohio State Rep.          means to the attainment of those ends." They can only be
77, that any act passed by the general assembly not            called into being to attend the independent powers, and
falling fairly within the scope of "legislative authority,"    can never be exercised without an existing necessity.
was as clearly void as though expressly prohibited. So
careful was the convention to enforce this principle, and           "To sustain this power in the general assembly,
to prevent the enlargement of the granted powers by            would be to violate all the great principles to which I
construction or otherwise, that they expressly declared in     have alluded. It would affirm its right to deal in, and
art. 8, § 28 -- "To guard against the transgression of the     barter away the sovereign right of the State, and thereby,
high powers we have delegated, we declare that all             in effect, to change the constitution. When the general
powers, not hereby delegated, remain with the people."         assembly of 1845 convened, it found the State in the
When, therefore, the exercise of any power by that body        unquestionable possession of the sovereign right of
is questioned, its validity must be determined from the        taxation, for the accomplishment of its lawful objects,
                                                                                                                   Page 20
                                        57 U.S. 369, *397; 14 L. Ed. 977, **989;
                                      1850 U.S. LEXIS 1558, ***65; 16 HOW 369

extending to 'all the persons and property belonging to        court says, -- Power to exempt property, was reserved to
the body politic.'"                                            the people; they alone could exempt, by an organic law.
                                                               That is to say, by an amended constitution. The clause
     When its successor convened, in 1846, under the           mainly relied on declares, "that all powers not delegated,
same constitution, and to legislate for the same people, if    remain with the [***68] people." Now it must be
this defence is available, it found the State shorn of this    admitted that this clause has a meaning; and it must also
power over fifteen or [***66] twenty millions of               be conceded (as I think,) that the Supreme Court of Ohio,
property, still within its jurisdiction and protected by its   has the uncontrollable right to declare what that meaning
laws. This and each succeeding legislature had the same        is; and that this court has just as little right to question
power to surrender the right, as to any and all other          that construction as the Supreme Court of Ohio has to
property; until at length the government, deprived of          question our construction of the Constitution of United
every thing upon which it could operate, to raise the          States.
means to attain [*398] its necessary ends, by the
exercise of its granted powers, would have worked its               In my judgment the construction of the court of Ohio
own inevitable destruction, beyond all power of remedy,        is proper; but if I believed otherwise I should at once
either by the legislature or the people. It is no answer to    acquiesce. Let us look at the matter fairly and truly as it
this to say that confidence must be reposed in the             is, and see what a different course on part of this court
legislative body, that it will not thus abuse the power.       would lead to; nay, what Ohio is bound to do in
                                                               self-defence and for self-preservation, under the
   "But, in the language of the court, in McCulloch v.         circumstances.
Maryland, 4 Wheat. 316, 'is this a case of confidence?'"
                                                                     [*399] In 1845 a general banking law is sought at
    "For every surrender of the right to tax particular        the hands of the legislature, where five dollars in paper
property not only tends to paralyze the government, but        can be circulated for every dollar in specie in the bank, or
involves a direct invasion of the rights of property, of the   on deposit, in eastern banks or with brokers. One dollar
balance of the community; since the deficiency thus            notes are authorized; every county in the State is entitled
created must be made up by larger contributions from           to a bank, and the large ones to several; the tempting lure
them, to meet the public demand."                              is held out of six per cent. interest on five hundred dollars
                                                               for every hundred dollars paid in as stock: thus obtaining
     The foregoing are some of the reasonings of the State     a profit [***69] of twenty-four dollars on each hundred
court on the consideration here involved. With these           dollars actually paid in. That such a bill would have
views I concur, and will add some of [***67] my own.           advocates enough to pass it through the legislature, all
The first is, "That acts of parliament derogatory from the     experience attests; and that the slight tax of thirty-six
power of subsequent legislatures, are not binding.             cents on each hundred dollars' worth of stock, subscribed
Because, (as Blackstone says,) the legislature being in        and paid, was deemed a privilege, when the existing
truth the sovereign power, is always equal, always             banks and other property were taxed much higher, is
absolute; and it acknowledges no superior on earth,            plainly manifest. As was obvious, when the law passed,
which the prior legislature must have been if its              banks sprang up at once -- some fifty in number having a
ordinances could bind a subsequent parliament. And             taxable basis last year of about eighteen millions. The
upon the same principle Cicero, in his letters to Atticus,     elder and safer banks were, of course, driven out, and
treats with proper contempt these restraining clauses          new organizations sought under the general law, by the
which endeavor to tie up the hands of succeeding               stockholders. From having constructed large public
legislatures. When you repeal the law itself, says he, you     works, and made great expenditures, Ohio has become
at the same time repeal the prohibitory clause which           indebted so as to require a very burdensome [**990] tax
guards against repeal."                                        on every species of property; this was imposed by the act
                                                               of 1851, and on demanding from these institutions their
    If this is so under the British government, how is it in
                                                               equal share, the State is told that they were protected by a
Ohio? Her Supreme Court holds that the State
                                                               contract made with the legislature of 1845, to be exempt
constitution of 1802 expressly prohibited one legislature
                                                               from further taxation, and were not bound by the late law,
from restraining its successors by the indirect means of
                                                               and, of course, they were sued in their own courts. The
contracts exempting certain property, from taxation. The
                                                                                                                     Page 21
                                         57 U.S. 369, *399; 14 L. Ed. 977, **990;
                                       1850 U.S. LEXIS 1558, ***69; 16 HOW 369

Supreme Court holds that by the express [***70] terms           roads and bridges, on compensation being made.
of the State constitution no such contract could be made
by the legislature of 1845, to tie up the hands of the               Where the distinction lies, involving a principle,
legislature of 1851. And then the banks come here and           between that case and this, I cannot perceive, as every
ask our protection against this decision, which declares        tax-payer is compensated by the security and comfort
the true meaning of the State constitution. It expressly        government affords. The political necessities for money
guarantees to the people of Ohio the right to assemble,         are constant and more stringent in favor of the right of
consult, "and instruct their representatives for their          taxation; its exercise is required daily to sustain the
common good;" and then "to apply to the legislature for a       government. But in the essential attributes of sovereignty
redress of grievances." It further declares, that all powers    the right of eminent domain and the right of taxation are
not conferred by that constitution on the legislature are       not distinguishable.
reserved to the people. Now, of what consequence or
                                                                    If the West River Bridge case be sound constitutional
practical value will these attempted securities be if one
                                                                law (as I think it is) then it must be true that the Supreme
legislature can restrain all subsequent ones by contracting
                                                                Court of Ohio is right in holding that the legislature of
away the sovereign power to which instructions could
                                                                1845 could not deprive the legislature of 1851 of its
apply?
                                                                sovereign powers or of any part of them.
     The question, whether the people have reserved this
                                                                     It is insisted, that the case of the State of Ohio v. The
right so as to hold it in their own hands, and thereby be
                                                                Commercial Bank of Cincinnati, 7 Ohio Rep. 125, has
enabled to regulate it by instructions to a subsequent
                                                                held otherwise. This is clearly a mistake. The State in
legislature, (or by a new constitution,) is a question that
                                                                that case raised no question as to the right of one
has been directly raised only once, in any State of the
                                                                legislature to cede the sovereign [***73] power to a
Union, so far as I know. In the case of Brewster v.
                                                                corporation, and tie up the hands of all subsequent
Hough, 10 New Hampshire Reports, 139, it [*400] was
                                                                legislatures: no such constitutional question entered into
[***71] raised, and Chief Justice Parker, in delivering
                                                                the decision; nor is any allusion made to it in the opinion
the opinion of the court in a case in all respects like the
                                                                of the court. It merely construed the acts of assembly,
one before us, says, "That it is as essential that the public
                                                                and held that a contract did exist on the ground that by
faith should be preserved inviolate as it is that individual
                                                                the charter the bank was taxed four per cent.; and
grants and contracts should be maintained and enforced.
                                                                therefore the charter must [*401] be enforced, as this
But there is a material difference between the right of a
                                                                rate of taxation adhered to the charter, and excluded a
legislature to grant lands, or corporate powers, or money,
                                                                higher imposition
and a right to grant away the essential attributes of
sovereignty or rights of eminent domain. These do not                It would be most unfortunate for any court, and
seem to furnish the subject-matter of a contract."              especially for this one, to hold that a decision affecting a
                                                                great constitutional consideration, involving the harmony
    This court sustained the principle announced by the
                                                                of the Union, (as this case obviously does,) should be
Supreme Court of New Hampshire, in the West River
                                                                concluded by a decision in a case where the constitutional
Bridge case. A charter for one hundred years,
                                                                question was not raised by counsel; and so far from being
incorporating a bridge company, had been granted; the
                                                                considered by the court, was never thought of: such a
bridge was built and enjoyed by the company. Then
                                                                doctrine is altogether inadmissible. And in this
another-law was passed authorizing public roads to be
                                                                connection I will say, that there are two cases decided by
laid out, and free bridges to be erected; the
                                                                this court, (and relied on by the plaintiff in error,) in
commissioners appropriated the West River Bridge and
                                                                regard to which similar remarks apply. The first one is
made it free; the Supreme Court of Vermont sustained the
                                                                that of New Jersey v. Wilson, 7 Cranch, 164. An
proceeding on a review of that decision. And this court
                                                                exchange of lands took place in 1758 between the British
held that the first charter was a contract securing the
                                                                [***74] colony of New Jersey and a small tribe of
franchises and property in the bridge to the company; but
                                                                Indians residing there. The Indians had the land granted
[***72] that the first legislature could not cede away the
                                                                to them by an act of the colonial legislature, which
sovereign right to eminent domain, and that the
                                                                exempted it from taxes. They afterwards sold it, and
franchises and property could be taken for the uses of free
                                                                removed. In 1804, the State legislature taxed these lands
                                                                                                                  Page 22
                                        57 U.S. 369, *401; 14 L. Ed. 977, **990;
                                      1850 U.S. LEXIS 1558, ***74; 16 HOW 369

in the hands of the purchasers; they were proceeded            violation of the bill of rights."
against for the taxes, and a judgment rendered, declaring
the act of 1804 valid. In 1812, the judgment was brought            "5th. That taxation upon property within the State,
before this court, and the case submitted on the part of the   wherever the owners may reside, is not against the bill of
plaintiff in error without argument; no one appearing for      rights."
New Jersey. This court held the British contract with the
                                                                    On these legal propositions the opinion here given
Indians binding; and, secondly, that it run with the land
                                                               sets out by declaring that, "The question, however, which
which was exempt from taxation in the hands of the
                                                               this court is called on to decide, and to which our
purchasers.
                                                               decision will be confined, is -- Are the shareholders in the
     No question was raised in the Supreme Court of New        old and new banks, liable to be taxed under the act of
Jersey, nor decided there, or in this court, as to the         1841, on account of the stock which they own in the
constitutional question of one legislature having authority    banks."
to deprive a succeeding one of sovereign power. The
                                                                    The following paragraph is the one relied on as
question was not considered, nor does it seen to have
                                                               adjudging the question, that the taxing power may be
been thought of in the State court or here.
                                                               embodied in a charter and contracted away as private
    The next case is Gordon's case, 3 Howard, 144. What        property, to wit: "Such a contract is a limitation on the
questions were there presented on the part of the State of     taxing power of the legislature making it, and upon
Maryland, does not appear in the report [***75] of the         succeeding legislatures, to impose any further tax on the
case, but I have turned to them in the record, to see how      franchise."
they were made in the State courts. They are as follows:
                                                                    "But why, when bought, as it becomes property, may
     "1st. That at the time of passing the general             it not be taxed as land is taxed which has been bought
assessment law of 1841, there was no contract [**991]          from the State, was repeatedly asked in the course of the
existing between the State and the banks, or any of them,      argument. The reason is, [***77] that every one buys
or the stockholders therein or any of them, by which any       land, subject in his own apprehension to the great law of
of the banks or stockholders can claim an exemption            necessity, that we must contribute from it and all of our
from the taxation imposed upon them by the said act of         property something to maintain the State.But a franchise
1841."                                                         for banking, when bought, the price is paid for the use of
                                                               the privilege whilst it lasts, and any tax upon it would
    "2d. That the contract between the State and the old       substantially be an addition to the price."
banks, if there be any contract, extends only to an
exemption from further 'taxes or burdens,' of the                   As the case came up from the Supreme Court of
corporate privileges of banking; [*402] and does not           Maryland, this court had power merely to reexamine the
exempt the property, either real or personal, of said          questions raised in the court below, and decided there.
banks, or the individual stockholders therein."                All that is asserted in the opinion beyond this is outside
                                                               of the case of which this court had jurisdiction, and is
    "3d. That even if the contract should be construed to      only so far to be respected as it is sustained by sound
exempt the real and personal property of the old banks,        reasoning; but its dicta are not binding as authority; and
and the property of the stockholders therein, yet such         so the Supreme Court of Maryland held in the case of the
exemption does not extend to the new banks, or those           Mayor, &c. of Baltimore v. The Baltimore and Ohio
chartered since 1830, and, moreover that the power of          Railroad Company, 6 Gill, 288.
revocation, in certain cases in these charters, reserves to
the State the power of passing the general assessment               The State of Maryland merely asked to have her
law."                                                          statutes [*403] construed, and if, by their true terms, she
                                                               had promised to exempt the stockholders of her banks
    "4th. That the imposition [***76] of a tax of 20           from taxation, then she claimed no tax of them. She took
cents upon every one hundred dollars' worth of property,       no shelter under constitutional objections, but guardedly
upon both the old and new banks, under the said                avoided doing so.
assessment law, is neither unequal nor oppressive, nor in
                                                                                                                   Page 23
                                        57 U.S. 369, *403; 14 L. Ed. 977, **991;
                                      1850 U.S. LEXIS 1558, ***77; 16 HOW 369

     If an expression [***78] of opinion is authority that     to conform to the construction they have settled; and the
binds, regardless of the case presented, then we are as        only objection to conformity [*404] that I suppose could
well bound the other way, by another quite equal               exist with any one is, that the construction is not settled.
authority. In the case of East Hartford v. Hartford Bridge     How is the fact?
Co. 10 Howard, 535, Mr. Justice Woodbury, delivering
the opinion of the court, says: The case of Goszler v. The          The refusal of some fifty banks to pay their assessed
Corporation of Georgetown, 6 Wheat. 596, 598, "appears         portion of the revenue for the year 1851, raised the
to settle the principle that a legislative body cannot part    question for the first time in the State of Ohio; since then
with its powers by any proceeding so as not to be able to      the doctrine has been maintained in various cases,
continue the exercise of them. It can, and should,             supported unanimously by all the judges of the Supreme
exercise them again and again, as often as the public          Court of that State, in opinions deeply considered, and
interests require." . . . .                                    manifesting a high degree of ability in the [**992]
                                                               judges, as the extract from one of them, above set forth,
     "Its members are made, by the people, agents or           abundantly shows. If the construction of the State
trustees for them, on this subject, and can possess no         constitution is not settled, it must be owing to the recent
authority to sell or grant their power over the trust to       date of the decisions. An opinion proceeding on this
others."                                                       hypothesis will, as I think, involve our judgment now
                                                               given in great peril hereafter; for if the court of Ohio do
     The Hartford case was brought here from the               not recede, but firmly adhere to their construction until
Supreme Court of Connecticut, by writ of error, on the         the decisions, now existing, gain maturity and strength by
ground that East Hartford held a ferry right secured by a      time, and the support of other adjudications conforming
legislative act that was a private contract. But this court    to them, then it must of necessity occur that this court
held, among other things that, by a true construction of       will be [***81] eventually compelled to hold that the
the State laws, no such contract existed; so that this case    construction is settled in Ohio; when it must be followed
cannot be relied on as binding authority more than             to avoid conflict between the judicial powers of that State
Gordon's case. If fair reasoning [***79] and clearness of      and the Union, an evil that prudence forbids.
statement are to give any advantage, then the Hartford
case has that advantage over Gordon's case.                          1. The result of the foregoing opinion is, that the
                                                               sixtieth section of the general banking law of 1845 is, in
     It is next insisted that the State legislatures have in   its terms, no contract professing to bind the Legislature of
many instances, and constantly, discriminated among the        Ohio not to change the mode and amount of taxation on
objects of taxation; and have taxed and exempted               the banks organized under this law; and for this
according to their discretion. This is most true. But the      conclusion I rely on the reasons stated by my brother
matter under discussion is aside from the exercise of this     Campbell, in his opinion, with which I concur.
undeniable power in the legislature. The question is
whether one legislature can, by contract, vest the                  2. That, according to the constitutions of all the
sovereign power of a right to tax, in a corporation as a       States of this Union, and even of the British Parliament,
franchise, and withhold the same power that legislature        the sovereign political power is not the subject of contract
had to tax, from all future ones? Can it pass an               so as to be vested in an irrepealable charter of
irrepealable law of exemption?                                 incorporation, and taken away from, and placed beyond
                                                               the reach of, future legislatures; that the taxing power is a
     General principles, however, have little application      political power of the highest class, and each successive
to the real question before us, which is this: Has the         legislature having vested in it, unimpaired, all the
constitution of Ohio withheld from the legislature the         political powers previous legislatures had, is authorized
authority to grant, by contract with individuals, the          to impose taxes on all property in the State that its
sovereign power; and are we bound to hold her                  constitution does not exempt.
constitution to mean as here Supreme Court has
construed it to mean? If the decisions in Ohio have settled        It is undeniably true that [***82] one legislature
the question in the affirmative that the sovereign political   may by a charter of incorporation exempt from taxation
power is not the subject of an irrepealable contract, then     the property of the corporation in part, or in whole, and
few will be [***80] so bold as to deny that it is our duty     with or without consideration; but this exemption will
                                                                                                                   Page 24
                                         57 U.S. 369, *404; 14 L. Ed. 977, **992;
                                       1850 U.S. LEXIS 1558, ***82; 16 HOW 369

only last until the necessities of the State require its        and other banking companies of that State," adopted
modification or repeal.                                         February, 1845.

     3. But if I am mistaken in both these conclusions,              The section provides, that every banking company
then, I am of opinion that, by the express provisions of        organized by the act, or complying with its provisions,
the constitution of Ohio, of 1802, the legislature of that      shall semiannually, at designated days, set off to the
State had withheld [*405] from its powers the authority         State, six per cent. of the net profits for the six months
to tie up the hands of subsequent legislatures in the           next preceding, "which sum or amount so set off shall be
exercise of the powers of taxation, and this opinion rests      in lieu of all taxes to which such company, or the
on judicial authority that this court is bound to follow; the   stockholders thereof, on account of stock owned therein,
Supreme Court of Ohio having held by various solemn             would otherwise be subject;" and the cashier was
and unanimous decisions, that the political power of            required to report the amount to the auditor and to pay it
taxation was one of those reserved rights intended to be        to the treasurer; but in computing the profits of the
delegated by the people to each successive legislature,         company for the purposes [*406] aforesaid, the interest
and to be exercised alike by every legislature according        received on the certificates of the funded debt held by the
to the instructions of the people. This being the true          company, or deposited with and transferred to the
meaning of the nineteenth and twenty-eighth sections of         treasurer of the State, or to the board of control by such
the bill of rights, forming part of the constitution of 1802;   company, shall not be taken into the account." I have
one section securing the right of instructing                   extracted the last clause merely because it forms a part of
representatives, and the other protecting [***83]               the section.
reserved rights held by the people.
                                                                     It is not usual for governments to levy taxes upon the
     Whether this construction given to the State               certificates of their funded debt, and Ohio had, in an early
constitution is the proper one, is not a subject of inquiry     statute, forbidden taxation of hers. This clause was a
in this court; it belongs exclusively to the State courts,      cumulative precaution, wholly unnecessary. Swan Stat.
and can no more be questioned by us than State courts           [***85] 747, § 5.
and judges can question our construction of the
Constitution of the United States. For these reasons I am            The case lies in the solution of the question whether
of opinion that the judgment of the Supreme Court of            the clause directing the banks to set apart semiannually,
Ohio should be affirmed.                                        upon the profits for the six months preceding, six per
                                                                cent. in lieu of all other taxes to which the company or
    Mr. Justice DANIEL.                                         the stockholders would otherwise be subject on account
                                                                of the stock, institutes an unalterable rule of taxation for
     In the views so clearly taken by my brother                the whole time of the corporate existence of these banks?
Campbell of the character of the legislation of Ohio,           The General Assembly of Ohio thinks otherwise, and has
impeached by the decision of the court, I entirely              imposed a tax upon the stock of the banks, corresponding
coincide. I will add to the objections he has so well           with the taxes levied upon other personal property held in
urged to the jurisdiction of this court, another, which to      the State. The payment of this tax has been resisted by
my mind at least is satisfactory; it is this, that one of the   the banks. The Supreme Court of Ohio, by its judgment,
parties to this controversy being a corporation created by      affirms the validity of the act of the general assembly,
a State, this court can take no cognizance, by the              and has condemned the bank to the payment. This
constitution, of the acts, or rights, or pretensions of that    judgment is the matter of consideration.
corporation.
                                                                     The section of the act above cited furnishes a rule of
    Mr. Justice CAMPBELL.                                       taxation, and while it remains in [**993] force a
                                                                compliance with it relieves the banks from all other taxes
    I dissent from the opinion of the court.                    to which they would otherwise be subject. Such is the
                                                                letter of the section.
     The question disclosed by the record, is contained in
the sixtieth section of an act of the General Assembly of           The question is, has the State of Ohio inhibited
Ohio, "to incorporate the State Bank of Ohio [***84]            herself from adopting any other rule of taxation either for
                                                                                                                  Page 25
                                        57 U.S. 369, *406; 14 L. Ed. 977, **993;
                                      1850 U.S. LEXIS 1558, ***86; 16 HOW 369

[***86] amount or mode of collection, while these banks        the State to the support of its government. The duty of all
continue in existence? It is not asserted that such a          to make such a contribution in the form of an equal and
prohibition has been imposed by the express language of        apportioned taxation, is a consequence of the social
the section. The term for which this rule of taxation is to    organization. The right to enforce it is a sovereign right,
continue is not plainly declared. The amounts paid             stronger than any proprietary claim to property. The
according to it discharge the taxes for the antecedent six     amount to be taken, the mode of collection, and the
months. Protection is given in advance of exaction.            duration of any particular assessment or form of
                                                               collection, are questions of administration submitted to
     The clause in the section, that this "sum or amount,      the discretion of the legislative authority; and variations
so set off, shall be in lieu of all taxes to which such        must frequently occur, according to the mutable
company or the stockholders thereof would otherwise to         conditions, circumstances, or policy of the State. These
subject," requires an addition to ascertain the duration of    conditions are regulated for the time, in the sixtieth
the rule. It may be completed in adding, "by the existing      section of this act. That section comes from the law
laws for the taxation of banks," or "till otherwise            maker, who ordains that the officers of certain banking
provided by law," or at "the date of such apportionment        corporations, at stated periods, shall set apart from their
or dividend." Or, following the argument of the banks, in      property a designated sum as their share of the public
adding, "during the existence of the banks." Whether we        burden, in lieu of other sums or modes of payment to
shall select from the one series of expressions, leading to    which they would be subject; but there is no promise that
one result, or the expression leading to another altogether    the same authority may not, as it clearly had a right to
different, depends upon the rules of interpretation            [***89] do, apportion a different rate of contribution. I
applicable to the subject.                                     will not say that a contract may not be contained in a law,
                                                               but the practice is not to be encouraged, and courts
      [*407] The first inquiries are of the relations of the   discourage the interpretation which discovers them. A
parties to the supposed contract to its subject-matter,        common informer sues for a penalty, or a revenue officer
[***87] and the form in which it has been concluded.           makes a seizure under a promise that on conviction the
The sixtieth section of the act of 1845, was adopted by        recovery shall be shared, and yet the State [*408]
the General Assembly of Ohio in the exercise of                discharges the forfeiture, or prevents the recovery by a
legislative powers, as a part its public law. The powers       repeal of the law, violating thereby no vested right nor
of that assembly in general, and that of taxation              impairing the obligation of any contract. 5 Cranch, 281;
especially, are trust powers, held by them as magistrates,     10 Wheat. 246; 6 Pet. 404.
in deposit, to be returned, after a short period, to their
constituents without abuse or diminution.                           A captor may be deprived of his share of
                                                               prize-money, pensioners of their promised bounty, at any
     The nature of the legislative authority is inconsistent   time before their payment. 2 Russ. & M. 35.
with an inflexible stationary system of administration. Its
office is one of vigilance over the varying wants and              Salaries may be reduced, offices having a definite
changing elements of the association, to the end of            tenure, though filled, amy be abolished, faculties may be
ameliorating its condition. Every general assembly is          withdrawn, the inducements to vest capital impaired and
organized with the charge of the legislative powers of the     defeated by the varying legislation of a State, without
State; each is placed under the same guidance,                 impairing constitutional obligation. 8 How. 163; 10 Ib.
experience, and observation; and all are forbidden to          395; 3 Ib. 534; 8 Pet. 88; 2 Sanf. S.C.R. 355. The whole
impress finally and irrevocably their ideas or policy upon     society is under the dominion of law, and acts, which
the political body. Each, with the aid of an experience,       seem independent of its authority, rest upon its toleration.
liberal and enlightened, is bound to maintain the State in     The multifarious [***90] interests of a civilized State
the command of all the resources and faculties necessary       must be continually subject to the legislative control.
to a full and unshackled self-government. No implication       General regulations, affecting the public order, or
can be favored which convicts a legislature of a departure     extending to the administrative arrangements of the State,
[***88] from this law of its being.                            must overrule individual hopes and calculations, though
                                                               they may have originated in its legislation. It is only
    The subject-matter of this section is the contributive     when rights have vested under laws that the citizen can
share of an important element of the productive capital of
                                                                                                                   Page 26
                                        57 U.S. 369, *408; 14 L. Ed. 977, **993;
                                      1850 U.S. LEXIS 1558, ***90; 16 HOW 369

claim a protection to them as property. Rights do not          cases affirm, "that the sovereignty of the State extends to
vest until all the conditions of the law have been fulfilled   every thing which exists by its authority, or is introduced
with exactitude during its continuance, or a direct            by its permission, and all on subjects of taxation." 2 Pet.
engagement has been made, limiting legislative power           449; 9 Wheat. 738; 4 Ib. 316.
over and producing an obligation. In this case it may be
conceded that at the end of every six months the payment            The limitations imposed by the court in these cases
then taken is a discharge for all antecedent liabilities for   excited a deep and pervading discontent, and must have
taxes. That there could be no retrospective legislation.       directed the court to a profound consideration of the
But beyond this the concessions of the section do not          question in its various relations. The case of the
extend.                                                        Providence Bank v. Billings, 4 Pet. 514, enabled the court
                                                               to give a practical illustration of sincerity with which the
     A plain distinction exists between the statutes which     principle I have quoted was declared. A bank, existing
create hopes, expectations, faculties, conditions, and         by the authority of a State legislature, claimed an
those which form contracts. There banks might fairly           immunity from taxation [***93] against the authority of
hope that without a change in the necessities of the State,    its creator.
their quota of taxes would not be increased; and that
while payment was punctually made the [***91] form of               The court then said "however absolute the right of an
collection would not be altered. But the general assembly      individual (to property) may be, it is still in the nature of
represents a sovereign, and as such designated this rule of    that right, that it must bear a portion of the public
taxation upon existing considerations of policy, without       burdens, and that portion is determined by the
annexing restraints on its will, or abdicating [**994] its     legislature." The court declared that the relinquishment of
prerogative, and consequently was free to modify, alter,       the power of taxation is never to be assumed. "The
or repeal the entire disposition.                              community has a right to insist that its abandonment
                                                               ought not to be presumed in a case in which the
     I have thus far considered the sixtieth section of the    deliberate purpose of the State to abandon it does not
act as a distinct act, embodying a State regulation with       plainly appear."
the view of ascertaining its precise limitations.
                                                                    There principles were reaffirmed, their sphere
    I shall, however, examine the general scheme and           enlarged, and their authority placed upon broad and solid
object of the act, of which it forms a part, to ascertain      foundations of constitutional law and general policy, in
whether a different signification can be given to it.          the opinion of this court, in the case of the Charles River
Before doing so, it is a matter of consequence to ascertain    Bridge, 11 Pet. 420. No opinion of the court more fully
on what principles the inquiry must be conducted.              satisfied the legal judgment of the country, and
                                                               consequently none has exercised more influence upon its
       [*409] Three cases occurred in this court, before       legislation. The Supreme Court of Pennsylvania,
either of the members who now compose it belonged to           speaking of these cases, says, "they are binding on the
it, in which taxation acts of the States or its municipal      State courts not merely as precedents, and therefore
authorities, involving questions of great feeling and          proving what the law is, but as the deliberate judgment of
interest, were pronounced invalid. In the last of these the    that tribunal [*410] with whom the final decision of
court said, "that in a society like ours, with one supreme     [***94] all such questions rests. The State courts have
government for national purposes, and numerous State           almost universally followed them. But no tribunal of the
governments for other purposes, [***92] in many                Union has acceded to the rule they lay down with a more
respects independent and in the uncontrolled exercise of       earnest appreciation of its justice than did this court." 7
many important powers, occasional interferences ought          Har. 144; 10 Barr, 142.
not to surprise us. The power of taxation is one of the
most essential to a State, and one of the most extensive in        The Supreme Court of Georgia says, "the decision,
its operation. The attempt to maintain a rule which shall      based as it is upon a subject particularly within the
limit its exercise is undoubtedly among the most delicate      cognizance and jurisdiction of the Supreme Court of the
and difficult duties which can devolve on those whose          United States, is entitled to the highest deference." And
province it is to expound the supreme law of the land, in      the eminent Chief Justice of that court adds, "that the
its application to individuals." The court in each of these    proposition it establishes commands my entire assent and
                                                                                                                  Page 27
                                        57 U.S. 369, *410; 14 L. Ed. 977, **994;
                                      1850 U.S. LEXIS 1558, ***94; 16 HOW 369

approbation." 9 Georgia Rep. 517; 10 N.H. 138; 17 Conn.        what had once got into the crown should [**995] have
454; 21 Vt. 590; 21 Ohio, (McCook's Rep.) 564; 9             been forever separated from private possession. For then
Ala. 235; 9 Rob. 324; 4 Coms. 419; 6 Gill, 288.                by forfeitures and attaintures he must have become lord
                                                               of the whole soil in a long course of time. The
     The chief justice, delivering the opinion of this court   constitution, therefore, seems to have left him free in this
in that case, quotes with approbation the principle, that      matter; but upon this tacit trust, (as he has all his other
the abandonment of the power of taxation ought not to be       power,) that he shall do nothing which may tend to the
presumed in a case in which the deliberate purpose to do       destruction of his subjects. However, [***97] though he
so did not appear, and says, "The continued existence of a     be thus trusted, it is only as head of the commonwealth;
government would be of no great value, if, by                  and the people of England have in no age been wanting to
implications and presumption, it was disarmed of the           put in their claim to that to which they conceived
powers necessary to accomplish the ends of it creation,        themselves to have a remaining interest; which claims are
and the functions it [***95] was designed to perform           the acts of resumption that from time to time have been
transferred to the hands of privileged corporations. The       made in parliament, when such gifts and grants were
rule of construction announced by the court was not            made as become burdensome and hurtful to the people.
confined to the taxing power; nor is it so limited in the      Nor can any government or State divest itself of the
opinion delivered. On the contrary it was distinctly           means of its own preservation; and if our kings should
placed on the ground that the interests of the community       have had an unlimited power of giving away their whole
were concerned in preserving, undiminished the power in        revenue, and if no authority could have revoked such
question; and whenever any power of the State is said to       gifts, every profuse prince, of which we have had many
be surrendered or diminished, whether it be the taxing         in this kingdom, would have ruined his successor, and the
power or any other affecting the public interest, the same     people must have been destroyed with new and repeated
principle applies, and the rule of construction must be the    taxes; for by our duty we are likewise to support the next
same."                                                         prince. So that if no authority could look into this, a
                                                               nation must be utterly undone without any way of
     The court only declared those principles for which        redressing itself, which is against the nature and essence
the commons of England had struggled for centuries, and        of any free establishment.
which were only established by magnanimous and heroic
efforts. The rules that public grants convey nothing by             Our constitution, therefore, seems to have been, that
implication, are construed strictly in favor of the            the king always might make grants, and that these grants,
sovereign, do not pass any thing not described nor             if passed according to the forms prescribed by the law,
referred to, and when the thing granted is described           were [***98] valid and pleadable, against not only him,
nothing else passes; that general words shall never be so      but his successors. However, it is likewise manifest that
construed as to deprive him of a greater amount of             the legislative power has had an uncontested right to look
revenue than he intended to grant, were not the inventions     into those grants, and to make them void whenever they
of the craft of crown lawyers, but were established in         were thought exorbitant."
contests [***96] with crown favorites and impressed
upon the administration, executive and judicial as checks           Nor were they careless or indifferent to
for the people. The invention of crown lawyers was             precautionary measures for the preservation of the
employed about such phrases, as ex speciali gratia, certa      revenues of the State from spoliation or waste. Official
scientia mero motu, and non obstante, to undermine the         responsibility was established, and the Lords High
strength of such rules, and to enervate the force of           Treasurer and Chancellor, through whose offices the
wholesome statutes. A writer of the seventeenth century        grants were to pass, were severally sworn "that they
says, "from the time of William [*411] Rufus, our kings        would neither know nor suffer the king's hurt, nor his
have thought they might alienate and dispose of the            disinheriting, nor that the rights of his crown be
crown lands at will and pleasure; and in all ages, not only    distressed by any means as far forth as ye may let; and if
charters of liberty, but likewise letters-patent for lands     ye may not let it, ye shall make knowledge thereof clearly
and manors, have actually passed in every reign. Nor           and explicitly to the king with your true advice and
would it have been convenient that the prince's hands          counsel."
should have been absolutely bound up by any law, or that
                                                                                                                     Page 28
                                         57 U.S. 369, *411; 14 L. Ed. 977, **995;
                                       1850 U.S. LEXIS 1558, ***98; 16 HOW 369

      [*412] The responsibility of these high officers, as      cases, control the decision of this, if applied to this act.
the history of England abundantly shows, was something          Indeed, the argument of the plaintiff rests upon rules
more than nominal; nor did the frequent enforcement of          created for, and adapted to, a class of statutes entirely
that rule of responsibility, nor the adoption by the judges     dissimilar. We were invited to consider the antecedent
of the stringent rules I have cited, protect the revenues of    legislation [***101] of Ohio, in reference to its [*413]
the State from spoliation. "The wickedness of men,"             banks, the discouraging effects of that legislation, and
continues this writer, [***99] "was either too cunning or       then to deal with this act, as a medicinal and curative
too powerful for the wisdom of laws in being. And from          measure; as an act recognizing past error, and correcting
time to time great men, ministers, minions, favorites,          for the future the consequences. It is proper to employ
have broken down the fences contrived and settled in our        this argument to its just limit. The legislation of Ohio
constitution. They have made a prey of the                      since 1825 certainly manifests a distinct purpose of the
commonwealth, plumed the prince, and converted to their         State to maintain its powers over these corporations, in
own use what was intended for the service and                   the matter of taxation, unimpaired. With a very few
preservation of the State. That to obviate this mischief,       exceptions this appears in all the statutes. It is seen in the
the legislative authority has interposed with inquiries,        act of 1825, in the charters granted in 1834, in the acts of
accusations, and impeachments, till at last such                1841-2-3, the two last being acts embracing the whole
dangerous heads were reached." Davenant's Dis. passim.          subject-matter of banking. It is said this austerity was the
                                                                source of great mischief, depreciated the paper currency
     Nor let it be said that this history contains no lessons   of the State, and occasioned distress to the people, and
nor instructions suitable to our condition. The                 that the change apparent in the act of 1845 was the
discussions before this court in the Indiana Railroad and       consequence.
the Baltimore Railroad cases exposed to us the sly and
stealthy arts to which State legislatures are exposed, and           The existence of a consistent and uniform purpose
the greedy appetites of adventurers, for monopolies and         for a long period is admitted. The abandonment of such a
immunities from the State right of government. We               purpose, and one so in harmony with sound principles of
cannot close our eyes to their insidious efforts to ignore      legislation, cannot be presumed. If the application of
the fundamental laws and institutions of the States, and to     these principles in Ohio was productive of mischief, we
subject the highest popular interests to their central          should have [***102] looked for an explicit [**996]
boards of control and directors' management.                    and unequivocal disclaimer. We have seen that the act
                                                                contains no renunciation of this important power. And it
     This is not the time for the relaxation [***100] of        may be fairly questioned whether th people of Ohio
those time-honored maxims, under the rule of which free         would have sanctioned such a measure. I know of no
institutions have acquired their reality, and liberty and       principle which enables me to treat the sixtieth section of
property their most stable guaranties. The Supreme              this act as a remedial statute. Even the dissenting
Court of Pennsylvania says, with great force, "that if acts     opinions in the Charles River and Louisa Railroad cases,
of incorporation are to be so construed as to make them         which have formed the repertory from which the
imply grants of privileges, immunities, and exemptions,         arguments of the plaintiffs have been derived, do not in
which are not expressly given, every company of                 terms declare such a rule, and the opinions delivered by
adventurers may carry what they wish, without letting the       the authority of the court repel such a conclusion. Nor
legislature know their designs. Charters would be framed        can I consider the decision in 7 Ohio R. 125 of
in doubtful or ambiguous language, on purpose to                consequence in this discussion. That case was decided
deceive those who grant them; and laws, which seem              upon a form of doctrine which after the judgments of this
perfectly harmless on their face, and which plain men           court, before cited, had no title to any place in the legal
would suppose to mean no more than what they say,               judgment of the country. The case was decided in
might be converted into engines of infinite mischief.           advance of the most important and authoritative of those
There is no safety to the public interest except in the rule    decisions. It is not surprising to hear that the judges who
which declares that the privileges not expressly granted        gave the judgment, afterwards renounced its principle, or
are withheld." 7 Harris, 144.                                   that another State court has disapproved it, (7 Harris,
                                                                144,) or that it has not been followed in kindred cases, 11
    The principles of interpretation, contained in these        [***103] Ohio, 12, 393; 19 Ib. 110; 21 Ib. (McCook,)
                                                                                                                      Page 29
                                         57 U.S. 369, *413; 14 L. Ed. 977, **996;
                                       1850 U.S. LEXIS 1558, ***103; 16 HOW 369

563, 604, 626; and at the first time when it came up for         grow by subsequent events; there are sections which
revision it was overruled.                                       convey present rights, or from which rights may possibly
                                                                 arise in the form of a contract; there are others which
     It remains for me to consider the act of 1845, its          enter into the general system of administration, affect the
purpose and details, in connection with the sixtieth             public order, and tend to promote the common security.
section of the act, to ascertain whether it is proper to         Some of these provisions may be dispensed with by those
assume that the State has relinquished its rights of             for whose exclusive benefit they were made. Some may
taxation over the banking capital of the State.                  be altered, modified, or repealed, to meet other conditions
                                                                 of the public interest, and some perhaps may not be
     The act of 1845 was designed to enable any number,          alterable except with the consent of the corporators
not [*414] fewer than five persons, to form associations         themselves. To determine the class to which one
to carry on the business of banking.                             enactment or another belongs, we are referred to those
                                                                 general principles I have already considered. In this act,
     The legislature determined the whole amount of the
                                                                 [*415] of seventy-five sections, which organizes a vast
capital which should be employed under the act -- that it
                                                                 machinery for private banking, which directs the delicate
should be distributed over the State, according to a
                                                                 and complex arrangements for the supply of a paper
specified measure of apportionment; that the bills to
                                                                 currency to the State, and determines the investment of
circulate as currency should have certain marks of
                                                                 millions of capital, we find this sixtieth section. The act
uniformity, and be in a certain proportion to capital and
                                                                 is enabling and permissive. It makes it lawful for persons
specie on hand, and that a collateral security should be
                                                                 [***106] to combine and to conduct business in a
given for their redemption. The act contains measures for
                                                                 particular manner. It forms no partnership for the State,
organization, relating to subscriptions for stock, the
                                                                 compels no one to embrace or to continue the application
appointment of officers and boards of management;
                                                                 of industry and capital according to its scheme. It grants
sections, of a general interest, referring to the frauds of
                                                                 licenses under certain conditions and reservations, but is
officers, the insolvency of the corporations, [***104]
                                                                 nowhere coercive. Among the general regulations is the
their misdirection and forfeiture; sections containing
                                                                 one which directs the banks at the end of every six
explicit and clear statements of corporate right and
                                                                 months to ascertain their net profits for the six months
privilege, the capacities they can exercise, the functions
                                                                 next preceding and to set apart six per cent. for. the State
they are to perform, and the term of their existence.
                                                                 in the place of the other taxes or contributions to which
     The act initiates a system of banking of which any          they would be liable. But the legislature imposes no limit
five of its citizens may avail, and which provides for the       to its power, nor term to the exercise of its will, nor binds
confederacy of these associations under the general title        itself to adhere to this or any other rule of taxation.
of the State Bank of Ohio, and its branches, and their
                                                                      The subject affects the public order and general
subjection to a board of control, appointed by them.
                                                                 administration. It is not properly a matter for bargain or
     More than fifty banks have been formed under this           barter; but the enactment is in the exercise of a sovereign
act, and thirty-nine belong to the confederacy. Some of          power, comprehending within its scope every individual
the banks over whose charters the State has reserved a           interest in the State. It is a power which every
plenary control, are by the act permitted to join it. It is      department of government knows that the community is
said "that the whole of this act is to be taken; the purpose     interested in retaining unimparied, and that every
of the act and the time of the act. It is a unit." It will not   corporator understood its abandonment ought not to be
be contended that the fifty-first section of this act, by        presumed in a case in which the [***107] deliberate
which this multitude of banking companies are adjudged           purpose to abandon it does not appear."
to be corporations, with succession for twenty years,
                                                                      I have sought in vain in the sixtieth section of the act,
places every other relation established by the act, beyond
                                                                 in the act itself, and in the legislation and jurisprudence
the legislative domain for the same period of time. For
                                                                 of Ohio, for the expression of such a deliberate purpose.
there are in the act measures designed for organization
and arrangement [***105] for the convenience and                      My opinion is that the Supreme Court of Ohio has
benefit of the corporators only; there are concessions           faithfully applied the lessons inculcated by this court, and
creating hopes and expectations out of which rights may
                                                                                 Page 30
                                      57 U.S. 369, *415; 14 L. Ed. 977, **996;
                                    1850 U.S. LEXIS 1558, ***107; 16 HOW 369

that its judgment should be affirmed.
                                                                                                                  Page 1

                 STATE HIGHWAY DEPARTMENT OF TEXAS ET AL, V. W. E. GORHAM.

                                                       No. 7963

                                          SUPREME COURT OF TEXAS

                                139 Tex. 361; 162 S.W.2d 934; 1942 Tex. LEXIS 243

                                                    May 27, 1942

SUBSEQUENT HISTORY:                   [***1] Rehearing       compensation benefits to respondent state highway
overruled June 24, 1942                                      department employee, pursuant to Tex. Rev. Civ. Stat. art
                                                             6674s. The district court had reversed a decision by an
PRIOR HISTORY:        Error to the Court of Civil            administrative board, which had denied benefits to the
Appeals for the Tenth District, in an appeal from            employee.
McLennan County.
                                                             OVERVIEW: The employee was injured by equipment
     W. E. Gorham, having obtained permission by             similar to a circular saw, which seriously cut and injured
reason of a legislative act, brought this suit against the   his leg, resulting in a permanent incapacity to work. The
State Highway Department of Texas to recover                 Department asserted that he was not entitled to benefits
workmen's compensation for injuries received by him          because Tex. Rev. Civ. Stat. art 6674s (1937), which
while in the employ of the department, when an               provided for compensation for Department employees,
instrument similar to a circular saw, which he was using     was not in effect on the date of his injury in December
and which he alleged was defective seriously cut and         1937. On appeal, the court agreed with the Department,
injured his leg near the ankle joint, resulting in a         holding that the language of the statute was clear and
permanent incapacity to work. Plaintiff had previously       unambiguous. The workmen's compensation insurance
filed his claim with the Industrial Accident Board and       became effective on the date stated in the notice sent by
same was denied. A judgment awarding plaintiff a lump        the Department to the Industrial Accident Board , as
sum recovery for $3,591.70 was affirmed by the Court of      required by the statute, which was January 1, 1938. The
Civil Appeals, 158 S.W. (2d) 330, and the State Highway      State and the Department were not liable for injuries
Department has brought error to the Supreme Court.           sustained by employees prior to that time. The court held
                                                             that a bill passed by the legislature, which provided that
     Judgments of both courts are reversed and judgment      all rights and privileges of the statute were to be applied
is here rendered in favor of the Highway Department.         to this individual employee as if the statute had been
                                                             effective on the date of his injury was unconstitutional
CASE SUMMARY:
                                                             and without effect. It violated the constitutional inhibition
                                                             against the enactment of local or special laws set forth in
PROCEDURAL POSTURE: Petitioners, the Texas                   Tex. Const. art. III, § 56.
State Highway Department and the State, sought review
of the order of the Court of Civil Appeals, Texas, which     OUTCOME: The court reversed the judgment of the
affirmed a district court's judgment granting workmen's      lower courts and entered judgment in favor of the
                                                                                                                   Page 2
                                          139 Tex. 361, *; 162 S.W.2d 934, **;
                                              1942 Tex. LEXIS 243, ***1

Department.                                                    Governments > Legislation > Interpretation
                                                               [HN5] While interpretations and construction by the
CORE TERMS: notice, payroll, special law,                      Texas Legislature of its Acts at the same or succeeding
compensation insurance, general law, prescribe, violative,     sessions are persuasive on a reviewing court in the
notified, work performed, number of employees,                 interpretation of statutes, they are not controlling.
estimated amount, physical examinations, annual,
workmen's compensation, particular case, permission,
deprived, effect prior, reasonable time, appropriation,        Governments > Legislation > Effect & Operation >
approximate, promulgate, convenient, physically,               Operability
designate, furnish, certify, notify                            Governments > State & Territorial Governments >
                                                               Employees & Officials
LexisNexis(R) Headnotes                                        Workers' Compensation & SSDI > Administrative
                                                               Proceedings > Awards > General Overview
                                                               [HN6] The date upon which workmen's compensation
                                                               insurance became effective and available to the
                                                               employees of the Texas State Highway Department is the
Governments > Legislation > Effect & Operation >               date stated in the notice, required by the statute, which
Operability                                                    was sent by the Department to the Industrial Accident
Governments > State & Territorial Governments >                Board, -- to wit, January 1, 1938, at 12:01 A.M.; and the
Employees & Officials                                          State and the Department are not liable, under the general
Workers' Compensation & SSDI > Administrative                  law, for injuries sustained prior to that time.
Proceedings > Awards > General Overview
[HN1] See Tex. Rev. Civ. Stat. art 6674s, § 3 (1937).
                                                               Constitutional Law > Bill of Rights > General Overview
                                                               Governments > Legislation > Enactment
Governments > Legislation > Interpretation                     [HN7] Tex. Const. art. III, § 36 forbids the amendment of
[HN2] Where a statute is plain and unambiguous, it will        a law without its being "re-enacted and published at
be enforced according to its wording. It is the duty of an     length."
appellate court to examine the entire act, and to construe
it as a whole. The statute should be given a fair review, in
order to accomplish the legislative intent and pursuable       Constitutional Law > Bill of Rights > General Overview
construction, considering the language and the subject         Constitutional Law > Equal Protection > Scope of
pose.                                                          Protection
                                                               [HN8] Section 3 of the Texas Bill of Rights provides that
                                                               all men shall have equal rights.
Governments > Legislation > Interpretation
[HN3] A statute will not be construed so as to ascribe to
the legislature an intention of doing an unjust thing by its   Constitutional Law > Equal Protection > Scope of
enactment, or of causing confusion thereby, if the statute     Protection
is reasonably susceptible of a construction showing the        Governments > Legislation > Enactment
legislature's intention to have been otherwise.                [HN9] Tex. Const. art. III, § 56 provides that no local or
                                                               special law shall be enacted where a general law can be
                                                               made applicable.
Governments > Legislation > Effect & Operation >
Operability                                                    COUNSEL: Gerald C. Mann, Attorney General, Wm. J.
Governments > Legislation > Enactment                          Fanning, Ardell Williams, Wm. J. R. King and Geo. W.
Governments > Legislation > Interpretation                     Barcus, Assistants Attorney General, for petitioners.
[HN4] Where an act is complete in and of itself, it is
fairly within the scope of the legislative power to            It was error for the court to hold that plaintiff proved
prescribe that it shall become operative on the happening      [***2] a good cause for not filing his claim with the
of some specific contingency or future event.                  Industrial Accident Board within six months; and that
                                                               there were no such conflicts in the findings of the jury as
                                                                                                                       Page 3
                                            139 Tex. 361, *; 162 S.W.2d 934, **;
                                                1942 Tex. LEXIS 243, ***2

to require a reversal of the judgment of the trial court.              [*364] "Sec. 3. [HN1] After the effective date of this
Scott v. Texas Emp. Ins. Assn., 118 S.W. (2d) 354;                law any employee * * *, who sustains an injury in the
Casualty Reciprocal Exch. v. Richardson, 86 S.W. (2d)             course of his employment shall be paid compensation as
838; Traders & Gen. Ins. Co. v. Wood, 103 S.W. (2d)               hereinafter provided.
1058.
                                                                       "The Department is hereby authorized to be self
Witt, Terrell, Lincoln, Jones & Riley, of Waco, for               insuring and is charged with the administration [***4]
respondent.                                                       of this law. The Department shall notify the Board of the
                                                                  effective date of such insurance, stating in such notice the
OPINION BY: SHARP                                                 nature of the work performed by the employees of the
                                                                  Department, the approximate number of employees, and
OPINION                                                           the estimated amount of the payroll.

     [**935] [*363] MR. JUSTICE SHARP delivered                        "The Department shall give notice to all employees
the opinion of the Court.                                         that, effective at the time stated in such notice, the
                                                                  Department has provided for payment of insurance."
      W. E. Gorham, having obtained legislative consent,          (Italics ours.)
brought this suit under Article 6674s, Vernon's Annotated
Civil Statutes, against the State Highway Department of                The Act further provides that the Department is
Texas, referred to as the Department, and The State of            authorized to promulgate and publish rules and
Texas, to recover workmen's compensation for injuries             regulations, and to prescribe and furnish such forms as
sustained while in the employ of the Department. A                may be necessary. It is required to designate a
recovery was denied by the Industrial Accident Board,             convenient number of physicians and surgeons [**936]
referred to as the Board, and Gorham appealed. Upon               to make physical examinations of all persons in the
trial in the district court, the jury found that he was totally   employ of the Department, and to determine those who
and permanently disabled as the result of an accidental           are physically fit to be classified as employees.
injury received on December 7, 1937, in the course of his
employment for the Department. The trial [***3] court                  There is a further provision that no person shall be
thereupon awarded Gorham a lump sum recovery of                   certified as an "employee" unless and until he has
$3,591.70. The judgment was affirmed by the Court of              submitted himself to a physical examination and is found
Civil Appeals. 158 S.W. (2d) 330. This Court granted a            to be physically fit for the duties to which he is assigned;
writ of error.                                                    but it is further provided that failure to be examined shall
                                                                  not bar a recovery.
    The principal question is whether the insurance
coverage contemplated by the law providing for                         The Act authorizes the Department to set [***5]
compensation insurance for employees of the Highway               aside from its available appropriations an amount, not to
Department was in effect on December 7, 1937, the date            exceed 3 1/2% of the annual labor payroll of the
on which Gorham was injured. For a determination of               Department, for the payment of all costs, administrative
this matter the Act itself, Article 6674s, Vernon's               expense, charges, benefits, and awards authorized by this
Annotated Civil Statutes, must be construed.                      law. The Department is charged with the duty of keeping
                                                                  a record of all injuries sustained by its employees and of
    This Act was passed on June 11, 1937, and was                 making a report thereof to the Board.
signed by the Governor on the same day. It carried the
emergency clause, and provided that it should take effect              On December 21, 1937, the Department notified the
immediately after its passage. The Act, therefore,                Board that, "Workmen's Compensation insurance for
unquestionably became a law on June 11, 1937. The                 certain employees of the Highway Department, as
question then remains as to when the insurance                    provided in said Statute, will become effective at 12:01
provisions in the Act became effective.                           A.M., January 1, 1938. The nature of the work
                                                                  performed by employees of the Highway Department is
    The Act provides in part as follows:                          Highway Construction and Maintenance, and all work
                                                                  incidental thereto. The appropriate number of [*365]
                                                                                                                    Page 4
                                       139 Tex. 361, *365; 162 S.W.2d 934, **936;
                                              1942 Tex. LEXIS 243, ***5

such employees is seven thousand (7,000). The estimated         work performed by the employees, the [*366]
amount of annual payroll is Nine Million Dollars                approximate number of employees, and the estimated
($9,000,000.00)."                                               amount of the payroll. The Legislature must have
                                                                contemplated that it would take a reasonable time to put
    The Industrial Accident Board certified that the            this program in operation. Therefore the following
Department became a subscriber as outlined under the            provisions of the Act appear to be controlling as to the
Workmen's Compensation Law on January 1, 1938, at               meaning of the "effective date" upon which the insurance
12:01 A.M.                                                      should go [***8] in operation:

     On May 26, 1939, the Legislature passed House Bill              "The Department shall notify the Board of the
No. 1047, being Chapter 1, page 950, Special Laws of the        effective date of such insurance. * * * The Department
46th Legislature, [***6] granting Gorham permission to          shall give notice to all employees that, effective at the
sue for compensation on account of the alleged injuries         time stated in the notice, the Department has provided for
and on account of the failure of the Department to              payment of insurance." (Italics ours.)
provide compensation insurance within a reasonable
time; and it was provided that any judgment so recovered             [HN3] A statute will not be construed so as to
should be paid out of the funds of the Department set           ascribe to the Legislature an intention of doing an unjust
aside for injuries to its employees. The bill reserved to       thing by its enactment, or of causing confusion thereby, if
the Department all defenses available to it under Article       the statute is reasonably susceptible of a construction
6674s, "except its failure to have compensation insurance       showing the Legislature's intention to have been
and to comply with the law relevant thereto and to certify      otherwise. Anderson v. Penix, 138 Texas 596, 161 S.W.
said Gorham as an employee, and except the Statute of           (2d) 455; Trimmier v. Carlton, 116 Texas 572, 296 S.W.
Limitations. It being the purpose of this act to make           1070; Winder v. King (Com. App.), 1 S.W. (2d) 587; 39
available to the said W. E. Gorham, all rights and              Tex. Jur. 174.
privileges of Article 6674s as if the Highway Commission
had put said Act into effect prior to December 7, 1937."             We believe, when we read the Act as a whole, that it
(Italics ours.)                                                 was the intention of the Legislature [**937] to leave it
                                                                to the Department to set up the rules, regulations, and
     It is a settled rule that [HN2] where a statute is plain   machinery necessary to put in operation the method of
and unambiguous, it will be enforced according to its           paying compensation to employees for injuries sustained
wording. It is the duty of the Court to examine the entire      while in the employ of the Department; and that such
Act, and to construe it as a whole. The statute should be       insurance could not take effect until the Department had
given a fair and reamatter, in order to accomplish the          inaugurated the system and notified the Industrial
legislative intent and pursonable construction,                 Accident Board of the effective date [***9] of such
considering the language and the subject pose. [***7]           insurance. In any event, there are no pleadings in this
39 Tex. Jur., p. 166 et seq., secs. 90 and 91.                  case that the Department was negligent in any manner in
                                                                getting the plan in operation, or that it was guilty of any
    After June 11, 1937, the Department was authorized          unreasonable delay. The distinction between the date
and required to promulgate rules and regulations, and to        upon which a legislative Act becomes a law and the date
prescribe and furnish forms, for the effective                  upon which that law becomes operative has been drawn
administration of the law. It was authorized to set aside       in numerous other decisions by this Court. See Corpus v
from its appropriation an amount, not to exceed 3 1/2%          Chorn, 136 Texas 209, 150 S.W. (2d) 70; Popham v.
of its annual labor payroll, to cover all costs of the          Patterson, 121 Texas 615, 51 S.W. (2d) 680; Anderson v.
program. It necessarily had to investigate the number of        Penix, supra.
employees to be included, the risks covered, and the
probable cost to the Department. The Department was                  [HN4] Where an Act is complete in and of itself, it is
required to designate a convenient number of doctors,           fairly within the scope of the legislative power to
and was authorized to conduct physical examinations of          prescribe that it shall become operative on the happening
employees. Since the program was to be administered in          of some specific contingency or future event. Johnson v.
connection with the Industrial Accident Board, the statute      Martin, 75 Texas 33, 12 S.W. 321; 16 C.J.S., p. 414, sec.
prescribed that the Board be notified of the nature of the      141; 9 Tex. Jur., 498. [*367]
                                                                                                                   Page 5
                                      139 Tex. 361, *367; 162 S.W.2d 934, **937;
                                             1942 Tex. LEXIS 243, ***9

It is asserted by respondent that the intention of the        into effect prior to December 7, 1937."
Legislature was conclusively demonstrated to the
contrary by the passage of House Bill No. 1047, supra,             The foregoing part of this Act is invalid for many
which granted Gorham permission to sue the State, and         reasons. To enumerate the following will suffice here: If
deprived the State and the Department of the defense that     this part of the Act be construed as an amendment to
the Act was not effective on December 7, 1937. [HN5]          Article 6674s, it is ineffectual; because general laws can
While interpretations and construction by the Legislature     not be amended in this manner. Caples v. Cole, supra. It
[***10] of its Acts at the same or succeeding sessions        is also violative of Article III, Section 36, of the Texas
are persuasive on the Court in the interpretation of          Constitution, which [HN7] forbids the amendment of a
statutes, they are not controlling. Caples v. Cole, 129       law without its being "re-enacted and published at
Texas 370, 102 S.W. (2d) 173, rehearing denied 129            length." If the Act be construed as a special law,
Texas 370, 104 S.W. (2d) 3.                                   depriving the State of a defense in a particular case, it is
                                                              unconstitutional, as being violative of Section 3 of the
     We therefore hold that [HN6] the date upon which         Texas Bill of Rights, which [HN8] provides that all men
the insurance became effective and available to the           shall have equal rights. It is also violative of Article III,
employees of the Department was the date stated in the        Section 56, of our State Constitution, [*368] which
notice, required by the statute, which was sent by the        [HN9] provides that no local or special law shall be
Department to the Board, -- towit, January 1, 1938, at        enacted where a general law can be made applicable.
12:01 A.M.; and the State and the Department are not          "The purpose of this constitutional inhibition against the
liable, under the general law, for injuries sustained prior   enactment of local or special laws is a wholesome one. It
to that time.                                                 is intended to prevent the granting of special [***12]
                                                              privileges and to secure uniformity of law throughout the
     But it is contended by respondent that, in his           State as far as possible." Miller v. El Paso County, 136
particular case, the State and the Department were            Texas 370, 150 S.W. (2d) 1000. It certainly was not the
deprived of that defense by the subsequent enactment of       intention of the framers of our Constitution that the State
House Bill No. 1047, supra, giving him the privilege of       should have certain defenses against some individuals,
bringing suit against the State and the Department, and       but not against others similarly situated.
wherein it was provided that all defense should be
available to the State and the Department, "except its            The judgments of the trial court and of the Court of
failure to have compensation insurance and to comply          Civil Appeals are reversed, and judgment is here
with the law relevant thereto and to certify said Gorham      rendered in favor of petitioners.
as an employee, and except the Statute of Limitations. It
being the purpose of this Act to make [***11] available           Opinion delivered May 27, 1942.
to the said W. E. Gorham, all rights and privileges of Art.
                                                                  Rehearing overruled June 24, 1942.
6674s as if the Highway Commission had put said Act
                                                                                                                    Page 1

                Sunbeam Environmental Services, Inc. and Alphonso Solomon and Company, Inc.,
                 Appellants v. Texas Workers' Compensation Insurance Facility, succeeded by the
                                     Facility Insurance Corporation, Appellee

                                                  NO. 03-01-00326-CV

                         COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN

                                      71 S.W.3d 846; 2002 Tex. App. LEXIS 1380

                                                February 22, 2002, Filed

NOTICE:     [**1] PURSUANT TO THE TEXAS                        attorneys not designated as the attorney in charge
RULES    OF     APPELLATE    PROCEDURE,                        purported to act for the insurer. The court of appeals
UNPUBLISHED OPINIONS SHALL NOT BE CITED                        disagreed. The statute of limitations was four years, as
AS AUTHORITY BY COUNSEL OR BY A COURT.                         the suit for debt was based on a breach of contract.
                                                               Evidence was sufficient to warrant the insurer's recovery,
SUBSEQUENT HISTORY:               Released for Publication     as complete documentation was provided of a breach,
April 18, 2002.                                                despite the insurer's failure to introduce a copy of the
                                                               policy. There was no evidence that the insured's contract
PRIOR HISTORY: FROM THE DISTRICT COURT                         differed in any material respect from those in evidence to
OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT.                     illustrate the terms therein. Further, the second insured
NO. 97-0115, HONORABLE SCOTT JENKINS,                          shared liability for the premiums. The insureds' failure to
JUDGE PRESIDING.                                               pay the amounts billed was sufficient to support
                                                               attorney's fees, despite their claim they did not receive
DISPOSITION: Affirmed.                                         the bills. Finally, any attorney employed by the firm
                                                               representing the insurer was entitled to correspond with
CASE SUMMARY:                                                  the insured.

                                                               OUTCOME: The judgment was affirmed.
PROCEDURAL POSTURE: The District Court of
Travis County, 250th Judicial District, Texas, granted         CORE TERMS: premium, coverage, workers'
summary judgment to appellee insurer, finding appellant        compensation, attorney's fees, owed, payroll, insured,
insureds liable for unpaid premiums, interest, and             wholly owned, invoice, limitations periods, servicing,
attorney's fees. The insureds appealed.                        complain, audit, statute of limitations, limitations bars,
                                                               evidence supports, trial record, documents filed, opposing
OVERVIEW: The insureds challenged judgment against             party, reply brief, designated, scintilla, claimant, expired,
them, contending that: (1) the insurer was barred from         signing, notice, uphold, insurance policy, evidence
recovering on the first of their policies by the statute of    admitted, coverage provided
limitations, (2) the evidence was insufficient to sustain
the decision, (3) the insurer failed to give proper pre-suit   LexisNexis(R) Headnotes
notice sufficient to award attorney's fees, and (4)
                                                                                                                    Page 2
                                   71 S.W.3d 846, *; 2002 Tex. App. LEXIS 1380, **1

                                                               Smith and Puryear.

                                                               OPINION BY: Bea Ann Smith
Contracts Law > Breach > General Overview
Contracts Law > Defenses > Statutes of Limitations             OPINION
Governments > Legislation > Statutes of Limitations >
Time Limitations                                                       [*848] Appellants Sunbeam Environmental
[HN1] A suit for debt based on a breach of contract has a      Services, Inc. (Sunbeam) and Alphonso Solomon and
four-year statute of limitations. Tex. Civ. Prac. & Rem.       Company, Inc. (ASC) challenge a judgment favoring the
Code Ann. § 16.004 (West Supp. 2002).                          Texas Workers' Compensation Insurance Facility (the
                                                               Facility). 1 The district court found appellants jointly and
                                                               severally liable to the Facility for unpaid premiums,
Civil Procedure > Appeals > Standards of Review >
                                                               interest on those premiums, and attorney's fees. Because
Substantial Evidence > General Overview
                                                               we find this cause is not barred by the statute of
[HN2] When reviewing no-evidence challenges, an
                                                               limitations and the evidence is sufficient to support the
appellate court considers all the evidence in the light
                                                               award, we affirm the district court's judgment.
most favorable to the judgment, making every reasonable
inference in its favor. It will uphold the jury's finding if          1 According to testimony at trial and appellate
more than a scintilla of evidence supports it. The                    briefs, the Facility Insurance Corporation
evidence supporting a finding is more than a scintilla if             succeeded the Texas Workers' Compensation
reasonable minds could arrive at the finding given the                Insurance Facility. The succession had occurred
facts proved in the particular case.                                  by time of trial and had no known effect on this
                                                                      case; we will refer to appellee simply as the
Civil Procedure > Appeals > Standards of Review >                     Facility.
Clearly Erroneous Review
                                                               [**2] BACKGROUND
[HN3] When reviewing factual-sufficiency challenges, an
appellate court considers all the evidence and upholds the         Sunbeam and ASC are both Texas corporations
jury's verdict unless it finds that (1) the evidence is too    wholly owned by Alphonso Solomon (Solomon).
weak to support the finding, or (2) the finding is so          Sunbeam received workers' compensation insurance
against the overwhelming weight of the evidence as to be       coverage through the Facility. The Facility was "a
manifestly unjust.                                             private, non-profit, unincorporated association of insurers
                                                               authorized to write workers' compensation insurance in
Civil Procedure > Parties > Required Representation            Texas for employers who are unable to obtain coverage
Civil Procedure > Remedies > Costs & Attorney Fees >           through private insurance companies." See All Star Sheet
General Overview                                               Metal & Roofing, Inc. v. Texas Dep't of Ins., 935 S.W.2d
[HN4] Tex. Civ. Prac. & Rem. Code Ann. § 38.002                186, 189 (Tex. App.--Austin 1996, no writ).
(West 1997) requires that in order for a claimant to
                                                                    This dispute concerns premiums on policies in effect
recover attorney's fees: (1) the claimant must be
                                                               in 1992 and 1993. Workers' compensation insurance
represented by an attorney; (2) the claimant must present
                                                               premiums are based on payroll expenditures. Insureds are
the claim to the opposing party or to a duly authorized
                                                               required to pay premiums based on their estimated
agent of the opposing party; and (3) payment for the just
                                                               payroll, but the final premium cannot be calculated until
amount owed must not have been tendered before the
                                                               all salaries and wages for the coverage period have been
expiration of the 30th day after the claim is presented.
                                                               disbursed. Part five of the standard workers'
                                                               compensation insurance policy calls for a payroll audit to
Civil Procedure > Appeals > Briefs                             calculate the final premium within three years of the end
[HN5] A reply brief is limited in scope to responding to       of the coverage period. Coverage for Sunbeam under the
matters in an appellee's brief. Tex. R. App. P. 38.3.          first policy in this case began January 29, 1992. Upon
                                                               learning that Sunbeam was a "combinable" risk with
JUDGES: Before Chief Justice Aboussie, Justices B. A.          [**3] ASC because Solomon wholly owned both
                                                                                                                    Page 3
                                 71 S.W.3d 846, *848; 2002 Tex. App. LEXIS 1380, **3

companies, the Facility required ASC to apply for                   The limitations period did not begin running on
coverage or the Facility would cancel Sunbeam's policy.        January 29, 1993, however. [**5] Part five of the
ASC applied and, on February 21, 1992, was added as an         workers' compensation policy states that, because the
insured through an endorsement on the first policy issued      final premium is based on the actual payroll disbursed,
to Sunbeam. The two [*849] companies renewed                   the final premium cannot be determined until after the
coverage under the second policy for the year beginning        end of the policy term; the policy specifies that the audit
January 29, 1993. The Facility canceled the second policy      will occur within three years of the end of the policy
on June 8, 1993, for nonpayment of premiums and failure        term. Here, the auditors sent an invoice on May 28, 1993
to make required reports.                                      for the additional $ 7520.13 they determined appellants
                                                               owed in premiums on the first policy. This suit for
     The district court found that appellants owed the         collection of this amount, filed less than four years after
Facility for unpaid premiums on these policies, less an        the date of this invoice, was timely.
offset due for a refund of a maintenance tax. Audits
showed that appellants owed $ 7,520.13 in additional           Sufficiency of the evidence
premium on the first policy and $ 5,808.33 in premium
on the second policy, less the credit of $ 871.47, yielding         Appellants raise five issues that essentially challenge
a total due of $ 12,456.99; the court also assessed            the sufficiency of the evidence to support the judgment.
prejudgment interest of $ 6,223.27, court costs, and           [HN2] When reviewing no-evidence challenges, we will
postjudgment interest. The court awarded attorney's fees       consider all the evidence in the light most favorable to the
of $ 3114 plus additional amounts for appeals.                 judgment, making every reasonable inference in its favor.
                                                               See Associated Indem. Corp. v. CAT Contracting, Inc.,
DISCUSSION                                                     964 S.W.2d 276, 285-86 (Tex. 1998); Transportation Ins.
                                                               Co. v. Moriel, 879 S.W.2d 10, 25 (Tex. 1994). We will
     Appellants raise eight issues on appeal. They assert      uphold the jury's finding if more than a scintilla of
that limitations bars the Facility from recovering on the      evidence supports it. Burroughs Wellcome Co. v. Crye,
first policy. By five issues, they complain [**4] about        907 S.W.2d 497, 499 (Tex. 1995); [**6] Seideneck v.
various aspects of the evidence admitted in support of the     Cal Bayreuther Assocs., 451 S.W.2d 752, 755 (Tex.
judgment, including the sufficiency of the evidence. They      1970); In re King's Estate, 150 Tex. 662, 244 S.W.2d
further complain that the Facility did not give pre-suit       660, 661 (Tex. 1951). The evidence supporting a finding
notice sufficient to empower the court to award attorney's     is more than a scintilla if reasonable minds could arrive at
fees and that attorneys not designated as the attorney in      the finding given the facts proved in the particular case.
charge purported to act for the Facility.                      See Crye, 907 S.W.2d at 499; Moriel, 879 S.W.2d at 25.
                                                               [HN3] When reviewing [*850] factual-sufficiency
Limitations                                                    challenges, we consider all the evidence and uphold the
                                                               jury's verdict unless we find that (1) the evidence is too
     Appellants contend that the statute of limitations bars
the Facility's claims for premiums owed on the policy          weak to support the finding, or (2) the finding is so
                                                               against the overwhelming weight of the evidence as to be
that expired at 12:01 a.m. on January 29, 1993. Because
                                                               manifestly unjust. Ortiz v. Jones, 917 S.W.2d 770, 772
this is [HN1] a suit for debt based on a breach of contract,
                                                               (Tex. 1996); Cain v. Bain, 709 S.W.2d 175, 176 (Tex.
a four-year statute of limitations applies. See Tex. Civ.
                                                               1986).
Prac. & Rem. Code Ann. § 16.004 (West Supp. 2002).
Appellants contend that the suit was filed too late because          Appellants complain that the Facility did not provide
it was filed hours after the four-year period expired at       "complete documents as evidence to show the court that a
12:01 a.m. on January 29, 1997.                                contract was violated." They point to the sole witness's
                                                               testimony that she did not know whether appellants had
     We find no authority to support appellants' assertion
                                                               received any of the insurance documents. Appellants'
that limitations periods are computed on any unit of time
                                                               argument regarding receipt of the contract is made for the
shorter than a day. The Facility's cause of action was thus
                                                               first time on appeal. The witness was an [**7] employee
timely filed even if the limitations period began running
                                                               of the Facility, not the servicing company or any of the
on January 29, 1993.
                                                               appellants, and so did not have direct knowledge of what
                                                                                                                  Page 4
                               71 S.W.3d 846, *850; 2002 Tex. App. LEXIS 1380, **7

the servicing company sent or what the appellants            janitorial workers, causing overcharges because the rate
received. She testified that the standard procedure would    for supervisory employees was lower. The affidavits
be for the servicing company to send to the insured a        attached to appellants' brief were not offered or admitted
standard policy with boilerplate language dictated by the    at trial and do not bear file stamps indicating that they
State. The policy's boilerplate language explains the        were filed with the district court. Some of the exhibits
process of estimating premiums and calculating them          [*851] attached to the affidavits are the same as
within three years after the coverage period based on        documents admitted at trial, but they do not require us to
actual payroll. Though the Facility did not introduce a      find that the Facility miscalculated the premiums due.
copy of a policy contained in appellants' files, there was   Appellants neither preserved this argument nor presented
no evidence that the appellants' contract differed in any    a record requiring reversal.
material respect from the contracts in evidence used to
illustrate the terms of appellants' contract. Further,       Attorney's fees
appellants' attorney effectively conceded receipt and
                                                                  Appellants contend that the Facility cannot recover
coverage at trial, stating that "no one is arguing that
                                                             attorney's fees because it did not give proper notice
they're not covered by insurance." The evidence admitted
                                                             before filing suit. They also contend that bills sent do not
was sufficient to show the terms of the contracts.
                                                             satisfy the statute permitting attorney's fees. See Tex. Civ.
     Appellants next contend that ASC was only an            Prac. & Rem. Code Ann. § 38.002 (West 1997). 2
additional named insured and not liable for premiums on      Appellants contend the bills do not satisfy the statute
Sunbeam's policies. They contend that ASC never had an       because [**10] they were not issued by the Facility's
account or policy with the Facility, that [**8] a policy     attorney. Appellants misread section 38.002; though the
was never issued to ASC, and that ASC never received a       party requesting attorney's fees must both make demand
policy or endorsement. Appellants do not cite to any         for payment (to ensure that the debtor is aware of the debt
evidence from the trial record supporting these claims.      being sued upon) and be represented by counsel (so that
Appellants' argument that ASC had no liability for           there is an attorney who is due the fees requested), there
premiums is premised on the fact that ASC did not            is no requirement that the demand must be made by
voluntarily apply for the insurance policy. The Facility     counsel. See id. The only evidence in the record is that
did not mandate that ASC request coverage; Solomon           the Facility sent invoices to the appellants for premiums
could have chosen to forego workers' compensation            due on each of the policies; there is no evidence in the
insurance for both companies, but chose to apply for         trial record that the appellants did not receive the bills.
coverage for ASC to preserve coverage for Sunbeam. The       The only evidence is that appellants failed to pay the
only evidence is that ASC applied for and received           amounts the Facility billed them and that the Facility was
coverage on equal footing with Sunbeam--ASC was              represented by counsel. The record supports the
"combined" with Sunbeam for purposes of workers'             conclusion that the Facility satisfied section 38.002. Id.
compensation insurance--rather than passively receiving
                                                                    2     This statute [HN4] requires that "(1) the
coverage under Sunbeam's policy. The January 1993
                                                                    claimant must be represented by an attorney; (2)
application for insurance lists both Sunbeam and ASC as
                                                                    the claimant must present the claim to the
names of the applicant, as does the binder issued for that
                                                                    opposing party or to a duly authorized agent of
policy. Both companies were wholly owned by Solomon
                                                                    the opposing party; and (3) payment for the just
and received their mail at the same address. The only
                                                                    amount owed must not have been tendered before
evidence is that both were insureds, and thus that they
                                                                    the expiration of the 30th day after the claim is
were both liable for premiums owed on the coverage
                                                                    presented." Tex. Civ. Prac. & Rem. Code Ann. §
provided to both companies. The evidence supports the
                                                                    38.002 (West 1997).
finding that ASC shared [**9] liability for premiums for
the coverage provided.                                             [**11] In their reply brief, appellants for the first
                                                             time challenge their liability for $ 350 in attorney's fees
     Appellants contend for the first time on appeal that
                                                             awarded to the Facility for filing a motion to compel
the Facility miscalculated the premiums due on both
                                                             them to respond to interrogatories. [HN5] A reply brief is
policies. They contend that they were erroneously
                                                             limited in scope to responding to matters in an appellee's
charged the same rate for supervisory employees as for
                                                             brief. Tex. R. App. P. 38.3. The Facility did not mention
                                                                                                                Page 5
                               71 S.W.3d 846, *851; 2002 Tex. App. LEXIS 1380, **11

the $ 350 award. Appellants waived this complaint by         cite no authority for the proposition that documents filed
failing to raise it in their initial brief.                  by other attorneys from his firm were invalidly filed.
                                                             Most important, appellants [**12] have not shown how
Authorization of attorneys                                   they were harmed by the filing of documents by
                                                             co-counsel in the firm of the attorney in charge. See Tex.
     Appellants contend that all pleadings and documents     R. App. P. 44.1; see also Spellmon v. Collins, 970
filed by attorneys other than David Dillon were              S.W.2d 578, 580 (Tex. App.--Houston [14th Dist.] 1998,
unauthorized. Appellants correctly assert that, by signing   no pet.). We resolve this issue in favor of the judgment.
the Facility's original petition, Dillon became the
Facility's attorney in charge. See Tex. R. Civ. P. 8. The    CONCLUSION
record plainly shows that attorneys other than Dillon
signed and filed documents without being designated as           Having resolved all issues in favor of the judgment,
attorneys in charge. All attorneys signing and filing        we affirm the district court's judgment.
documents on the Facility's behalf were from the same
firm as Dillon. Though appellants were entitled to               Bea Ann Smith, Justice
continue to correspond with the attorney in charge, they
                                                                                                                   Page 1

               Walter E. SWITZER, Jr., Appellant, v. CITY OF PHOENIX, Jack Williams, Mayor
                  of the City of Phoenix, David P. Jones, Wesley Johnson, Faith I. North, V. A.
                Cordova, Dr. Joseph Madison Greer, and Clarence H. Shivvers, Members of the
                       Phoenix City Council, John E. Burke, Phoenix City Clerk, Appellees

                                                        No. 6770

                                              Supreme Court of Arizona

                                  86 Ariz. 121; 341 P.2d 427; 1959 Ariz. LEXIS 145

                                                      July 1, 1959

DISPOSITION:        [***1] Modified and affirmed.             court found instead that a decrease in the proportion
                                                              payable to the city, so long as the bondholders received
CASE SUMMARY:                                                 their quid pro quo, was permissible.

                                                              OUTCOME: The court modified the summary judgment
PROCEDURAL POSTURE: A lower court (Arizona)                   in favor of appellees and affirmed as modified.
granted motion for summary judgment filed by appellees,
a city, the city council members, and the city clerk, in      CORE TERMS: convention, taxation, street,
appellant real estate taxpayer's action seeking a             modification, ordinance, highway, improvement bonds,
declaratory judgment and injunctive relief to prevent the     right to impose, power of taxation, issuance, decrease,
issuance of certain street improvement bonds.                 existing law, excise tax, continuation, surrendered,
                                                              proportion, contracted, suspended, memorial, sentence,
OVERVIEW: The city adopted an ordinance authorizing           pledge, impair, right to tax, contracting, bonds issued,
the issuance of street and highway improvement bonds          taxes collected, power to impose, crystal clear,
which were to be paid from the city's share of the funds      indebtedness, collection
received from the state's motor vehicle fuel and gasoline
tax receipts. The taxpayer argued, inter alia, that the       LexisNexis(R) Headnotes
bonds would increase the city's total debt above the limit
set by Ariz. Const. art. IX, § 8. The trial court found for
appellees, and the court modified and affirmed. The court
held that an obligation payable from a special fund
                                                              Governments > Local Governments > Finance
created by the imposition of excise taxes and for the
                                                              Governments > Public Improvements > Financing
payment of which the general credit of the taxing
                                                              [HN1] Phoenix, Ariz., Ordinance No. S-1186 states that a
authority was not pledged was not a debt within the
                                                              bond and the issue of which it is a part are payable solely,
meaning of constitutional debt limitations. The court
                                                              as to both principal and interest, from the proceeds of
rejected the taxpayer's argument that the city could not
                                                              revenues to be derived by said city from taxes collected
bind the state not to decrease the motor vehicle tax. The
                                                              by the state of Arizona and returned to the city for street
court held that the ordinance's broad language that the
                                                              and highway purposes.
state fuel tax could not be decreased was ultra vires. The
                                                                                                                   Page 2
                                            86 Ariz. 121, *; 341 P.2d 427, **;
                                              1959 Ariz. LEXIS 145, ***1

Governments > Public Improvements > Financing                  Governments > Legislation > Enactment
[HN2] Bonds issued to finance public improvements, if          Governments > State & Territorial Governments >
made payable solely from the revenues to be derived            Finance
from the operation of the improvement, do not constitute       Tax Law > State & Local Taxes > General Overview
an indebtedness within the meaning of the limitation           [HN7] 'The right to impose taxes is a legislative power,
clauses of the constitution.                                   inherent in organized government. In the absence of
                                                               constitutional limitations, a legislature may enact such
                                                               tax laws as it sees fit, subject only to the restrictions
Governments > Public Improvements > Financing                  contained in the constitution of the United States.
[HN3] The weight of authority generally is to the effect       Everything over which the authority of the state reaches
that an obligation payable from a special fund created by      may be the subject of taxation, whether it be person,
the imposition of fees, penalties, or excise taxes and for     property, or occupation. There are certain safeguards,
the payment of which the general credit of the taxing          however, that should be provided: First; The legislature
authority is not pledged is not a debt within the meaning      should be prohibited from contracting away the right to
of constitutional debt limitations.                            tax anything or person whatsoever, or from making any
                                                               irrepealable grant of exemption.
Governments > Local Governments > Finance
Governments > Public Improvements > Financing                  COUNSEL: Gust, Rosenfeld, Divelbess & Robinette,
Tax Law > State & Local Taxes > Administration &               Phoenix, for appellant.
Proceedings > Collection
                                                               William C. Eliot, City Atty., Merle L. Hanson, Anis
[HN4] Phoenix, Ariz., Ordinance No. S-1186 provides
                                                               Mitchell and Leven B. Ferrin, Asst. City Attys., Phoenix,
that no decrease in the proportion thereof of the motor
                                                               for appellees.
vehicle fuel tax payable to the city of Phoenix may be
made while any of such bonds so remain outstanding and
                                                               JUDGES: Struckmeyer, Justice. Phelps, C. J., and Udall
there is hereby vested in the holders of such bonds and
                                                               and Johnson, JJ., concurring.Note: BERNSTEIN, J.,
the interest coupons thereto attached a contract right in
                                                               having heard this case in the Superior Court, disqualified,
the continuation of such tax and its allocation as above
                                                               and took no part in the determination of this appeal.
set forth. And further, the contract rights herein vested in
the holders of such bonds shall extend to the imposition,
                                                               OPINION BY: STRUCKMEYER
collection and proper application of the street revenues,
that is the taxes collected by the state of Arizona and
                                                               OPINION
returned to the city for street and highway purposes, until
such bonds shall have been paid in full as to principal and           [*123] [**428] This is an action wherein
interest and shall not be subject to repeal, impairment or     appellant, an elector and real property taxpayer of the
modification either by the city or by the legislature or       City of Phoenix, seeks a declaratory judgment and
people of the state of Arizona.                                injunctive relief to prevent the issuance of certain street
                                                               improvement bonds. The court below entered a summary
Constitutional Law > Congressional Duties & Powers >           judgment in favor of appellees, declaring that the
Contracts Clause > General Overview                            ordinance of the City of Phoenix under which the bonds
Governments > Public Improvements > Financing                  were issued did not violate the state constitution and was
[HN5] A modification of the constitution and the statutes      not otherwise unlawful.
which does not lessen the likelihood of payment or delay
                                                                    On May 7, 1957, the city held a bond election at
payment of the bonds will not impair the obligation of the
                                                               which the duly qualified electors authorized the issuance
contract arising in consideration of the existing law.
                                                               of certain street and highway improvement bonds;
                                                               thereafter, on September 27, 1957, the city adopted its
Governments > State & Territorial Governments >                Ordinance No. S-1186, by which there was authorized the
Finance                                                        issuance [***2] of street and highway improvement
[HN6] See Ariz. Const. art. IX, § 1.                           bonds in the amount of $ 2,500,000, the principal and
                                                               interest thereon to be paid from the city's share of the
                                                                                                                     Page 3
                                        86 Ariz. 121, *123; 341 P.2d 427, **428;
                                              1959 Ariz. LEXIS 145, ***2

funds received from the Motor Vehicle Fuel and Gasoline       taxes to the repayment of highway improvement bonds.
Tax receipts collected by the State and distributed to the    We notice that section 7 of the Ordinance is a pledge of
city pursuant to the applicable statutes.                     revenues in the alternative. The city pledges all "or so
                                                              much thereof as may be necessary." Consequently, the
     Appellant first urges that the issuance of the bonds     question presented is academic and does not pertain to an
would increase the total indebtedness of the city above       actual controversy. It is not subject to resolution by this
the four per cent limit set by the constitution of Arizona,   court. Podol v. Jacobs, 65 Ariz. 50, 173 P.2d 758.
Art. IX, § 8, A.R.S. Both the proposition submitted to the
voters on May 7, 1957 and the Ordinance recite:                   The city's Ordinance S-1186, among other things,
                                                              promises the bond purchaser:
         "* * * [HN1] This bond and the issue of
       which it is a part are payable solely, as to                      "* * * [HN4] that no decrease in the
       both principal and interest, from the                         proportion thereof [the Motor Vehicle
       proceeds of revenues to be derived by said                    Fuel Tax] payable to the City of Phoenix
       City from taxes collected by the State of                     may be made while any of such bonds so
       Arizona and returned to the city for street                   remain outstanding and there is hereby
       and highway purposes. * * *"                                  vested in the holders of such bonds and the
                                                                     interest coupons thereto attached a
                                                                     contract right in the continuation of such
     It is the settled law of this state that [HN2] bonds            tax and its allocation as above set forth."
issued to finance public improvements, if made payable
solely from the revenues to be derived from the operation     And further,
of the improvement, do not constitute an indebtedness                   "* * * The contract rights herein vested
within the meaning of the limitation clauses of the                  in the holders of such bonds shall extend
constitution. [*124] Guthrie v. City of Mesa, 47 Ariz.               to the imposition, collection and proper
336, 56 P.2d [***3] 655; Crandall v. Town of Safford,                application of the street revenues
47 Ariz. 402, 56 P.2d 660; Humphrey v. City of Phoenix,              [meaning the taxes collected by the State
55 Ariz. 374, 102 P.2d 82; Board of Regents of                       of Arizona and returned to the City for
University of Arizona v. Sullivan, 45 Ariz. 245, 42 P.2d             street and highway purposes] until such
619.                                                                 bonds shall have been paid [***5] in full
                                                                     as to principal and interest and shall not be
     Appellant argues, however, that the same rule should            subject to repeal, impairment or
not apply when the obligations are to be paid out of the             modification either by the city or by the
fund created by the collection of a special excise tax. The          [*125] Legislature or people of the State
authorities dealing with this problem are not entirely in            of Arizona."
accord, but [HN3] the weight generally is to the effect
that an obligation payable from a special fund created by     Appellant contends that the quoted language is an attempt
the imposition of fees, penalties, or excise taxes and for    by the city to bind the legislature and the state of Arizona
the payment of which the general credit of the taxing         not to decrease the state Motor Vehicle Fuel Tax nor to
authority is not pledged is not a debt within the meaning     decrease the portion of the proceeds payable to the City
of constitutional debt limitations. See Stone v. City of      of Phoenix until the bonds issued by the City of Phoenix
Hobbs, 54 N.M. 237, 220 P.2d 704, and Annotation 100          are all paid and that as such it is invalid. In part we
A.L.R. 878; Gruen v. Tax Commission, 35 Wash.2d 1,            agree. To the extent that the language of the resolution
211 P.2d 651. We will follow the weight of authority at       purports to require the continuance of all laws without
least to the extent where, as here, the fund from which the   modification of the amount of the Motor Vehicle Fuel
obligations are to be paid is created [**429] by              Tax or the proportion payable to the city, it is clearly a
voluntary contributions of the state to the city.             usurpation of the legislative function of the people of the
                                                              State.
    Appellant next urges that a municipality may not,
under the existing law, pledge all the revenues to be             There can be no doubt that the legislature, in
received [***4] from the Motor Vehicle and Gasoline
                                                                                                                        Page 4
                                         86 Ariz. 121, *125; 341 P.2d 427, **429;
                                               1959 Ariz. LEXIS 145, ***5

permitting the Motor Vehicle Fuel Tax to be used for the       years.
retirement of the bonds has, by clear implication,
promised that it would do nothing to impair the                     We have considered Art. IX, § 1, and arrived at the
obligation arising in consideration of the existing law.       same conclusion as the majority in the Gruen case, but
But [HN5] a modification of the constitution and the           for different reasons.
statutes which does not lessen the likelihood of payment
                                                                    The Minutes of the Constitutional Convention of this
[***6] or delay payment of the bonds will not impair the
                                                               state establish that the article was introduced in the
obligation of the contract. Scougale v. Page, 194 Ark.
                                                               Convention as Substitute Proposition No. 106. This
280, 106 S.W.2d 1023; Flint v. Duval County, 126 Fla.
                                                               proposition came before the Convention for discussion on
18, 170 So. 587; State ex rel. Freeling v. Howard, 67 Okl.
                                                               Saturday morning, November 19, 1910. At that time, the
296, 171 P. 41. The bondholders cannot be injured by
                                                               Honorable George W. P. Hunt, who later became the
modification of the statute, such as a decrease in the
                                                               seven-time Governor of Arizona, said:
proportion payable to the city, so long as they receive
their quid pro quo, and the legislature and the people of
                                                                            "In regard to that [***8] first section.
the state may make any changes in the law, organic and
                                                                        The Committee on Taxation had a
otherwise, save those which will impair the obligation of
                                                                        memorial gotten up by the Tax
the contract. We therefore hold that the broad language
                                                                        Association composed of men all over the
alluded to, in so far as it purports to restrict any changes
                                                                        United States who have made this a study
in the existing law, is ultra vires and ineffective to
                                                                        for years, and I have on my desk here
transfer to the bondholders the right to a continuation
                                                                        letters from nearly every professor on
without modification.
                                                                        economics in all the universities of the
     There is an implication from the appellant's                       country, from Harvard, in Massachusetts
argument that a construction of the statutes committing                 to Stanford, in California, and they are for
the legislature and the State of Arizona to the                         anyone who wants to look at these letters.
continuation of a law imposing a tax, since of necessity                They one and all believe this is the only
the law must be continued in order to retire the                        way to put this in the constitution, and if
contemplated bonds, violates that portion of Art. IX, § 1               the members of the convention will allow
of the constitution which provides:                                     me to read them a letter from Washington,
                                                                        which is a sample of the letters I have
           [HN6] "The power of taxation shall                           received, it will throw some light on the
       never be surrendered, [***7] suspended,                          subject. It is from J. E. Frost, President of
       or contracted away."                                             the State Board of Tax Commissioners of
                                                                        the State of Washington, at Olympia,
                                                                        Washington."
     [**430] Appellant directs the attention of this court
to Gruen v. Tax Commission, supra. There, with four            Here follows the letter, the pertinent portions of which we
judges dissenting, the Washington Supreme Court, in            set forth:
construing an identical provision, stated [35 Wash.2d 1,                  "'Dear Sir: I am just in receipt of a letter
211 P.2d 680]:                                                         from the Hon. Allen R. Foote, of
                                                                       Columbus, Ohio, President of the
         "It is crystal clear that the legislature did                 International Tax Association, asking me
       not in any way relinquish or yield its right                    to express to you my views on the subject
       to impose a tax * * *."                                         of constitutional provisions relative to
                                                                       taxation.
 [*126] The four dissenting judges were of the opinion
that where the state pledged the proceeds of an excise tax                  ***
on cigarettes to the payment of bonds, the power of
                                                                             [HN7] "'The right to impose taxes is a
taxation was suspended, surrendered, and contracted
                                                                        legislative power, inherent in organized
away until the retirement of the bonds -- possibly thirty
                                                                        [***9] government. In the absence of
                                                                                                                    Page 5
                                        86 Ariz. 121, *126; 341 P.2d 427, **430;
                                              1959 Ariz. LEXIS 145, ***9

       constitutional limitations, a legislature              sentence of Art. IX, § 1 was designed to leave legislators
       may enact such tax laws as it sees fit,                unencumbered in so far as their power to impose taxes.
       subject only to the restrictions contained             We note also from the report of the Third Conference of
       in the constitution of the United States.              the same Association, p. 88, that one M. H. Carver of the
       Everything over which the authority of the             Louisiana State Tax Commission is quoted as stating:
       state reaches may be the subject of
       taxation, whether it be person, property, or                        "There is little necessity for putting
       occupation.                                                   anything at all in the constitution about
                                                                     taxation,      and     some    distinguished
            ***                                                      authorities hold that everything on the
                                                                     subject in a constitution is dangerous. To
           "'There are certain safeguards,                           meet the decision of the Supreme Court of
       however, that should be provided: First;                      the United States, though, in the
       The legislature should be prohibited                          Dartmouth        College    case     [***11]
       [*127] from contracting away the right to                     [Trustees of Dartmouth College v.
       tax anything or person whatsoever, or                         Woodward], 4 Wheat. 518, [4 L. Ed. 629],
       from making any irrepealable grant of                         it is well to provide:
       exemption.'" (Emphasis supplied.)
                                                                         "'That the power of taxation shall
1
                                                                     never be suspended, surrendered or
       1 In the discussion that followed, Mr. M. G.                  contracted away. * * *'"
       Cunniff stated from the floor: "I am satisfied with
       the proposition as it stands. but I am not satisfied
                                                                   Thus, it becomes apparent that the first sentence of
       that the courts of Arizona will get the right
                                                              Substitute Proposition No. 106, now Art. IX, § 1, was
       interpretation."
                                                              adopted for the purpose of restricting the legislature's
     From the content of the letter, it can be gleaned that   right to alienate the power to tax anything and all
since the legislature should be prohibited from               persons. The prohibition is against the irrepealable grant
contracting away the right to tax, the Convention intent      of immunity from taxation. It was not intended to
was to accomplish the converse; [***10] that is, that the     prohibit the levying of a tax. The scope of the language
legislature would have the right to tax anything and all      was communicated to, and understood by, the members
persons whatsoever. Viewed in this light, it would            of the Constitutional Convention.
appear that by the use of the words "power of taxation,"
                                                                   Therefore, we are of the opinion that the first
the [**431] Convention meant "the power to impose
                                                              sentence of Art. IX, § 1 is a prohibition against the
taxes."
                                                              surrender or relinquishment [*128] of the right to
     The complete text of the Memorial referred to in the     impose a tax. In the instant case, "it is crystal clear" that
statement by the Honorable George W. P. Hunt can be           the legislature is not contracting away the right to impose
found in the report of State and Local Taxation, 5th          a tax. The legislature has imposed a tax and has simply
National Conference of the National Tax Association           applied the proceeds of the tax to a particular purpose.
held in Richmond, Virginia, September, 1911, pp. 451
                                                                   Except as modified by this opinion, the judgment of
through 457. A reading of the Memorial leads us to the
                                                              the court below is affirmed.
conclusion that the language contained in the first
                                                                                                               Page 1

                                           TEXAS v. NEW MEXICO

                                                  No. 65, Orig.

                                SUPREME COURT OF THE UNITED STATES

              462 U.S. 554; 103 S. Ct. 2558; 77 L. Ed. 2d 1; 1983 U.S. LEXIS 67; 51 U.S.L.W. 4805

                                            March 30, 1983, Argued
                                            June 17, 1983, Decided

PRIOR HISTORY: ON EXCEPTIONS TO REPORT                    permitted to vote on the Commission and participate in
OF SPECIAL MASTER.                                        all Commission deliberations. In the alternative, the
                                                          master recommended the continuance of the suit as
DISPOSITION: Exceptions to Special Master's report        presently postured. The court sustained the exceptions to
sustained in part and overruled in part.                  the master's recommendation that another person be
                                                          permitted to vote on the Commission. Once Congress
CASE SUMMARY:                                             approved the Compact, it had the force of law and the
                                                          court was not entitled to order relief inconsistent with its
                                                          terms. To provide a third, tie-breaking vote on the
PROCEDURAL POSTURE: The State of Texas sued               Commission would fundamentally alter the Commission
the State of New Mexico, claiming New Mexico              in contravention of the Compact's terms.
breached its obligations under the Pecos River Compact
by depleting the flow of the Pecos River. The U.S.        OUTCOME: The court sustained the exceptions filed by
Government intervened. The court granted leave to file    the Government and New Mexico to the master's
the complaint and appointed a special master, who         recommendation that another party be given a vote on the
recommended that the court appoint a third party to the   Commission. The court overruled all other exceptions
Pecos River Commission to resolve the dispute and other   and returned the case to the master with directions that he
relief. The Government and New Mexico filed               determine the unresolved issue of whether New Mexico
exceptions.                                               breached its obligations under the Compact and related
                                                          questions.
OVERVIEW: The Compact provided that New Mexico
should not deplete by man's activities the flow of the    CORE TERMS: compact, river, inflow, inflow-outflow,
Pecos River at the New Mexico-Texas state line below an   special masters, engineering, shortfall, state-line, outflow,
amount that would give to Texas a certain quantity of     basin, dam, interstate, curve, state line, correlation,
water. The Compact also established the Commission,       original jurisdiction, recommendation, depletion,
which was to be composed of a representative from each    advisory committee, stream, flood, reservoir, negotiation,
State and the Government; the Government's                measured, quantity of water, apportionment, equitable,
representative was not permitted to vote. Texas alleged   acre-feet, ratified, appoint
that New Mexico breached its obligations under the
Compact so as to deplete the flow of the River. The       LexisNexis(R) Headnotes
master recommended that to resolve the dispute, either
the Government's representative or a third party be
                                                                                                                  Page 2
                                          462 U.S. 554, *; 103 S. Ct. 2558, **;
                                        77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67

Constitutional Law > Congressional Duties & Powers >           and report on data as to the stream flows, storage,
Contracts Clause > General Overview                            diversions, salvage, and use of the waters of the Pecos
Governments > State & Territorial Governments >                River and its tributaries, Arts. V(d)(3), (4) of the Pecos
Relations With Governments                                     River Contract.
[HN1] See U.S. Const. art. I, § 10, cl. 3.

                                                               Constitutional Law > Congressional Duties & Powers >
Governments > State & Territorial Governments >                Contracts Clause > General Overview
Relations With Governments                                     Governments > Federal Government > U.S. Congress
Governments > State & Territorial Governments >                Governments > State & Territorial Governments >
Water Rights                                                   Relations With Governments
Real Property Law > Water Rights > General Overview            [HN4] Under the Compact Clause, two States may not
[HN2] Art. III of the Pecos River Compact provides that        conclude an agreement without the consent of the United
the State of New Mexico shall not deplete by man's             States Congress. However, once given, congressional
activities the flow of the Pecos River at the New              consent transforms an interstate compact within the
Mexico-Texas state line below an amount which will give        Compact Clause into a law of the United States. One
to the State of Texas a quantity of water equivalent to that   consequence of this metamorphosis is that, unless the
available to Texas under the 1947 condition. The term          compact to which Congress has consented is somehow
"1947 condition" is expressly defined as that situation in     unconstitutional, no court may order relief inconsistent
the Pecos River Basin as described and defined in the          with its express terms.
Report of the Engineering Advisory Committee, Art.
II(g) of the Pecos River Compact. In turn, the Report
                                                               Governments > State & Territorial Governments >
includes basic data, processes, and analyses utilized in
                                                               Relations With Governments
preparing that report, Art. II(f) of the Pecos River
                                                               Governments > State & Territorial Governments >
Compact, and "deplete by man's activities" is defined to
                                                               Water Rights
include any beneficial consumptive uses of water within
                                                               Real Property Law > Water Rights > General Overview
the Pecos River Basin, but excludes diminutions of flow
                                                               [HN5] The Pecos River Compact clearly delimits the role
due to "encroachment of salt cedars" or deterioration of
                                                               of the United State Commissioner on the Pecos River
the channel of the stream, Art. II(e) of the Pecos River
                                                               Commission. Although the United States Commissioner
Compact.
                                                               must be present at a Commission meeting in order to
                                                               provide a quorum and serves as its presiding officer, and
Governments > State & Territorial Governments >                although the engineering advisers to the United States
Relations With Governments                                     Commissioner have consistently participated fully in the
Governments > State & Territorial Governments >                work of the various engineering committees and
Water Rights                                                   subcommittees, Art. V(a) of the Compact specifies that
Real Property Law > Water Rights > General Overview            the Commissioner representing the United States shall
[HN3] The Pecos River Compact establishes the Pecos            not have the right to vote in any of the deliberations of
River Commission as a permanent body, in more or less          the Commission. No other third party is given the right to
the same form that it had during the negotiations on the       vote on matters before the Commission. To provide a
Compact. It is to have three Commissioners, one from the       third, tie-breaking vote on regular Commission business
State of Texas, one from the State of New Mexico, and          would be to alter fundamentally the structure of the
one representing the United States, but the United States      Commission.
representative can not vote, Art. V(a) of the Pecos River
Compact. Accordingly, the Commission can take official
                                                               Governments > Federal Government > Employees &
action only with the concurrence of both state
                                                               Officials
Commissioners. The Commission is given broad powers
                                                               Governments > State & Territorial Governments >
to make all findings of fact necessary to administer the
                                                               Water Rights
Compact, Arts. V(d)(5)-(10) of the Pecos River Compact,
                                                               Real Property Law > Water Rights > General Overview
as well as to engage in studies of water supplies of the
                                                               [HN6] Congress may vest a federal official with the
Pecos River and to collect, analyze, correlate, preserve
                                                                                                                 Page 3
                                          462 U.S. 554, *; 103 S. Ct. 2558, **;
                                        77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67

responsibility to administer the division of interstate       [HN10] Where Congress has so exercised its
streams.                                                      constitutional power over waters, courts have no power to
                                                              substitute their own notions of an "equitable
                                                              apportionment" for the apportionment chosen by
Governments > State & Territorial Governments >               Congress. Nevertheless, the mere existence of a compact
Claims By & Against                                           does not foreclose the possibility that the United States
Governments > State & Territorial Governments >               Supreme Court will be required to resolve a dispute
Relations With Governments                                    between the compacting states.
Real Property Law > Water Rights > General Overview
[HN7] Under the Pecos River Compact, the solution for
impasse is judicial resolution of such disputes as are        Civil Procedure > Jurisdiction > Subject Matter
amenable to judicial resolution, and further negotiation      Jurisdiction > General Overview
for those disputes that are not.                              Governments > State & Territorial Governments >
                                                              Water Rights
                                                              Real Property Law > Water Rights > General Overview
Governments > State & Territorial Governments >               [HN11] The United States Supreme Court's equitable
Relations With Governments                                    power to apportion interstate streams and the power of
Governments > State & Territorial Governments >               the states and Congress acting in concert to accomplish
Water Rights                                                  the same result are to a large extent complementary.
Real Property Law > Water Rights > General Overview
[HN8] The United States Supreme Court expressly
refuses to make indefinite appointments of                    Constitutional Law > Congressional Duties & Powers >
quasi-administrative officials to control the division of     Contracts Clause > General Overview
interstate waters on a day-to-day basis, even with the        Constitutional Law > The Judiciary > Jurisdiction >
consent of the states involved.                               General Overview
                                                              Governments > Legislation > Interpretation
                                                              [HN12] In the absence of an explicit provision or other
Civil Procedure > Justiciability > Case or Controversy        clear indications that a bargain to that effect was made,
Requirements > General Overview                               the United States Supreme Court shall not construe a
Constitutional Law > The Judiciary > Congressional            compact between states to preclude a state from seeking
Limits                                                        judicial relief when the compact does not provide an
Governments > State & Territorial Governments >               equivalent method of vindicating the state's rights.
Relations With Governments
[HN9] There is no doubt that the United States Supreme
Court's jurisdiction to resolve controversies between two     Civil Procedure > Jurisdiction > Subject Matter
states, U.S. Const., Art. III, § 2, cl. 1; 28 U.S.C.S. §      Jurisdiction > Jurisdiction Over Actions > General
1251(a)(1), extends to a properly framed suit to apportion    Overview
the waters of an interstate stream between states through     Constitutional Law > The Judiciary > Jurisdiction >
which it flows, or to a suit to enforce a prior               General Overview
apportionment. It also extends to a suit by one state to      Governments > State & Territorial Governments >
enforce its compact with another state or to declare rights   Claims By & Against
under a compact. If there is a compact, it is a law of the    [HN13] 28 U.S.C.S. § 1251(a) is construed as providing
United States, and the Court's first and last order of        the United States Supreme Court with substantial
business is interpreting the compact.                         discretion to make case-by-case judgments as to the
                                                              practical necessity of an original forum in the Court for
                                                              particular disputes within its constitutional original
Constitutional Law > Congressional Duties & Powers >          jurisdiction. The Court exercises that discretion with an
Census > Apportionment & Redistricting                        eye to promoting the most effective functioning of the
Governments > State & Territorial Governments >               Court within the overall federal system. If authorized
Water Rights                                                  representatives of the states to a compact have reached an
Real Property Law > Water Rights > General Overview           agreement within the scope of their congressionally
                                                                                                                 Page 4
                                        462 U.S. 554, *; 103 S. Ct. 2558, **;
                                      77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67

ratified powers, recourse to the Court when one state has   that the Inflow-Outflow Manual did not accurately
second thoughts is hardly necessary for the state's         describe the actual state of the river, the flow of water at
protection.                                                 the state line almost every year being significantly below
                                                            the amount predicted. The Commission was unable to
                                                            agree on the appropriate method for determining annual
Civil Procedure > Jurisdiction > Subject Matter             shortfalls of water flow. Texas then invoked the original
Jurisdiction > General Overview                             jurisdiction of the United States Supreme Court, alleging
Governments > State & Territorial Governments >             in its complaint that New Mexico had breached its
Relations With Governments                                  obligations under the Compact by allowing man's
Governments > State & Territorial Governments >             activities to deplete the water available from the flow of
Water Rights                                                the river at the state line below that which was available
[HN14] Absent extraordinary cause, the United States        under the 1947 conditions, and seeking a decree ordering
Supreme Court shall not review the Pecos River              New Mexico to deliver water in accordance with the
Commission's actions without a more precise mandate         Compact. The United States intervened to protect its own
from Congress than either the Pecos River Compact or 28     claims to the Pecos River waters under the Compact. The
U.S.C.S. § 1251 provides.                                   Supreme Court granted leave to file the complaint (44 L
                                                            Ed 2d 84), and appointed a Special Master (46 L Ed 2d
Governments > State & Territorial Governments >             274). The Special Master, in his first report to the court,
Relations With Governments                                  concluded that a new Inflow-Outflow Manual was
Governments > State & Territorial Governments >             required in order to provide an accurate description of the
Water Rights                                                conditions existing in 1947. The Supreme Court
Real Property Law > Water Rights > General Overview         approved the report in full (64 L. Ed. 2d 485). The Special
[HN15] See Article VI of the Pecos River Compact.           Master then recommended in a later report that in order to
                                                            resolve the water allocation issues, the Supreme Court
DECISION:                                                   should appoint a third party to participate in all
                                                            Commission deliberations and cast the tie-breaking vote
     Supreme Court held not authorized under Pecos          whenever the two Commissioners could not agree. The
River Compact to designate third party to cast              Special Master also rejected a motion by New Mexico to
tie-breaking votes on Pecos River Commission's water        dismiss the case, and one by Texas to adopt a simpler
allocation disputes.                                        method than provided by the Inflow-Outflow Manual for
                                                            determining the extent of shortfalls in state-line water
SUMMARY:                                                    deliveries.

     Texas and New Mexico entered into an agreement,              On exceptions to the report of the Special Master, the
known as the Pecos River Compact, which governed the        United States Supreme Court sustained in part and
allocation of the waters of the Pecos River Basin between   overruled in part, and returned the case to the Special
the two states. The Compact, which was approved by          Master for a final decision on whether New Mexico was
Congress, provided in part that New Mexico was not to       in compliance with obligations imposed by the Pecos
deplete by man's activities the flow of the river at the    River Compact. In an opinion by Brennan, J., expressing
state line below that which would give Texas a quantity     the unanimous view of the court, it was held that (1) the
of water equivalent to that which was available to Texas    Supreme Court could not order a third party to be
under certain consumption conditions existing in 1947.      designated and empowered to participate in all
Under the Compact, an "Inflow-Outflow Manual" was           Commission deliberations and cast the tie-breaking vote
used to determine how much water Texas should expect        when necessary, since it would be inconsistent with the
to receive over any particular period under the 1947        express terms of the Compact, (2) it was within the
conditions. The Compact also established the Pecos River    original jurisdiction of the Supreme Court under Article
Commission to resolve water allocation disputes by the      III, 2, cl 1 of the United States Constitution and 28 USCS
unanimous vote of the two voting members representing       1251(a) to resolve by equitable apportionment the dispute
their respective states, with a third non-voting member     between the two states regarding the allocation of the
representing the United States. It later became apparent    Pecos River Basin waters under the Compact, since the
                                                                                                                  Page 5
                                         462 U.S. 554, *; 103 S. Ct. 2558, **;
                                       77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67

express terms of the Compact did not make the                Congress, since the lack of such jurisdiction would leave
Commission the sole arbiter of those disputes, and the       the court powerless to grant one of the states relief on its
lack of jurisdiction would leave the court powerless to      claim under the Compact, and the express terms of the
grant Texas relief on its claim, and (3) the Supreme Court   Compact do not establish the Pecos River Commission as
could not adopt the simplified method for determining        the sole arbiter of these disputes between the two states.
water flow shortfalls, since the Commission had not
adopted it or any other feasible method as an alternative
                                                                  POSSESSIONS §58 ;
to replace the inflow-outflow method, and the simplified
method was not similar enough to the inflow-outflow             compact between states -- water rights -- method of
method.                                                      measurement -- ;
LAWYERS' EDITION HEADNOTES:                                      Headnote:[3A][3B]

                                                                  The United States Supreme Court may not order the
     POSSESSIONS §58 ;
                                                             adoption of a "double mass analysis" method for
     compact between states -- water rights -- resolution    determining when a shortfall has occurred in the amount
of disputes -- ;                                             of water from the Pecos River Basis that a state is entitled
                                                             to under the Pecos River Compact that was entered into
    Headnote:[1A][1B]                                        between two states and approved by Congress, where the
                                                             Pecos River Commission, which was established under
     The United States Supreme Court cannot order that a     the Compact to resolve disputes regarding the allocation
third party be designated and empowered to participate in    of the waters, has not adopted that method, although it is
all deliberations of the Pecos River Commission and cast     entitled to do so, and the "double mass analysis" method
the tie-breaking vote when the two Commission members        is not similar enough to the "inflow-outflow method"
are not in agreement concerning the allocation of the        established by the Compact, the Commission not having
waters of the Pecos River Basin between the two states       adopted a more feasible method as allowed by the
they respectively represent pursuant to the Pecos River      Compact to replace the inflow-outflow method.
Compact that was entered into between the two states and
approved by Congress, since the order would be
inconsistent with the express terms of the Compact, the           POSSESSIONS §58;
effect of the provision of a third, tie-breaking vote on
                                                                compact clause -- state compacts -- consent of
regular Commission business being to alter
                                                             Congress -- effect -- ;
fundamentally the structure of the Commission.
                                                                 Headnote:[4]
     POSSESSIONS §58
                                                                  Under the compact clause found in Article 1, 10, cl 3
     STATES §58 ;                                            of the United States Constitution, two states may not
                                                             without the consent of Congress conclude an agreement,
    original jurisdiction -- compact between states --       such as the Pecos River Compact, which was agreed to in
water rights -- resolution of dispute -- ;                   order to allocate the waters of Pecos River Basin between
                                                             two states, but once given, congressional consent
    Headnote:[2A][2B][2C]                                    transforms the interstate compact within this clause into a
                                                             law of the United States.
     It is within the original jurisdiction of the United
States Supreme Court under Article III, 2, cl 1 of the
United States Constitution and 28 USCS 1251(a) to                 COURTS §111
resolve by equitable apportionment the dispute of two
states regarding the allocation of the waters of the Pecos        POSSESSIONS §59 ;
River Basin pursuant to the Pecos River Compact that
                                                                  compact between states -- congressional consent --
was entered into by the two states and approved by
                                                             judicial relief -- ;
                                                                                                                     Page 6
                                           462 U.S. 554, *; 103 S. Ct. 2558, **;
                                         77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67

    Headnote:[5]                                                two states and approved by Congress, since continuing
                                                                supervision by the court of water decrees would test the
    Unless a compact between two states to which                limits of proper judicial function.
Congress has consented is somehow unconstitutional, no
court may order relief inconsistent with its express terms.
                                                                      STATES §54.5;

      WATERS §18.5 ;                                               jurisdiction suits between states -- water rights --
                                                                compacts -- ;
   division of interstate streams -- administration --
power of Congress -- ;                                              Headnote:[9A][9B]

    Headnote:[6]                                                     The United States Supreme Court's jurisdiction to
                                                                resolve controversies between two states pursuant to
     Congress may vest a federal official with                  Article III, 2, cl 1 of the United States Constitution and
responsibility to administer the division of interstate         28 USCS 1251(a) extends to a properly framed suit to
streams.                                                        apportion the waters of an interstate stream between
                                                                states through which it flows, or to a suit to enforce a
                                                                prior apportionment, even though litigation of such
      COURTS §120
                                                                disputes is a poor alternative to negotiations between the
      POSSESSIONS §58 ;                                         interested states, and also extends to a suit by one state to
                                                                enforce its compact with another state or to declare rights
    compact between states -- water rights -- failure to        under a compact.
resolve disputes -- ;

    Headnote:[7]                                                      COURTS §120 ;

     The failure of two states to agree on one issue,               equitable apportionment          between     states    --
however important, does not render void the Pecos River         congressional power -- ;
Compact, which was established to allocate between the
                                                                    Headnote:[10]
states the waters of the Pecos River Basin, and by which
the Pecos River Commission was created to resolve                   Courts have no power to substitute their own notions
disputes pursuant to the unanimous vote of the two voting       of an equitable apportionment of waters between states
members representing their respective states, and neither       for the apportionment chosen by Congress, where
does it provide a justification for altering its structure by   Congress has exercised its constitutional power over
judicial decree.                                                waters.

      POSSESSIONS §58                                                 STATES §58
      REFERENCE §2 ;                                                  WATERS §18.5 ;
    compact between states          --   water    rights   --       interstate streams -- equitable apportionment -- ;
appointment of master -- ;
                                                                    Headnote:[11]
    Headnote:[8]
                                                                     The equitable power of the United States Supreme
    The United States Supreme Court will not appoint a          Court to apportion interstate streams and the power of the
master to control the diversion, storage and use of the         states and Congress acting in concert to accomplish the
Pecos River Basin waters within the State of New                same result are to a large extent complementary.
Mexico, the allocation of those waters being governed by
the Pecos River Compact that was entered into between
                                                                                                                     Page 7
                                           462 U.S. 554, *; 103 S. Ct. 2558, **;
                                         77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67

     POSSESSIONS §58 ;                                           and New Mexico (and approved by Congress) to govern
                                                                 allocation of the waters of the Pecos River, which rises in
     compact between states -- water rights -- dispute --        New Mexico and flows into Texas. Article III(a) of the
judicial resolution -- ;                                         Compact requires that New Mexico "not deplete by man's
                                                                 activities the flow of the Pecos River at the New
    Headnote:[12]                                                Mexico-Texas state line below an amount which will give
                                                                 to Texas a quantity of water equivalent to that available
     In the absence of an explicit provision or other clear
                                                                 to Texas under the 1947 condition." The Compact
indications that one state has agreed to trade away its
                                                                 establishes the Pecos River Commission (Commission) --
right to seek an equitable apportionment of a river in
                                                                 consisting of one Commissioner from each State and a
return for a promise that the other state could avoid at
                                                                 nonvoting representative of the United States -- and
will, the United States Supreme Court will not construe a
                                                                 empowers it to make all findings of fact necessary to
compact between the states to preclude a state from
                                                                 administer the Compact. The two voting Commissioners
seeking judicial relief when the compact does not provide
                                                                 were unable to agree when a dispute arose between the
an equivalent method of vindicating the state's rights.
                                                                 States concerning the methods for determining annual
                                                                 shortfalls of state-line water flow with regard to Texas'
     POSSESSIONS §58                                             right to receive as much water as it would have received
                                                                 under the consumption conditions prevailing in New
     STATES §58 ;                                                Mexico in 1947. Texas filed this action against New
                                                                 Mexico (the United States intervened to protect its claims
   compact between states -- water                rights    --   on the waters of the river), alleging that New Mexico had
administrative action -- judicial review -- ;                    breached its obligations under Art. III(a) of the Compact
                                                                 and seeking a decree commanding New Mexico to
    Headnote:[13]
                                                                 deliver water in accordance with the Compact. This Court
     Without a more precise mandate from Congress than           appointed a Special Master, who ultimately filed the
is provided by the Pecos River Compact or 28 USCS                report involved here, and the parties filed various
1251, the United States Supreme Court, absent                    exceptions thereto.
extraordinary cause, will not in its discretion under
                                                                     Held:
1251(a) review the actions of the Pecos River
Commission, which was created by the Compact to                       1. Exceptions of the Government and New Mexico to
resolve disputes concerning the allocation of the waters         the Master's recommendation that either the United States
of the Pecos River Basin between the compacting states,          Commissioner or some other third party be given a vote
such review not being necessary for a state's protection,        on the Commission and be empowered to participate in
where both Commission members representing their                 all Commission deliberations are sustained. Once
respective states must first vote to approve the action.         congressional consent is given to an interstate compact as
                                                                 required by the Compact Clause, the compact is
     STATES §54 ;                                                transformed into a law of the United States, and unless
                                                                 the compact is unconstitutional, no court may order relief
    original jurisdiction -- disputes between states -- ;        inconsistent with its express terms. Here, the Compact
                                                                 provides that the Government Commissioner shall not
    Headnote:[14A][14B]                                          have the right to vote, and no other third party is given
                                                                 the right to vote on matters before the Commission. This
     The model case for invocation of the United States          Court cannot rewrite the Compact so as to provide for a
Supreme Court's original jurisdiction is a dispute between       third, tie-breaking vote. Moreover, the Court's equitable
states of such seriousness that it would amount to "casus        powers have never been exercised so as to appoint
belli" if the states were fully sovereign.
                                                                 quasi-administrative officials to control the division of
                                                                 interstate waters on a day-to-day basis. Pp. 564-566.
SYLLABUS
                                                                     2. New Mexico's exception to the Master's
     The Pecos River Compact was entered into by Texas
                                                                                                                    Page 8
                                          462 U.S. 554, *; 103 S. Ct. 2558, **;
                                        77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67

alternative recommendation to continue the suit as             Charlotte Uram, Special Assistant Attorney General of
presently postured is overruled, and the recommendation        New Mexico, argued the cause for defendant. With her
is accepted. There is no merit to New Mexico's                 on the briefs were Paul G. Bardacke, Attorney General,
contention that this Court may do nothing more than            Jeff Bingaman, former Attorney General, and Peter
review the Commission's official actions, and that the         Thomas White, Special Assistant Attorney General.
case should be dismissed if it is found either that there is
no Commission action to review or that actions taken by        Solicitor General Lee, Deputy Solicitor General
the Commission were not arbitrary or capricious. This          Claiborne, and John H. Garvey filed a brief for the United
Court's original jurisdiction to resolve controversies         States.
between two States extends to a suit by one State to
enforce its compact with another State or to declare rights    JUDGES: BRENNAN, J., delivered the opinion for a
under a compact. Here, fundamental structural                  unanimous Court.
considerations of the Compact militate against New
Mexico's theory, since if all questions under the Compact      OPINION BY: BRENNAN
had to be decided by the Commission in the first instance,
New Mexico could indefinitely prevent authoritative            OPINION
Commission action solely by exercising its veto on the
                                                                     [*556] [***7] [**2561] JUSTICE BRENNAN
Commission. Nor do the Compact's express terms
                                                               delivered the opinion of the Court.
constitute the Commission as the sole arbiter of disputes
over New Mexico's Art. III obligations. Moreover, if                   [***LEdHR1A] [1A] [***LEdHR2A] [2A]
authorized representatives of the compacting States have       [***LEdHR3A] [3A]For the second time we consider
reached an agreement on action to be taken by the              exceptions to a report of the Special Master in this case.
Commission, this Court will not review the Commission's        The States of Texas and New Mexico and the United
action at the behest of one of the States absent               States have filed exceptions to a report submitted by the
extraordinary cause or a precise mandate from Congress.        Special Master on September 10, 1982 (1982 Report).
Pp. 566-571.                                                   We sustain an exception in which both New Mexico and
                                                               the United States concur, overrule all other exceptions,
     3. Texas' exception to the Master's recommendation
                                                               and return the case to the Special Master for a final
against approval of Texas' motion to adopt a so-called
                                                               decision on the basic issue in dispute -- whether New
"Double Mass Analysis" method for determining when a
                                                               Mexico is in compliance with obligations imposed by the
shortfall in state-line flows has occurred is overruled.
                                                               Pecos River Compact.
The Compact provides that until the Commission adopts
a more feasible method, an "inflow-outflow method"                 I
shall be used to measure state-line shortfalls. The
"Double Mass Analysis" is not close enough to what the              The Pecos River rises in north-central New Mexico
Compact terms an "inflow-outflow method, as described          and flows in a southerly direction into Texas until it joins
in the Report of the Engineering Advisory Committee" to        the Rio Grande near Langtry, Tex. 1 It is the principal
make it acceptable for use in determining New Mexico's         river in eastern New Mexico, draining roughly one-fifth
compliance with its Art. III obligations. While the            of the State, and it is a major tributary of the Rio Grande.
Compact leaves the Commission free to adopt the
"Double Mass Analysis," this Court may not apply it                    1 From north to south, the Pecos River flows
against New Mexico in the absence of Commission                        past Pecos and Santa Rosa, N. M., and then into
action. Pp. 571-574.                                                   the Alamogordo Reservoir above Alamogordo (or
                                                                       Sumner) Dam. It then passes Fort Sumner and
COUNSEL: R. Lambeth Townsend, Assistant Attorney                       traverses a relatively desolate region in the central
General of Texas, argued the cause for plaintiff. With                 part of the State. From Acme to Artesia, in the
him on the briefs were Mark White, Attorney General,                   area around Roswell, the river is fed by a large,
John W. Fainter, Jr., First Assistant Attorney General,                slowly flowing aquifer. Below Artesia, the river
Richard E. Gray III, Executive Assistant Attorney                      passes through a set of deltas and lakes formed by
General, and Frank R. Booth.                                           the now-deteriorated McMillan and Avalon
                                                                                                                  Page 9
                                      462 U.S. 554, *556; 103 S. Ct. 2558, **2561;
                                   77 L. Ed. 2d 1, ***LEdHR3A; 1983 U.S. LEXIS 67

         Dams, then flows past Carlsbad and into the Red       Compact Commission was formed, consisting of three
         Bluff Reservoir, which straddles the state line and   Commissioners, representing the two States and the
         is used to regulate the river in Texas.               United States. In January 1948, the Compact
                                                               Commission's engineering advisory committee submitted
        [*557] Due in large part to many natural               a lengthy report (1947 Study), the central portion of
difficulties, 2 the Pecos barely supports a level of           which was a set of river routing studies describing six
development reached in the first third of this century. If     "conditions" of the Pecos, one of which consisted of the
development in New Mexico were not restricted,                 actual conditions as of the beginning of 1947. 4 Each of
especially the [**2562] groundwater pumping near               the studies was embodied in a 41-column table
Roswell, no water at all might reach Texas in many years.      accounting for all known inflows and outflows of water
As things stand, the amount of water Texas receives in         on the river during each of the years between 1905 and
[***8] any year varies with a number of factors besides        1946. 5 The engineering advisory committee also drafted
beneficial consumption in New Mexico. These factors            a Manual of Inflow-Outflow Methods [*559] of
include, primarily, precipitation in the Pecos Basin over      Measuring Changes in Stream-Flow Depletion (1948)
the preceding several years, evaporation in the McMillan       (Inflow-Outflow Manual), which contained charts and
and Alamogordo Reservoirs, and nonbeneficial                   tables, derived from data in the 1947 Study, to be used in
consumption of water by salt cedars and other riverbed         determining how much water Texas should expect to
vegetation.                                                    receive over any particular period for any particular
                                                               levels of precipitation, under the consumption conditions
         2 In its natural state, the Pecos may dry up          prevailing in New Mexico in 1947.
         completely for weeks at a time over fairly long
         reaches in central New Mexico. Much of its                   3 In 1925, the States negotiated a compact for
         annual flow comes in flash floods, carrying with             regulating the river. It was approved by both state
         them great quantities of topsoil that both                   legislatures, but the Governor of New Mexico
         progressively destroy reservoirs, by silting, and            vetoed its bill. In the early 1930's, the Texas
         render the river's waters quite saline. The                  congressional delegation succeeded in holding up
         nonflood "base" flow of the Pecos below                      federal funding for construction of the
         Alamogordo Dam is supplied to a large part by                Alamogordo Dam until New Mexico agreed to
         groundwater aquifers that empty into the river in            ensure that Texas received the same portion of
         the reach between Acme and Artesia, N. M. The                flood flows originating above Avalon Dam that it
         operation of these aquifers is little understood.            had received during the period from 1905 to 1935.
         They are depleted by pumping from wells in the               This agreement was signed in 1935 by the
         Roswell area, and there is some suggestion that at           Secretary of the Interior, the United States
         times heavy groundwater pumping in the area                  Senators from both States, and representatives of
         around Roswell may actually reverse the direction            the irrigation districts concerned, and it was
         of flow of the underground aquifer, so that water            formally ratified by the Texas Legislature but
         flows away from the river. See Texas' Brief on the           never by the New Mexico Legislature. New
         1947 Condition (filed Aug. 21, 1978), p. 34. In              Mexico       did,   however,     sharply   restrict
         addition, a steady stream of underground brine               groundwater pumping in the Roswell area in
         enters the river at Malaga Bend, some 10 miles               1937, thus restoring to some extent the base flow
         above the Texas border, severely impairing the               of the river.
         quality of water that reaches Texas when the river           4        The six "conditions" studied by the
         is low. Salt cedars, which consume large amounts             engineering committee represented various
         of water, proliferate along its channel and in the           combinations of historical facts from different
         silt deposits at the heads of its reservoirs.                periods and hypothetical assumptions about the
                                                                      existence, condition, and operation of the dams
     A                                                                and irrigation projects that had been built since
                                                                      1905. See S. Doc. No. 109, 81st Cong., 1st Sess.,
     After 20 years of false starts, 3 in 1945 Texas and
                                                                      9-11 (1949) (S. Doc. 109). The only one material
New Mexico commenced negotiations on a compact to
                                                                      to the Compact as adopted is the "1947
allocate the [*558] waters of the Pecos Basin. A
                                                                                                                 Page 10
                                     462 U.S. 554, *559; 103 S. Ct. 2558, **2562;
                                      77 L. Ed. 2d 1, ***8; 1983 U.S. LEXIS 67

       condition," which assumed actual conditions as of      defined as "that situation in the Pecos River Basin as
       1947, with some additional use by the Carlsbad         described and defined in the Report of the Engineering
       and Fort Sumner projects.                              Advisory Committee." Art. II(g). In turn, the Report was
       5 For instance, on each table column 14 showed         defined to include "basic data, processes, and analyses
       depletion by pumps between Acme and Artesia,           utilized in preparing that report," Art. II(f), and "deplete
       column 15 showed inflows from aquifers in the          by man's activities" was defined to include any
       same reach, and column 16 showed depletion by          "beneficial consumptive uses of water within the Pecos
       salt cedars. Some of the entries in the tables         River Basin," but to exclude diminutions of flow due to
       could be inferred more or less easily from             "encroachment of [*560] salt cedars" or "deterioration
       observed data -- e. g., the flow of the river past     of the channel of the stream," Art. II(e).
       specific gauges, or diversions to irrigation
       projects. Others, such as the entries for salt-cedar        [HN3] The Compact also established the Pecos River
       depletions or evaporation from each reservoir,         Commission as a permanent body, in more or less the
       could only be estimated, albeit with some degree       same form that it had during the negotiations on the
       of reliability. However, many entries -- e. g., the    Compact. It was to have three Commissioners, one from
       three columns showing "flood inflows" and the          each State and one representing the United States, but the
       two columns entitled "channel losses" -- required      United States representative could not vote. Art. V(a).
       a great deal of speculation, and to some extent        Accordingly, the Commission could take official action
       they may have been used as residual categories to      only with the concurrence of both state Commissioners.
       "balance the books." See S. Doc. 109, at 41-42;        The Commission was given broad powers to make all
       Report of Review of Basic Data to Engineering          findings of fact necessary to administer the Compact,
       Advisory Committee, Pecos River Commission             Arts. V(d)(5)-(10), as well as to "[engage] in studies of
       24 (1960) (stipulated exhibit No. 8) (Review of        water supplies of the Pecos River" and to "[collect],
       Basic Data).                                           analyze, correlate, preserve and report on data as to the
                                                              stream flows, storage, diversions, salvage, and use of the
     On the basis of the 1947 Study and the                   waters of the Pecos River and its tributaries," Arts.
Inflow-Outflow Manual, the [***9] two States                  V(d)(3), (4). 7
successfully negotiated the Pecos River Compact. It was
signed by the Commissioners from both States on                      7 Further relevant provisions in Arts. V and VI
December 3, 1948, and thereafter ratified by both state              are discussed infra, at 568, n. 14, 571-572.
legislatures and -- as required under the Compact Clause
                                                                   For roughly 15 years, the Pecos River Commission
of the Constitution 6 -- approved by Congress. Ch. 184,
                                                              functioned more or less as had been contemplated in the
63 Stat. 159. The 1947 Study and the Inflow-Outflow
                                                              Compact. It met regularly, passed resolutions, and
Manual were [**2563] incorporated into S. Doc. 109,
                                                              undertook studies of various questions of importance to
and they unquestionably provided the basis upon which
                                                              those who use the waters of the Pecos. The apparent
Congress approved the Compact, see S. Rep. No. 409,
                                                              harmony that characterized the Commission in those
81st Cong., 1st Sess. (1949).
                                                              years, however, seems largely to have been the result of a
       6 [HN1] "No State shall, without the Consent of        tacit agreement to defer disagreement on a problem of
       Congress, . . . Compact with another State, or         serious magnitude. For it became clear soon after the
       with a foreign Power . . . ." U.S. Const., Art. I, §   Compact went into effect that the 1947 Study and, more
       10, cl. 3.                                             importantly, the tables in the Inflow-Outflow Manual did
                                                              not describe the actual state of the river. In almost every
     The crucial substantive provision of the Pecos River     year following adoption of the Compact, state-line flows
Compact is found at Art. III(a): [HN2] "New Mexico            were significantly [***10] below the amount that one
shall not deplete by man's activities the flow of the Pecos   would have predicted on the basis of the Inflow-Outflow
River at the New Mexico-Texas state line below an             Manual, with no obvious change either in natural
amount which will give to Texas a quantity of water           conditions along the river or in "man's activities."
equivalent to that available to Texas under the 1947
condition." The term "1947 condition" was expressly               The initial response of the Commission to this
                                                              problem was to authorize, in 1957, an ambitious "Review
                                                                                                               Page 11
                                     462 U.S. 554, *560; 103 S. Ct. 2558, **2563;
                                      77 L. Ed. 2d 1, ***10; 1983 U.S. LEXIS 67

of Basic Data," [*561] which would essentially retrace               9 The Commission did not meet at all between
the steps of the engineering committee's 1947 Study to               January 1967 and November 1968, during which
provide a more accurate description of the "1947                     period the identities of four key persons changed.
condition." The Review of Basic Data was presented to                Both the Texas Commissioner (first appointed
the Commission in 1960; it essentially duplicated the                immediately after the Compact was ratified) and
1947 Study, but using different periods of time, revised             the Engineering Advisor to the United States
records, a number of different assumptions, and different            Commissioner (also chairman of the engineering
hydrological and mathematical procedures. The                        committee and principal author of the 1947 Study
Commission took no action on the Review of Basic Data                and Inflow-Outflow Manual) died. The New
until two years later, when it directed the engineering              Mexico and United States Commissioners (the
committee to proceed with a draft of a new                           latter an important force in the original compact
Inflow-Outflow Manual, and adopted as findings of fact a             negotiations) retired. Thus, by late 1968,
set of figures derived from the new study showing that               administration of the Compact was largely in the
the cumulative shortfall of state-line flows for the years           hands of people with no personal connection to
1950-1961 was approximately 53,000 acre-feet. 8                      the Commission's early work.

       8 This figure was far less than the shortfall that        B
       would have been found had the tables in the
       original Inflow-Outflow Manual been used. The              In June 1974, Texas invoked the original jurisdiction
       Commission did not determine whether any              of this Court [***11] under Art. III, § 2, cl. 2, of the
       difference between expected flows and actual          United States Constitution and 28 U.S. C. § 1251. Its bill
       flows was due to "man's activities" in New            of complaint alleged that New Mexico had breached its
       Mexico, and later engineering committee reports       obligations under Art. III(a) of the Compact "by
       indicated that adjustments to the 1950-1961           countenancing and permitting depletions by man's
       figures were contemplated.                            activities within New Mexico to the extent that from
                                                             1950 through 1972 there has occurred a cumulative
       [**2564] This was essentially the Commission's        departure of the quantity of water available from the flow
last action with respect to the all-important question of    of the Pecos River at the Texas-New Mexico State Line
Texas' right under the Compact to receive as much water      in excess of 1,200,000 acre-feet from the equivalent
as it would have received under the "1947 condition." 9      available under the 1947 condition . . . ." Texas sought a
Disputes that had been deferred and avoided in the past      decree commanding New Mexico to deliver water in
now surfaced. They came to a head at a special meeting       accordance with the Compact. The United States
of the Commission in July 1970, at which the Texas           intervened to protect its own claims on the waters of the
Commissioner stated his position that, calculated            Pecos River, which had been preserved in Arts. XI-XII of
according to the original Inflow-Outflow Manual, there       the Compact. We granted leave to file the complaint, 421
had been a cumulative shortfall in state-line flows of 1.1   U.S. 927 (1975), and appointed a Special Master, 423
million [*562] acre-feet for the years 1950-1969, that       U.S. 942 (1975).
the Review of Basic Data was "incomplete and replete
with errors," and that Texas had a right to an annual              In 1979, the Special Master made his first report to
determination of departures in state-line flows under the    this Court. In that report, he recommended that we reject
original assumptions of the 1947 Study until the             Texas' position that the phrase "1947 condition" in Art.
Commission adopted a different method. Thereafter, the       III(a) of the Compact should be taken to mean an
Texas and New Mexico staffs prepared different reports       artificial condition [*563] as described by the 1947
in 1971 and 1974 on cumulative shortfalls under the          Study embodied in S. Doc. 109, however erroneous the
"1947 condition," with Texas relying on the original         data in that study might have been. Instead, he concluded
Inflow-Outflow Manual and New Mexico on the Review           that "[the] 1947 condition is that situation in the Pecos
of Basic Data. Attempts to mediate between the two           River Basin which produced in New Mexico the
positions failed, and the Commission took no action for      man-made depletions resulting from the stage of
lack of agreement between the two voting                     development existing at the beginning of the year 1947 . .
Commissioners.                                               . ," and that a new Inflow-Outflow Manual was required.
                                                                                                                    Page 12
                                       462 U.S. 554, *563; 103 S. Ct. 2558, **2564;
                                        77 L. Ed. 2d 1, ***11; 1983 U.S. LEXIS 67

1979 Report 41. We approved the report in full. 446              conclude an agreement such as the Pecos River Compact
U.S. 540 (1980).                                                 without the consent of the United States Congress.
                                                                 However, once given, "congressional consent transforms
     Over the following two years, the Special Master            an interstate compact within this Clause into a law of the
received evidence on the question of what corrections to         United States." Cuyler v. Adams, 449 U.S. 433, 438
the 1947 Study and the Inflow-Outflow Manual were                (1981); see Pennsylvania v. Wheeling & Belmont Bridge
required to produce an accurate description of the 1947          Co., 13 How. 518, 566 (1852).One consequence of this
condition, and thus of New Mexico's obligations under            metamorphosis is that, unless the compact to which
Art. III(a) of the Compact. In his 1982 Report, however,         Congress has consented is somehow unconstitutional, no
he concluded that resolution of these issues [**2565]            court may order relief inconsistent with its express terms.
would require that we "exercise administrative powers            Yet that is precisely what the Special Master has
delegated to the [Pecos River Commission]" and that              recommended. [HN5] The Pecos River Compact clearly
"such exercise of administrative power is beyond the             delimits the role of the United State Commissioner.
judicial function." 1982 Report 27. Recognizing that the         Although the United States Commissioner must be
Commission would be unlikely to act by unanimous vote            present at a Commission meeting in order to provide a
of both State Commissioners, and that continued impasse          quorum and serves as its presiding officer, and although
favored the upstream State, the Special Master                   the engineering advisers to the United States
recommended:                                                     Commissioner have consistently participated fully in the
                                                                 work of the various engineering committees and
     "[The] equity powers of the Court are adequate to           subcommittees, Art. V(a) of the Compact specifies that
provide a remedy. If within a reasonable time . . . the          "the Commissioner representing the United States . . .
States do not agree on a tie-breaking procedure, the Court       shall not have the right to vote in any of the deliberations
would be justified in ordering . . . that either the             of the Commission." No other third party is given the
representative of the United States, or some other               right to vote on matters before the Commission. To
third-party, be designated and empowered to participate          [*565] provide a third, tie-breaking vote on regular
in all Commission deliberations and act decisively when          Commission business would be to alter fundamentally the
the States are not in agreement. The order should provide        structure of the Commission.
that the decision of the tie-breaker is final, subject only to
appropriate review by the Court. Upon the selection of a           [***LEdHR6] [6][HN6] Congress may vest a federal
tie-breaker, the States should be ordered to return to the       official with the responsibility to administer the division
Commission for determination of this long-standing               of interstate streams. See Arizona v. California, 373 U.S.
controversy." Id., at 26.                                        546, 564-567 (1963).Other interstate compacts, approved
                                                                 by Congress contemporaneously with the Pecos River
       [*564] At the same time, the Special Master
                                                                 Compact, allow federal representatives a vote on
rejected two pending motions, [***12] one by New
                                                                 compact-created commissions, or expressly provide for
Mexico for dismissal of the case altogether, and one by
                                                                 arbitration by federal officials of commission disputes.
Texas to adopt a simpler method than the Inflow-Outflow
                                                                 E. g., Upper Colorado Basin Compact, 63 Stat. 31, 35-37;
Manual provides for determining the extent of shortfalls
                                                                 Arkansas River Compact, 63 Stat. 145, 149-151;
in state-line water deliveries.
                                                                 Yellowstone River Compact, 65 Stat. 663, 665-666. The
    II                                                           Pecos River Compact clearly lacks the features of these
                                                                 other compacts, and we are not free to rewrite it.
     Both the United States and New Mexico have filed
exceptions to the Special Master's key recommendation --               [**2566] [***LEdHR7] [7]Without doubt, the
that either the United States Commissioner or some other         structural likelihood of impasse on the Pecos River
third party be given a vote on the Pecos River                   Commission is a serious matter. In light of other States'
Commission and empowered to participate in all                   experience, Texas and New Mexico might well consider
Commission deliberations. We sustain their exceptions.           amending their Compact to provide for some mutually
                                                                 acceptable method for resolving paralyzing impasses
  [***LEdHR1A] [1B] [***LEdHR4] [4] [***LEdHR5]                  such as the one that gave rise to this suit. Nevertheless,
[5][HN4] Under the Compact Clause, two States may not            [***13] the States' failure to agree on one issue, however
                                                                                                                    Page 13
                                       462 U.S. 554, *565; 103 S. Ct. 2558, **2566;
                                        77 L. Ed. 2d 1, ***13; 1983 U.S. LEXIS 67

important, does not render the Compact void, nor does it                commission's decisions without providing the
provide a justification for altering its structure by judicial          States an opportunity to challenge them, see Iowa
decree. The Commission has acted on many matters by                     v. Illinois, 151 U.S. 238 (1894). We have,
unanimous vote. 10 We cannot say whether unanimity                      however, been willing to appoint a River Master
would have been achieved had a tie breaker stood ready                  solely to perform ministerial tasks. New Jersey v.
to endorse one State's position over the other's. [HN7]                 New York, 347 U.S. 995, 1002-1004 (1954).
Under the Compact as it now stands, the solution for
impasse is judicial resolution of such disputes as are                III
amenable to judicial resolution, and further negotiation
                                                                      In the alternative, the Special Master recommends
for those disputes that are not. See infra, at 569-571.
                                                                 "continuance of [this] suit as presently postured." 1982
        10 For instance, the Commission has taken a              Report 28. New Mexico excepts to this recommendation
        number of concrete actions with regard to                insofar as it embodies a certain conception of this Court's
        salt-cedar eradication and salinity alleviation,         role in resolving the present dispute. It contends that this
        especially at Malaga Bend. Furthermore, it has           Court may do nothing more than review official actions
        participated in and coordinated studies of various       of the Pecos River Commission, on the deferential model
        features of the river, and it has maintained the         of judicial review of administrative action by a federal
        numerous gauges and other equipment used in              agency, and that this case [*567] should be dismissed if
        such studies.                                            we find either that there is no Commission action to
                                                                 review or that the actions the Commission has taken were
                                                                 not arbitrary or capricious. Thus, in New Mexico's view,
                                                                 this suit may be maintained only as one for judicial
      [*566] [***LEdHR8] [8]Texas, in support of the             review of the Commission's [***14] quantification of
Special Master's recommendation, argues that                     the 1950-1961 shortfall, and the implied acceptance of
reformation of the Compact is within this Court's                the Review of Basic Data which, New Mexico argues,
equitable powers. Indeed, in its complaint Texas                 that entailed. 12 According to New [**2567] Mexico,
specifically requested that we appoint a Master "to              "[this] Court has no authority to act de novo or assume
control the diversion, storage and use of [the] Pecos River      the powers of the Pecos River Commission." Motion of
Basin waters within the State of New Mexico"; given the          New Mexico to Recommend Final Decree (filed Feb. 19,
scope of the Commission's mandate, a tie breaker on the          1982), p. 2. We disagree.
Commission would be the functional equivalent of such a
Master. Texas has not, however, identified a single                     12     We note that the Special Master's 1979
instance where we have granted similar relief. 11 [HN8]                 Report, which we approved, decisively rejected
We have expressly refused to make indefinite                            New Mexico's argument that the Pecos River
appointments of quasi-administrative officials to control               Commission in fact adopted the Review of Basic
the division of interstate waters on a day-to-day basis,                Data, but that same report did not suggest that we
even with the consent of the States involved. E. g.,                    dismiss this action. See 1979 Report 40-41, 44.
Vermont v. New York, 417 U.S. 270 (1974); Wisconsin v.                  Thus, at least by implication, the argument New
Illinois, 289 U.S. 710, 711 (1933). Continuing                          Mexico now advances was also rejected. New
supervision by this Court of water decrees would test the               Mexico did not object to those portions of the
limits of proper judicial functions, and we have thought it             Special Master's Report, although it did object to
wise not to undertake such a project. Vermont v. New                    others. New Mexico's Objections to the Report of
York, supra, at 277.                                                    the Special Master and Brief (filed Nov. 29,
                                                                        1979).
        11 On occasion in the past, before the device of
        appointing special masters in original jurisdiction
        cases became common, we have gone so far as to
        appoint a commission with broad powers to                  [***LEdHR9A] [9A] [***LEdHR10] [10][HN9] There
        resolve factual questions in a controversy between       is no doubt that this Court's jurisdiction to resolve
        two States, see Iowa v. Illinois, 147 U.S. 1 (1893),     controversies between two States, U.S. Const., Art. III, §
        but even then we declined to accept the                  2, cl. 1; 28 U.S. C. § 1251(a)(1), extends to a properly
                                                                                                                   Page 14
                                       462 U.S. 554, *567; 103 S. Ct. 2558, **2567;
                                    77 L. Ed. 2d 1, ***LEdHR10; 1983 U.S. LEXIS 67

framed suit to apportion the waters of an interstate stream            14 Article V(f) provides: "Findings of fact made
between States through which it flows, e. g., Kansas v.                by the Commission shall not be conclusive in any
Colorado, 185 U.S. 125, 145 (1902), or to a suit to                    court, or before any agency or tribunal, but shall
enforce a prior apportionment, e. g., Wyoming v.                       constitute prima facie evidence of the facts
Colorado, 298 U.S. 573 (1936).13 It also extends to a suit             found." That language is ambiguous as to the role
by one State to enforce its compact with another State or              of the Supreme Court, but an earlier version of
to declare rights under a compact. Virginia v. West                    Art. V(f) -- one that was proposed by New
Virginia, 206 U.S. 290, 317-319 (1907); cf. West                       Mexico -- sheds further light: "The findings of the
Virginia ex rel. Dyer v. Sims, 341 U.S. 22, 30 (1951)                  Commission shall not be conclusive in any court
(jurisdiction to interpret a compact on writ of certiorari);           or tribunal which may be called upon to interpret
Green v. Biddle, 8 Wheat. 1, 91 (1823). If there is a                  or enforce this Compact." Minutes of Meeting of
compact, it is a law of the United States, see supra, at               the Pecos River Compact Commission, Sept. 28,
564, and our first and last order of business is interpreting          1943, p. 11 (proposed Art. XII, para. 4). Since the
the [*568] compact. [HN10] "Where Congress has so                      only parties with rights and duties to be enforced
exercised its constitutional power over waters, courts                 under any draft of the Compact were the United
have no power to substitute their own notions of an                    States and the two signatory States, it is clear that
'equitable apportionment' for the apportionment chosen                 the New Mexico draft reflected the assumption
by Congress." Arizona v. California, 373 U.S., at                      that this Court might be called upon to enforce the
565-566. Nevertheless, as Virginia v. West Virginia                    Compact. Article V(f) assumed its present from at
proves, the mere existence of a compact does not                       a late stage in the negotiations and with no
foreclose the possibility that we will be required to                  discussion on the record; its change was most
resolve a dispute between the compacting States.                       likely due to the efforts of a federal drafting
                                                                       expert brought in after all significant disputes had
       13 [***LEdHR9A] [9B]That jurisdiction exists                    been resolved, see Pecos River Compact
       even though litigation of such disputes is                      Commission Meeting, Nov. 8-13, 1948, p. 61,
       obviously a poor alternative to negotiation                     reprinted in S. Doc. 109, at 101. In the light of
       between the interested States. See Vermont v.                   the other factors discussed in text, we need not
       New York, 417 U.S. 270, 277-278 (1974); infra, at               consider whether, standing alone, this history
       575-576.                                                        would be dispositive.
                                                                       15 Cf. Kansas v. Colorado, 206 U.S. 46, 117
       [***LEdHR2A] [2B]The question for decision,                     (1907). See also Frankfurter & Landis, The
therefore, is what role the Pecos River Compact leaves to              Compact Clause of the Constitution -- A Study in
this Court. The Compact itself does not expressly                      Interstate Adjustments, 34 Yale L. J. 685, 701
address the rights of the States to seek relief in the                 (1925) ("[One] answer is clear: no one State can
Supreme Court, although it clearly contemplates some                   control the power to feed or to starve, possessed
independent exercise of judicial authority. 14                         by a river flowing through several States");
Fundamental       [***15]      structural considerations,              Bannister, Interstate Rights in Interstate Streams
however, militate against New Mexico's theory. First, if               in the Arid West, 36 Harv. L. Rev. 960, 979-980
all questions under the Compact had to be decided by the               (1923) (describing practice in international law).
Commission in the first instance, New Mexico could
indefinitely prevent authoritative Commission action                     [***LEdHR2A] [2C] [***LEdHR11] [11]
solely by exercising its veto on the Commission. As New         [***LEdHR12] [12]If it were clear that the Pecos River
Mexico is the upstream State, with effective [*569]             Commission was intended to be the exclusive forum for
power to deny water altogether to Texas except under            disputes between the States, then we would withdraw.
extreme flood conditions, the Commission's failure to           But the express terms of the Pecos River Compact do not
take action to enforce New Mexico's obligations under           constitute the Commission as the sole arbiter of disputes
Art. III(a) would invariably work to New Mexico's               between the States over New Mexico's Art. III
[**2568] benefit. 15 Under New Mexico's interpretation,         obligations. [HN11] Our equitable power to apportion
this Court would be powerless to grant Texas relief on its      interstate streams and the power of the States and
claim under the Compact.                                        Congress acting in concert to accomplish the same result
                                                                                                                 Page 15
                                      462 U.S. 554, *569; 103 S. Ct. 2558, **2568;
                                   77 L. Ed. 2d 1, ***LEdHR12; 1983 U.S. LEXIS 67

are to a large extent complementary. See Frankfurter &                it." Id., at 91.
Landis, The Compact Clause of the Constitution -- A
Study in Interstate Adjustments, 34 Yale L. J. 685,
705-708 (1925). Texas' right to invoke the original
                                                                     [***16] [***LEdHR13] [13] [***LEdHR14A]
jurisdiction of this Court was an important part of the
                                                               [14A]Considerations outside the Compact itself also
context in which the Compact was framed; indeed, the
                                                               render New Mexico's theory of the role of this Court
threat of such litigation undoubtedly contributed to New
                                                               untenable. According to New Mexico, Texas may seek
Mexico's willingness to enter into a compact. It is
                                                               judicial review in this Court of decisions actually made
difficult to conceive that Texas would trade away its right
                                                               by the Commission -- presumably on the votes of both
to seek an equitable apportionment of the river in return
                                                               States' Commissioners. That is not the proper function of
for a promise that New Mexico could, for all practical
                                                               our original jurisdiction to decide controversies between
purposes, avoid at will. 16 [HN12] In the absence of an
                                                               two States. In recent years, [HN13] we have consistently
explicit provision or other clear indications that a bargain
                                                               interpreted 28 U.S. C. § 1251(a) as providing us with
to that effect was made, we shall not construe a compact
                                                               substantial discretion to make case-by-case judgments as
to preclude a [*570] State from seeking judicial relief
                                                               to the practical necessity of an original forum in this
when the compact does not provide an equivalent method
                                                               Court for particular disputes within our constitutional
of vindicating the State's rights. Cf. Green v. Biddle, 8
                                                               original jurisdiction. See Maryland v. Louisiana, 451
Wheat., at 91. 17
U.S. 725, 743 (1981); Ohio v. Wyandotte Chemicals
       16 Note that under Art. XIV of the Compact              Corp., 401 U.S. 493, 499 (1971). We exercise that
       Texas may withdraw from the Compact only with           discretion with an eye to promoting the most effective
       the concurrence of the New Mexico State                 functioning of this Court within the overall federal
       Legislature.                                            [**2569] system. See ibid. If authorized representatives
       17 In Green v. Biddle, the owners of certain            of the compacting States have reached an agreement
       lands in Kentucky sued their tenant to recover the      [*571] within the scope of their congressionally ratified
       lands. The tenant relied on two Kentucky statutes       powers, recourse to this Court when one State has second
       which gave him a good defense to the action, and        thoughts is hardly "necessary for the State's protection,"
       the owners responded that the statutes were             Massachusetts v. Missouri, 308 U.S. 1, 18 (1939). 18
       invalid as violations of a compact between              [HN14] Absent extraordinary cause, we shall not review
       Kentucky and Virginia, ratified by Congress,            the Pecos River Commission's actions without a more
       which provided that "all private rights, and            precise mandate from Congress than either the Compact
       interests of lands within [Kentucky] derived from       or 28 U.S. C. § 1251 provides.
       the laws of Virginia prior to [the separation of
                                                                      18
       Kentucky from Virginia], shall remain valid and
       secure under the laws of [Kentucky], and shall be                      [***LEdHR14A] [14B]Cf. Illinois v.
       determined by the laws now existing in                         Milwaukee, 406 U.S. 91, 93 (1972) (original
       [Virginia]." 8 Wheat., at 3. An argument was                   jurisdiction will not be taken where there is an
       made -- similar to New Mexico's argument in this               adequate alternative forum for resolution of the
       case -- that disputes concerning the compact could             dispute). The model case for invocation of this
       only be resolved by a commission to be appointed               Court's original jurisdiction is a dispute between
       under the terms of the agreement, and not by the               States of such seriousness that it would amount to
       courts that would ordinarily resolve questions of              casus belli if the States were fully sovereign.
       title to land. We rejected the argument because                North Dakota v. Minnesota, 263 U.S. 365,
       the possibility that one State could defeat the                372-374 (1923); Missouri v. Illinois, 200 U.S.
       rights of the other's citizens or allow the                    496, 519-521 (1906). When it is able to act, the
       occupants of the land to enrich themselves                     Commission is a completely adequate means for
       without title simply by refusing to appoint                    vindicating either State's interests. The need for
       commissioners "is too monstrous to be for a                    burdensome original jurisdiction litigation, which
       moment entertained. The best feelings of our                   prevents this Court from attending to its appellate
       nature revolt against a construction which leads to            docket, would seem slight.
                                                                                                              Page 16
                                   462 U.S. 554, *571; 103 S. Ct. 2558, **2569;
                                77 L. Ed. 2d 1, ***LEdHR14A; 1983 U.S. LEXIS 67

    Therefore, we accept the Special Master's alternative   The vertical axis measures corresponding 3-year averages
recommendation that this suit continue as presently         of the measured "outflow" at the state line. The data
framed.                                                     points form a smooth curve that, according to the
                                                            Manual, "fairly accurately [covers] the entire range of
    IV                                                      expected water supply so far as such a supply is affected
                                                            by meteorological factors" under the "1947 condition" as
       [***LEdHR3A] [3B]The Special Master also             described in the 1947 Study. S. Doc. 109, at 149.
recommends that we deny a motion made by Texas --
apparently at the Special Master's invitation -- to adopt          19 The Inflow-Outflow Manual appended to the
what it calls a "Double Mass Analysis" as the method for           engineering committee's 1947 Study describes the
determining when a shortfall in state-line flows has               inflow-outflow method as follows:
occurred. 1982 Report 21. Texas excepts to that
recommendation. We overrule the exception.                              "The inflow-outflow method involves the
                                                                   determination of the correlation between an index
     [***17] Once again, we turn to the provisions of              of the inflow to a basin as measured at certain
the Compact. Article VI provides:                                  gaging stations and the outflow from the basin. It
                                                                   is obviously impossible to measure all of the
    [HN15] "The following principles shall govern in               inflow. The gaging stations which are utilized to
regard to the apportionment made by Article III of this            measure a part of the inflow are termed index
Compact:                                                           inflow stations because the amount of water
                                                                   measured at those stations is an acceptable index
    ....
                                                                   of the inflow to the basin. From the plotting by
     "(c) Unless and until a more feasible method is               years of the sum of the index inflows against the
devised and adopted by the Commission the                          outflow there is developed a correlation curve
inflow-outflow method, as described in the Report of the           showing the relationship between inflow and
Engineering Advisory Committee, shall be used to:                  outflow. Any changes thereafter in the basin
                                                                   which occur between the points of inflow and the
     [*572] "(i) Determine the effect on the state-line            point of outflow and which affect the water
flow of any change in depletions by man's activities or            supply of the basin can be measured by the
otherwise, of the waters of the Pecos River in New                 change in correlation between the inflow and
Mexico."                                                           outflow from that indicated by the correlation
                                                                   curve previously developed. For example, if over
    It is clear that the Commission has not adopted "a             a period of years additional depletions occur
more feasible method," so the question is whether Texas'           between the inflow points and the outflow point,
"Double Mass Analysis" fairly comes within the                     the correlation between the inflow and the
Compact phrase "inflow-outflow method, as described in             outflow will change: With a given inflow into the
the Report of the Engineering Advisory Committee." If it           basin there will be less outflow." S. Doc. 109, at
does not, then we may not use it to measure state-line             149.
shortfalls in enforcing the Compact.
                                                                  At this point in the litigation, it has been decided
     As an illustration of the method, 19 and to permit     that the actual curve provided by the original
administration of the Compact to begin, the                 Inflow-Outflow Manual does not accurately describe the
Inflow-Outflow Manual provides a correlation curve and      correlation between inflows and the state-line outflow
set of tables for the critical reach of the river between   under the 1947 condition. The parties' evidence now
Alamogordo Dam and the state line. See Appendix to this     must be directed [***18] to drawing a new curve, like
opinion. Plotted along the horizontal axis are              the old one but using more accurate data, and the disputes
overlapping 3-year averages [**2570] of the sums of         between them involve questions of which inflows should
four "index inflows" -- the actual, measured flow into      be "index inflows" and how the historic values of those
Alamogordo Reservoir, and unmeasured estimates of           inflows should be deduced and incorporated into the
"flood inflows," see n. 5, supra, in three sub-reaches      curve. See n. 21, infra. Texas' motion to substitute its
between Alamogordo [*573] Dam and the state line.
                                                                                                                    Page 17
                                      462 U.S. 554, *573; 103 S. Ct. 2558, **2570;
                                       77 L. Ed. 2d 1, ***18; 1983 U.S. LEXIS 67

"Double Mass Analysis" represents a bold effort to              at 150-151. The "Double Mass Analysis" represents a
simplify this initial process by reducing the number of         sharply different approach to how to go about measuring
index inflows to one, directly measurable value -- the          shortfalls at the state line, an approach which the
measured flow past Alamogordo Dam. In essence,                  Compact leaves the Commission free to adopt, but which
Texas' position is that this single inflow provides an          this Court may not apply against New Mexico in the
adequate index for all the inflows into the river that are      absence of Commission action.
more difficult (if not impossible) to measure. If so, the
correlation curve described by plotting 3-year averages of          V
the single inflow against the state-line outflow would
                                                                    In a pretrial order dated October 31, 1977, the
furnish an adequate benchmark to which post-Compact
                                                                Special Master identified four [**2571] broad questions
flows could be compared to determine whether Texas is
                                                                to be resolved. The first was settled by our approval of
receiving the water it may expect to receive under the
                                                                his 1979 Report, 446 U.S. 540 [***19] (1980). See
Compact. 20
                                                                supra, at 563. The crucial question that remains to be
       20       It deserves emphasis that neither the           decided is the fourth: "[Has] New Mexico fulfilled her
       Inflow-Outflow Manual in any of its past or              obligations under Article III(a) of the Pecos River
       projected versions nor the Texas "Double Mass            Compact?" [*575] Pretrial Order 6. That question
       Analysis" has anything to say about whether a            necessarily involves two subsidiary questions. First,
       particular shortfall in state-line water deliveries is   under the proper definition of the "1947 condition," see
       due to "man's activities," a critical qualification on   supra, at 563, what is the difference between the quantity
       New Mexico's obligation to deliver water under           of water Texas could have expected to receive in each
       Art. III(a) of the Compact. At best, correlation         year and the quantity it actually received? For the
       curves for sub-reaches of the river can be helpful       1950-1961 period, that difference has been determined by
       in identifying where a shortfall seems to originate.     unanimous vote of the Commission; for 1962 to the
                                                                present, determining the extent of the shortfall will
      [*574] Although simplification would be desirable,        require adjudicating disputes between the States as to
and the question is a close one, on balance we conclude         specific issues raised by the 1947 Study, the Review of
that the "Double Mass Analysis" is not close enough to          Basic Data, and the Inflow-Outflow Manual. The States
what the Compact terms an "inflow-outflow method, as            have fully briefed their positions, however, and the
described in the Report of the Engineering Advisory             Special Master has already heard extensive evidence on
Committee" to make it acceptable for use in determining         these questions. 21 Second, to what extent were the
New Mexico's compliance with its Art. III obligations.          shortfalls due to "man's activities in New Mexico"?
The flows past Alamogordo Dam do not always bear a
physical relationship to the state-line outflow. In its                 21     New Mexico has generally relied on the
natural state, the Pecos actually dries up for long periods             Review of Basic Data. Texas has submitted a
of time between Alamogordo and the state line, so the                   document      entitled     "Texas      'Workability'
water that crosses the state line is not the same water that            Statement," filed Nov. 18, 1981, which identifies
passes the dam, except in periods of extreme flood. The                 nine "[questions] which must be resolved in
Compact, by reference to the 1947 Study, clearly                        connection with the flood inflow computation."
contemplates that the adequacy of state-line flows can be               Id., at 4-5. Not all of them involve large
determined without taking into account all inflows into                 quantities of water. At this stage of the litigation,
the Pecos, but the intent of the Compact's framers was                  there seems to be no more than three or four
clearly to use as much information as possible rather than              issues upon which the Special Master will have to
relying on a single index inflow, even if that inflow                   resolve difficult questions of fact or of
reflects the same meteorological factors that produce the               hydrological method. We leave to the Special
other inflows. The Inflow-Outflow Manual expressly                      Master's discretion whether these issues should be
indicates that the engineering committee intended to                    considered as framed in § 4(b) of his original
develop more precise correlation curves for smaller                     pretrial order or whether a revised formulation
sub-reaches of the river, taking into account inflows not               would be more appropriate. See Order of Dec.
incorporated into the curve it provided. See S. Doc. 109,               29, 1981, pp. 5-7; 1982 Report 10-11.
                                                                                                                Page 18
                                      462 U.S. 554, *575; 103 S. Ct. 2558, **2571;
                                       77 L. Ed. 2d 1, ***19; 1983 U.S. LEXIS 67

Time and again we have counseled States engaged in            return this case to the Special Master for determination of
litigation with one another before this Court that their      the unresolved issues framed in his pretrial order, in a
dispute "is one more likely to be wisely solved by            manner consistent with this opinion.
co-operative study and by conference and mutual
concession on the part of representatives of the States so        It is so ordered.
vitally interested in it than by proceedings in any court
                                                                  [*577] [SEE appendix to opinion of the court IN
however constituted." New York v. New Jersey, 256 U.S.
                                                              ORIGINAL] [***20] [**2572] APPENDIX TO
296, 313 (1921); cf. Vermont v. New York, 417 U.S., at
                                                              OPINION OF THE COURT
277-278; Minnesota v. Wisconsin, 252 U.S. 273, 283
(1920); Washington v. Oregon, 214 U.S. 205, 218                   [See Illustration in Original]
(1909). It is within this Court's power to determine
whether New Mexico is in compliance with Art. III(a) of           [*578] Inflow-outflow relationships, Alamogordo
the [*576] Pecos River Compact, but it is difficult to        Dam to New Mexico-Texas State line
believe that the bona fide differences in the two States'
views of how much water Texas is entitled to receive              [1,000 acre-feet units]
justify the expense and time necessary to obtain a judicial
resolution of this controversy. With that observation, we

                                                                                       Outflow
                       Index inflow                                                   relationship
140                                                                                                                  77
150                                                                                                                  83
160                                                                                                                  89
170                                                                                                                  96
180                                                                                                                102
190                                                                                                                109
200                                                                                                                115
210                                                                                                                122
220                                                                                                                129
230                                                                                                                136
240                                                                                                                143
250                                                                                                                151
260                                                                                                                159
270                                                                                                                166
280                                                                                                                174
290                                                                                                                182
300                                                                                                                189
310                                                                                                                197
320                                                                                                                205
330                                                                                                                212
340                                                                                                                220
                                                                                                            Page 19
                                   462 U.S. 554, *578; 103 S. Ct. 2558, **2572;
                                    77 L. Ed. 2d 1, ***20; 1983 U.S. LEXIS 67

350                                                                                                            228
400                                                                                                            267
450                                                                                                            307
500                                                                                                            352
550                                                                                                            402
600                                                                                                            454
650                                                                                                            506
750                                                                                                            615
800                                                                                                            671
850                                                                                                            728
900                                                                                                            786

                                                               [1,000 acre-feet units]
     [**2573] Inflow-outflow calculations, Alamogordo
Dam to New Mexico-Texas State line (from 1947
condition theoretical studies)

                                                                                  Accumulated differences
               Index      Routed         Outflow         Differences
              inflow     outflow       from curve                                                  Omitting
                                                                               All years            1942-44
1919-21          557.8        412.3            410.1               +2.2                     +2.2               +2.2
1920-22          370.3        259.9            243.8              +16.1                    +18.3              +18.3
1921-23          392.3        259.6            261.0                -1.4                   +16.9              +16.9
1922-24          268.4        156.3            164.9                -8.6                    +8.3               +8.3
1923-25          300.1        178.0            189.1               -11.1                    -2.8               -2.8
1924-26          318.7        200.6            204.0                -3.4                    -6.2               -6.2
1925-27          325.9        203.9            209.1                -5.2                   -11.4              -11.4
1926-28          307.2        187.5            194.8                -7.3                   -18.7              -18.7
1927-29          250.2        150.2            151.2                -1.0                   -19.7              -19.7
1928-30          275.0        168.8            170.0                -1.2                   -20.7              -20.7
1929-31          294.4        189.2            185.1               +4.1                    -16.8              -16.8
1930-32          377.2        251.7            249.2               +2.5                    -14.3              -14.3
1931-33          342.2        236.0            221.8              +14.2                      -.1                -.1
1932-34          292.0        191.9            183.4               +8.5                     +8.4               +8.4
1933-35          223.6        136.0            131.5               +4.5                    +12.9              +12.9
1934-36          227.4        127.8            134.2                -6.4                    +6.5               +6.5
                                                                                                           Page 20
                                    462 U.S. 554, *578; 103 S. Ct. 2558, **2573;
                                     77 L. Ed. 2d 1, ***20; 1983 U.S. LEXIS 67

1935-37            367.1        243.5            241.3              +2.2                 +8.7                +8.7
1936-38            388.5        253.1            258.0               -4.9                +3.8                +3.8
1937-39            392.2        256.3            161.0               -4.7                    -.9               -.9
1938-40            269.0        151.1            165.3              -14.2                -15.1              -15.1
1939-41            267.1        639.8            634.2              +5.6                  -9.5                -9.5
1940-42            859.7        732.3            739.2               -6.9                -16.4              -16.4
1941-43            859.3        746.2            738.8              +6.4                 -10.1              -10.0
1942-44            337.4        246.2            217.9             +28.3                +18.3
1943-45            224.8        139.0            132.4              +6.6                +24.9                 -3.4
1944-46            201.2        121.0            115.8              +5.2                +30.1                +1.8

                                                            Supreme Court of the United States 58

REFERENCES                                                  L Ed Index to Annos, States; Supreme Court of the
32A Am Jur 2d, Federal Practice and Procedure 537, 556;     United States; Waters
72 Am Jur 2d, States, Territories, and Dependencies 5; 78
Am Jur 2d, Waters 309-315                                   ALR Quick Index, Federal Courts; Riparian Owners;
                                                            States; Waters and Watercourses
8 Federal Procedure, L Ed, Courts and Judicial System
20:200, 20:219                                              Federal Quick Index, Compacts; Riparian Rights; Rivers;
                                                            States; Supreme Court of the United States; Waters and
2 Federal Procedural Forms, L Ed, Appeal, Certiorari,       Watercourses
and Review 3:721-3:742
                                                                    Annotation References:
USCS, Constitution, Article I, Section 10, Clause 3, and
Article III, Section 2, Clause 1; 28 USCS 1251(a)           Original jurisdiction of United States Supreme Court in
                                                            suits between states. 68 L. Ed. 2d 969.
US L Ed Digest, States, Territories, and Possessions 58
                                                                                                                   Page 1

                  TRINOVA CORPORATION v. MICHIGAN DEPARTMENT OF TREASURY

                                                       No. 89-1106

                                   SUPREME COURT OF THE UNITED STATES

                498 U.S. 358; 111 S. Ct. 818; 112 L. Ed. 2d 884; 1991 U.S. LEXIS 842; 59 U.S.L.W.
4097; 91 Cal. Daily Op. Service 1278; 91 Daily Journal DAR 2066

                                               October 1, 1990, Argued
                                              February 19, 1991, Decided

PRIOR HISTORY:       CERTIORARI TO THE                         the tax base measure attributed to the state and the
SUPREME COURT OF MICHIGAN.                                     contribution of state business activity to the entire value
                                                               added process. The court concluded that the corporation
DISPOSITION:         433 Mich. 141, 445 N.W.2d 428,          failed to meet its burden of proving by clear and cogent
affirmed.                                                      evidence that the state's apportionment provided a
                                                               distorted result.
CASE SUMMARY:
                                                               OUTCOME: The Court affirmed the judgment denying
                                                               the corporation's claim for a refund because the
PROCEDURAL POSTURE: Appellant corporation                      three-factor apportionment formula of the appellee state's
sought review of the judgment from the Supreme Court           single business tax did not violate either the Due Process
of Michigan, which denied its claim for a refund of taxes      Clause or the Commerce Clause of the Federal
assessed under appellee state's single business tax statute.   Constitution.
Mich. Comp. Laws § 208.1 et seq. (1979).
                                                               CORE TERMS: apportionment, tax base, business
OVERVIEW: The corporation filed a suit for a refund of         activity, formula, depreciation, payroll, apportionment
taxes assessed under the state's single business tax (SBT)     formula, geographic, taxation, apportioned, income taxes,
statute. The state supreme court affirmed the judgment         taxing, adjusted, business tax, unitary, interstate
denying his claim for a refund. On certiorari, the             commerce, gross receipts, value-added, interstate,
corporation contended that the state's SBT was not fairly      realized, out-of-state, subtraction, assigned, tax year,
apportioned as applied to it and that the tax discriminated    taxable income, company-wide, discriminate, calculated,
against interstate commerce. The court affirmed the            multiplied, taxed
judgment denying his claim for a refund and held that the
three-factor apportionment formula of the state's SBT,         LexisNexis(R) Headnotes
Mich. Comp. Laws § 208.1 et seq. (1979), did not violate
either the Due Process Clause or the Commerce Clause of
the Federal Constitution. The court found that the SBT
was applied to an activity with a substantial nexus with
the taxing state, was fairly apportioned, and did not          Tax Law > State & Local Taxes
discriminate against interstate commerce. The court            [HN1] Value added is an economic concept. Value added
determined that there was a rational relationship between      is defined as the increase in the value of goods and
                                                                                                                     Page 2
                                           498 U.S. 358, *; 111 S. Ct. 818, **;
                                      112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842

services brought about by whatever a business does to           General Overview
them between the time of purchase and the time of sale.         Tax Law > State & Local Taxes > Value Added Tax
The value a business adds to a single product is the            [HN4] A value added tax (VAT) differs in important
difference between the value of the product at sale and         respects from a corporate income tax. A corporate
the cost of goods purchased from other businesses that          income tax is based on the philosophy of ability to pay,
went into the product. It follows that the sale price of a      as it consists of some portion of the profit remaining after
product is the total of all value added by each step of the     a company has provided for its workers, suppliers, and
production process to that point.                               other creditors. A VAT, on the other hand, is a much
                                                                broader measure of a firm's total business activity. Even
                                                                if a business entity is unprofitable, under normal
Tax Law > Federal Income Tax Computation >                      circumstances it adds value to its products and, as a
Valuation > Business Interests                                  consequence, will owe some VAT. Because value added
Tax Law > State & Local Taxes > Value Added Tax                 is a measure of actual business activity, a VAT correlates
[HN2] A business adds value by handling or processing           more closely to the volume of governmental services
these goods with its labor force, machinery, buildings and      received by the taxpayer than does an income tax.
capital. Value added usually refers to the activities of a      Further, because value added does not fluctuate as widely
single business enterprise. The term can, however, be           as net income, a VAT provides a more stable source of
used with regard to a single product, or even an entire         revenue than the corporate income tax.
economy. Value added is a means of consistently
measuring the size of business firms and other economic
enterprises comprising the total economy. Gross National        Tax Law > Federal Income Tax Computation >
Product is virtually equivalent to national value added.        Deductions for Amortization, Depletion & Depreciation
                                                                > Amortization, Cost Recovery & Depreciation (IRC
                                                                secs. 167-169, 171, 178, 194-195, 197, 216, 248, 280F) >
Tax Law > State & Local Taxes > Income Tax >                    General Overview
Corporations & Unincorporated Associations > General            Tax Law > State & Local Taxes > Personal Property
Overview                                                        Tax > General Overview
Tax Law > State & Local Taxes > Minimum Tax                     [HN5] Depreciation is the reduction in value of a firm's
Tax Law > State & Local Taxes > Value Added Tax                 assets, through wear and tear, obsolescence, or other
[HN3] One of the acknowledged advantages of value               factors, and thus roughly measures consumption of
added as a measure of taxation is its neutrality. A value       capital.
added tax (VAT) is neutral in the sense that it taxes all
business activity alike: Under a pure VAT, all forms of
business      organization       (corporation,  partnership,    Tax Law > Federal Income Tax Computation > General
proprietorship), all types of financing (debt, equity) and      Overview
all methods of production (capital intensive, labor             Tax Law > State & Local Taxes > Franchise Tax >
intensive) bear the same tax burden. Tax factors are            General Overview
minimized in business decisions; inherent advantages and        [HN6] The Michigan single business tax (SBT) is levied
relative efficiencies are allowed to operate in the market      against any person with business activity within the State
economy with minimum tax distortions. This neutrality           of Michigan. Mich. Comp. Laws § 208.31(1). In order to
of a value-added tax is in notable contrast to the effects of   calculate the amount of a taxpayer's SBT the taxpayer
both the corporation income tax and the payroll taxes.          must, first, determine its total tax base. The total tax base
The former, by definition, is applied only to corporations      consists of the taxpayer's value added, calculated by the
and varies with their reliance on equity rather than debt       addition method: Cost of Labor + Depreciation + Interest
capital and the efficiency with which they use equity           + Profit. Under Mich. Comp. Laws § 208.9, the taxpayer
capital -- that is, their net profits.                          begins with federal taxable income (representing profit),
                                                                adds other elements that reflect consumption of labor and
                                                                capital including compensation, depreciation, dividends,
Governments > Public Improvements > General                     and interest paid by the taxpayer, and makes other
Overview                                                        detailed adjustments.
Tax Law > State & Local Taxes > Income Tax >
                                                                                                                    Page 3
                                           498 U.S. 358, *; 111 S. Ct. 818, **;
                                      112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842

Tax Law > State & Local Taxes > Franchise Tax >                 Constitutional Law > Congressional Duties & Powers >
General Overview                                                Commerce Clause > General Overview
Tax Law > State & Local Taxes > Personal Property               Tax Law > State & Local Taxes > Sales Tax > General
Tax > General Overview                                          Overview
[HN7] Business activity is broadly defined as a transfer        [HN10] The Court will sustain a tax against Commerce
of legal or equitable title to or rental of property, whether   Clause challenge so long as the tax is applied to an
real, personal, or mixed, tangible or intangible, or the        activity with a substantial nexus with the taxing state, is
performance of services, or a combination thereof, made         fairly apportioned, does not discriminate against
or engaged in, or caused to be made or engaged in, within       interstate commerce, and is fairly related to the services
this state, whether in intrastate, interstate, or foreign       provided by the state.
commerce, with the object of gain, benefit, or advantage,
whether direct or indirect, to the taxpayer or to others, but
                                                                Constitutional Law > Bill of Rights > Fundamental
shall not include the services rendered by an employee to
                                                                Rights > Procedural Due Process > Scope of Protection
his employer, services as a director of a corporation, or a
                                                                Energy & Utilities Law > Taxation
casual transaction. Mich. Comp. Laws § 208.3 (1979)
                                                                Tax Law > State & Local Taxes > General Overview
                                                                [HN11] The due process requires that there be a minimal
Tax Law > State & Local Taxes > Franchise Tax >                 connection between the interstate activities and the taxing
General Overview                                                state, and a rational relationship between the income
Tax Law > State & Local Taxes > Personal Property               attributed to the state and the intrastate values of the
Tax > General Overview                                          enterprise.
[HN8] If a taxpayer does business both within and
without Michigan, it must determine the portion of its
                                                                Tax Law > State & Local Taxes > Franchise Tax >
total value added attributable to Michigan. That portion is
                                                                General Overview
the average of three ratios: (1) Michigan payroll to total
                                                                Tax Law > State & Local Taxes > Personal Property
payroll, (2) Michigan property to total property, and (3)
                                                                Tax > General Overview
Michigan sales to total sales. The total tax base is
                                                                [HN12] In a unitary enterprise, compensation,
multiplied by the portion of business activity attributable
                                                                depreciation, and profit are not independent variables to
to Michigan (under the three-factor formula), and the
                                                                be adjusted without reference to each other.
result, subject to several further adjustments, is the
taxpayer's adjusted tax base. Mich. Comp. Laws §
208.31(2). Mich. Comp. Laws § 208.23(a) permits a               Energy & Utilities Law > Taxation
taxpayer to deduct a portion of its capital acquisitions,       Tax Law > State & Local Taxes > Administration &
and Mich. Comp. Laws § 208.31(5) permits a                      Proceedings > Audits & Investigations
labor-intensive taxpayer to reduce its adjusted tax base by     Tax Law > State & Local Taxes > Franchise Tax >
a percentage equal to the percentage by which                   General Overview
compensation exceeds 63 percent of the total tax base,          [HN13] Separate accounting, while it purports to isolate
but with such reduction not to exceed a maximum of 37           portions of income received in various states, may fail to
percent. Actual tax liability equals the adjusted tax base      account for contributions to income resulting from
multiplied by a tax rate of 2.35 percent.                       functional integration, centralization of management, and
                                                                economies of scale. Because these factors of profitability
                                                                arise from the operation of the business as a whole, it
Tax Law > State & Local Taxes > Franchise Tax >
                                                                becomes misleading to characterize the income of the
General Overview
                                                                business as having a single identifiable source. Although
Tax Law > State & Local Taxes > Personal Property
                                                                separate geographical accounting may be useful for
Tax > General Overview
                                                                internal auditing, for purposes of state taxation it is not
[HN9] The amended Mich. Comp. Laws § 208.69 creates
                                                                constitutionally required.
a presumption that the statutory apportionment formula
fairly represents the taxpayer's business activity in
Michigan unless the adjusted tax base meets one of two          Tax Law > State & Local Taxes > Franchise Tax >
tests.
                                                                                                                     Page 4
                                           498 U.S. 358, *; 111 S. Ct. 818, **;
                                      112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842

General Overview                                                tax revenues that, under the theory of the tax, belong of
[HN14] In the case of a more-or-less integrated business        right to other jurisdictions. The Court has always
enterprise operating in more than one state, arriving at        declined to undertake the essentially legislative task of
precise territorial allocations of value is often an elusive    establishing a single constitutionally mandated method of
goal, both in theory and in practice.                           taxation.

                                                                DECISION:
Constitutional Law > Bill of Rights > Fundamental
Rights > Procedural Due Process > Scope of Protection                Michigan's value added, single business tax, as
Tax Law > State & Local Taxes                                   applied to particular foreign corporation during particular
Tax Law > State & Local Taxes > Income Tax >                    tax year, held not to violate commerce clause (Art I, 8, cl
General Overview                                                3) or due process.
[HN15] The first component of fairness in an
apportionment formula is what might be called internal          SUMMARY:
consistency -- that is, the formula must be such that, if
applied by every jurisdiction, it would result in no more            The state of Michigan levied, on any person with
than all of the unitary business income being taxed. The        business activity in the state, a tax which was (1) called
second and more difficult requirement is what might be          the "single business tax," and (2) described by some as a
called external consistency -- the factor or factors used in    type of "value added tax." For purposes of the tax, the
the apportionment formula must actually reflect a               total tax base generally consisted of the taxpayer's "value
reasonable sense of how income is generated.                    added," calculated under an "addition method" as cost of
                                                                labor plus depreciation plus interest plus profit. As
                                                                applied to taxpayers doing business both within and
Tax Law > State & Local Taxes > Value Added Tax                 without the state, (1) such taxpayers were authorized to
[HN16] In order to prevail on a challenge that an               use an apportionment formula which multiplied the total
apportionment formula fails the external consistency test,      tax base by a factor which consisted of the average of the
an income taxpayer must prove by clear and cogent               three ratios of (a) Michigan payroll to total payroll, (b)
evidence that the income attributed to the state is in fact     Michigan property to total property, and (c) Michigan
out of all appropriate proportions to the business              sales to total sales; (2) several further adjustments were
transacted in that state, or has led to a grossly distorted     permitted, including (a) a deduction by taxpayers of a
result. The party must demonstrate that, in the context of      portion of their capital acquisitions, and (b) a limited
a value added tax, there is no rational relationship            reduction by labor-intensive taxpayers of excessive
between the tax base measure attributed to the state and        compensation; and (3) the actual tax liability equaled the
the contribution of state business activity to the entire       tax base, as finally adjusted, multiplied by a 2.35-percent
value added process.                                            tax rate. During 1980, an Ohio corporation which
                                                                manufactured automobile components made more than $
Tax Law > State & Local Taxes                                   103 million worth of sales in Michigan, but maintained
Transportation Law > Intrastate Commerce                        only a 14-employee sales office in the state. The
[HN17] States are free to structure their tax systems to        corporation had a net loss of taxable income for that year,
encourage the growth and development of intrastate              but was liable, under the Michigan apportionment
commerce and industry.                                          formula, for a single business tax of about $ 294,000,
                                                                based upon (1) multiplying the corporation's total tax
                                                                base of about $ 221 million by an 8.9717-percent factor,
Tax Law > State & Local Taxes > General Overview                which was the average of a (a) payroll ratio of 0.2328
[HN18] In reviewing state taxation schemes under the            percent, (b) property ratio of 0.0930 percent, and (c) sales
Commerce Clause, the Court attempts to ensure that each         ratio of 26.5892 percent; and (2) reducing the initial
state taxes only its fair share of an interstate transaction.   result of about $ 19.8 million to a tax base, as finally
The Court acts as a defense against state taxes which,          adjusted, of about $ 12.5 million, through (a) about a $
whether by design or inadvertence, either give rise to          9,000 capital-acquisitions deduction, and (b) about a $
serious concerns of double taxation, or attempt to capture      7.3 million labor-intensive reduction. In 1985, the
                                                                                                                    Page 5
                                           498 U.S. 358, *; 111 S. Ct. 818, **;
                                      112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842

Michigan Court of Appeals, an intermediate appellate            the location of its plant and equipment and much of its
court, ruled in another case that a state statutory provision   compensation, the tax, for apportionment purposes, was
entitled certain taxpayers to relief from the apportionment     (a) an indivisible tax upon a bona fide measure of
formula for the single business tax. The Ohio corporation       business activity--the value added--not (b) three separate
then filed an amended return and refund claim for the           and independent taxes on compensation, depreciation,
1980 tax year. When the Michigan treasury department            and income; (4) the corporation had failed to prove by
denied relief, the corporation sued for a refund in the         clear and cogent evidence that the state's apportionment
Michigan Court of Claims, which ruled in the                    formula provided a distorted result, where the state had
corporation's favor based upon the prior Court of Appeals       consistently applied the formula, the elements of which
decision. While the department's appeal was pending, a          appeared to reflect a very large share of activities from
restrictive amendment to the statutory relief provision         which value was generated, with further relief for
was enacted, and the Court of Appeals, in ordering a            labor-intensive taxpayers such as the corporation; and (5)
reversal and remand, ruled that the amendment was to be         the corporation had failed to show that the tax
given retroactive effect (166 Mich. App. 656, 421 NW2d            discriminated against out-of-state businesses.
258). On appeal, the Michigan Supreme Court, in
affirming on other grounds without addressing the                    Scalia, J., concurring in the judgment, expressed the
amendment's retroactivity, expressed the view that (1) the      view that (1) the court's conclusion that Michigan's single
statutory relief provision applied only if necessary to save    business tax was not facially discriminatory was
the single business tax against unconstitutional                sufficient to comply with the requirements of the
application; (2) under the Federal Constitution's               commerce clause; and (2) the single business tax did not
commerce clause (Art I, 8, cl 3) and under the due              violate the due process clause, because (a) the
process clause of the Constitution's Fourteenth                 corporation conceded that there was a minimal
Amendment, "business activity," as defined for purposes         connection between the corporation's interstate activities
of the single business tax, was not susceptible to accurate     and the taxing state, and (b) the single business tax did
analysis when only one component of the total business          not tax extraterritorial values.
effort was analyzed; and (3) the averaged ratios of the
                                                                     Stevens, J., joined by Blackmun, J., dissenting,
corporation's payroll, property, and sales were a fair
                                                                expressed the view that (1) although the parties referred
representation of the corporation's business activity in
                                                                to the single business tax as a value added tax, the
Michigan, thus making the corporation ineligible for
                                                                Michigan tax, as a practical matter, was nothing more
relief on statutory or constitutional grounds (433 Mich
                                                                than an amalgam of three separate taxes on payroll,
141, 445 NW2d 428).
                                                                depreciable fixed assets, and income; (2) because the
     On certiorari, the United States Supreme Court             value added by the two principal components of the
affirmed. In an opinion by Kennedy, J., joined by               single business tax--labor and capital--are fully realized
Rehnquist, Ch. J., and White, Marshall, and O'Connor,           and thus can be precisely quantified and geographically
JJ., it was held that Michigan's value added, single            assigned when the actual purchase of labor services and
business tax, as applied to the Ohio corporation during         use of capital occur, Michigan's apportionment of a
1980, did not violate either the commerce clause or the         taxpayer's entire payroll and capital expenses resulted in
due process clause, because (1) the corporation did not         the unconstitutional taxation by Michigan of a portion of
dispute that its business activities had a substantial nexus    the taxpayer's extraterritorial activities, in violation of
with the state and subjected the corporation to the state's     due process; and (3) with respect to the case at hand,
taxing authority; (2) the corporation did not argue that the    although less than 1 percent of the corporation's property
amount of tax that the corporation was required to pay          and payroll expenses were incurred within Michigan's
bore no fair relation to the services provided by the state;    borders, the state, by applying its apportionment formula
(3) it was proper for the state to apportion the tax, for the   to the corporation's payroll and capital, treated 9 to 10
state, absent an apportionment formula, was unable to           percent of the corporation's labor and capital costs as if
assign the tax base and its principal components to             they were in-state expenses.
separate geographic locations and to separate accounts in
                                                                    Souter, J., did not participate.
each state without serious theoretical and practical
difficulty, where, even if the corporation could identify
                                                                                                                      Page 6
                                             498 U.S. 358, *; 111 S. Ct. 818, **;
                                        112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842

LAWYERS' EDITION HEADNOTES:                                            A "pure" value added tax (VAT)--without any
                                                                  special exemptions, deductions, or other adjustments--is
                                                                  neutral in the sense that the VAT taxes all business
     COMMERCE §238                                                activity alike, for the same tax burden is borne by (1) all
                                                                  forms of business organization (corporation, partnership,
     CONSTITUTIONAL LAW §605;
                                                                  proprietorship); (2) all types of financing (debt, equity);
    foreign corporation -- state value added tax --               and (3) all methods of production (capital intensive, labor
apportionment -- nondiscrimination -- due process -- ;            intensive).

    Headnote:[1A][1B][1C][1D][1E][1F][1G]
                                                                       INCOME TAXES §1
     A state's value added, single business tax, as applied
                                                                       TAXES §3;
during a particular tax year to a foreign manufacturing
corporation which had more than $ 103 million in sales,               value added tax -- nature -- computation -- ;
but maintained only a 14-employee sales office in that
state in that year, does not violate either the Federal               Headnote:[3]
Constitution's commerce clause (Art I, 8, cl 3) or the due
process clause of the Constitution's Fourteenth                        A value added tax (VAT) differs in important
Amendment--where the state (1) uses a total tax base              respects from a corporate income tax: (1) a corporate
calculating "value added" as cost of labor plus                   income tax is based on the philosophy of ability to pay,
depreciation plus interest plus profit, (2) authorizes the        as such a tax consists of some portion of the profit
use of an apportionment formula which multiplies the              remaining after a company has provided for its workers,
total tax base by a factor which consists of the average of       suppliers, and other creditors, but a VAT is a much
the three ratios of (a) in-state payroll to total payroll, (b)    broader measure of a firm's total activity, because even if
in-state property to total property, and (c) in-state sales to    a business entity is unprofitable, such an entity, under
total sales, (3) permits several further adjustments to the       normal circumstances, adds value to its products and thus
tax base, including (a) a deduction by taxpayers of a             will owe some VAT; (2) a VAT correlates more closely
portion of their capital acquisitions, and (b) a limited          to the governmental services received by the taxpayer
reduction by labor-intensive taxpayers of excessive               than does an income tax, because value added is a
compensation, and (4) calculates actual tax liability as the      measure of actual business activity; and (3) a VAT
tax base, as finally adjusted, multiplied by a tax rate of        provides a more stable source of revenue than the
2.35 percent--because (1) the corporation does not                corporate income tax, because value added does not
dispute that its business activities have a substantial           fluctuate as widely as net income.
nexus with the state and subject the corporation to the
state's taxing authority; (2) the corporation does not argue
                                                                       TAXES §192;
that the amount of tax that the corporation is required to
pay bears no fair relation to the services provided by the            value added tax -- computation -- ;
state; (3) it is proper for the state to apportion the tax; (4)
the corporation has failed to prove by clear and cogent               Headnote:[4A][4B][4C]
evidence that the state's apportionment formula provides
a distorted result; and (5) the corporation has failed to              A value added tax is assessed as a percentage of
show that the tax discriminates against out-of-state              "value added" for the relevant fiscal period, where value
businesses. (Stevens and Blackmun, JJ., dissented from            added may be calculated under either a "subtraction" or
this holding.)                                                    an "addition" method, each of which provides an
                                                                  identical measurement, given that (1) under the
                                                                  subtraction method, value added equals revenues minus
     TAXES §68;                                                   cost of materials, and (2) under the addition method,
                                                                  value added equals cost of labor plus depreciation plus
    value added tax -- what taxable -- ;
                                                                  interest plus profit.
    Headnote:[2]
                                                                                                                    Page 7
                                           498 U.S. 358, *; 111 S. Ct. 818, **;
                                      112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842

     COMMERCE §238                                              "addition method" as cost of labor plus depreciation plus
                                                                interest plus profit, for (1) even if the corporation can
     CONSTITUTIONAL LAW §603;                                   identify the location of its plant and equipment and much
                                                                of its compensation, the tax, for apportionment purposes,
    state tax on multistate business -- due process -- ;        is (a) an indivisible tax upon a bona fide measure of
                                                                business activity--the value added--not (b) three separate
    Headnote:[5]
                                                                and independent taxes on compensation, depreciation,
     A state tax on a multistate business will be sustained     and income; (2) since the corporation was unprofitable in
against a challenge under the Federal Constitution's            that year, so that overall value added amounted to less
commerce clause (Art I, 8, cl 3), so long as the tax (1) is     than compensation plus depreciation, a nonapportionment
applied to an activity with a substantial nexus with the        approach would require a conclusion that (a) the
taxing state, (2) is fairly apportioned, (3) does not           corporation added value at its out-of-state factory through
discriminate against interstate commerce, and (4) is fairly     the consumption of capital and labor, but (b) the
related to the services provided by the state; this four-part   corporate products somehow lost value outside of that
test, while responsive to commerce clause dictates,             process, perhaps between the time that they left the
encompasses as well the requirement, under the due              factory and the time that they were delivered to in-state
process clause of the Constitution's Fourteenth                 customers; (3) such an approach is incompatible with the
Amendment, that there be (1) a minimal connection               rationale of a value added tax and unsupported in the
between the interstate activities and the taxing state, and     record, where (a) for all that the record shows, production
(2) a rational relationship between (a) the income              operations might have added little value and the sales
attributed to the state, and (b) the intrastate values of the   office might have added significant value through
enterprise; the principles which govern the validity of         superior marketing skill, liaison between the corporation
such state taxes seek (1) to accommodate the necessary          and its customers, or mere fortuity, (b) in a unitary
abstractions of tax theory to the realities of the              enterprise such as the corporation, compensation,
marketplace, (2) to avoid formalism, and (3) to rely upon       depreciation, and profit are not independent variables to
a consistent and rational method of inquiry focusing on         be adjusted without reference to the other, and (c) it
the practical effect of the challenged tax.                     would distort the application of the tax in both theory and
                                                                practice to confine the value added consequences of the
                                                                state market to solely the labor and capital expended by
     COMMERCE §238                                              the in-state sales force; (4) given that "value added" also
                                                                may be calculated by a "subtraction method"--which uses
     CONSTITUTIONAL LAW §605                                    revenues minus cost of materials, but reaches an identical
                                                                result--(a) the difference between the addition and
     EVIDENCE §979.2;
                                                                subtraction methods is one of form and lacks
    Headnote:[6A][6B][6C][6D][6E][6F][6G][6H ][6I]              constitutional significance, and (b) under either method,
                                                                value added includes a residual that cannot be
     For purposes of determining liability under a state's      geographically located with economic precision, since,
value added, single business tax, it is proper, under the       under the subtraction method, even though both revenues
Federal Constitution's commerce clause (Art I, 8, cl 3)         and the purchase of materials might be located, value
and under the due process clause of the Constitution's          added would itself be a remainder which would be no
Fourteenth Amendment, for the state to apportion the            more assignable than income; (6) the same factors--such
"value added" of a foreign manufacturing corporation            as functional integration, centralization of management,
which had more than $ 103 million in sales, but                 and economies of scale--which lead to a conclusion that
maintained only a 14-employee sales office in the state in      separate geographical accounting is not constitutionally
a particular tax year, because the state, absent an             required for state income taxation of a unitary business
apportionment formula, is unable to assign the tax base         make it impossible to determine the location of value
and its principal components to separate geographic             added with exact precision; and (7) in the case of a
locations and to separate accounts in each state without        more-or-less integrated business enterprise operating in
serious theoretical and practical difficulty, where the state   more than one state, arriving at precise territorial
uses a total tax base calculating "value added" under an        allocations of "value" is often an elusive goal, in both
                                                                                                                    Page 8
                                            498 U.S. 358, *; 111 S. Ct. 818, **;
                                       112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842

theory and practice. (Stevens and Blackmun, JJ.,                   Headnote:[9]
dissented from this holding).
                                                                    For purposes of determining a state's authority, under
                                                               the Federal Constitution's commerce clause (Art I, 8, cl 3)
     COMMERCE §238;                                            and under the due process clause of the Constitution's
                                                               Fourteenth Amendment, to apportion the state's value
    state tax on multistate business -- apportionment -- ;     added, single business tax--as applied to a foreign
                                                               manufacturing corporation which had more than $ 103
    Headnote:[7]
                                                               million in sales, but maintained only a 14-employee sales
     Under the Federal Constitution's commerce clause          office in the state in a particular tax year--the United
(Art I, 8, cl 3), apportionment of a state tax on a            States Supreme Court can and must assume that the
multistate business is permitted only when precise             corporation's in-state sales were part of the corporation's
geographical measurement is not feasible, for to allow         essential economic strategies and were an integral part of
apportionment where there is no practical or theoretical       corporationwide value added, where (1) without those
justification could provide the opportunity for a state to     in-state sales, the corporation's value added would have
export tax burdens and import tax revenues.                    been lowered to a remarkable degree; (2) the market
                                                               demand that sustained those sales did not arise solely,
                                                               perhaps not even substantially, from the activities of the
     COMMERCE §238                                             corporation's in-state sales personnel; but (3) the
                                                               requirements of the state market determined the direction
     CONSTITUTIONAL LAW §605;                                  of the corporation's design, production, and distribution
                                                               process; and (4) the corporation, by serving that market
    state value added tax -- apportionment -- foreign
                                                               and by meeting that market's demands, generated value
corporation -- due process -- ;
                                                               added in the sums that the corporation did. (Stevens and
    Headnote:[8]                                               Blackmun, JJ., dissented from this holding).

     For purposes of determining whether apportionment
                                                                    COMMERCE §239
of a state's single business tax is permitted, under the
Federal Constitution's commerce clause (Art I, 8, cl 3)             CONSTITUTIONAL LAW §603;
and under the due process clause of the Constitution's
Fourteenth Amendment, with respect to a foreign                    state tax -- due process -- ;
manufacturing corporation which had sales and a sales
office in the state in a particular tax year, the tax cannot       Headnote:[10]
be analyzed as a tax upon "business activity," where the
state's tax statute (a) does not say that the tax is a tax         For purposes of determining whether a state is
upon business activity, but (b) provides that the tax is a     permitted, under the Federal Constitution's commerce
tax of 2.35 percent upon the adjusted tax base of every        clause (Art I, 8, cl 3) and under the due process clause of
person with business activity in the state which is            the Constitution's Fourteenth Amendment, to apportion
allocated or apportioned to the state; even though in-state    the state's value added, single business tax, the
business activity is a threshold requirement for the single    Constitution does not require a formalistic analysis
business tax, and even though "value added" is the             resulting in a penalty for the state's selection of an easier
measure of that tax, an attempt to label the tax as a tax      calculation method for the state's taxpayers.
upon business activity does not permit the court to forgo
examination of the actual tax base and the tax's                    COMMERCE §238
apportionment provisions.
                                                                    CONSTITUTIONAL LAW §605
     EVIDENCE §414;                                                 EVIDENCE §979.2;
    state tax -- validity -- assumptions -- ;                      Headnote:[11A][11B][11C][11D][11E][11F]
                                                                                                                    Page 9
                                           498 U.S. 358, *; 111 S. Ct. 818, **;
                                      112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842

     A foreign manufacturing corporation which had                  APPEAL §1092
more than $ 103 million in sales, but maintained only a
14-employee sales office in the state in a particular tax           COMMERCE §330
year fails to prove by clear and cogent evidence that a
                                                                    CONSTITUTIONAL LAW §607;
distorted result, in violation of the Federal Constitution's
commerce clause (Art I, 8, cl 3) or the due process clause          failure to contest issue -- income apportionment --
of the Constitution's Fourteenth Amendment, is provided        state tax on multistate business -- due process -- ;
by the state's apportionment formula to calculate the
corporation's in-state "value added" subject to the state's        Headnote:[12]
value added, single business tax for that tax year, where
(1) the corporation's liability is based upon an adjusted           With respect to a state tax on a unitary, multistate
tax base of about $ 12.5 million, which base is calculated     business, the test for fair income apportionment, under
by (a) multiplying the corporation's total "value added"       the Federal Constitution's commerce clause (Art I, 8, cl 3)
tax base of about $ 221 million by an 8.9717-percent           and under the due process clause of the Constitution's
factor, which is the average of a (i) 0.2328-percent ratio     Fourteenth Amendment, has two components: (1) internal
of in-state payroll to total payroll, (ii) 0.0930-percent      consistency, that is, the formula must be such that, if
ratio of in-state property to total property, and (iii)        applied by every jurisdiction, the formula would result in
26.5892-percent ratio of in-state sales to total sales, and    no more than all of the unitary business' income being
(b) reducing the initial result of about $ 19.8 million        taxed, and (2) external consistency, that is, the factor or
through (a) about a $ 9,000 capital-acquisitions               factors used in the apportionment formula must actually
deduction, and (b) about a $ 7.3 million reduction for         reflect a reasonable sense of how income is generated;
excessive compensation by a labor-intensive taxpayer; (2)      the United States Supreme Court, on certiorari to review
the corporation does not contest the internal consistency      a foreign corporation's challenge to the apportionment
of the state's apportionment formula; and (3) with respect     formula of a state's tax, need not consider the internal
to the formula's external consistency, (a) a three-factor      consistency of the state's formula, where the corporation
formula of payroll, property, and sales has been approved      does not contest such internal consistency.
for the apportionment of state income taxes, for, even
though the one-third weight given to each factor is not
                                                                    EVIDENCE §414;
precise for every case, the three factors appear in
combination to reflect a very large share of the activities        burden of proof -- validity -- income tax -- value
by which value is generated, (b) sales do not have to be       added tax -- ;
excluded for value added purposes, for (i) sales, as a
measure of market demand, have a profound impact upon              Headnote:[13]
the amount of an enterprise's value added, and (ii) value
added is not subject to geographic ascertainment, (c) thus,         In order to prevail on a claim, under the Federal
the single business tax does not tax value earned outside      Constitution's commerce clause (Art I, 8, cl 3) and under
the state's borders, and (d) it is not necessary to say for    the due process clause of the Constitution's Fourteenth
certain whether the three-factor formula or one of several     Amendment, that a state tax on the income of a multistate
other proposed formulas gives the most accurate                business violates the external consistency test, a taxpayer
calculation, where (i) the corporation has not                 must prove by clear and cogent evidence that the income
convincingly demonstrated which formula is the most            attributed to the state (1) is in fact out of all appropriate
accurate, and (ii) the corporation gives no estimate of the    proportions to the business transacted in that state, or (2)
value added that would take into account both in-state         has led to a grossly distorted result; the same test applies
sales activity and in-state market demand for the              to apportionment of a state value added tax.
corporation's products, but (iii) the state has consistently
applied a formula, the elements of which appear to reflect
                                                                    APPEAL §1662;
a very large share of activities from which value is
generated, with further relief for labor-intensive                 effect of decision on other grounds -- ;
taxpayers such as the corporation. (Stevens and
Blackmun, JJ., dissented from this holding.)                       Headnote:[14A][14B]
                                                                                                                      Page 10
                                            498 U.S. 358, *; 111 S. Ct. 818, **;
                                       112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842

     On certiorari to review a foreign corporation's claim           state tax -- nondiscrimination -- apportionment -- ;
that a state's value added tax violates the Federal
Constitution's commerce clause (Art I, 8, cl 3) and the              Headnote:[16]
due process clause of the Constitution's Fourteenth
                                                                      With respect to a state tax on a multistate business,
Amendment, the United States Supreme Court need not
                                                                 the Federal Constitution's commerce clause (Art I, 8, cl 3)
consider the state's alternative claim that the state, instead
                                                                 has a deeper meaning that may be implicated even though
of taxing value added, could have taxed gross receipts of
                                                                 state provisions do not allocate tax burdens between
sales into the state, where the Supreme Court concludes
                                                                 insiders and outsiders in a manner that is facially
that neither the commerce clause nor the due process
                                                                 discriminatory; thus, the commerce clause requires more
clause is violated by the state's value added tax, as
                                                                 than mere facial neutrality, but the content of that
applied to the corporation in a particular tax year.
                                                                 requirement is fair apportionment, and the deeper
                                                                 meaning is embodied in the requirement of fair
       COMMERCE §239                                             apportionment, as expressed in the tests of internal and
                                                                 external consistency.
       COURTS §124.5

       EVIDENCE §918;                                                 COMMERCE §238

       nondiscrimination -- state value added tax -- motive           COURTS §124;
-- ;
                                                                      state tax -- fair share -- double taxation -- legislative
       Headnote:[15A][15B][15C]                                  task -- ;

     A foreign corporation fails to demonstrate that a               Headnote:[17]
state's value added, single business tax discriminates
against out-of-state businesses in violation of the Federal           In reviewing state taxation schemes under the
Constitution's commerce clause (Art I, 8, cl 3), where (1)       Federal Constitution's commerce clause (Art I, 8, cl 3),
the corporation cannot point to any treatment of in-state        the United States Supreme Court (1) attempts to insure
and out-of-state firms that is discriminatory on its face;       that each state taxes only its fair share of an interstate
(2) in the absence of any facial discrimination, the             transaction; and (2) acts as a defense against state taxes
corporation, other than a vague accusation of                    which, whether by design or inadvertence, either (a) give
discrimination, presents no other standard--not involving        rise to serious concerns of double taxation, or (b) attempt
fair apportionment--by which the constitutionality of the        to capture tax revenues that, under the theory of the tax,
tax might be considered; and (3) although the state's            belong of right to other jurisdictions; but (3) declines to
governor said that the tax was enacted to promote the            undertake the essentially legislative task of establishing a
development and investment of business within the state,         single constitutionally mandated method of taxation.
(a) it is a laudatory goal in the design of a tax system to
promote investment that will provide jobs and prosperity         SYLLABUS
to citizens of the taxing state, (b) states are free to
                                                                      Michigan's single business tax (SBT) is a value
structure their tax systems to encourage the growth and
                                                                 added tax (VAT) levied against entities having "business
development of intrastate commerce and industry, (c) all
                                                                 activity" within the State. As part of the SBT
the contemporaneous evidence concerning passage of the
                                                                 computation, a taxpayer doing business both within and
tax suggests a benign motivation, combined with the
                                                                 without the State must determine its apportioned tax base
practical need to increase revenues, and (d) neither the
                                                                 by multiplying its total value added -- which consists of
corporation nor the secondary sources that the
                                                                 its profit, as represented by its federal taxable income,
corporation relies upon present any evidence that the tax
                                                                 plus compensation paid to labor, depreciation on capital,
was inspired as a way to export tax burdens or import tax
                                                                 and other factors -- by the portion of its business activity
revenues.
                                                                 attributable to Michigan -- which consists of the average
                                                                 of three ratios: (1) Michigan payroll to total payroll, (2)
       COMMERCE §238;                                            Michigan property to total property, and (3) Michigan
                                                                                                                 Page 11
                                           498 U.S. 358, *; 111 S. Ct. 818, **;
                                      112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842

sales to total sales. During 1980, the tax year in question,   cannot be assigned to one geographic location with any
petitioner Trinova, an Ohio corporation, maintained a          precision, the decision to apportion the tax is not
14-person sales office in Michigan. Under the SBT              unconstitutional. Although Trinova's compensation and
formula, its 1980 payroll and property apportionment           depreciation may appear in isolation to be susceptible of
factors were only 0.2328% and 0.0930% respectively,            geographic designation, those elements cannot be
while its sales factor was 26.5892%, representing              separated from income, which cannot be located in a
Michigan sales of over $ 100 million. Although its 1980        single State. The SBT is not a combination or series of
federal taxable income showed a loss of almost $ 42.5          several smaller taxes on compensation, depreciation, and
million, Trinova's SBT computation resulted in a tax of        income, but is an indivisible tax upon a different, bona
over $ 293,000. Trinova paid the tax, but subsequently         fide measure of business activity, the value added. This
filed an amended return and refund claim, alleging that it     conclusion is no different from the one this Court has
was entitled to relief under Michigan law because the          reached in upholding the validity of state apportionment
SBT's apportionment provisions did not fairly represent        of income taxes. The same factors that prevent
the extent of its business activity within the State. The      determination of the geographic location where income is
amended return proposed that Trinova's company-wide            generated -- such as functional integration of the
compensation and depreciation be excluded from its             intrastate and extrastate activities of a unitary business
preapportionment value added, and that its actual              enterprise, centralization of management, and economies
Michigan compensation and depreciation be added back           of scale -- make it impossible to determine the location of
into its apportioned tax base, which would result in a         value added with exact precision. See, e. g., Mobil Oil
negative value added apportioned to Michigan and entitle       Corp., supra, at 438; Amerada Hess Corp. v. Director,
the company to a refund for its entire 1980 SBT payment.       Div. of Taxation, N. J. Dept. of Treasury, 490 U.S. 66,
When respondent Department of Treasury denied relief,          74, 104 L. Ed. 2d 58, 109 S. Ct. 1617. Thus, although
Trinova sued for a refund in the State Court of Claims,        Trinova had no federal income during 1980, it cannot be
which ruled in its favor. However, the State Court of          relieved of tax upon its Michigan business. Such relief
Appeals held that Trinova was not entitled to statutory        would be incompatible with the rationale of a VAT,
relief, and the State Supreme Court affirmed, holding,         under which tax becomes due even if the taxpayer was
among other things, that the SBT's three-factor                unprofitable, and is unsupported by the record. Trinova's
apportionment formula did not violate either the Due           approach would require the conclusion that it added value
Process Clause or the Commerce Clause of the Federal           only at the factory through the consumption of capital
Constitution.                                                  and labor, while the record would as easily support a
                                                               finding that its production operations added little value
     Held: As applied to Trinova during the tax year at        and its sales offices added significant value. Although
issue, the SBT's three-factor apportionment formula does       Trinova's 14 Michigan sales personnel need not be relied
not violate either the Due Process Clause or the               on as the sole, or even a substantial, source of all the
Commerce Clause. Pp. 372-387.                                  value added that can be apportioned fairly to Michigan, it
                                                               cannot be doubted that, without the company's $ 100
     (a) Under the test stated in Complete Auto Transit,       million in Michigan sales, its total value added would
Inc. v. Brady, 430 U.S. 274, 279, 51 L. Ed. 2d 326, 97 S.      have been lower to a remarkable degree. It distorts the
Ct. 1076, a state tax levied upon multistate businesses is     SBT both in application and theory to confine value
valid under the Commerce Clause if, as relevant here, it is    added consequences of the Michigan market solely to the
fairly apportioned and does not discriminate against           labor and capital expended by the resident sales force. Pp.
interstate commerce. Moreover, the Complete Auto test          373-379.
encompasses the Due Process Clause requirement that,
inter alia, a rational relationship exist between the               (c) The SBT's three-factor apportionment formula
income attributed to the State and the intrastate values of    cannot be ruled unfair, since Trinova has failed to meet
the enterprise. See, e. g., Mobil Oil Corp. v.                 its burden of proving, by clear and cogent evidence, that
Commissioner of Taxes of Vt., 445 U.S. 425, 436-437, 63        there is no rational relationship between its tax base
L. Ed. 2d 510, 100 S. Ct. 1223.                                measure attributed to Michigan and the contribution of its
                                                               Michigan business activity to the entire value added
    (b) Because the SBT attempts to tax a base that            process. Cf., e. g., Container Corp. of America v.
                                                                                                                  Page 12
                                           498 U.S. 358, *; 111 S. Ct. 818, **;
                                      112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842

Franchise Tax Bd., 463 U.S. 159, 169, 180-181, 77 L.            COUNSEL: Peter S. Sheldon argued the cause             for
Ed. 2d 545, 103 S. Ct. 2933; Moorman Mfg. Co. v. Bair,          petitioner. With him on the briefs were Thomas          D.
437 U.S. 267, 274, 57 L. Ed. 2d 197, 98 S. Ct. 2340. This       Hammerschmidt, Jr., Jeffery V. Stuckey, Benjamin        O.
Court has approved the same formula for apportionment           Schwendener, Jr., William F. Sheehan, Collette          C.
of income, see, e. g., Butler Bros. v. McColgan, 315 U.S.       Goodman, and Walter Hellerstein.
501, 86 L. Ed. 991, 62 S. Ct. 701, and the formula has
gained wide acceptance in that context "because payroll,        Richard R. Roesch, Assistant Attorney General of
property, and sales appear in combination to reflect a          Michigan, argued the cause for respondent. With him on
very large share of the activities by which value is            the brief were Frank J. Kelley, Attorney General, Gay
generated," Container Corp., supra, at 183 (emphasis            Secor Hardy, Solicitor General, and Thomas L. Casey,
added). Trinova's argument -- that the formula leads to a       Assistant Solicitor General. *
distorted result, out of all proportion to the company's
                                                                       * Briefs of amici curiae urging reversal were
Michigan business, because sales have no relationship to,
                                                                       filed for Alcan Aluminum Corp. et al. by Patrick
and add nothing to, the value that compensation and
                                                                       R. Van Tiflin, Myra L. Willis, and James H.
depreciable plant contribute to the Michigan tax base -- is
                                                                       Geary; and for Caterpillar Inc. by Don S. Harnack
rejected, since sales (as a measure of market demand) do
                                                                       and Richard A. Hanson.
have a profound impact upon the amount of an
enterprise's value added, and since there is no basis for                   Benna Ruth Solomon and Charles Rothfeld
distinguishing similar arguments that were pressed, and                filed a brief for the Council of State Governments
rejected by this Court, with regard to the apportionment               et al. as amici curiae urging affirmance.
of income. Because the three-factor formula causes no
distortion, the SBT does not tax value earned outside
Michigan. The argument that the value was added in
Ohio, by labor and capital, and that no value has been          JUDGES: KENNEDY, J., delivered the opinion of the
added in Michigan, wrongly assumes that value added is          Court, in which REHNQUIST, C. J., and WHITE,
subject to geographic ascertainment and that a sales            MARSHALL, and O'CONNOR, JJ., joined. SCALIA, J.,
factor is inappropriate in apportionment. Trinova gives no      filed an opinion concurring in the judgment, post, p. 387.
estimate of the value added that would take account of          STEVENS, J., filed a dissenting opinion, in which
both its Michigan sales activity and Michigan market            BLACKMUN, J., joined, post, p. 388. SOUTER, J., took
demand for its products, whereas the State has                  no part in the consideration or decision of the case.
consistently applied the three-factor formula and has
enacted further provisions giving relief to labor intensive     OPINION BY: KENNEDY
taxpayers like Trinova. Pp. 379-384.
                                                                OPINION
     (d) The SBT does not discriminate against interstate
commerce. Trinova cannot point to any treatment of                   [*361] [***896] [**823] JUSTICE KENNEDY
in-state and out-of-state firms that is discriminatory on its   delivered the opinion of the Court.
face. Although American Trucking Assns., Inc. v.
Scheiner, 483 U.S. 266, 281, 97 L. Ed. 2d 226, 107 S. Ct.             [***LEdHR1A] [1A]The principal question before
2829, states that the Commerce Clause has a "deeper             us is whether the three-factor apportionment formula of
meaning" that may be implicated even absent facial              the Michigan single business tax (SBT), Mich. Comp.
discrimination, that meaning is embodied in the                 Laws § 208.1 et seq. (1979), violates either the Due
requirement of fair apportionment and does not                  Process Clause or the Commerce Clause of the Federal
encompass Trinova's vague accusation of discrimination.         Constitution. The applicability of a three-factor formula
Nor is that accusation supported by a statement of              to a state income tax is well settled, but we have not
Michigan's Governor that the SBT was enacted to                 considered whether a similar apportionment formula may
promote business development and investment within the          be applied to a value added tax (VAT). We granted
State. Such promotion is a laudable goal in the absence of      certiorari to consider this question and to determine
evidence of an impermissible motive to export tax               whether the Michigan SBT discriminates against
burdens or import tax revenues. Pp. 384-386.                    out-of-state businesses.
                                                                                                                   Page 13
                                       498 U.S. 358, *361; 111 S. Ct. 818, **823;
                                112 L. Ed. 2d 884, ***LEdHR1A; 1991 U.S. LEXIS 842

     [*362] I                                                  advantages of value added as a measure of taxation is its
                                                               neutrality. A VAT is neutral in the sense that it taxes all
      Although in Europe and Latin [***897] America            business activity alike: Under a pure VAT, all forms of
VAT's are common, see Lindholm, The Origin of the              business     organization     (corporation,    partnership,
Value-Added Tax, 6 J. Corp. L. 11 (1980); Due,                 proprietorship), all types of financing (debt, equity) and
Economics of the Value Added Tax, 6 J. Corp. L. 61             all methods of production (capital intensive, labor
(1980), in the United States they are much studied but         intensive) bear the same tax burden.
little used. Michigan is the first and, the parties tell us,
the only State to have enacted a VAT as a tax on business                "Tax factors are minimized in business
activity. We begin with a description of value added and              decisions; inherent advantages and relative
VAT's in general, and then discuss the Michigan SBT.                  efficiencies are allowed to operate in the
                                                                      market economy with minimum tax
    A                                                                 distortions.
     [HN1] Value added is an economic concept. "Value                      "This neutrality of a value-added tax
added is defined as the increase in the value of goods and            is in notable contrast to the effects of both
services brought about by whatever a business does to                 the corporation income tax and the payroll
them between the time of purchase and the time of sale."              taxes. The former, by definition, is applied
Haughey, The Economic Logic of the Single Business                    only to corporations and varies with their
Tax, 22 Wayne L. Rev. 1017, 1018 (1976) (hereinafter                  reliance on equity rather than debt capital
Haughey). The value a business adds to a single product               and the efficiency with which they use
is "the difference between the value of the product at sale           equity capital -- that is, their net profits."
and the cost of goods purchased from other businesses                 Smith, Value-added tax: [***898] the
that went into the product." Taxation and Economic                    case for, 48 Harv. Bus. Rev. 77, 79
Policy Office, Michigan Department of Treasury,                       (Nov.-Dec. 1970).
Analysis of the Michigan Single Business Tax 20-21
(1985) (hereinafter SBT Analysis). It follows that the sale    Though neutral in theory, VAT's often depart in practice
price of a product is the total of all value added by each     from the pure value added model because of special
step of the production process to that point. "The value       exemptions, deductions, and other adjustments. These
added of a loaf of bread is the sum of the value               features can eliminate much of the claim to neutrality.
contributed at each stage of the production and                See generally The Value-Added Tax: Lessons from
distribution process. Among others, it includes the            Europe (H. Aaron ed. 1981).
contribution of the farmer, miller, baker, wholesaler and
retailer." Haughey 1019.                                                [***LEdHR3] [3][HN4] A VAT differs in
                                                               important respects from a corporate income tax. A
    [HN2] A business "adds value by handling or                corporate income tax is based on the philosophy of ability
processing these [goods] with its labor force, machinery,      to pay, as it consists of some portion of the profit
buildings and capital." R. Kleine, Advisory Commission         remaining after a company has provided for its workers,
on Intergovernmental Relations, The Michigan Single            [*364] suppliers, and other creditors. A VAT, on the
Business Tax: A Different Approach to State Business           other hand, is a much broader measure of a firm's total
Taxation 1 (1978) (hereinafter Kleine). In this litigation,    business activity. Even if a business entity is
value added usually refers to the [*363] activities of a       unprofitable, under normal circumstances it adds value to
single business enterprise. The term can, however, be          its products and, as a consequence, will owe some VAT.
used with regard to a single product, or even an entire        Because value added is a measure of actual business
economy. "[Value added] is a means of consistently             activity, a VAT correlates more closely to the volume of
measuring the size of business firms and other economic        governmental services received by the taxpayer than does
enterprises [**824] comprising the total economy . . . .
                                                               an income tax. Further, because value added does not
Gross National Product is virtually equivalent to national     fluctuate as widely as net income, a VAT provides a
value added." Haughey 1017.                                    more stable source of revenue than the corporate income
                                                               tax. See generally Kleine 3, figure 1. "'The logic or
      [***LEdHR2] [2][HN3] One of the acknowledged
                                                                                                              Page 14
                                       498 U.S. 358, *364; 111 S. Ct. 818, **824;
                                  112 L. Ed. 2d 884, ***LEdHR3; 1991 U.S. LEXIS 842

rationale of the [VAT] rests squarely on the benefits              1983); P. Samuelson & W. Nordhaus, Economics
received principle of taxation -- government services are          902 (12th ed. 1985).
essential to the operation of any business enterprise . . .        2 See, e. g., Aaron, Introduction and Summary,
and a part of these public service costs should properly be        in The Value-Added Tax: Lessons from Europe 1,
included in the cost of doing business.'" Id., at 4 (citation      2 (H. Aaron ed. 1981) (hereinafter Aaron);
omitted).                                                          Haughey 1018; Special Committee on the
                                                                   Value-Added Tax of the Section of Taxation,
      [***LEdHR4A] [4A]The SBT Analysis, at 20-21,                 American Bar Association, The Choice Between
provides us with the following simplified example of               Value-Added and Sales Taxation at Federal and
how value added is determined. Assume a bakery's sole              State Levels in the United States, 29 Tax Lawyer
revenue comes from the sale of bread. The bakery's costs           457, 459 (1976) (addition and subtraction
consist of materials (flour, sugar, spices, utilities), labor      methods "reac[h] the same result by the opposite
(baker, sales clerk), capital (building, mixer, utensils,          means"); SBT Analysis 20 (addition and
oven), and credit (interest paid on loans). Any excess of          subtraction are "two alternative, but equivalent
revenues over costs represents profit. Thus:                       ways of calculating value added. . . . The
                                                                   important point is that, conceptually, these two
   Revenues = Cost of Labor + Cost of Materials +                  calculations are equal").
Depreciation 1 + Interest + Profit.                                3      The nations of the European Economic
                                                                   Community (EEC) each levy a VAT under yet a
    Because value added is defined as the difference
                                                                   third method, as a multistage sales tax. See
between the value of products sold (revenues), and the
                                                                   generally Aaron. Under the EEC system, the
cost of materials going into the products, we can
                                                                   bakery in our example would be taxed on each
represent value added (for the entire firm) by a second
                                                                   sale of bread and would receive a credit for each
simple equation:
                                                                   purchase of materials going into production of the
      [*365]    Value added = Revenues - Cost of                   bread. Similarly, at each other link in the chain of
Materials.                                                         production and distribution, tax is assessed on
                                                                   sales, but credit is provided on purchases. This
    The same result is reached by another common                   multistage sales tax system places the burden on
method. If we subtract Cost of Materials [**825] from              the taxpayer to demonstrate that it did, in fact,
each side of the first equation above, we have:                    purchase goods for which it requests a credit. The
                                                                   multistage sales tax version of the VAT has been
   Revenues - Cost of Materials = Cost of Labor +                  advocated as promoting tax compliance, though
Depreciation + Interest + Profit.                                  the evidence does not necessarily support this
                                                                   view. See Oldman & Woods, Would a
       [***899] So in practice value added can be                  Value-Added Tax System Relieve Tax
calculated as either Revenues - Cost of Materials; or Cost         Compliance      Problems,     in    Income      Tax
of Labor + Depreciation + Interest + Profit. Not                   Compliance: A Report of the ABA Section of
surprisingly, these are referred to as the "subtraction" and       Taxation Invitational Conference on Income Tax
the "addition" methods. Each provides an identical                 Compliance 317 (1983) (multistage consumption
measurement of a taxpayer's value added. 2 Once value              VAT has traditionally been regarded as
added is determined, the VAT is assessed as a percentage           self-enforcing because the tax credit mechanism is
of the value added for the relevant fiscal period. 3               said to induce firms to report transactions
                                                                   accurately).
       1 In calculating value added, a firm's use of
       capital is represented by depreciation. [HN5]                   The requirement of "fiscal frontiers" to
       Depreciation is the reduction in value of a firm's          record and tax interstate transactions makes the
       assets, through wear and tear, obsolescence, or             multistage sales tax approach impracticable for an
       other factors, and thus roughly measures                    individual State. McLure, State and Federal
       consumption of capital. See McGraw-Hill                     Relations in the Taxation of Value Added, 6 J.
       Dictionary of Modern Economics 130 (3d ed.                  Corp. L. 127, 130-131 (1980); see also Haughey
                                                                                                                 Page 15
                                     498 U.S. 358, *365; 111 S. Ct. 818, **825;
                                  112 L. Ed. 2d 884, ***899; 1991 U.S. LEXIS 842

       1025 ("invoice credit method is not workable in a           L. Ed. 2d 99, 81 S. Ct. 124 (1960). The arguments
       subeconomy without the legal authority and                  in that case focused on whether the BAT was best
       means to control the flow of imports and                    characterized as a tax on income or a tax on gross
       exports").                                                  receipts, with the concern that under our
                                                                   jurisprudence of the time a "direct" tax on gross
            On international transactions, the EEC's               receipts from interstate commerce would be
       VAT's are assessed in the jurisdiction of                   unconstitutional.
       destination. As a result, no tax is applied on
       exports, while full tax is applied to imports. See          The Michigan SBT is an addition method VAT,
       id., at 1024-1025; Aaron 4. The destination          although it inevitably permits various exclusions,
       principle does not, however, purport to determine    exemptions, and adjustments that depart from the simple
       whether value was added in the jurisdiction of       value added examples described above. Subject to
       destination, or the jurisdiction of origin.          exemptions contained at Mich. Comp. Laws § 208.35
                                                            (1979), [HN6] the Michigan SBT is levied against any
     [*366] B                                               person with "business activity" within the State of
                                                            Michigan. § 208.31(1). 5 In order to calculate the amount
     The Michigan SBT went into effect on January 1,        of a taxpayer's SBT the taxpayer must, first, determine its
1976. 1975 Mich. Pub. Acts 228. 4 The SBT replaced          total tax base. The total tax base consists of the taxpayer's
seven [***900] different business taxes. Kleine 22;         value added, calculated by the addition method: Cost of
Brief for Respondent 8. Before 1976, a typical              Labor + Depreciation + Interest + Profit. Under § 208.9,
manufacturer with business activity in [*367] Michigan      the taxpayer begins with federal taxable income
would have been subject to a franchise tax, an income       (representing profit), adds other elements that reflect
tax, an intangible property tax, and an ad valorem          consumption of labor and capital including
property tax upon inventories. Mitchell, Taxes Repealed     compensation, depreciation, dividends, and interest paid
and Amended, 22 Wayne L. Rev. 1029 (1976); Brief for        by the taxpayer, and makes other detailed adjustments.
Respondent 8-9. After enactment [**826] of the SBT,
the same manufacturer would pay only one tax.                      5 "[HN7] Business activity" is broadly defined
                                                                   as "a transfer of legal or equitable title to or rental
       4 The SBT was not Michigan's first experiment               of property, whether real, personal, or mixed,
       with a VAT. Between 1953 and 1967, Michigan                 tangible or intangible, or the performance of
       had utilized a Business Activities Tax (BAT)                services, or a combination thereof, made or
       similar to the Michigan SBT. Although the BAT               engaged in, or caused to be made or engaged in,
       was a subtraction method VAT, and permitted                 within this state, whether in intrastate, interstate,
       different adjustments than the SBT, the BAT tax             or foreign commerce, with the object of gain,
       base included "a company's payroll, profits, and            benefit, or advantage, whether direct or indirect,
       capital outlay less depreciation allowed," Lock,            to the taxpayer or to others, but shall not include
       Rau, & Hamilton, The Michigan Value-Added                   the services rendered by an employee to his
       Tax, 8 Nat. Tax J. 357, 363 (1955), and was                 employer, services as a director of a corporation,
       apportioned among States by the same                        or a casual transaction. . . ." Mich. Comp. Laws §
       three-factor formula that is challenged here. See           208.3 (1979).
       Mich. Stat. Ann. §§ 7.557(1)-7.557(24) (Supp.
       1955), repealed, 1967 Mich. Pub. Acts 281. The              Second, [HN8] if a taxpayer does business both
       Michigan Supreme Court upheld the BAT against        within and without Michigan, it must determine the
       a challenge on facts remarkably similar to those     portion of its total value added attributable to Michigan.
       presented here by Trinova. Armco Steel Corp. v.      That portion, the crux of this case, is the average of three
       State, 359 Mich. 430, 102 N.W.2d 552, 555-556        ratios: (1) Michigan payroll [*368] to total payroll, (2)
       (1960) (Ohio corporation had nominal Michigan        Michigan property to total property, and (3) Michigan
       property and payroll, but substantial Michigan       sales to total sales. §§ 208.45, 208.46, 208.49, 208.51.
       sales). We dismissed an appeal of the judgment in    The total tax base is multiplied by the portion of business
       Armco for want of a substantial federal question.    activity attributable to Michigan (under the three-factor
       Armco Steel Corp. v. Michigan, 364 U.S. 337, 5
                                                                                                                  Page 16
                                        498 U.S. 358, *368; 111 S. Ct. 818, **826;
                                     112 L. Ed. 2d 884, ***900; 1991 U.S. LEXIS 842

formula), and the result, subject to several further                      this alternative calculation, no firm's Michigan
adjustments, is the taxpayer's "adjusted tax base." §                     SBT liability will ever exceed 1.175% of
208.31(2).                                                                apportioned gross receipts.

     Two further adjustments are relevant here: §                    II
208.23(a), which permits a taxpayer to deduct a portion
of its capital acquisitions, and § 208.31(5), which permits          Trinova, an Ohio corporation, manufactures
a labor-intensive taxpayer to reduce its adjusted tax base      automobile components. Its principal office is located in
by a percentage equal to the percentage by which                Maumee, Ohio, a suburb of Toledo located near the
compensation exceeds 63% of the total tax base, but with        Michigan border. During 1980, the tax year in question,
such reduction not to exceed a maximum of 37%. Actual           Trinova maintained a fixed presence in Michigan: a sales
tax liability [***901] equals the adjusted tax base             office of 14 employees who solicited orders, maintained
multiplied by a tax rate of 2.35%. 6                            contact with Trinova's Michigan customers, and
                                                                performed clerical work. Michigan, with its automobile
        6 Any taxpayer can, in the alternative, calculate       industry, was a major market for Trinova's products.
        its adjusted tax base as total gross receipts           Indeed, Trinova made $ 103,981,354 worth of sales to
        multiplied by the apportionment figure (derived         Michigan during 1980, 26.5892% of its total sales of $
        using the three-factor formula) divided by two.         391,065,866. Trinova calculated its 1980 SBT adjusted
        This figure is then multiplied by the 2.35% tax         tax base as follows: [*369]
        rate to give actual tax liability. § 208.31(2). Under

U. S. taxable income (loss)                                                                               ($ 42,466,114)
Add:
Compensation                                                                                               $ 226,356,271
Depreciation                                                                                                $ 23,262,909
Dividends, interest, and royalties
paid                                                                                                        $ 22,908,950
Other                                                                                                          $ 549,526
Subtotal                                                                                                   $ 230,611,542

Subtract:
Dividends, interest, and royalties
received                                                                                                    ($ 9,486,223)
Total Tax Base                                                                                             $ 221,125,319
Apportionment:
Payroll Factor                                                                                                  0.2328%
Property Factor                                                                                                 0.0930%
Sales Factor                                                                                                   26.5892%

Average Factor                                                                                                  8.9717%
Apportioned Tax Base:
                                                                                                           $ 221,125,319
                                                                                                                  Page 17
                                       498 U.S. 358, *369; 111 S. Ct. 818, **826;
                                    112 L. Ed. 2d 884, ***901; 1991 U.S. LEXIS 842

                                                                                                              x 8.9717%

                                                                time, § 208.69 provided that if the apportionment
       [**827] See 433 Mich. 141, 150-152, 445 N.W.2d           provisions of the SBT did not "fairly represent the extent
428, 431-433 (1989). Trinova further adjusted its tax base      of the taxpayer's business activity" in Michigan, the
by subtracting a capital acquisition deduction ($ 9,063)        taxpayer could, among other alternatives, petition for the
and by taking the maximum (37%) reduction for                   employment of "any other method to effectuate an
labor-intensive [***902] taxpayers. These adjustments           equitable allocation and apportionment of the taxpayer's
resulted in a 1980 adjusted tax base of $ 12,492,671.           tax base."
When multiplied by the tax rate of 2.35%, Trinova's tax
liability amounted to $ 293,578 ($ 12,492,671 x 2.35%).              Soon after the decision in Jones & Laughlin, Trinova
7 Trinova timely filed its return and paid its tax liability.   filed an amended return and refund claim for the 1980 tax
                                                                year. Based on the relief granted in Jones & Laughlin,
       7 Trinova could have calculated its tax liability        Trinova proposed that despite admitted company-wide
       under the alternative gross receipts method, Mich.       value added of $ 221 million and Michigan sales of over
       Comp. Laws § 208.31(2) (1979), as follows: Total         $ 100 million, for purposes of the Michigan SBT it
       gross receipts ($ 391,065,866) multiplied by             should be treated as if it had negative total value added.
       Michigan apportionment factor (8.9717%)                  Value added apportioned to Michigan would also have
       divided by two (equals $ 17,542,628) multiplied          been negative, and Trinova would have been entitled to a
       by 2.35% equals tax liability of $ 412,251. This         refund for its entire 1980 SBT payment. 8 Upon denial of
       figure amounts to less than 0.4% of Trinova's            relief by the Michigan Department of [*371] Treasury,
       Michigan sales. Of course, Trinova did not use           Trinova sued for a refund in the Michigan Court of
       this method, as it was required to pay only $            Claims, which ruled in Trinova's favor on the authority of
       293,578 (or 0.28% of Michigan sales) under the           Jones & Laughlin. No. 86-10430-CM (May 5, 1987);
       apportionment method challenged here.                    App. to Pet. for Cert. 42a-51a.

      [*370] In 1985, a Michigan intermediate Court of                 8 The amended return proposed that Trinova's
Appeals ruled that taxpayers similarly situated to Trinova             company-wide compensation and depreciation be
were entitled to "relief" under Mich. Comp. Laws §                     excluded from the preapportionment tax base, and
208.69 (1979), a provision of the SBT. Jones & Laughlin                actual Michigan compensation and depreciation
Steel Corp. v. Department of Treasury, 145 Mich. App.                  be added back into the apportioned tax base, as
405, 377 N.W.2d 397, leave to appeal and                               follows:
reconsideration denied, 424 Mich. 895 (1986). At the

Total Tax Base -- statutory formula:                                                                      $ 221,125,319

Deduct Compensation                                                                                     ($ 226,356,271)
Deduct Depreciation                                                                                       ($ 23,262,909)

Trinova's Proposed Total Tax Base:                                                                        ($ 28,493,861)
Apportionment (8.9717%)                                                                                    ($ 2,556,384)
Add Michigan Compensation                                                                                     $ 511,774
Add Michigan Depreciation                                                                                        $ 2,152
                                                                                                                   Page 18
                                      498 U.S. 358, *371; 111 S. Ct. 818, **827;
                                   112 L. Ed. 2d 884, ***902; 1991 U.S. LEXIS 842

                                                              Trinova's averaged ratios of payroll, property, and sales
           433 Mich. 141, 147, n.4, 445 N.W.2d 428,           are a fair representation of the extent of its business
       431, n.4 (1989).                                       activity in Michigan, making it ineligible for relief on
                                                              statutory or constitutional grounds. Id., at 163-166, 445
       [***903] While the Department of Treasury's            N.W.2d at 438-439. We granted Trinova's petition for a
appeal was pending in the Michigan Court of Appeals,          writ of certiorari. 494 U.S. 1015 (1990).
the legislature amended § 208.69. 1987 Mich. Pub. Acts
39. [HN9] The amended § 208.69 creates a presumption          III
that the statutory apportionment formula fairly represents
the taxpayer's business activity in [**828] Michigan                 [***LEdHR5] [5]The principles which govern the
unless the adjusted tax base meets one of two tests,          validity of state taxes levied upon multistate businesses
neither of which Trinova could satisfy, and which do not      seek to accommodate the necessary abstractions of tax
merit discussion here. See Mich. Comp. Laws Ann. §            theory to the realities of the marketplace. Under the test
208.69(3) (West Supp. 1990). The Court of Appeals             stated in Complete Auto Transit, Inc. v. Brady, 430 U.S.
referred to the legislature's statement that its Act was      274, 279, 51 L. Ed. 2d 326, 97 S. Ct. 1076
intended to be                                                (1977),[HN10] we will sustain a tax against Commerce
                                                              Clause challenge so long as "the tax is applied to an
          "curative, expressing the original intent           activity with a substantial nexus with the taxing State, is
       of the legislature that the single business            fairly apportioned, does not discriminate against
       tax . . . is an indivisible value added type           interstate commerce, and is fairly related to the services
       of tax and not a combination or series of              provided by the State." We applied this four-part test in
       several smaller taxes and that relief from             later cases addressing a wide variety of taxes. See
       formulary apportionment should be                      Goldberg v. Sweet, 488 U.S. 252, 260, n.12, 102 L. Ed.
       granted      only     under     extraordinary          2d 607, 109 S. Ct. 582 (1989) (citing applications in
       circumstances." 1987 Mich. Pub. Acts 39,               cases involving sales, severance, use, corporate income,
       § 2.                                                   and business and occupation taxes).

Relying upon this language, the Court of Appeals                     [***904] In Complete Auto, we renounced the
determined that the amendment was to be given                 formalistic approach of Spector Motor Service, Inc. v.
retroactive effect as a "remedial and procedural" statute     O'Connor, 340 U.S. 602, 95 L. Ed. 573, 71 S. Ct. 508
and that Trinova was not entitled to statutory relief. 166    (1951), which had prohibited a State from taxing the
Mich. App. 656, 666, 421 N.W.2d 258, 262 (1988).              privilege of doing business in the State, treating it as a tax
                                                              upon interstate commerce and so beyond the authority of
     The Michigan Supreme Court affirmed the Court of         the [*373] State. We seek to avoid formalism and to rely
Appeals. 433 Mich. 141, 445 N.W.2d 428 (1989).                upon a "consistent and rational method of inquiry
Without addressing retroactive application of the             [focusing on] the practical effect of a challenged tax."
amendments to § 208.69, it construed § 208.69 as a            Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445
"constitutional 'circuit [*372] breaker'" to be applied       U.S. 425, 443, 63 L. Ed. 2d 510, 100 S. Ct. 1223 (1980).
only if required in order to save the SBT against             The Complete Auto test, while responsive to Commerce
unconstitutional application. 433 Mich. 141 at 156, 445       Clause dictates, encompasses as well [HN11] the due
N.W.2d at 434. The court then upheld the SBT against          process requirement that there be "a 'minimal connection'
Trinova's federal constitutional challenges. The Michigan     between the interstate activities and the taxing State, and
Supreme Court noted that formulary apportionment of           a rational relationship between the income attributed to
income taxes is uncontroversial and that it did "not          the State and the intrastate values of the enterprise."
believe that 'business activity' as defined under the [SBT]   Mobil Oil Corp., supra, at 436- 437; see also Amerada
is susceptible to accurate analysis when only one             Hess Corp. v. Director, Div. of Taxation, N. J. Dept. of
component of the total business effort is examined." Id.,     Treasury, 490 U.S. 66, 80, 104 L. Ed. 2d 58, 109
at 163, 445 N.W.2d at 438. The court concluded that           [**829] S. Ct. 1617 (1989) (SCALIA, J., concurring).
                                                                                                                    Page 19
                                        498 U.S. 358, *373; 111 S. Ct. 818, **829;
                                 112 L. Ed. 2d 884, ***LEdHR1A; 1991 U.S. LEXIS 842

[***LEdHR1A] [1B]In this Court, Trinova does not                arguments by Michigan and some amici curiae that the
dispute that its business activities have a substantial         Michigan SBT can be analyzed as a tax upon "business
nexus with Michigan and subject it to the State's taxing        activity." Brief for Council of State Governments et al. as
authority. Nor does Trinova argue that the amount of tax        Amici Curiae 11. The statute does not say that the SBT is
it is required to pay bears no fair relation to the services    a tax upon business activity, but rather that it is a "tax of
provided by the State. Complete Auto, supra, at 279.            2.35% upon the adjusted tax base of every person with
Trinova instead contends that Michigan's SBT fails the          business activity in this state which is allocated or
other two prongs of the Complete Auto test: that the SBT        apportioned to this state." Mich. Comp. Laws § 208.31(1)
is not fairly apportioned as applied to Trinova and that        (1979) (emphasis added). While Michigan business
the tax discriminates against interstate commerce. We           activity is a threshold requirement for the tax, and value
consider these claims and begin with the matter of              added is its measure, labeling the SBT a tax on "business
apportionment.                                                  activity" does not permit us to forgo examination of the
                                                                actual tax base and apportionment provisions. "A tax on
A                                                               sleeping measured by the number of pairs of shoes you
                                                                have in your closet is a tax on shoes." Jenkins, State
         [***LEdHR6A] [6A]Trinova's claim that                  Taxation of Interstate Commerce, 27 Tenn. L. Rev. 239,
apportionment of the tax is unconstitutional concentrates       242 (1960).
on the elements of the apportionment formula. The
original rationale for apportionment of income was the                 [***LEdHR6A] [6C]Trinova errs in the opposite
difficulty of identifying the geographic source of the          direction. It would dissect the tax base as if the SBT were
income earned by a multistate enterprise. See Underwood         three separate and independent taxes: a tax on
Typewriter Co. v. Chamberlain, 254 U.S. 113, 120-121,           compensation, a tax on depreciation, and a [*375] tax on
65 L. Ed. 165, 41 S. Ct. 45 (1920) (legislature "faced          income, each apportioned. Trinova insists that
with the impossibility of allocating specifically the profits   compensation and depreciation can be located and can be
earned by the [taxpayer's] processes conducted within its       separated from the total value added calculation. As a
borders"). As we stated the problem in Container Corp.          result, Trinova would be taxed upon its Michigan
of America v. Franchise Tax Bd., 463 U.S. 159, 192, 77          compensation and Michigan depreciation. It would owe
L. Ed. 2d 545, 103 S. Ct. 2933 (1983): "Allocating              no additional tax upon income [**830] apportionable to
income among various taxing jurisdictions [*374] bears          Michigan, because it had no income during the relevant
some resemblance . . . to slicing a shadow. " Trinova           tax year.
argues that because its SBT tax base is composed in large
part of compensation and depreciation, elements which                This characterization, and with it Trinova's
can be assigned to a geographic source, we must reject          constitutional argument, fails. Doubtless Trinova can
apportionment altogether.                                       identify the location of its plant and equipment and much
                                                                of its compensation. The Michigan SBT, however, is not
       [***LEdHR6A] [6B] [***LEdHR7] [7]We can                  three separate and independent taxes, and Trinova cannot
accept the premise that apportionment is permitted only         purport to identify the geographic source of value added
when precise geographic measurement is not feasible, for        by assuming that two elements can be located in a single
to allow apportionment where there is no practical or           State while the third cannot. Trinova's proposed
theoretical justification could provide the opportunity for     apportionment for the 1980 tax year, n.8, supra, provides
a State to export tax burdens and import tax revenues.          a good example of the problems that accompany its
The Commerce Clause prohibits this competitive                  argument.
mischief. The issue becomes whether, without an
apportionment formula, Michigan can assign the SBT tax              In 1980, Trinova's company-wide value added
base and its principal components to separate geographic        amounted to much less than its compensation plus
locations [***905] and to separate accounts in each             depreciation. In short, Trinova was unprofitable. Under a
State. Michigan has decided it cannot do so without             VAT, however, tax becomes due in any event. Trinova's
serious theoretical and practical difficulty, and upon          approach would require us to conclude that Trinova
review of the case we accept that determination.                added value at the factory through the consumption of
                                                                capital and labor, but that its products somehow lost
      [***LEdHR8] [8]We reject at the outset, however,
                                                                                                                Page 20
                                       498 U.S. 358, *375; 111 S. Ct. 818, **830;
                                112 L. Ed. 2d 884, ***LEdHR6A; 1991 U.S. LEXIS 842

value outside of this process, perhaps between the time       method. The addition and subtraction methods of
they left the factory and the time they were delivered to     calculating value, however, are but two different paths to
customers in Michigan. This approach is incompatible          the same result. See n.2, supra. Had Michigan calculated
with the rationale of a VAT and is unsupported in the         the SBT tax base by the subtraction method, reporting
record.                                                       total revenues minus total cost of materials, Trinova's
                                                              characterization would collapse of its own weight.
     For all this record shows, Trinova's production          Trinova could geographically locate its revenues and
operations might have added little value and its sales        even determine where it purchased its materials. The
offices might have added significant value, through           Michigan apportionment formula [*377] assumes as
superior marketing skill, liaison between the company         much. But were Trinova to calculate value added based
and its customers, or mere fortuity. See Moorman Mfg.         upon the location of its revenues, it would apportion a
Co. v. Bair, 437 U.S. 267, 272, 57 L. Ed. 2d 197, 98 S.       much greater share of its value added to Michigan
Ct. 2340 (1978) (record lacked analysis of what portion       (26.5892%) than was apportioned under Michigan's
of profits was apportionable [***906] to sales, to            [**831]      three-factor   formula     (8.9717%).     An
manufacturing, or to other phase of company's                 apportionment of value added based solely on the source
operations).                                                  of revenues is no less justifiable than an apportionment
                                                              based solely upon the location of compensation or
      [*376] But we need not rely upon Trinova's 14           depreciation.
Michigan sales personnel as the source of all the value
added that can be apportioned fairly to Michigan. [HN12]              [***LEdHR6A] [6F] [***LEdHR10] [10]The
In a unitary enterprise, compensation, depreciation, and      difference between the addition and subtraction methods
profit are not independent variables to be adjusted           is one of form and lacks constitutional significance.
without reference to each other. If Trinova had paid an       Michigan chose the addition method of calculating value
additional $ 100 million in compensation during 1980,         added as a convenience to taxpayers, for whom federal
there is no way of knowing whether, or to what extent,        taxable income provided an easy starting point. Kleine
value added would have increased. In fact, value added        6-7 (discussing advantages of addition method); SBT
would not have increased so long as revenues did not          Analysis 21 (same). The Constitution does not require a
increase. These elements of value added are inextricable,     formalistic analysis resulting in a penalty for Michigan's
codependent variables.                                        selection of an easier calculation method for its
                                                              taxpayers.
       [***LEdHR6A] [6D] [***LEdHR9] [9]Without
Trinova's $ 100 million in 1980 Michigan sales, the                   [***LEdHR4A] [4C] [***LEdHR6A] [6G]Both
company's value added would have been lower to a              methods of calculation, moreover, illustrate the
remarkable degree. The market demand that sustained           justification for the State's adoption of an apportionment
those sales did not arise solely, perhaps not even            formula. Under either [***907] method, value added
substantially, from the activities of Trinova's 14            includes a remainder or residual that cannot be located
Michigan sales personnel. But there can be little doubt       with economic precision. Under the addition method,
that requirements of the Michigan market determined the       value added contains the element of income, one
direction of Trinova's design, production, and distribution   calculated by and dependent upon factors (revenues
process. By serving that market and meeting its demands,      minus total costs) not included in the addition method
Trinova generated value added in the sums that it did. We     equation; under the subtraction method, value added is
can and must assume that Michigan sales were a part of        itself a remainder, no more assignable than income. It
the company's essential economic strategies and were an       would be impractical to locate value added by a
integral part of company-wide value added. It distorts the    geographic test. We thus agree with the Michigan
tax both in application and theory to confine value added     Legislature's statement that the SBT is not, for
consequences of the Michigan market solely to the labor       apportionment purposes, "a combination or series of
and capital expended by the resident sales force.             several smaller taxes," 1987 Mich. Pub. Acts 39, § 2, but
                                                              an "indivisible," ibid., tax upon a different, bona fide
         [***LEdHR4A]         [4B]       [***LEdHR6A]         measure of business activity, the value added.
[6E]Trinova's attempted characterization is arguable only     [***LEdHR6A] [6H]This conclusion is no different from
because Michigan calculates value added by the addition
                                                                                                                 Page 21
                                       498 U.S. 358, *377; 111 S. Ct. 818, **831;
                                112 L. Ed. 2d 884, ***LEdHR6A; 1991 U.S. LEXIS 842

the one we have reached in upholding the validity of state   New Jersey corporate income tax, which used federal
apportionment of income taxes. As with a VAT, the            taxable income as a benchmark and required certain
discrete components of a state income tax may appear in      [**832] adjustments (as does the Michigan SBT). New
isolation susceptible of geographic [*378] designation.      Jersey required oil companies to [*379] add back into
Nevertheless, since Underwood Typewriter Co. v.              income any deduction taken for taxes paid under the
Chamberlain, 254 U.S. 113, 65 L. Ed. 165, 41 S. Ct. 45       federal windfall profits tax. The taxpayers objected
(1920), we have recognized the impracticability of           [***908] that the windfall profits tax is "an exclusively
assuming that all income can be assigned to a single         out-of-state expense because it is associated with the
source. In this respect, Trinova's argument becomes a        production of oil outside New Jersey." Id., at 74.
familiar and often rejected genre of tax-payer challenge:
                                                                  In like manner, Trinova objects to the SBT's
              "Apportionability often has been               requirement that it add compensation and depreciation to
       challenged by the contention that . . . the           federal taxable income on the grounds that these are, with
       source of [particular] income may be                  limited exception, out-of-state expenses. In Amerada
       ascertained by separate geographical                  Hess Corp. we rejected outright the idea that
       accounting. The Court has rejected that               geographically assignable costs of production must be
       contention so long as the intrastate and              excluded from an apportionment of income:
       extrastate activities formed part of a single
       unitary business. See Butler Bros. v.                           "Just as each [taxpayer's] oil-producing
       McColgan, 315 U.S. 501, 506-508, 86 L.                       revenue -- as part of a unitary business --
       Ed. 991, 62 S. Ct. 701 (1942); Ford Motor                    is not confined to a single State, Exxon
       Co. v. Beauchamp, 308 U.S. 331, 336, 84                      Corp., 447 U.S. 207 at 226, 65 L. Ed. 2d
       L. Ed. 304, 60 S. Ct. 273 (1939); cf.                        66, 100 S. Ct. 2109, . . . so too the costs of
       Moorman Mfg. Co. v. Bair, 437 U.S. at                        producing this revenue are unitary in
       272. In these circumstances, the Court has                   nature. See Container Corp., 463 U.S. at
       noted that [HN13] separate accounting,                       182 (the costs of a unitary business cannot
       while it purports to isolate portions of                     be deemed confined to the locality in
       income received in various States, may                       which they are incurred)." Ibid.
       fail to account for contributions to income
       resulting from functional integration,                    [***LEdHR1A] [1C] [***LEdHR6A] [6I]The
       centralization of management, and                     reasoning of Amerada Hess Corp. applies with equal
       economies of scale. Butler Bros. v.                   force to the case here. The same factors that prevent
       McColgan, 315 U.S. at 508-509. Because                determination of the geographic location where income is
       these factors of profitability arise from the         generated, factors such as functional integration,
       operation of the business as a whole, it              centralization of management, and economies of scale,
       becomes misleading to characterize the                make it impossible to determine the location of value
       income of the business as having a single             added with exact precision. In concluding that Michigan
       identifiable 'source.' Although separate              can apportion the SBT, we merely reaffirm what we have
       geographical accounting may be useful for             written before: "[HN14] In the case of a more-or-less
       internal auditing, for purposes of state              integrated business enterprise operating in more than one
       taxation it is not constitutionally required."        State, . . . arriving at precise territorial allocations of
       Mobil Oil Corp., 445 U.S. at 438.                     'value' is often an elusive goal, both in theory and in
                                                             practice." Container Corp., 463 U.S. at 164.

     In a recent challenge to this unitary business          B
principle, we rejected the argument that particular
                                                                       [***LEdHR1A]         [1D]      [***LEdHR11A]
assignable costs of a business should be excluded from a
                                                             [11A]Having determined that Michigan's SBT attempts
broader tax base. Amerada Hess Corp. v. Director, Div.
                                                             to tax a base that cannot be assigned to one location with
of Taxation, N. J. Dept. of Treasury, 490 U.S. 66, 104 L.
                                                             any precision, and that apportionment is proper, we must
Ed. 2d 58, 109 S. Ct. 1617 (1989). We considered the
                                                                                                                  Page 22
                                       498 U.S. 358, *379; 111 S. Ct. 818, **832;
                                112 L. Ed. 2d 884, ***LEdHR11A; 1991 U.S. LEXIS 842

next [*380] consider whether Michigan's apportionment          apportionment for every case, the formula "has gained
formula for Trinova's value added is fair.                     wide approval precisely because payroll, property, and
[***LEdHR11A] [11B] [***LEdHR12] [12]Container                 sales appear in combination to reflect a very large share
Corp. states our test for fair income apportionment:           of the activities by which value is generated." Container
                                                               Corp., supra, at 183 (emphasis added). The three-factor
           "[HN15] The first, and again obvious,               formula is widely used and is included in the Uniform
       component of fairness in an apportionment               Division of Income for Tax Purposes Act, 7A U. L. A.
       formula is what might be called internal                331 (1990 Cum. Supp.) (approved in 1957 by the
       consistency -- that is, the formula must be             National Conference of Commissioners on Uniform State
       such that, if applied by every jurisdiction,            Laws and the American Bar Association).
       it would result in no more than all of the
       unitary business' income being taxed. The                    Trinova argues that on the facts of this case, the
       second and more difficult requirement is                three-factor formula leads to a distorted result, out of all
       what might be called external consistency               proportion to the business done by Trinova in Michigan.
       -- the factor or factors used in the                    Trinova's Michigan payroll constituted 0.2328% of total
       apportionment formula must actually                     payroll, its Michigan property constituted 0.0930% of
       reflect a reasonable sense of how income                total property, and its Michigan sales constituted
       is generated." Id., at 169.                             26.5892% of total sales. The three-factor formula
                                                               averages these ratios, with the result that 8.9717% of
Trinova does not contest the internal consistency of the       Trinova's value added, or $ 19,838,700, is assigned to
SBT's apportionment formula, and we need not consider          Michigan. Because Trinova is a labor-intensive taxpayer,
that question. [***LEdHR11A] [11C] [***LEdHR13]                and can deduct capital acquisitions, the tax base is further
[13]Instead, Trinova argues that the SBT [HN16]                reduced to $ 12,492,671.
apportionment formula fails the external consistency test.
                                                                   In this Court, Trinova proposes an alternative
In order to prevail on such a challenge, an income
                                                               two-factor apportionment, excluding the sales factor.
taxpayer must prove "by 'clear and cogent evidence' that
                                                               Under the two-factor formula, only 0.1629% of Trinova's
the income attributed to the State is in fact 'out of all
                                                               value added, or $ 360,213, would be assigned to
appropriate proportions [***909] to the business
                                                               Michigan. Brief for Petitioner 33-34. 9
transacted . . . in that State,' [Hans Rees' Sons, Inc.,]283
U.S. 123 at 135, 51 S. Ct. 385, 75 L. Ed. 879, or has 'led            9 Trinova's proposed two-factor apportionment
to a grossly distorted result,' [Norfolk & Western R.                 differs drastically from the apportionment Trinova
Co.,]390 U.S. 317 at 326, 88 S. Ct. 995, 19 L. Ed. 2d                 requested in the Michigan state courts. Under the
1201." Moorman Mfg. Co., 437 U.S. at 274.We conclude                  approach Trinova took in state court, following
that the same test applies to apportionment of a VAT.                 Jones & Laughlin Steel Corp. v. Department of
Trinova must demonstrate that, in the context of a VAT,               Treasury, 145 Mich. App. 405, 377 N.W.2d 397
there is no rational relationship between the tax base                (1985), Trinova's apportioned tax base would be
measure attributed to the State and the contribution of               -$ 2,042,458. See n.8, supra. Under the two-factor
Michigan business activity to the entire value [**833]                formula that Trinova now urges upon us, it is $
added process. See Container Corp., supra, at 180-181.                360,213.
[***LEdHR11A] [11D]The Michigan SBT uses the same
three-factor apportionment formula we first approved for              [*382] Although the three-factor formula "can be
apportionment of income in Butler Brothers v.                  justified as a rough, practical approximation of the
McColgan, 315 U.S. 501, 86 L. Ed. 991, 62 S. Ct. 701           distribution of either a corporation's sources of income or
(1942).This standard has become "something of a                the social costs which it generates," General Motors
benchmark against [*381] which other apportionment             Corp. v. [***910] District of Columbia, 380 U.S. 553,
formulas are judged." Container Corp., supra, at 170; see      561, 14 L. Ed. 2d 68, 85 S. Ct. 1156 (1965), Trinova
also Moorman Mfg. Co., supra, at 282 (BLACKMUN, J.,            argues that the formula does not reflect how the value
dissenting); id., at 283-284 (Powell, J., dissenting).         added tax base is generated. The principal flaw, it
Although the one-third weight given to each of the three       contends, is that the formula includes a sales factor.
factors -- payroll, property, and sales -- is not a precise    "Sales have no relationship to, and add nothing to, the
                                                                                                                  Page 23
                                      498 U.S. 358, *382; 111 S. Ct. 818, **833;
                                   112 L. Ed. 2d 884, ***910; 1991 U.S. LEXIS 842

value that [compensation and depreciable plant]              Moorman Mfg. Co., whatever the merit of Trinova's
contribute to the tax base in Michigan." Brief for           argument that sales do not contribute to value added
Petitioner 31. Trinova's position finds some support         "from the standpoint of economic theory or legislative
among economists. See Barlow & Connell, The Single           policy, it cannot support a claim in this litigation that [the
Business Tax, in Michigan's Fiscal and Economic              State] in fact taxed profits not attributable to activities
Structure 673, 704 (H. Brazer ed. 1982); Kleine 7, 14,       within the State during the yea[r 1980]." 437 U.S. at 272.
n.5.                                                         Trinova gives no basis for distinguishing the same
                                                             arguments that were pressed, and rejected, with regard to
     We have, supra, at 376, already concluded that sales    the apportionment of income. We could not accept
(as a measure of market demand) do have a profound           Trinova's argument that the sales factor distorts
impact upon the amount of an enterprise's value added,       Michigan's apportionment formula without rejecting our
and therefore reject the complete exclusion of sales as      precedents which approve [***911] the use of the same
somehow resulting in more accurate apportionment. We         formula to apportion income.
further reject this critique because it cannot distinguish
application of the three-factor formula to a VAT from             As we find no distortion caused by the three-factor
application to an income tax. In fact, nearly identical      formula, it follows that the Michigan SBT does not tax
criticisms were levied against the three-factor formula as   "value earned outside [Michigan's] borders." ASARCO
a method for apportioning income by economists who           Inc. v. Idaho Tax Comm'n, 458 U.S. 307, 315, 73 L. Ed.
theorize that income (like value added) is the product of    2d 787, 102 S. Ct. 3103 (1982). The argument that the
labor and capital, and that the [**834] marketplace          value was added in Ohio, by labor and capital, and that
contributes nothing to production of income. See             no value has been added in Michigan assumes that value
Studenski, The Need for Federal Curbs on State Taxes on      added is subject to geographic ascertainment and assumes
Interstate Commerce: An Economist's Viewpoint, 46 Va.        further the inappropriateness of a sales factor in
L. Rev. 1121, 1131-1132 (1960); Harriss, Economic            apportionment. For the reasons we have given, we reject
Aspects of Interstate Apportionment of Business Income,      both arguments.
37 Taxes 327, 362-363 (1959); Harriss, Interstate
Apportionment of Business Income, 49 Am. Econ. Rev.                 [*384] [***LEdHR1A] [1E] [***LEdHR11A]
398, 400 (1959). If it were not for their age, these         [11E] [***LEdHR14A] [14A]We need not say for
criticisms could have been taken almost verbatim from        certain which method -- unadjusted apportionment by the
Trinova's brief:                                             three-factor formula ($ 19,838,700), apportionment by
                                                             Trinova's alternative two-factor formula ($ 360,213),
          [*383] "Sales-by-destination are not a             Trinova's Jones & Laughlin apportionment urged in state
       proper allocation factor . . . . Taken by             court (-$ 2,042,458), or the adjusted tax base as
       themselves, they do not necessarily                   calculated in Trinova's original 1980 return ($
       represent the location of the company's               12,492,671) -- gives the most accurate calculation of
       productive income-creating effort. Only               Trinova's value added in Michigan. Trinova has not
       the location of the company's capital and             convincingly demonstrated which figure is most accurate.
       labor, which may be wholly different from             Trinova gives no estimate of the value added that would
       the destination of the sales, identifies the          take account of both its Michigan sales activity and
       location of that effort and hence the situs           Michigan market demand for its products. Michigan, on
       for the imposition of a state income tax              the other hand, has consistently applied a formula, the
       upon it." Studenski, supra, at 1131-1132.             elements of which appear to reflect a very large share of
                                                             the activities by which value is generated, with further
                                                             relief for labor-intensive taxpayers such as Trinova.
    Despite such criticism, the Uniform Division of          Trinova has failed to meet its burden of proving "by 'clear
Income for Tax Purposes Act decided upon an income           and cogent evidence,'" Moorman Mfg. Co., supra, at 274,
apportionment formula that included sales, and the           that the State of Michigan's apportionment provides a
importance of sales in generating value has been             distorted result. 10
acknowledged by this Court. Container Corp., 463 U.S.
at 183. Thus, as we responded to a similar argument in               10     [***LEdHR11A] [11F] [***LEdHR14A]
                                                                                                                   Page 24
                                       498 U.S. 358, *384; 111 S. Ct. 818, **834;
                                112 L. Ed. 2d 884, ***LEdHR14A; 1991 U.S. LEXIS 842

       [14B]                                                    483 U.S. 266, 281, 97 L. Ed. 2d 226, 107 S. Ct. 2829
                                                                (1987), that "the Commerce Clause has a deeper meaning
            As an alternative ground for upholding the          that may be implicated even though state provisions . . .
       tax, Michigan reminds us that, instead of taxing         do not allocate tax burdens between insiders and
       value added, it could have taxed gross receipts of       outsiders in a manner that is facially discriminatory." The
       sales into Michigan. We have repeatedly upheld           Commerce Clause requires more than mere facial
       such taxes. Standard Pressed Steel Co. v.                neutrality. The content of that requirement is fair
       Washington Revenue Dept., 419 U.S. 560, 564, 95          apportionment. The "deeper meaning" to which American
       S. Ct. 706, 42 L. Ed. 2d 719 (1975); General             Trucking refers is embodied in the requirement of fair
       Motors Corp. v. Washington, 377 U.S. 436, 448,           apportionment, as expressed in the tests of internal and
       12 L. Ed. 2d 430, 84 S. Ct. 1564 (1964);                 external consistency. Other than the vague accusation of
       McGoldrick v. Berwind-White Coal Mining Co.,             discrimination, Trinova presents no other standard by
       309 U.S. 33, 58, 84 L. Ed. 565, 60 S. Ct. 388            which we might consider the constitutionality of the
       (1940). While we accept the analogy Michigan             Michigan SBT. [***LEdHR15A] [15C]In further
       has drawn between a VAT and an income tax, we            support of its discrimination argument, Trinova relies
       recognize that the SBT also bears some                   upon the 1987 statement of Michigan's Governor that the
       similarities to a gross-receipts tax. Further, the       SBT was enacted "'to promote the development and
       SBT's alternative method of taxation (based upon         investment of business within Michigan.'" Executive
       gross receipts) might provide an additional limit        Message of Governor James J. Blanchard to the Michigan
       on any distortion or possibility that out-of-state       Supreme Court, Nov. 6, 1987, App. to Pet. for Cert. 73a.
       values might be taxed. See n.6, supra. In light of       This statement helps Trinova not at all. It is a laudatory
       our disposition, we need not address these               goal in the design of a tax system to promote investment
       arguments.                                               that will provide jobs and prosperity to the citizens of the
                                                                taxing State. [HN17] States are free to "structure their tax
 [**835] C                                                      systems to [*386] encourage the growth and
                                                                development of intrastate commerce and industry."
           [***LEdHR1A]          [1F]     [***LEdHR15A]
                                                                Boston Stock Exchange, supra, at 336.Although Trinova
[15A]Trinova also urges that the Michigan SBT should
                                                                repeats the Governor's statement in an attempt to
be struck down because it discriminates against
                                                                demonstrate an impermissible motive on the part of the
out-of-state businesses in violation of the Commerce
                                                                State, all the contemporaneous evidence concerning
Clause. Trinova cannot point to any treatment of in-state
                                                                passage of the SBT suggests a benign motivation,
and out-of-state firms that is discriminatory on its face, as
                                                                combined with a practical need to increase revenues. 11
in the cases it cites. See, e. g., [*385] Westinghouse
                                                                Neither Trinova nor the secondary sources it relies upon
Electric Corp. v. Tully, 466 U.S. 388, 393, 80 L. Ed. 2d
                                                                [**836] present any evidence that the SBT was inspired
388, 104 S. Ct. 1856 (1984) (tax credit was limited to
                                                                as a way to export tax burdens or import tax revenues.
gross receipts from export products shipped from a
regular place of business of the taxpayer within New                   11 According to Kleine, proponents of the SBT
York); Boston Stock Exchange v. State Tax Comm'n, 429                  argued as follows: (1) because of Michigan's
U.S. 318, 324-328, 50 L. Ed. 2d 514, 97 S. Ct. 599                     volatile economy, the State's corporate income tax
(1977) (tax facially discriminated against transactions on             had proven unpredictably cyclical, and therefore a
securities exchanges located outside of New York and                   poor source of revenue. The SBT would provide a
had been enacted in an [***912] effort to discourage                   much broader tax base, and thus prove a more
growth of such exchanges); Halliburton Oil Well                        stable revenue source; (2) the SBT would lessen
Cementing Co. v. Reily, 373 U.S. 64, 10 L. Ed. 2d 202,                 the tax burden on capital, thereby encouraging
83 S. Ct. 1201 (1963) (sales tax exempted isolated sales               new investment; (3) the SBT would replace
within State, but use tax lacked a similar exemption for               numerous taxes, resulting in less paperwork for
similar isolated sales outside of the State).                          both the taxpayer and the tax collector; (4) the
[***LEdHR15A] [15B] [***LEdHR16] [16]In the                            SBT would not discriminate against businesses on
absence of any facial discrimination, Trinova recalls our              the basis of their forms of organization; and (5)
statement in American Trucking Assns., Inc. v. Scheiner,               the SBT would tax inefficient and efficient firms
                                                                                                                 Page 25
                                      498 U.S. 358, *386; 111 S. Ct. 818, **836;
                               112 L. Ed. 2d 884, ***LEdHR15A; 1991 U.S. LEXIS 842

       equally for their use of government services,          the view that this suffices to comply with the
       whereas an income tax would burden more                requirements of the Commerce Clause, see Amerada
       heavily efficient, highly profitable firms. In         Hess Corp. v. Director, Div. of Taxation, N. J. Dept. of
       addition, at the time of the SBT's enactment,          Treasury, 490 U.S. 66, 80, 104 L. Ed. 2d 58, 109 S. Ct.
       Michigan faced a fiscal crisis. The legislature        1617 (1989) (SCALIA, J., concurring in judgment); Tyler
       provided that the new SBT would overlap with           Pipe Industries, Inc. v. Washington State Dept. of
       the old corporate franchise tax, resulting in          Revenue, 483 U.S. 232, 265, 107 S. Ct. 2810, 97 L. Ed.
       additional cash flow of $ 180 million. Kleine          2d 199 (1987) (SCALIA, J., concurring in part and
       20-23. The argument that a VAT would permit            dissenting in part), I would forgo the additional
       "exporting" the tax to taxpayers outside the State     Commerce Clause analysis articulated in Complete Auto
       "was not used to any great extent by the               Transit, Inc. v. Brady, 430 U.S. 274, 279, 51 L. Ed. 2d
       proponents of the Michigan [SBT]." Id., at 23.         326, 97 S. Ct. 1076 (1977). Some elements of that
                                                              analysis, however, are relevant to the quite separate
IV                                                            question whether the tax complies with the requirements
                                                              of the Due Process Clause, see Mobil Oil Corp. v.
       [***LEdHR1A] [1G] [***LEdHR17] [17][HN18]              Commissioner of Taxes of Vt., 445 U.S. 425, 436-437, 63
In reviewing state taxation [***913] schemes under the        L. Ed. 2d 510, 100 S. Ct. 1223 (1980); Amerada Hess
Commerce Clause, we attempt "to ensure that each State        Corp., supra, at 80-81 (SCALIA, J., concurring in
taxes only its fair share of an interstate transaction."      judgment).
Goldberg v. Sweet, 488 U.S. 252, 260-261, 102 L. Ed. 2d
607, 109 S. Ct. 582 (1989). We act as a defense against            Trinova concedes that there is a minimal connection
state taxes which, whether by design or inadvertence,         between its interstate activities and the taxing State, see
either give rise to serious concerns of double taxation, or   Mobil, supra; ante, at 373. The only issue, then, is
attempt to capture tax revenues that, under the theory of     whether the tax violates the Due Process Clause by taxing
the tax, belong of right to other jurisdictions. We have      extraterritorial values. For the reasons stated in Parts
always "declined to undertake the essentially legislative     III-A and III-B of the Court's opinion, I agree that it does
task of establishing [*387] a 'single constitutionally        not.
mandated method of taxation.'" Id., at 261, quoting
Container Corp., 463 U.S. at 171. We do not say today         DISSENT BY: STEVENS
whether other States should adopt a VAT, or whether
Michigan's three-factor formula is the only acceptable        DISSENT
method of apportionment. We do hold that, as applied to
Trinova during the tax year at issue, the Michigan SBT           [*388] JUSTICE STEVENS, with whom JUSTICE
does not violate the Due Process or Commerce Clauses of       BLACKMUN joins, dissenting.
the Constitution.
                                                                   Although the parties refer to Michigan's "Single
     The judgment of the Supreme Court of Michigan is         Business Tax" (SBT) as a "Value Added Tax" (VAT),
                                                              that term does not appear in the text of the statute. The
Affirmed.                                                     text of the relevant Act describes the SBT as a tax on
                                                              "certain commercial, [***914] business, and financial
    JUSTICE SOUTER took no part in the consideration          activities." 1 As a practical matter, Michigan's SBT is
or decision of this case.                                     nothing more than an amalgam of three separate taxes: a
                                                              tax on payroll, a tax on depreciable fixed assets, and a tax
CONCUR BY: SCALIA                                             on income. Payroll and depreciation represent [**837]
                                                              over 90 percent of the SBT base, and the productive
CONCUR                                                        activities that are measured by payroll and depreciation
                                                              take place at geographic locations that are readily
     JUSTICE SCALIA, concurring in the judgment.
                                                              identifiable. Because Michigan's SBT uses an
     As the Court notes, ante, at 384, the Michigan single    apportionment formula to tax a portion of those activities
business tax is not facially discriminatory. Since I am of    occurring outside Michigan, I depart from the Court's
                                                              analysis and conclude that the state taxation scheme
                                                                                                                  Page 26
                                        498 U.S. 358, *388; 111 S. Ct. 818, **837;
                                     112 L. Ed. 2d 884, ***914; 1991 U.S. LEXIS 842

violates established principles of due process.                      In upholding the constitutionality of the SBT against
                                                                a Due Process Clause challenge, the Court today
         1 The preamble to the statute states, in part:         concludes that even though the bulk of Trinova's property
                                                                and payroll are located outside Michigan, it does not
              "AN ACT to provide for the imposition, levy,      follow that the bulk of its value-adding activities are
         computation,         collection, assessment     and    located outside Michigan and thus are not attributable to
         enforcement, by lien or otherwise, of taxes on         or taxable by Michigan. Rather, the Court assumes that
         certain commercial, business, and financial            the value added to a product is largely contingent upon
         activities . . . ." See Mich. Comp. Laws § 208.1, p.   the revenue that the product generates when it is sold in
         4 (1986).                                              the marketplace. Because the value added by Trinova's
                                                                use of labor and capital in Ohio is not realized until
              The Michigan Supreme Court's explanation
                                                                Trinova's product is sold in Michigan and the product is
         of the significance of the label "value added tax"
                                                                given market value by consumers, the Court concludes
         describes it as a tax upon business activity. In its
                                                                that Michigan's sales contribute greatly to the value of
         opinion below, the Michigan court explained:
                                                                Trinova's product, and thus that allowing a portion of the
              "In short, a value added tax is a tax upon        value added by Trinova's business activities in Ohio to be
         business activity. The act employs a value added       attributed to Michigan through use of an apportionment
         measure of business activity, but its intended         formula is justified.
         effect is to impose a tax upon the privilege of
                                                                     The Court's assumption that value [***915] added
         conducting business activity within Michigan. It
                                                                from labor and capital is not realized until the product is
         is not a tax upon income. MCL 208.31(4); MSA
                                                                sold, however, is simply wrong. Finished goods, even
         7.558(31) (4)." 433 Mich. 141, 149, 445 N.W.2d
                                                                though stored in a warehouse and not yet sold, are more
         428, 431-432 (1989).
                                                                valuable than raw materials. Moreover, under the
              This Court today also states that "value added    Michigan statute, the revenues generated by the sales of
         is a measure of actual business activity." Ante, at    the finished product are reflected in the net income
         364.                                                   component of the tax base. Thus, [*390] in this case,
                                                                because Trinova operated at a loss, the value added by
     I                                                          labor and capital is reduced, rather than enhanced, by the
                                                                ultimate sales made in Michigan. It necessarily follows
     Petitioner Trinova's executive offices and                 that allowing Michigan to apportion out-of-state expenses
manufacturing facilities are located in Ohio. Most of its       incurred for fixed assets and labor on the basis of
employees live and work in Ohio. In fact, significantly         Michigan sales in effect allows Michigan to tax
less than one percent of [*389] Trinova's capital assets        extraterritorial business activity.
and labor were employed in Michigan in 1980. 2 The
company operated at a substantial loss in that year. The             Under this Court's due process jurisprudence, a State
question presented is whether the fact that 26 percent of       may constitutionally tax only those interstate business
Trinova's unprofitable sales were made to Michigan              activities or income to which it has a rational nexus. See
customers provides a constitutionally sufficient                Container Corp. of America v. Franchise Tax Bd., 463
justification for the State to attribute to Michigan (and       U.S. 159, 165-166, 77 L. Ed. 2d 545, 103 S. Ct. 2933
thus to tax) approximately nine percent of Trinova's            [**838] (1983). However, in the context of state income
productive activities, almost all of which actually             taxes on "unitary" interstate businesses, our cases allow
occurred in Ohio.                                               States to deviate from the fixed rule of geographic
                                                                accounting in favor of a more flexible system of
         2        The Company's total payroll was $             formulary apportionment. In so doing, we have cautioned
         226,356,271; its Michigan payroll was only $           that "the functional meaning of this requirement [of a
         511,774 or less than one-fourth of one percent. Its    rational nexus between the taxing State and the taxed
         Michigan depreciation was only $ 2,152,                activities] is that there be some sharing or exchange of
         representing less than one-tenth of one percent of     value not capable of precise [geographic] identification or
         its entire depreciation.                               measurement . . . which renders formula apportionment a
                                                                                                                  Page 27
                                       498 U.S. 358, *390; 111 S. Ct. 818, **838;
                                    112 L. Ed. 2d 884, ***915; 1991 U.S. LEXIS 842

reasonable method of taxation." Id., at 166.                    should not be deemed to be realized and should not be
                                                                geographically assigned until Trinova's product is sold,
     The Court today extends its analysis upholding the         and that the measure of value added by payroll and
constitutionality of income apportionment as an                 capital expenses should be adjusted by the ultimate
exception to the general rule of geographic accounting to       revenue the product generates.
situations in which the original justification for the use of
an imprecise apportionment formula no longer holds.                 II
Unlike the income of a unitary business, which we before
have recognized may not be precisely allocated, the two              The Court's assumption that value added by property
principal elements of Michigan's SBT -- property and            and payroll is not realized and cannot be determined until
payroll -- are subject to precise geographic identification     the product is sold is belied by the rationale underlying
and thus do not warrant being subject to an                     the VAT. [*392] The "concept of value added . . . is
apportionment formula.                                          derived from the most basic of economic facts -- the
                                                                scarcity of resources -- and hence consistently measures
     The Court concedes, as it must, that far less than one     the amount of scarce labor and capital resources used up
percent of Trinova's capital assets and labor were              (and not available for use elsewhere) in every economic
employed in Michigan in 1980, but rejects the logical           activity." See Haughey, The Economic Logic of the
result of such analysis by concluding that it does not          Single Business Tax, 22 Wayne L. Rev. 1017, 1018
necessarily follow that far less than one percent of            (1976). That a product is ultimately unprofitable does not
Trinova's "value added" can be precisely [*391]                 diminish the [**839] amount of resources a company
identified as having been realized outside Michigan.            utilized in manufacturing the product. Nor does the value
Instead, the Court concludes that the value added by            added to the economy or gross national product by the
Trinova's factors of production located outside of              company's purchase of labor and utilization of capital
Michigan cannot be precisely determined until the               diminish when the product is not sold or is sold for a net
ultimate product is sold and the market value or revenue        loss.
that the product commands is considered. As the Court
states, "the Michigan SBT . . . is not three separate and            Rather, value added is fully realized at each stage of
independent taxes, and Trinova cannot purport to identify       the production process -- at the stages where labor
the geographic source of value added by assuming that           services are sold and paid for by the company in the form
two elements can be located in a single State while the         of payroll expenses and where capital is consumed. The
third cannot." Ante, at 375. Rather, "in a unitary              amount of value added at these intermediate stages of
enterprise, compensation, depreciation, and profit are not      production is the price paid for the labor services and for
independent variables to be adjusted without reference to       the capital expended. See ibid. (value added may be
each other. If Trinova had paid an additional $ 100             determined by "adding up all of the payments paid
million in compensation [***916] during 1980, there is          internally to the owners of the labor and capital used").
no way of knowing whether, or to what extent, value             Regardless of the profitability (or unprofitability) of the
added would have increased. In fact, value added would          ultimate product, value added by labor and capital is not
not have increased so long as revenues did not increase."       eliminated or diminished if the ultimate product is unable
Ante, at 376 (emphasis added).                                  to command equivalent value or revenue in the
                                                                marketplace. 3 As [***917] the Court itself concedes
    Driving the Court's analysis is the recognition that        early in its opinion, [*393] "even if a business entity is
Trinova in 1980 netted a loss of over $ 42 million. This,       unprofitable, under normal circumstances it adds value to
the Court concludes, means that the ultimate value added        its products and, as a consequence, will owe some VAT."
by Trinova's use of labor and capital resources was not         Ante, at 364. This immunity of the VAT base from the
equivalent to its actual payroll and capital expenses.          vagaries of the marketplace is the basic justification for
Resisting the perceived awkwardness of finding "that            the SBT: "Because value added does not fluctuate as
Trinova added value at the factory through the                  widely as net income, a VAT provides a more stable
consumption of capital and labor, but that its products         source of revenue than the corporate income tax." Ibid.
somehow lost value outside of this process," id., at 375,
the Court holds that the value added by capital and labor                3 Unlike the tax bases under the VAT schemes
                                                                         that are found in European and South American
                                                                                                                  Page 28
                                       498 U.S. 358, *393; 111 S. Ct. 818, **839;
                                    112 L. Ed. 2d 884, ***917; 1991 U.S. LEXIS 842

       countries, see ante, at 365-366, n.3, the tax base      expenses results in the unconstitutional taxation [*394]
       under Michigan's SBT is affected by the revenues        by Michigan of a portion of the taxpayer's extraterritorial
       that the product brings in only insofar as such         activities. 4 In fact, in Trinova's case, although less than
       revenues are reflected in the company's net             [**840] one percent of Trinova's property and payroll
       income, which is a component of the tax base            expenses are incurred within its borders, Michigan, by
       under the additive method. In the foreign               applying the apportionment formula to payroll and
       jurisdictions utilizing the VAT, however, the           capital, treats nine to ten percent of Trinova's labor and
       starting point for computing the tax base is the        capital costs as if they were in-state expenses. 5 Because
       revenue received by the taxpayer from sales made        [***918] such extraterritorial taxation violates basic
       in the taxing jurisdiction, with certain amounts        principles of due process, I respectfully dissent.
       exempted or subtracted from the in-state
       revenues. Although measuring value added with                  4 "The taxation of property not located in the
       reference to revenues might therefore be                       taxing State is constitutionally invalid, both
       warranted in traditional European models of the                because it imposes an illegitimate restraint on
       VAT, it is unjustified under Michigan's SBT,                   interstate commerce and because it denies to the
       because the income component of the VAT base                   taxpayer the process that is his due. A State will
       in Michigan already accounts for revenues.                     not be permitted, under the shelter of an imprecise
                                                                      allocation formula or by ignoring the peculiarities
       Concededly, under the Michigan statute, the task of            of a given enterprise, to 'project the taxing power
calculating precisely Trinova's value added by its capital            of the state plainly beyond its borders. . . .' Any
and labor resources without looking to its ultimate sales             formula used must bear a rational relationship,
or profit is complicated by the unprofitability of Trinova's          both on its face and in its application, to property
business during the tax year in question. Under                       values connected with the taxing State." Norfolk
Michigan's method for calculating the SBT base, the                   & Western R. Co. v. Missouri State Tax Comm'n,
corporation's profit is added to the sum of labor costs and           390 U.S. 317, 325, 19 L. Ed. 2d 1201, 88 S. Ct.
capital expenditures (consisting of depreciation and                  995 (1968) (footnote omitted).
interest expenses) and represents the value added by the              5 The Court implies that it would be unjust to
corporation's skill and entrepreneurial effort. Insofar as            apportion Trinova's net income without also
Trinova in 1980 netted a loss of over $ 42 million,                   apportioning its company-wide labor and
Trinova's VAT base was actually reduced by "addition"                 appreciation. Ante, at 381-382, n.9. My reaction to
of its profit to its labor and capital costs.                         the facts of this case is just the opposite. Because
                                                                      the apportioned share of the taxpayer's net loss far
     It is nevertheless clear that value added under the              exceeds the actual use of labor and capital in
additive method is realized at each stage of the                      Michigan, there is no more justification for
production process and is undiminished if the product                 imposing the SBT on Trinova than there would be
suffers a net loss. That Michigan chooses to allow a                  to collect an income tax from a taxpayer whose
company's VAT base to be reduced by the extent of its                 company-wide operations, as well as its Michigan
unprofitability does not in any way lead to the Court's               operations, produced a substantial net loss.
conclusion that the value added by labor and capital is not
realized when (and where) those resources are purchased,       REFERENCES
and that the amount of that value added to the economy is      71 Am Jur 2d, State and Local Taxation 19, 75, 77, 110,
not equivalent to the price paid by the company for those      285, 296-299, 305, 306
resources.
                                                               USCS, Constitution, Art I, 8, cl 3; Amendment 14
     Because the value added by the two principal
components of Michigan's SBT -- labor and capital -- are       L Ed Digest, Commerce 238, 244; Constitutional Law
fully realized and thus can be precisely quantified and        605
geographically assigned when the actual purchase of
labor services and use of capital occur, Michigan's            L Ed Index, Apportionment and Allocation; Commerce;
apportionment of a company's entire payroll and capital        Corporate Taxes; Taxes
                                                                                                                Page 29
                                       498 U.S. 358, *394; 111 S. Ct. 818, **840;
                                    112 L. Ed. 2d 884, ***918; 1991 U.S. LEXIS 842

Index to Annotations, Apportionment and Allocation;            Validity, under Federal Constitution, of state tax on, or
Discrimination; Taxes                                          measured by, net income of foreign corporation. 3 L. Ed.
2d 1787.
         Annotation References:
                                                               Construction and application of Uniform Division of
What issues will the Supreme Court consider, though not,       Income for Tax Purposes Act. 8 ALR4th 934.
or not properly, raised by the parties. 42 L. Ed. 2d 946.
                                                               Comment Note.--Validity, under Federal Constitution, of
Validity, under commerce clause of Federal Constitution,       state tax on, or measured by, income of foreign
of state gross receipts or income taxes involving interstate   corporation. 67 ALR2d 1322.
transactions-- Supreme Court cases. 34 L. Ed. 2d 749.
                                                                                                                   Page 1

                   UNITED STATES TRUST COMPANY OF NEW YORK, TRUSTEE v. NEW
                                         JERSEY ET AL.

                                                       No. 75-1687

                                   SUPREME COURT OF THE UNITED STATES

                            431 U.S. 1; 97 S. Ct. 1505; 52 L. Ed. 2d 92; 1977 U.S. LEXIS 1

                                              Argued November 10, 1976
                                                   April 27, 1977

PRIOR HISTORY:        APPEAL FROM THE                          was not a reserved power that could not be contracted
SUPREME COURT OF NEW JERSEY                                    away. Also, the court also determined that the impairment
                                                               was not reasonable or necessary to serve an important
CASE SUMMARY:                                                  public purpose.

                                                               OUTCOME: The court reversed a state's supreme court's
PROCEDURAL POSTURE: Appellant, trustee for port                affirmance of a lower court's holding that the statutory
authority bonds, sought review of the Supreme Court of         repeal of a statutory covenant did not violate the Contract
New Jersey, which affirmed a lower court's holding that        Clause of U.S. Constitution. The court held that the
the statutory repeal of a statutory covenant was a             repeal of the statutory covenant did violate the Contract
reasonable exercise of the state's police power and was        Clause because it impaired a financial contractual
not prohibited by the Contract Clause, U.S. Const. art. I,     obligation of the state and the impairment was not
§ 10, cl. 1.                                                   reasonable or necessary to serve an important public
                                                               purpose.
OVERVIEW: Appellant, trustee for port authority
bonds, brought an action to contest the repeal of a            CORE TERMS: covenant, port authority, repeal,
statutory covenant limiting the ability of a port authority    bondholder, impairment, transportation, mass transit,
to subsidize rail passenger transportation from revenues       deficit, toll, railroad's, bridge, police power, passenger,
and reserves. Appellant claimed that repeal of the             consolidated bonds, transit, reserve fund, N.J Laws,
covenant impaired the obligation of the state's contract       environmental, holder, impair, modification, impaired,
with the bondholders because it totally eliminated its         commuter, energy, tunnel, path, Y Laws, public purpose,
security provision, which protected the port authority's       contractual obligations, contractual
reserve fund from depletion. The state superior court
ruled that the statutory repeal was a reasonable exercise      LexisNexis(R) Headnotes
of the state's police power and found that it was not
prohibited by the Contract Clause, U.S. Const. art. I, §
10, cl. 1. The state supreme court affirmed. Appellant
challenged the decision. The court reversed, holding that
                                                               Constitutional Law > Congressional Duties & Powers >
the Contract Clause was violated because the repeal had
                                                               Contracts Clause > General Overview
the effect of impairing a contractual obligation of the
                                                               [HN1] See U.S. Const. art. I, § 10, cl. 1.
state. The court found that the state's financial obligation
                                                                                                                  Page 2
                                            431 U.S. 1, *; 97 S. Ct. 1505, **;
                                        52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1

Constitutional Law > Congressional Duties & Powers >                The states of New York and New Jersey, which had
Contracts Clause > General Overview                            previously established the Port Authority of New York
Contracts Law > Contract Modifications > General               and New Jersey to effectuate a better coordination of
Overview                                                       facilities of commerce in the port of New York, entered
[HN2] It is not every modification of a contractual            into a statutory covenant in 1962, as part of bi-state
promise that impairs the obligation of contract under          legislation authorizing Port Authority involvement in a
federal law.                                                   construction project and the acquisition of a railroad,
                                                               whereby the two states agreed with each other, and with
                                                               the holders of bonds which the Port Authority had
Constitutional Law > Congressional Duties & Powers >           previously issued, that so long as any of such bonds
Contracts Clause > General Overview                            remained outstanding and unpaid and the holders had not
Contracts Law > Contract Modifications > General               given their consent, neither the states nor the Port
Overview                                                       Authority would use, for other than permitted purposes,
Governments > Legislation > Effect & Operation >               any revenues or reserves which were then, or in the future
Retrospective Operation                                        might be, pledged as security for such bonds. Both states
[HN3] The Contract Clause, U.S. Const. art. I, § 10, cl. 1,    passed legislation, effective in 1973, rendering the 1962
limits the power of the states to modify their own             covenant inapplicable, or in effect repealed, with respect
contracts as well as to regulate those between private         to bonds issued by the Port Authority after such effective
parties. Yet the Contract Clause does not prohibit the         date. In 1974, both states enacted legislation which
states from repealing or amending statutes generally, or       repealed the 1962 covenant outright. Thereafter, a trustee
from enacting legislation with retroactive effects.            and holder of Port Authority bonds brought an action in
                                                               the Superior Court of New Jersey, Law Division, Bergen
Constitutional Law > Congressional Duties & Powers >           County, New Jersey, challenging the constitutionality of
Contracts Clause > General Overview                            New Jersey's 1974 repealing legislation. The Superior
Governments > Legislation > Interpretation                     Court ruled that the statutory repeal was a reasonable
[HN4] In general, a statute is itself treated as a contract    exercise of New Jersey's police power, not prohibited
when the language and circumstances evince a legislative       under the contract clause of the United States
intent to create private rights of a contractual nature        Constitution (Art I, 10, cl 1), which prohibits state laws
enforceable against the state.                                 impairing the obligation of contracts, nor under the
                                                               clause's counterpart in the New Jersey Constitution (134
                                                               NJ Super 124, 338 A2d 833). The Supreme Court of New
Constitutional Law > Congressional Duties & Powers >           Jersey affirmed (69 NJ 253, 353 A2d 514).
Contracts Clause > General Overview
[HN5] Contract rights are a form of property and as such            On appeal, the United States Supreme Court
may be taken for a public purpose provided that just           reversed. In an opinion by Blackmun, J., joined by
compensation is paid.                                          Burger, Ch. J., and Rehnquist and Stevens, JJ., expressing
                                                               the view of a majority of the seven participating members
                                                               of the court, it was held that the 1974 New Jersey law
Constitutional Law > Congressional Duties & Powers >           violated the contract clause of the United States
Contracts Clause > General Overview                            Constitution, since outright repeal of the 1962 covenant
[HN6] Although the Contract Clause, U.S. Const. art. I, §      impaired a contractual obligation of the states, having
10, cl. 1, appears literally to proscribe "any" impairment,    eliminated an important security provision which was a
the prohibition is not an absolute one and is not to be read   purely    financial     obligation,   and    since    such
with literal exactness like a mathematical formula. Thus,      impairment--allegedly justified as necessary for
a finding that there has been a technical impairment is        implementing the states' plan for encouraging private
merely a preliminary step in resolving the more difficult      automobile users to shift to public transportation--was
question whether that impairment is permitted under the        neither necessary to achievement of the states' plan nor
Constitution.                                                  reasonable in light of the circumstances.
SUMMARY:                                                           Burger, Ch. J., concurring, expressed the view that
                                                                                                                         Page 3
                                              431 U.S. 1, *; 97 S. Ct. 1505, **;
                                          52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1

the constitutional prohibition against the impairment of        (Art I, 10, cl 1) limits the power of the states to modify
contracts had been violated because the state had failed to     their own contracts as well as to regulate those between
demonstrate that the impairment was essential to the            private parties, but the clause does not prohibit the states
achievement of an important state purpose and had not           from repealing or amending statutes generally, or from
shown that it did not know, and could not have known,           enacting legislation with retroactive effects.
the impact of the contract on that state interest at the time
the contract was made.
                                                                       OUTLAWRY §1
     Brennan, J., joined by White and Marshall, JJ.,
                                                                       LAW §74 ;
dissenting, expressed the view that there had been a
relatively inconsequential infringement of contract rights             bill of attainder -- ex post facto law -- state limitation
in the pursuit of substantial and important public ends         -- ;
that was not violative of the contract clause.
                                                                       Headnote:[3A][3B]
    Stewart and Powell, JJ., did not participate.
                                                                     The prohibitions of the United States Constitution
LAWYERS' EDITION HEADNOTES:                                     against any state's enacting a bill of attainder or ex post
                                                                facto law (Art I, 10, cl 1) limit the powers of the states
     LAW §216 ;                                                 only with regard to the imposition of punishment.

    contract clause -- statutory covenant -- repeal --
                                                                       LAW §513 ;
security provision for bondholders -- ;
                                                                       due process -- retrospective civil laws -- ;
    Headnote:[1A][1B][1C]
                                                                       Headnote:[4A][4B]
     A state statute which retroactively repeals a statutory
covenant between two states and the holders of bonds                 The due process clause of the Fourteenth
issued by the states' port authority--under which covenant      Amendment generally does not prohibit retrospective
it was agreed that so long as any bonds remained                civil legislation, unless the consequences are particularly
outstanding and unpaid and the holders had not given            harsh and oppressive.
their consent, the states and the port authority would not
use, for other than permitted purposes, any revenues or
reserves pledged as security for such bonds--violates the              CONTRACTS §67
contract clause of the United States Constitution (Art I,
10, cl 1), prohibiting state law impairment of contract                STATUTES §91 ;
obligations, since outright repeal of the covenant
                                                                       statute as contract -- statute governing contract -- ;
eliminates an important security provision which is a
purely financial obligation, thus constituting an                      Headnote:[5A][5B]
impairment of the states' contract obligation, and since
such impairment is not reasonable and necessary to serve             In general, a statute is treated as a contract when the
the purposes claimed by the state. (Brennan, White, and         language and circumstances evince a legislative intent to
Marshall, JJ., dissenting from this holding.)                   create private rights of a contractual nature enforceable
                                                                against the state; in addition, statutes governing the
                                                                interpretation and enforcement of contracts may be
     LAW §135;
                                                                regarded as forming part of the obligation of contracts
    contract clause -- limit on states -- statutes -- ;         made under their aegis.

    Headnote:[2]
                                                                       STATES §51 ;
    The contract clause of the United States Constitution
                                                                       legislative covenant -- prospective repeal -- ;
                                                                                                                    Page 4
                                            431 U.S. 1, *; 97 S. Ct. 1505, **;
                                        52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1

    Headnote:[6A][6B]                                              contract clause -- change in statutory remedy -- ;

     Two states, which had covenanted and agreed with              Headnote:[9A][9B]
each other, and with the holders of bonds of the states'
port authority, that as long as such bonds remained                 Under the contract clause of the United States
outstanding and the bondholders had not given their            Constitution (Art I, 10, cl 1) protecting the obligation of
consent, the states and the port authority would not use       contracts from state impairment, it is not always
any "revenues or reserves, which have been or shall be         unconstitutional for changes in statutory remedies to
pledged in whole or in part as security for such bonds, for    affect preexisting contracts.
... other than permitted purposes," have the power to
repeal the statutory covenant prospectively as to bonds             LAW §207;
issued after the repeal goes into effect.
                                                                  contract clause -- remedies and obligations --
                                                               modification -- ;
     STATES §51 ;
                                                                   Headnote:[10A][10B]
    legislative covenant -- contractual obligation -- ;
                                                                   Obligations as well as remedies may be modified
    Headnote:[7]
                                                               without necessarily violating the contract clause of the
     A legislative covenant--under which two states            United States Constitution (Art I, 10, cl 1), which
"covenant and agree with each other and with the holders       protects the obligation of contracts from state
of ... bonds" of the states' port authority that so long as    impairment.
any of the bonds of such holders remained outstanding
and unpaid and the bondholders had not given their                  LAW §10;
consent, the states and the port authority would not use,
for other than permitted purposes, any revenues or                 contract clause -- construction -- technical
reserves pledged as security for the bonds--constitutes a      impairment as necessitating further inquiry -- ;
contractual obligation of the two states, since (1) the
intent to make a contract appears in the language of the           Headnote:[11]
covenant, (2) the purpose of the covenant was to invoke,
as security against repeal, the constitutional protection of        Since the prohibition of the contract clause of the
the contract clause of the United States Constitution (Art     United States Constitution (Art I, 10, cl 1) against a
I, 10, cl 1), which prohibits states from passing any law      state's impairing the obligation of contracts is not an
impairing the obligation of contracts, and (3) the states      absolute one and is not to be read with literal exactness
received, in return for their promise, public marketability    like a mathematical formula, a finding that there has been
of bonds to finance a construction project and acquisition     a technical impairment is merely a preliminary step in
of a railroad.                                                 resolving the more difficult question whether such
                                                               impairment is permitted under the Constitution, and the
                                                               court must attempt to reconcile the strictures of the
     LAW §530 ;                                                contract clause with the essential attributes of sovereign
                                                               power necessarily reserved by the states to safeguard the
    contract rights as property -- ;                           welfare of their citizens.
    Headnote:[8A][8B]
                                                                    LAW §214(1) ;
   Contract rights are a form of property and as such
may be taken for a public purpose provided that just               contract clause -- police power of states -- ;
compensation is paid.
                                                                   Headnote:[12]

     LAW §286 ;                                                    The contract clause of the United States Constitution
                                                                                                                       Page 5
                                                 431 U.S. 1, *; 97 S. Ct. 1505, **;
                                             52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1

(Art I, 10, cl 1), prohibiting state impairment of contract           Headnote:[15]
obligations, limits otherwise legitimate exercises of state
legislative authority, and the existence of an important               Under the contract clause of the United States
public interest is not always sufficient to overcome that         Constitution (Art I, 10, cl 1), prohibiting state impairment
limitation; whatever is reserved of state power must be           of contract obligations, a state is not required to adhere to
consistent with the fair intent of the constitutional             a contract that surrenders an essential attribute of its
limitation of that power, and the scope of the state's            sovereignty.
reserved power depends on the nature of the contractual
relationship with which the challenged law conflicts.                  STATES §51 ;

                                                                      power -- financial contracts -- ;
     LAW §271 ;
                                                                      Headnote:[16]
    contract clause -- police power -- private contracts --
;                                                                     A state has the power to enter into effective financial
                                                                  contracts.
    Headnote:[13]

     Although the states must possess broad power to                   CORPORATIONS §45
adopt general regulatory measures without being
concerned that private contracts will be impaired or even              STATES §51 ;
destroyed as a result, private contracts are not subject to
unlimited modification under the states' police power for             borrowing money -- contracts to repay -- ;
purposes of the contract clause of the United States
Constitution (Art I, 10, cl 1), prohibiting state impairment          Headnote:[17A][17B]
of contract obligations; legislation adjusting the rights
                                                                       States and cities, when they borrow money and
and responsibilities of contracting parties must be upon
                                                                  contract to repay it with interest, are not acting as
reasonable conditions and of a character appropriate to
                                                                  sovereignties, but their contracts have the same meaning
the public purpose justifying its adoption, but, as is
                                                                  as similar contracts between private persons.
customary in reviewing economic and social regulation,
courts properly defer to legislative judgment as to the
necessity and reasonableness of a particular measure.                  LAW §216;

                                                                      contract clause -- state's financial obligations --
     LAW §214(2) ;                                                private contracts -- public purpose -- ;
   contract clause -- reasonableness of impairment --                 Headnote:[18]
emergency -- ;
                                                                       The contract clause of the United States Constitution
    Headnote:[14A][14B]                                           (Art I, 10, cl 1), which prohibits the states from passing
                                                                  any law impairing the obligation of contracts, is not an
     Although the existence of an emergency and the
                                                                  absolute bar to subsequent modification of a state's own
limited duration of a relief measure are factors to be
                                                                  financial obligations; as with laws impairing the
assessed in determining the reasonableness of an
                                                                  obligations of private contracts, an impairment may be
impairment for purposes of the contract clause of the
                                                                  constitutional if it is reasonable and necessary to serve an
United States Constitution (Art I, 10, cl 1), such factors
                                                                  important public purpose, although in applying such
cannot be regarded as essential in every case.
                                                                  standard, complete deference to a legislative assessment
                                                                  of reasonableness and necessity is not appropriate, since
     LAW §142 ;                                                   the state's self-interest is at stake. (Brennan, White, and
                                                                  Marshall, JJ., dissented in part from this holding.)
    contract clause -- state contract -- ;
                                                                                                                     Page 6
                                              431 U.S. 1, *; 97 S. Ct. 1505, **;
                                          52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1

       LAW §216 ;                                               SYLLABUS

    contract clause -- impairment of state's financial                A 1962 statutory covenant between New Jersey and
obligations -- reasonableness determination -- ;                New York limited the ability of the Port Authority of
                                                                New York and New Jersey to subsidize rail passenger
       Headnote:[19]                                            transportation from revenues and reserves pledged as
                                                                security for consolidated bonds issued by the Port
     An impairment of a state's own financial obligations       Authority. A 1974 New Jersey statute, together with a
is constitutional under the contract clause of the United       concurrent and parallel New York statute, retroactively
States Constitution (Art I, 10, cl 1), if the impairment is     repealed the 1962 convenant. Appellant, both as a trustee
reasonable and necessary to serve an important public           for, and as a holder of, Port Authority bonds, brought suit
purpose; the extent of impairment is a relevant factor in       in the New Jersey Superior Court for declaratory relief,
determining its reasonableness.                                 claiming that the 1974 New Jersey statute impaired the
                                                                obligation of the States' contract with the bondholders in
       STATES §68 ;                                             violation of the Contract Clause of the United States
                                                                Constitution. The Superior Court dismissed the
       financial obligations -- ;                               complaint after trial, holding that the statutory repeal was
                                                                a reasonable exercise of New Jersey's police power and
       Headnote:[20]                                            was not prohibited by the Contract Clause. The New
                                                                Jersey Supreme Court affirmed. Held: The Contract
    A state cannot refuse to meet its legitimate financial      Clause prohibits the retroactive repeal of the 1962
obligations simply because it would prefer to spend the         covenant. Pp. 14-32.
money to promote the public good rather than the private
welfare of its creditors.                                            (a) The outright repeal of the 1962 covenant totally
                                                                eliminated an important security provision for the
                                                                bondholders and thus impaired the obligation of the
       LAW §215 ;
                                                                States' contract. Pp. 17-21.
       contract clause -- eminent domain -- ;
                                                                    (b) The security provision of the 1962 covenant was
       Headnote:[21A][21B]                                      purely a financial obligation and thus not necessarily a
                                                                compromise of the States' reserved powers that cannot be
     For purposes of the contract clause of the United          contracted away. Pp. 21-25.
States Constitution (Art I, 10, cl 1), which prohibits states
from passing laws impairing the obligation of contracts,             (c) The repeal of the 1962 covenant cannot be
states are free to exercise their powers of eminent domain      sustained on the basis of Faitoute Iron & Steel Co. v.
to abrogate contractual rights upon payment of just             City of Asbury Park, 316 U.S. 502, and W. B. Worthen
compensation.                                                   Co. v. Kavanaugh, 295 U.S. 56, simply because the
                                                                bondholders' rights were not totally destroyed. Pp. 26-28.

       LAW §216 ;                                                    (d) An impairment of contract such as is involved in
                                                                this case can only be upheld if it is both reasonable and
       impairment of contract obligations -- state contracts    necessary to serve an important public purpose, but here
-- ;                                                            the impairment was neither necessary to achieve the
                                                                States' plan to encourage private automobile users to shift
       Headnote:[22]                                            to public transportation nor reasonable in light of changed
                                                                circumstances. Total repeal of the 1962 covenant was not
     A state is not completely free to consider impairing
                                                                essential, since the States' plan could have been
the obligation of its own contracts on a par with other
                                                                implemented with a less drastic modification of the
policy alternatives, and is not free to impose a drastic
                                                                covenant, and since, without modifying the covenant at
impairment when an evident and more moderate course
                                                                all, the States could have adopted alternative means of
would serve its purposes equally well.
                                                                achieving their twin goals of discouraging automobile use
                                                                                                                  Page 7
                                           431 U.S. 1, *; 97 S. Ct. 1505, **;
                                       52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1

and improving mass transit. Nor can the repeal be            1962 that had limited the ability of The Port Authority of
claimed to be reasonable on the basis of the need for        New York and New Jersey 2 to subsidize rail passenger
mass transportation, energy conservation, and                transportation from revenues and reserves.
environmental protection, since the 1962 covenant was
adopted with knowledge of such concerns. Pp. 28-32.                 1   [HN1] "No State shall... pass any... Law
                                                                    impairing the Obligation of Contracts...." U.S.
     69 N.J. 253, 353 A.2d 514, reversed.                          Const., Art. I, § 10, cl. 1.

      BLACKMUN, J., delivered the opinion of the Court,             2 The name originally was "The Port of New
in which BURGER, C.J., and REHNQUIST and                            York Authority." 1921 N.J. Laws, c. 151, p. 416;
STEVENS, JJ., joined. BURGER, C.J., filed a                         1921 N. Y. Laws, c. 154, p. 496. It was changed
concurring statement, post, p. 32. BRENNAN, J., filed a             to "The Port Authority of New York and New
dissenting opinion, in which WHITE and MARSHALL,                    Jersey," effective July 1, 1972. 1972 N.J. Laws,
JJ., joined, post, p. 33. STEWART, J., took no part in the          c. 69; 1972 N. Y. Laws, c. 531.
decision of the case. POWELL, J., took no part in the
consideration or decision of the case.                             The suit, one for declaratory relief, [***98] was
                                                             instituted by appellant United States Trust Company of
COUNSEL: Devereux Milburn argued the cause for               New York in the Superior Court of New Jersey, Law
appellant. With him on the briefs were Robert A.             Division, Bergen County. Named as defendants were the
McTamaney and Robert B. Meyner.                              State of New Jersey, its Governor, and its Attorney
                                                             General. Plaintiff-appellant sued as trustee for two series
William F. Hyland, Attorney General of New Jersey, pro       of Port Authority Consolidated Bonds, as a holder of Port
se, argued the cause for appellees. With him on the brief    Authority Consolidated Bonds, and on behalf of all
were Michael I. Sovern and Murray J. Laulicht. *             holders of such bonds. 3

       * Louis J. Lefkowitz, Attorney General, Samuel               3     Appellant is trustee for the Fortieth and
       A. Hirshowitz, First Assistant Attorney General,             Forty-first Series of Port Authority Consolidated
       and Daniel M. Cohen, Assistant Attorney                      Bonds, with an aggregate principal amount of $
       General, filed a brief for the State of New York as          200 million. At the time the complaint was filed,
       amicus curiae urging affirmance.                             appellant also held approximately $ 96 million of
                                                                    Consolidated Bonds in its own account, as
                                                                    custodian, and as fiduciary in several capacities.
                                                                    There were then over $ 1,600 million of
JUDGES: Burger, Brennan, White, Marshall, Blackmun,                 Consolidated Bonds outstanding.
Rehnquist, Stevens;, Stewart took no part in the decision
of the case. Powell took no part in the consideration or          After a trial, the Superior Court ruled that the
decision of the case.                                        statutory repeal was a reasonable exercise of New
                                                             Jersey's police power, and declared that it was not
OPINION BY: BLACKMUN                                         prohibited by the Contract Clause or by its counterpart in
                                                             the New Jersey Constitution, Art. IV, § 7, P3.
OPINION                                                      Accordingly, appellant's complaint was dismissed. 134
N.J. Super. 124, 338 A.2d 833 (1975). The Supreme
    [*3]  [***97]     [**1508] MR. JUSTICE                   Court of New Jersey, on direct appeal and by per [*4]
BLACKMUN delivered the opinion of the Court.                 curiam opinion, affirmed "substantially for the reasons
                                                             set forth in the [trial court's] opinion." 69 N.J. 253, 256,
      [***LEdHR1A] [1A]This case presents a challenge
                                                             353 A.2d 514, 515 (1976). We noted probable
to a New Jersey statute, 1974 N.J. Laws, c. 25, as
                                                             jurisdiction. 427 U.S. 903 (1976). 4
violative of the Contract Clause 1 of the United States
Constitution. That statute, together with a concurrent and          4 The State of New York is not a party to this
parallel New York statute, 1974 N. Y. Laws, c. 993,                 case, although its Attorney General has filed a
repealed a statutory covenant made by the two States in             brief as amicus curiae. A challenge to the parallel
                                                                                                                    Page 8
                                          431 U.S. 1, *4; 97 S. Ct. 1505, **1508;
                                        52 L. Ed. 2d 92, ***98; 1977 U.S. LEXIS 1

        New York statute has been pending in the                       the revenues derived from its operations. By
        Supreme Court of New York, County of New                       reason of these financial limitations two concepts
        York, since 1974. United States Trust Co. of New               initially emerged which have played an important
        York v. New York, No. 09128/74.                                role in the realization of the purposes for which
                                                                       the Authority was created: first, the specific
    I                                                                  projects undertaken by the Authority should be
                                                                       self-supporting, i. e., the revenues of each should
    BACKGROUND                                                         be sufficient to cover its operating expenses and
                                                                       debt service requirements; and second, since the
     A. Establishment of the Port Authority. The Port
                                                                       Authority is a public agency over which its
Authority was established in 1921 by a bistate compact to
                                                                       creditors have no direct control, the bondholders
effectuate "a better co-ordination of the terminal,
                                                                       should be protected by covenants with the
transportation and other facilities of commerce in, about
                                                                       Authority and with the states which have ultimate
and through the port of New York." 1921 N.J. Laws, c.
                                                                       control over its operations." 134 N.J. Super. 124,
151, p. 413; 1921 N. Y. Laws, c. 154, p. 493. See N.J.
                                                                       139-140, 338 A.2d 833, 841 (1975).
Stat. Ann. § 32:1-1 et seq. (1940); N. Y. Unconsol. Laws
§ 6401et seq. (McKinney 1961). The compact, as the                          The two States subsequently took steps to
Constitution requires, Art. I, § 10, cl. 3, received                   protect the Port Authority's financial integrity.
congressional consent. 42 Stat. 174.                                   See, for example, the 1925 statutory declarations
                                                                       not to authorize the construction of competitive
     The compact granted the Port Authority enumerated
                                                                       bridges within the district or to limit the right of
powers and, by its Art. III, "such other and additional
                                                                       the Port Authority to levy such charges and tolls
powers as shall be conferred upon it by the Legislature of
                                                                       as it deemed necessary to produce revenues to
either State concurred in by the Legislature of the other,
                                                                       fund its bonds. 1925 N.J. Laws, c. 37, § 5; 1925
or by Act or Acts of Congress." The powers are
                                                                       N. Y. Laws, c. 210, § 5.
enumerated in Art. VI. Among them is "full power and
authority to purchase, construct, lease and/or [**1509]              See generally E. Bard, The Port of New York
operate any terminal or transportation facility within said     Authority (1942).
district." "Transportation facility" is defined, in Art.
XXII, to include "railroads, steam or electric,... for use           B. Initial Policy Regarding Mass Transit. Soon after
for the transportation or carriage of persons or property."     the Port Authority's inception, the two States, again with
                                                                the consent of Congress, 42 Stat. 822, agreed upon a
     The Port Authority was conceived as a financially          comprehensive plan for the entity's development. 1922
independent entity, with funds primarily derived from           N.J. Laws, c. 9; 1922 N. Y. Laws, c. 43. This plan was
private investors. The preamble to the compact speaks of        concerned primarily, if not solely, with transportation of
the "encouragement of [*5] the investment of capital,"          freight by carriers and not with the movement of
and the Port Authority was given power to mortgage its          passengers in the Port Authority district. The plan,
facilities and to pledge its revenues to secure [***99]         however, was not implemented. 6 The New [*6] Jersey
the payment of bonds issued to private investors. 5             Legislature at that time declared that the plan "does not
                                                                include the problem of passenger traffic," even though
        5 The Port Authority possessed no taxing power
                                                                that problem "should be considered in co-operation with
        and was unable to pledge the credit of either State.
                                                                the port development commission." 1922 Laws, c. 104.
        The trial court found:
                                                                The Port Authority itself recognized the existence of the
             "Under the terms of the Compact the power          passenger service problem. 1924 Annual Report 23;
        to levy taxes or to pledge the credit of either state   1928 Annual Report 64-66; App. 574a-575a.
        was expressly withheld from the Authority. From
                                                                       6 The parties are not in agreement as to the
        its inception, with the exception of monies
                                                                       original perception of the compact and the plan.
        advanced as loans by the states, the Authority was
                                                                       The appellant claims that the Port Authority was
        required to finance its facilities solely with money
                                                                       organized "as a freight coordinating agency,"
        borrowed from the public and to be repaid out of
                                                                       Brief for Appellant 5, whereas the appellees
                                                                                                                  Page 9
                                        431 U.S. 1, *6; 97 S. Ct. 1505, **1509;
                                      52 L. Ed. 2d 92, ***99; 1977 U.S. LEXIS 1

       challenge that description and emphasize the                The States in 1931 also enacted statutes creating the
       presence of a mass transit problem as a factor of      general reserve fund of the Port Authority. 1931 N.J.
       profound concern in the Port Authority's               Laws, c. 5; 1931 N. Y. Laws, c. 48. Surplus revenues
       development. Brief for Appellees 2-5. The trial        from all Port Authority facilities were to be pooled in the
       court found that neither the commission which          fund to create an irrevocably pledged reserve equal to
       recommended the creation of the Port Authority         one-tenth of the par value of the Port Authority's
       nor the comprehensive plan contemplated                outstanding bonds. This level was attained 15 years later,
       responsibility of the agency for passenger transit.    in 1946.
       134 N.J. Super., at 134-139, 338 A. 2d, at
       838-841.                                                   In 1952, the Port Authority abandoned the practice of
                                                              earmarking specific facility revenues as security for
      In 1927 the New Jersey Legislature, in an Act           bonds of that facility. The Port Authority's Consolidated
approved by the Governor, directed the Port Authority to      Bond Resolution established the present method of
make plans "supplementary to or amendatory of the             financing its activities; under this method its bonds are
comprehensive plan... as will provide adequate interstate     secured by a pledge of the general reserve fund. 8
and suburban transportation facilities for passengers."
1927 Laws, c. 277. The New York Legislature followed                 8 The appellees state that the creation of the
suit in 1928, but its bill encountered executive veto. 7             general reserve fund "made the Port Authority's
The [***100] trial court observed that this [**1510]                 fiscal strength possible." Brief for Appellees 6 n.
veto "to all intents and purposes ended any legislative              7.
effort to involve the Port Authority in an active role in
                                                                          The parties, however, are in disagreement as
commuter transit for the next 30 years." 134 N.J. Super.,
                                                                     to the actual and proper fiscal policy of the Port
at 149, 338 A. 2d, at 846.
                                                                     Authority. Appellant claims that each facility
       7 Governor Alfred E. Smith in his statement in                should have prospects of producing sufficient
       support of his veto said:                                     revenue to support itself. Appellees' position is
                                                                     apparent from their assertion that although the
            "[It] has been a great disappointment to me to           self-supporting-facility concept may have
       find that the opposition of the railroads has                 "initially emerged," as the trial court stated, 134
       prevented to date the making of real progress in              N.J. Super., at 140, 338 A. 2d, at 841, "the
       working out the program of freight distribution in            concept had no practical significance because it
       the port which always has been the main object                was not attained prior to 1931 and was
       and purpose of the Port of New York Authority. I              unnecessary after 1931," with the establishment of
       am satisfied that the Port Authority should stick to          the general reserve fund. Brief for Appellees 7.
       this program and I am entirely unwilling to give
       my approval to any measure which at the expense                    The trial court observed that upon the
       of the solution of the great freight distribution             adoption of the Consolidated Bonds Resolution in
       problem will set the Port Authority off on an                 1952, the self-supporting-facility concept "ceased
       entirely new line of problem connected with the               to have the significance previously attached to it."
       solution of the suburban passenger problem."                  134 N.J. Super., at 143, 338 A. 2d, at 843.
       App. 573a-574a.
                                                                     [*8] D. Renewed Interest in Mass Transit.
      [*7] C. Port Authority Fiscal Policy. Four bridges      Meanwhile, the two States struggled with the passenger
for motor vehicles were constructed by the Port               transportation problem. Many studies were made. The
Authority. A separate series of revenue bonds was issued      situation was recognized as critical, great costs were
for each bridge. Revenue initially was below                  envisioned, and substantial deficits were predicted for
expectations, but the bridges ultimately accounted for        any mass transit operation. The Port Authority itself
much of the Port Authority's financial strength. The          financed a study conducted by the Metropolitan Rapid
legislatures transferred the operation and revenues of the    Transit Commission which the States had established in
successful Holland Tunnel to the Port Authority, and this     1954.
more than made up for the early bridge deficits.
                                                                                                                    Page 10
                                         431 U.S. 1, *8; 97 S. Ct. 1505, **1510;
                                      52 L. Ed. 2d 92, ***100; 1977 U.S. LEXIS 1

     In 1958, Assembly Bill No. 16 was introduced in the      605a. The committee concluded that the solution to
New Jersey Legislature. This would have had the Port          bondholder concern was "[l]imiting by a constitutionally
Authority take over, improve, and operate interstate rail     protected statutory covenant with Port Authority
mass transit between New Jersey and New York. The             bondholders the extent to which the Port Authority
bill was opposed vigorously by the Port Authority on          revenues and reserves pledged to such bondholders can in
legal and financial grounds. The Port Authority also          the future be applied to the deficits of possible future Port
retaliated, in a sense, by including a new safeguard in its   Authority passenger railroad facilities beyond the original
contracts with bondholders. This prohibited the issuance      Hudson & Manhattan Railroad system." Id., at 656a.
of any bonds, [***101] secured by the general reserve         And the trial court found that the 1962 New Jersey
fund, for a new facility unless the Port Authority first      Legislature "concluded it was necessary to place a
certified that the issuance of the bonds would not            limitation on mass transit deficit operations to be
"materially impair the sound credit standing" of the Port     undertaken by the Authority in the future so as to
Authority. App. 812a. Bill No. 16 was not passed.             promote continued investor confidence in the Authority."
                                                              134 N.J. Super., at 178, 338 A. 2d, at 863-864.
     In 1959, the two States, with the consent of
Congress, Pub. L. 86-302, 73 Stat. 575, created the New           The statutory covenant of 1962 was the result. The
York-New Jersey Transportation Agency to deal "with           covenant itself was part of the bistate legislation
matters affecting public mass transit within and between      authorizing the Port Authority to acquire, construct, and
the 2 States." 1959 N.J. Laws, c. 13, § 3.1, as amended by    operate the Hudson & Manhattan Railroad and the World
c. 24; 1959 N. Y. Laws, c. 420, § 3.1.                        Trade Center. The statute in relevant part read: S

     Also in 1959, the two States enacted legislation              "The 2 States covenant and agree with each other
providing that upon either State's election the Port          and [*10] with the holders of any affected bonds, as
Authority would be authorized to purchase and own             hereinafter defined, that so long as any of such bonds
railroad passenger cars for the purpose of leasing them to    remain outstanding and unpaid and the holders thereof
[**1511] commuter railroads. 1959 N.J. Laws, c. 25;           shall not have given [***102] their consent as provided
1959 N. Y. Laws, c. 638. Bonds issued for this purpose        in their contract with the port authority, (a)... and (b)
would be guaranteed by the electing State. New York so        neither the States nor the port authority nor any
elected, N. Y. Const., Art. X, § 7, effective January 1,      subsidiary corporation in corporated for any of the
1962, and approximately $ 100 million of Commuter Car         purposes of this act will apply any of the rentals, tolls,
Bonds were issued by the Port Authority to purchase           fares, fees, charges, revenues or reserves, which have
about [*9] 500 air-conditioned passenger cars and eight       been or shall be pledged in whole or in part as security
locomotives used on the Penn Central and Long Island          for such bonds, for any railroad purposes whatsoever
Railroads.                                                    other than permitted purposes hereinafter set forth." 1962
                                                              N.J. Laws, c. 8, § 6; 1962 N.Y. Laws, c. 209, § 6. 9I
     E. The 1962 Statutory Covenant.In 1960 the
takeover of the Hudson & Manhattan Railroad by the                    9 Not at issue in the instant case is part (a) of § 6
Port Authority was proposed. This was a privately                     of the statutory covenant (omitted in the quoted
owned interstate electric commuter system then linking                material in the text), which promises that the
Manhattan, Newark, and Hoboken through the Hudson                     States will not impair the Port Authority's control
tubes. It had been in reorganization for many years, and              over its fees or services. This provision has not
in 1959 the Bankruptcy Court and the United States                    been repealed, even prospectively.
District Court had approved a plan that left it with cash
sufficient to continue operations for two years but with            The "permitted purposes" were defined to include (i)
no funds for capital expenditures. In re Hudson &             the Hudson & Manhattan as then existing, (ii) railroad
Manhattan R. Co., 174 F. Supp. 148 (SDNY 1959), aff'd         freight facilities, (iii) tracks and related facilities on Port
sub nom. Spitzer v. Stichman, 278 F.2d 402 (CA2              Authority vehicular bridges, and (iv) a passenger railroad
1960). A special committee of the New Jersey Senate was       facility if the Port Authority certified that it was
formed to determine whether the Port Authority was            "self-supporting" or, if not, that at the end of the
"fulfilling its statutory duties and obligations," App.       preceding calendar year the general reserve fund
                                                              contained the prescribed statutory amount, and that all the
                                                                                                                 Page 11
                                        431 U.S. 1, *10; 97 S. Ct. 1505, **1511;
                                      52 L. Ed. 2d 92, ***102; 1977 U.S. LEXIS 1

Port Authority's passenger revenues, including the             Bonds, or the ability of the Port Authority to fulfill its
Hudson & Manhattan, would not produce deficits in              commitments to bondholders. This § 7 certification was
excess of "permitted deficits."                                based on a projection [*12] that the annual net loss of
                                                               the PATH system would level off at about $ 6.6 million
     A passenger railroad would be deemed                      from 1969 to 1991. At the time the certification was
"self-supporting" if the amount estimated by the               made the general reserve fund contained $ 69 million,
Authority as average annual net income equaled or              and thus the projected PATH deficit was close to the
exceeded the average [**1512] annual debt service for          level of "permitted deficits" under the 1962 covenant.
the following decade. Though the covenant was not              134 N.J. Super., at 163, and n. 27, 338 A. 2d, at 855, and
explicit on the point, the States, the Port Authority, and     n. 27.
its bond counsel have agreed that any state subsidy might
be included in the computation of average annual net                The PATH fare in 1962 was 30 cents and has
income of the facility.                                        remained at that figure despite recommendations for
                                                               increase. App. 684a-686a. As a result of the
      [*11] "Permitted deficits," the alternative method       continuation of the low fare, PATH deficits have far
under permitted purpose (iv), was defined to mean that         exceeded the initial projection. Thus, although the
the annual estimated deficit, including debt service, of the   general reserve fund had grown to $ 173 million by 1973,
Hudson tubes and any additional non-self-sustaining            substantially increasing the level of permitted deficits to
railroad facility could not exceed one-tenth of the general    about $ 17 million, the PATH deficit had grown to $ 24.9
reserve fund, or 1% of the Port Authority's total bonded       million. In accordance with a stipulation of the parties,
debt.                                                          id., at 682a-683a, the trial court found that the PATH
                                                               deficit so exceeded the covenant's level of permitted
     The terms of the covenant were self-evident. Within       deficits that the Port Authority was unable to issue bonds
its conditions the covenant permitted, and perhaps even        for any new passenger railroad facility that was not
contemplated, additional Port Authority involvement in         self-supporting. 134 N.J. Super., at 163 n. 26, 338 A. 2d,
deficit rail mass transit as its financial position            at 855 n. 26. 10
strengthened, since the limitation of the covenant was
linked to, and would expand with, the general reserve                 10      Notwithstanding the "permitted deficits"
fund.                                                                 formula, the covenant permits use of Port
                                                                      Authority revenues for mass transit if 60% of the
     A constitutional attack on the legislation containing            bondholders give their consent. The procedures
the covenant was promptly launched. New Jersey and                    for obtaining such consent are provided in § 16
New York joined in the defense. The attack proved                     (b) of the Consolidated Bond Resolution. App.
unsuccessful. Courtesy Sandwich Shop, Inc. v. Port of                 802a-809a. The Port Authority commissioned a
New York Authority, 12 N.Y.2d 379, 190 N.E.2d 402,                  study by First Boston Corporation in 1971 that
appeal dismissed, 375 U.S. 78 (1963). See Kheel v. Port               proposed placing a surcharge on bridge and tunnel
of New York Authority, 331 F. Supp. 118 (SDNY 1971),                  tolls, with the extra revenues going to a special
aff'd, 457 F.2d 46 (CA2), cert. denied, 409 U.S. 983                 fund to secure bonds for mass transportation
(1972).                                                               projects. This proposal would not have
                                                                      diminished the historic reserves pledged to secure
     With the legislation embracing the covenant thus
                                                                      the bonds. The study concluded, however, that
effective, the Port Authority on September 1, 1962,
                                                                      some increase in the interest rates of existing
assumed the ownership and operating responsibilities of
                                                                      bonds would have been necessary to obtain a
the Hudson & Manhattan through a wholly owned
                                                                      favorable vote of the bondholders. Id., at
[***103] subsidiary, Port Authority Trans-Hudson
                                                                      696a-699a. There is some evidence in the record
Corporation (PATH). Funds necessary for this were
                                                                      that such a proposal could not win bondholder
realized by the successful sale of bonds to private
                                                                      approval, partly because the requisite procedures
investors accompanied by the certification required by §
                                                                      are unwieldy. Id., at 191a-192a.
7 of the Consolidated Bond Resolution that the operation
would not materially impair the credit standing of the               [**1513] F. Prospective Repeal of the Covenant.
Port Authority, the investment status of the Consolidated
                                                                                                                  Page 12
                                        431 U.S. 1, *12; 97 S. Ct. 1505, **1513;
                                      52 L. Ed. 2d 92, ***103; 1977 U.S. LEXIS 1

Governor Cahill of New Jersey and Governor Rockefeller        of the 1962 covenant, but its attitude changed with the
of New York in April 1970 jointly sought increased Port       election of a new Governor in 1973. In early 1974, when
Authority participation in mass transit. In November          bills were pending in the two States' legislatures to repeal
1972 they agreed upon a [*13] plan for expansion of the       the covenant [*14] retroactively, a national energy crisis
PATH system. This included the initiation of direct rail      was developing. On November 27, 1973, Congress had
service to Kennedy Airport and the construction of a line     enacted the Emergency Petroleum Allocation Act, 87
to Plainfield, N.J., by way of Newark Airport. The plan       Stat. 627, as amended, 15 U.S.C. § 751 et seq. (1970 ed.,
anticipated a Port Authority investment of something less     Supp. V). In that Act Congress found that the hardships
than $ 300 million out of a projected total cost of $ 650     caused by the oil shortage "jeopardize the normal flow of
million, with the difference to be supplied by federal and    commerce and constitute a national energy crisis which is
state grants. It also proposed to make the covenant           a threat to the public health, safety, and welfare." 87 Stat.
inapplicable with respect to bonds issued after the           628, 15 U.S.C. § 751 (a)(3). This time, proposals for
legislation went into effect. This program was enacted,       retroactive repeal of the 1962 covenant were passed by
effective May 10, 1973, and the 1962 covenant was             the legislature and signed by the Governor of each State.
thereby rendered inapplicable, or in effect repealed, with    1974 N.J. Laws, c. 25; 1974 N.Y. Laws, c. 993. 12
respect to bonds issued subsequent to the effective date of
the new legislation. 1972 N.J. Laws, c. 208; [***104]                12 Governor Wilson of New York, upon signing
1972 N.Y. Laws, c. 1003, as amended by 1973 N.Y.                     that State's repealer, observed:
Laws, c. 318. 11
                                                                           "It is with great reluctance that I approve a
       11 The introductory statement appended to the                 bill that overturns a solemn pledge of the State. I
       New Jersey bill recited:                                      take this extraordinary step only because it will
                                                                     lead to an end of the existing controversy over the
            "The bill is also designed to preclude the               validity of the statutory covenant, a controversy
       application of the 1962 covenant to holders of                that can only have an adverse affect [sic] upon the
       bonds newly issued after the effective date of this           administration and financing of the Port
       act, while maintaining in status quo the rights of            Authority, and because it will lead to a speedy
       the holders of the bonds issued after March 27,               resolution by the courts of the questions and
       1962 (the effective date of the 1962 covenant                 issues concerning the validity of the statutory
       legislation) but prior to the effective date of this          covenant. Because it is the province of the courts
       act." Id., at 707a.                                           to decide questions of constitutionality, I will not
                                                                     prevent the covenant issue from being brought
            Earlier in 1972 the New York Legislature had             before them, especially where it is the
       enacted, and the Governor had signed, a bill                  unanimously expressed desire of the members of
       repealing the 1962 covenant in its entirety. 1972             both houses of the New York State Legislature as
       N.Y. Laws, c. 1003. New Jersey did not adopt the              well as the expressed will of the Governor and
       necessary complementary legislation at that time.             both houses of the Legislature of the State of New
       The 1973 amendment to the New York                            Jersey to do so." App. 774a.
       legislation, noted in the text, was then enacted to
       conform to the New Jersey statute.                          On April 10, 1975, the Port Authority announced an
                                                              increase in its basic bridge and tunnel tolls designed to
      G. Retroactive Repeal of the Covenant. It soon          raise an estimated $ 40 million annually. App.
developed that the proposed PATH expansion would not          405a-407a, 419a-421a, 528a. This went into effect May
take place as contemplated in the Governors' 1972 plan.       5 and was, it was said, "[t]o increase [the Port
New Jersey was unwilling to increase its financial            Authority's] ability to finance vital mass transit
commitment in response to a sharp increase in the             improvements." Id., at 405a.
projected cost of constructing the Plaintield extension.
As a result the anticipated federal grant was not                  [**1514] II
approved. App. 717a.
                                                                  At the time the Constitution was adopted, and for
    New Jersey had previously prevented outright repeal       nearly a century thereafter, the Contract Clause was one
                                                                                                                 Page 13
                                       431 U.S. 1, *14; 97 S. Ct. 1505, **1514;
                                     52 L. Ed. 2d 92, ***104; 1977 U.S. LEXIS 1

of the few express limitations on state power. The many      the enactment of that statute, such a defaulting purchaser,
decisions of [*15] [***105] this Court involving the         under Texas law, could have reinstated his claim to the
Contract Clause are evidence of its important place in our   land upon written request and payment of delinquent
constitutional jurisprudence. Over the last century,         interest, unless rights of third parties had intervened.
however, the Fourteenth Amendment has assumed a far          This Court held that "[HN2] it is not every modification
larger place in constitutional adjudication concerning the   of a contractual promise that impairs the obligation of
States. We feel that the present role of the Contract        contract under federal law." Id., at 506-507. It observed
Clause is largely illuminated by two of this Court's         that the State "has the 'sovereign right... to protect the...
decisions. In each, legislation was sustained despite a      general welfare of the people'" and "'we must respect the
claim that it had impaired the obligations of contracts.     "wide discretion on the part of the legislature in
                                                             determining what is and what is not necessary,"'" id., at
      Home Building & Loan Assn. v. Blaisdell, 290 U.S.      508-509, [***106] quoting East New York Savings
398 (1934), is regarded as the leading case in the modern    Bank v. Hahn, 326 U.S. 230, 232-233 (1945). The Court
era of Contract Clause interpretation. At issue was the      recognized that "the power of a State to modify or affect
Minnesota Mortgage Moratorium Law, enacted in 1933,          the obligation of contract is not without limit," but held
during the depth of the Depression and when that State       that "the objects of the Texas statute make abundantly
was under severe economic stress, and appeared to have       clear that it impairs no protected right under the Contract
no effective alternative. The statute was a temporary        Clause." 379 U.S., at 509.
measure that allowed judicial extension of the time for
redemption; a mortgagor who remained in possession                Both of these cases eschewed a rigid application of
during the extension period was required to pay a            the Contract Clause to invalidate state legislation. Yet
reasonable income or rental value to the mortgagee. A        neither indicated that the Contract Clause was without
closely divided Court, in an opinion by Mr. Chief Justice    meaning in modern constitutional jurisprudence, or that
Hughes, observed that "emergency may furnish the             its limitation on state power [**1515] was illusory.
occasion for the exercise of power" and that the             Whether or not the protection of contract rights comports
"constitutional question presented in the light of an        with current views of wise public policy, the Contract
emergency is whether the power possessed embracees the       Clause remains a part of our written Constitution. We
particular exercise of it in response to particular          therefore must attempt to apply that constitutional
conditions." Id., at 426. It noted that the debates in the   provision to the instant case with due respect for its
Constitutional Convention were of little aid in the          purpose and the prior decisions of this Court.
construction of the Contract Clause, but that the general
purpose of the Clause was clear: to encourage trade and           [*17] III
credit by promoting confidence in the stability of
contractual obligations. Id., at 427-428. Nevertheless, a          [***LEdHR1A]          [1B]    [***LEdHR2]           [2]
State "continues to possess authority to safeguard the       [***LEdHR3A] [3A] [***LEdHR4A] [4A]We first
vital interests of its people.... This principle of          examine appellant's general claim that repeal of the 1962
harmonizing the constitutional prohibition with the          covenant impaired the obligation of the States' contract
necessary residuum of state power has had progressive        with the bondholders. It long has been established
recognition in the decisions of this Court." Id., at         that[HN3] the Contract Clause limits the power of the
434-435. The great clauses of the Constitution are to be     States to modify their own contracts as well as to regulate
considered in the [*16] light of our whole experience,       those between private parties. Fletcher v. Peck, 6 Cranch
and not merely as they would be interpreted by its           87, 137-139 (1810);Dartmouth College v. Woodward, 4
Framers in the conditions and with the outlook of their      Wheat. 518 (1819).Yet the Contract Clause does not
time. Id., at 443.                                           prohibit the States from repealing or amending statutes
                                                             generally, or from enacting legislation with retroactive
    This Court's most recent Contract Clause decision is     effects. 13 Thus, as a preliminary matter, appellant's claim
El Paso v. Simmons, 379 U.S. 497 (1965). That case           requires a determination that the repeal has the effect of
concerned a 1941 Texas statute that limited to a 5-year      impairing a contractual obligation.
period the reinstatement rights of an interest-defaulting
purchaser of land from the State. For many years prior to           13    [***LEdHR3A] [3B] [***LEdHR4A] [4B]
                                                                                                                 Page 14
                                         431 U.S. 1, *17; 97 S. Ct. 1505, **1515;
                                   52 L. Ed. 2d 92, ***LEdHR4A; 1977 U.S. LEXIS 1

             The Contract Clause is in the phrase of the              a contract when the language and circumstances
       Constitution which contains the prohibition                    evince a legislative intent to create private rights
       against any State's enacting a bill of attainder or            of a contractual nature enforceable against the
       ex post facto law. Notwithstanding Mr. Chief                   State. Compare Dodge v. Board of Education,
       Justice Marshall's reference to these two other                302 U.S. 74, 78-79 (1937), with Indiana ex rel.
       forbidden categories in Fletcher v. Peck, 6                    Anderson v. Brand, 303 U.S. 95, 104-105 (1938).
       Cranch, at 138-139, it is clear that they limit the            In addition, statutes governing the interpretation
       powers of the States only with regard to the                   and enforcement of contracts may be regarded as
       imposition of punishment. Cummings v.                          forming part of the obligation of contracts made
       Missouri, 4 Wall. 277, 322-326 (1867); Calder v.               under their aegis. See n. 17, infra. See generally
       Bull, 3 Dall. 386, 390-391 (1798). The Due                     Hale, The Supreme Court and the Contract
       Process Clause of the Fourteenth Amendment                     Clause: II, 57 Harv. L. Rev. 621, 663-670 (1944).
       generally does not prohibit retrospective civil
       legislation, unless the consequences are                       15    [***LEdHR6A] [6B]
       particularly "harsh and oppressive." Welch v.
                                                                            Between the enactment of the 1962 covenant
       Henry, 305 U.S. 134, 147 (1938). See Usery v.
                                                                      and its retrospective repeal in 1974, the Port
       Turner Elkhorn Mining Co., 428 U.S. 1, 14-20
                                                                      Authority issued and sold to the public $ 1,260
       (1976).
                                                                      million of Consolidated Bonds. The Fortieth and
                                                                      Forty-first Series, for which appellant is trustee,
                                                                      were issued after the 1973 prospective repeal and
     [***LEdHR5A] [5A] [***LEdHR6A] [6A]                              prior to the retrospective repeal. The holders of
[***LEdHR7] [7]In this case the obligation was itself                 those bonds were not parties to the 1962
created by a statute, the 1962 legislative covenant. It is            covenant, since the States undoubtedly had the
unnecessary, however, to dwell on the criteria for                    power to repeal the covenant prospectively.
determining whether state legislation gives rise to a                 SeeOgden v. Saunders, 12 Wheat. 213 (1827).
contractual obligation. 14 The trial court [*18] [***107]             The subsequent bondholders arguably are like
found, 134 N.J. Super., at 183 n. 38, 338 A. 2d, at 866 n.            third-party beneficiaries of the covenant. There is
38, and appellees do not deny, that the 1962 covenant                 testimony in the record that they were indirectly
constituted a contract between the two States and the                 protected because the bonds outstanding at the
holders of the Consolidated Bonds issued between 1962                 time of the prospective repeal (in excess of $ 1
and the 1973 prospective repeal. 15 The intent to make a              billion) could not be expected to be retired in the
contract is clear from the statutory language: "The 2                 foreseeable future. App. 1105a. We need not
States covenant and agree with each other and with the                decide whether that indirect relationship supports
holders of any affected bonds...." 1962 N.J. Laws, c. 8, §            standing to challenge the retroactive repeal,
6; 1962 N. Y. Laws, c. 209, § 6. Moreover, as the                     however. Appellant also sued as a holder of
chronology set forth above reveals, the purpose of the                Consolidated Bonds (some $ 72 million) issued
covenant was to invoke the constitutional protection of               between 1962 and 1973. Id., at 56a-57a.
the Contract [**1516] Clause as security against repeal.
                                                                     The parties sharply disagree about the value of the
In return for their promise, the States received the benefit
                                                               1962 [*19] covenant to the bondholders. Appellant
they bargained for: public marketability of Port Authority
                                                               claims that after repeal the secondary market for affected
bonds to finance construction of the World Trade Center
                                                               bonds became "thin" and the price fell in relation to other
and acquisition of the Hudson & Manhattan Railroad. We
                                                               formerly comparable bonds. This claim is supported by
therefore have no doubt that the 1962 covenant has been
                                                               the trial court's finding that "immediately following
properly characterized as a contractual obligation of the
                                                               repeal and for a number of months thereafter the market
two States.
                                                               price for Port Authority bonds was adversely affected."
       14    [***LEdHR5A] [5B]                                 134 N.J. Super., at 180, 338 A. 2d, at 865. Appellees
                                                               respond that the bonds nevertheless retained an "A"
            [HN4] In general, a statute is itself treated as   rating from the leading evaluating services and that after
                                                                                                            Page 15
                                        431 U.S. 1, *19; 97 S. Ct. 1505, **1516;
                                  52 L. Ed. 2d 92, ***LEdHR6A; 1977 U.S. LEXIS 1

an initial adverse effect they regained a comparable price       adopt the terms of their bargain in reliance on the
position in the market. Findings of the trial court support      law in effect at the time the agreement is reached.
these claims as well. Id., at 179-182, 338 A. 2d, at
864-866. The fact is that no one can be sure precisely                   [***LEdHR9A] [9B]It is not always
how much financial loss the bondholders suffered.                unconstitutional, however, for changes in
Factors unrelated to repeal may have influenced price. In        statutory remedies to affect pre-existing contracts.
addition, the market may not have reacted fully, even as         During the early years when the Contract Clause
yet, to the covernant's repeal, because of the pending           was regarded as an absolute bar to any
litigation and the possibility that the repeal would be          impairment, this result was reached by treating
nullified by the courts.                                         remedies in a manner distinct from substantive
                                                                 contract obligations. Thus, for example, a State
    [***LEdHR8A]         [8A]    [***LEdHR9A]         [9A]       could abolish imprisonment for debt because
[***LEdHR10A] [10A]In any event, the question of                 elimination of this remedy did not impair the
valuation need not be resolved in the instant case because       underlying obligation. Penniman's Case, 103 U.S.
the State has made no effort to compensate the                   714 (1881); Mason v. Haile, 12 Wheat. 370
bondholders for any loss [***108] sustained by the               (1827); see Sturgesv.Crownishield, 4 Wheat. 122,
repeal. 16 As a security provision, the covenant was not         200-201 (1819).
superfluous; it limited the Port Authority's deficits and
                                                                        [***LEdHR10A] [10B]Yet it was also
thus protected the general reserve fund from depletion.
                                                                 recognized very early that the distinction between
Nor was the covenant merely modified or replaced by an
                                                                 remedies and obligations was not absolute.
arguably comparable security provision. Its outright
                                                                 Impairment of a remedy was held to be
repeal totally eliminated an important security provision
                                                                 unconstitutional if it effectively reduced the value
and thus impaired the obligation of the States' contract.
                                                                 of substantive contract rights. Greenv. Biddle, 8
See Richmond Mortgage & Loan Corp. v. Wachovia
                                                                 Wheat. 1, 75-76, 84-85 (1823). See also Bronson
Bank & Trust Co., 300 U.S. 124, 128-129 (1937). 17
                                                                 v. Kinzie, 1 How. 311, 315-318 (1843); Von
       16    [***LEdHR8A] [8B]                                   Hoffman v. City of Quincy, 4 Wall., at 552-554.
                                                                 More recent decisions have not relied on the
             [HN5] Contract rights are a form of property        remedy/obligation distinction, primarily because
       and as such may be taken for a public purpose             it is now recognized that obligations as well as
       provided that just compensation is paid.                  remedies may be modified without necessarily
       Contributors to Pennsylvania Hospital v.                  violating the Contract Clause. El Paso v.
       Philadelphia, 245 U.S. 20 (1917); see El Paso v.          Simmons, 379 U.S. at 506-507, and n. 9; Home
       Simmons, 379 U.S. 497, 533-534 (1965) (Black,             Building & Loan Assn. v. Blaisdell, 290 U.S., at
       J., dissenting).                                          429-435.
       17 The obligations of a contract long have been
       regarded as including not only the express terms               Although now largely an outdated formalism,
       but also the contemporaneous state law pertaining         the remedy/obligation distinction may be viewed
       to interpretation and enforcement. "This Court            as approximating the result of a more
       has said that 'the laws which subsist at the time         particularized inquiry into the legitimate
       and place of the making of a contract, and where          expectations of the contracting parties. The
       it is to be performed, enter into and form a prt of       parties may rely on the continued existence of
       it, as if they were expressly referred to or              adequate statutory remedies for enforcing their
       incorporated in its terms.'" Home Building &              agreement, but they are unlikely to expect that
       Loan Assn. v. Blaisdell, 290 U.S. 398, 429-430            state law will remain entirely static. Thus, a
       (1934), quoting Von Hoffman v. City of Quincy,            reasonable modification of statutes governing
       4 Wall. 535, 550 (1867). See also Ogden v.                contract remedies is much less likely to upset
       Saunders, 12 Wheat., at 259-260, 297-298                  expectations than a law adjusting the express
       (opinions of Washington and Thompson, JJ.).               terms of an agreement. In this respect, the repeal
       This principle presumes that contracting parties          of the 1962 covenant is to be seen as a serious
                                                                                                                 Page 16
                                         431 U.S. 1, *19; 97 S. Ct. 1505, **1516;
                                   52 L. Ed. 2d 92, ***LEdHR10A; 1977 U.S. LEXIS 1

         disruption of the bondholders' expectations.          power to adopt general regulatory measures without
                                                               being concerned that private contracts will be impaired,
      [*20] [**1517] The trial court recognized that           or even destroyed, as a result. Otherwise, one would be
there was an impairment in this case: "To the extent that      able to obtain immunity from state regulation by making
the repeal of the covenant authorizes the Authority to         private contractual arrangements. This principle is
assume greater deficits for such [*21] purposes, it            summarized in Mr. Justice Holmes' well-known dictum:
permits a diminution of the pleadged revenues and              "One whose rights, such as they are, are subject to state
reserves and may be said to constitute an impairment of        restriction, cannot remove them from the power of the
the states' contract with the bondholders." 134 N.J.           State by making a contract about them." Hudson Water
Super., at 183, 338 A. 2d, at 866.                             Co. v. McCarter, 209 U.S. 349, 357 (1908).18

    Having thus established that the repeal impaired a                18 Accord: Stephenson v. Binford, 287 U.S.
contractual obligation [***109] of the States, we turn to             251, 276 (1932); Manigault v. Springs, 199 U.S.
the question whether that impairment violated the                     473, 480 (1905). See Home Building & Loan
Contract Clause.                                                      Assn. v. Blaisdell, 290 U.S., at 437-438.

    IV

   [***LEdHR11] [11][HN6] Although the Contract                  [***LEdHR14A] [14A]Yet private contracts are not
Clause appears literally to proscribe "any" impairment,        subject to unlimited modification under the police power.
this Court observed in Blaisdell that "the prohibition is      The Court in Blaisdell recognized that laws intended to
not an absolute one and is not to be read with literal         regulate existing contractual relationships must serve a
exactness like a mathematical formula." 290 U.S., at           legitimate public purpose. 290 U.S., at 444-445.A State
428.Thus, a finding that there has been a technical            could not "adopt as its policy the repudiation of debts or
impairment is merely a preliminary step in resolving the       the [**1518] destruction of contracts or the denial of
more difficult question whether that impairment is             means to enforce them." Id., at 439. Legislation adjusting
permitted under the Constitution. In the instant case, as      the rights and responsibilities of contracting parties must
in Blaisdell, we must attempt to reconcile the strictures of   be upon reasonable conditions [***110] and of a
the Contract Clause with the "essential attributes of          character appropriate to the public purpose justifying its
sovereign power," id., at 435, necessarily reserved by the     adoption. Id., at 445-447.19 As is customary in reviewing
States to safeguard the welfare of their citizens. Id., at     economic and social [*23] regulation, however, courts
434-440.                                                       properly defer to legislative judgment as to the necessity
                                                               and reasonableness of a particular measure. East New
  [***LEdHR12] [12]The trial court concluded that repeal       York Savings Bank v. Hahn, 326 U.S. 230 (1945).
of the 1962 covenant was a valid exercise of New
Jersey's police power because repeal served important                 19    [***LEdHR14A] [14B]
public interests in mass transportation, energy
conservation, and environmental protection. 134 N.J.                        Blaisdell suggested further limitations that
Super., at 194-195, 338 A. 2d, at 873.Yet the Contract                have since been subsumed in the overall
Clause limits otherwise legitimate exercises of state                 determination of reasonableness. The legislation
legislative authority, and the existence of an important              sustained in Blaisdell was adopted pursuant to a
public interest is not always sufficient to overcome that             declared emergency in the State and strictly
limitation. "Undoubtedly, whatever is reserved of state               limited in duration. Subsequent decisions struck
power must be consistent with the fair intent of the                  down state laws that were not so limited. W.B.
constitutional limitation of that power." Blaisdell, 290              Worthen Co. v. Thomas, 292 U.S. 426, 432-434
U.S., at 439. Moreover, the [*22] scope of the State's                (1934) (relief not limited as to "time, amount,
reserved power depends on the nature of the contractual               circumstances, or need"); Treigle v. Acme
relationship with which the challenged law conflicts.                 Homestead Assn., 297 U.S. 189, 195 (1936) (no
                                                                      emergency or temporary measure). Later
  [***LEdHR13] [13]The States must possess broad                      decisions abandoned these limitations as absolute
                                                                      requirements. Veix v. Sixth Ward Building &
                                                                                                                Page 17
                                        431 U.S. 1, *23; 97 S. Ct. 1505, **1518;
                                  52 L. Ed. 2d 92, ***LEdHR14A; 1977 U.S. LEXIS 1

       Loan Assn., 310 U.S., 32, 39-40 (1940)                 spending powers. 21 [***111] Such formalistic
       (emergency need not be declared and relief             distinctions perhaps cannot be dispositive, but they
       measure need not be temporary); East New York          contain an important element of truth. Whatever the
       Savings Bank v. Hahn, 326 U.S. 230 (1945)              propriety of a State's binding itself to a [**1519] future
       (approving 10th extension of one-year mortgage         course of conduct in other contexts, the power to enter
       moratorium). Undoubtedly the existence of an           into effective financial contracts cannot be questioned.
       emergency and the limited duration of a relief         Any financial obligation could be regarded in theory as a
       measure are factors to be assessed in determining      relinquishment of the State's spending power, since
       the reasonableness of an impairment, but they          money spent to repay debts is not available for other
       cannot be regarded as essential in every case.         purposes. Similarly, the taxing power may have to be
                                                              exercised if debts are to be repaid. Notwithstanding these
                                                              effects, the Court has regularly held that the States are
                                                              bound by their debt contracts. 22
    [***LEdHR15] [15]When a State impairs the
obligation of its own contract, the reserved-powers                  21 In New Jersey v. Wilson, 7 Caranch 164
doctrine has a different basis. The initial inquiry                  (1812), the Court held that a State could properly
concerns the ability of the State to enter into an                   grant a permanent tax exemption and that the
agreement that limits its power to act in the future. As             Contract Clause prohibited any impairment of
early as Fletcher v. Peck, the Court considered the                  such an agreement. This holding has never been
argument that "one legislature cannot abridge the powers             repudiated, although tax exemption contracts
of a succeeding legislature." 6 Cranch, at 135. It is often          generally have not received a sympathetic
stated that "the legislature cannot bargain away the police          construction. See B. Wright, The Contract Clause
power of a State." Stone v. Mississippi, 101 U.S. 814,               of the Constitution 179-194 (1938).
817 (1880). 20 This doctrine requires a determination of
the State's power to create irrevocable contract rights in                By contrast, the doctrine that a State cannot
the first place, rather than an inquiry into the purpose or          contract away the power of eminent domain has
reasonableness of the subsequent impairment. In short,               been established since West River Bridge Co. v.
the Contract Clause does not require a State to adhere to a          Dix, 6 How. 507 (1848). See Contributors to
contract that surrenders an essential attribute of its               Pennsylvania Hospital v. Philadelphia, 245 U.S.,
sovereignty.                                                         at 23-24. The doctrine that a State cannot be
                                                                     bound to a contract forbidding the exercise of its
       20     Stone v. Mississippi sustained the State's             police power is almost as old. See n. 20, supra.
       revocation of a 25-year charter to operate a
       lottery. Other cases similarly have held that a
       State is without power to enter into binding
                                                                     22    State laws authorizing the impairment of
       contracts not to exercise its police power in the
                                                                     municipal bond contracts have been held
       future. E. g., Pierce Oil Corp.v. City of Hope,
                                                                     unconstitutional.   W.B. Worthen Co. v.
       248 U.S. 498, 501 (1919); Atlantic Coast Line R.
                                                                     Kavanaugh, 295 U.S. 56 (1935); Louisiana v.
       Co. v. Goldsboro, 232 U.S. 548, 558 (1914);
                                                                     Pilsbury, 105 U.S. 278 (1882). Similarly, a tax on
       Douglas v. Kentucky, 168 U.S. 488, 502-505
                                                                     municipal bonds was held unconstitutional
       (1897). See Home Building & Loan Assn. v.
                                                                     because its effect was to reduce the contractual
       Blaisdell, 290 U.S., at 436-437.
                                                                     rate of interest. Murray v. Charleston, 96 U.S.
       [***LEdHR16] [16]In deciding whether a State's                432, 443-446 (1878).
contract was invalid ab initio under the reserved-powers
                                                                          A number of cases have held that a State may
doctrine, earlier decisions relied on distinctions among
                                                                     not authorize a municipality to borrow money and
the various powers of the State. Thus, the [*24] police
                                                                     then restrict its taxing power so that the debt
power and the power of eminent domain were among
                                                                     cannot be repaid. Louisiana ex rel. Hubert v. New
those that could not be "contracted away," but the State
                                                                     Orleans, 215 U.S. 170, 175-178 (1909); Wolff v.
could bind itself in the future exercise of the taxing and
                                                                     New Orleans, 103 U.S. 358, 365-368 (1881); Von
                                                                                                                 Page 18
                                        431 U.S. 1, *24; 97 S. Ct. 1505, **1519;
                                      52 L. Ed. 2d 92, ***111; 1977 U.S. LEXIS 1

       Hoffman v. City of Quincy, 4 Wall., at 554-555.         an impairment may be constitutional if it is reasonable
       See Fisk v. Jefferson Police Jury, 116 U.S. 131         and necessary to serve an important public purpose. In
       (1885) (contract for payment of public officer).        applying [*26] this standard, however, complete
                                                               deference to a legislative assessment of reasonableness
           See also Wood v. Lovett, 313 U.S. 362               and necessity is not appropriate because the State's
       (1941); Indiana ex rel. Anderson v. Brand, 303          self-interest is at stake. A governmental entity can
       U.S. 95 (1938).                                         always find a use for extra money, especially when taxes
                                                               do not have to be raised. If a State could reduce its
      [***LEdHR17A] [17A]The instant case involves a           financial obligations whenever it wanted to spend the
financial obligation and thus as a threshold matter may        money for what it regarded as an important public
not be said automatically to fall [*25] within the             purpose, the Contract Clause would provide no protection
reserved powers that cannot be contracted away. 23 Not         at all. 25
every security provision, however, is necessarily
financial. For example, a revenue bond might be secured               24    See El Paso v. Simmons, 379 U.S. 497
by the State's promise to continue operating the facility in          (1965); Faitoute Iron & Steel Co. v. City of
question; yet such a promise surely could not validly be              Asbury Park, 316 U.S. 502 (1942); Louisiana v.
construed to bind the State never to close the facility for           New Orleans, 102 U.S. 203 (1880).
health or safety reasons. The security provision at issue
here, however, is different: The States promised that
revenues and reserves securing the bonds would not be
depleted by the Port Authority's operation of                         25 For similar reasons, a dual standard of review
deficit-producing passenger railroads beyond the level of             was applied under the Fifth Amendment to federal
"permitted deficits." Such a promise is purely financial              legislation abrogating contractual gold clauses.
and thus not necessarily a compromise of the State's                  "There is a clear distinction between the power of
reserved powers.                                                      the Congress to control or interdict the contracts
                                                                      of private parties when they interfere with the
       23    [***LEdHR17A] [17B]                                      exercise of its constitutional authority, and the
                                                                      power of the Congress to alter or repudiate the
            "The truth is, States and cities, when they               substance of its own engagements when it has
       borrow money and contract to repay it with                     borrowed money under the authority which the
       interest, are not acting as sovereignties. They                Constitution confers." Perry v. United States, 294
       come down to the level of ordinary individuals.                U.S. 330, 350-351 (1935). Cf. Norman v.
       Their contracts have the same meaning as that of               Baltimore & O.R. Co., 294 U.S. 240, 304-305
       similar contracts between private persons. Hence,              (1935). See also Lynch v. United States, 292 U.S.
       instead of there being in the undertaking of a State           571, 580 (1934) (need for money is no excuse for
       or city to pay, a reservation of a sovereign right to          repudiating contractual obligations); Note, The
       withhold payment, the contract should be                       Constitutionality of the New York Municipal
       regarded as an assurance that such a right will not            Wage Freeze and Debt Moratorium: Resurrection
       be exercised. A promise to pay, with a reserved                of the Contract Clause, 125 U. Pa. L. Rev. 167,
       right to deny or change the effect of the promise,             188-191 (1976).
       is an absurdity." Murray v. Charleston, 96 U.S., at
       445.                                                          [**1520] The trial court recognized to an extent the
                                                               special status of a State's financial obligations when it
                                                               held that total repudiation, presumably for even a
                                                               worthwhile public purpose, would be unconstitutional.
  [***LEdHR18] [18]Of course, to say that the financial        But the trial court regarded the protection of the Contract
restrictions of the 1962 covenant were valid when              Clause as available only in such an extreme case: "The
adopted does not finally resolve this case. The Contract       states' inherent power to protect the public welfare may
Clause is not an absolute bar to subsequent modification       be validly exercised under the Contract Clause even if it
of a [***112] State's own financial obligations. 24 As         impairs a contractual obligation so long as it does not
with laws impairing the obligations of private contracts,      destroy it." 134 N.J. Super., at 190, 338 A. 2d, at
                                                                                                                 Page 19
                                       431 U.S. 1, *26; 97 S. Ct. 1505, **1520;
                                     52 L. Ed. 2d 92, ***112; 1977 U.S. LEXIS 1

870-871.                                                     state court conducted a hearing and found that the
                                                             municipality could not otherwise pay off its creditors and
  [***LEdHR19] [19]The trial court's "total destruction"     that the plan was in the best interest of all creditors. Id.,
test is based on what we think is a misreading of W.B.       at 504.
Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935).26 In the
first place, the impairment held [*27] unconstitutional in         [*28] Under the specific composition plan at issue
Kavanaugh was one that affected the value of a security      in Faitoute, the holders of revenue bonds received new
provision, and certainly not every bond would have been      securities bearing lower interest rates and later maturity
worthless. More importantly, Mr. Justice Cardozo             dates. This Court, however, rejected the dissenting
needed only to state an "outermost limits" test in the       bondholders' Contract Clause objections. The reason was
Court's opinion, id., at 60, because the impairment was so   that the old bonds represented only theoretical rights; as a
egregious. [***113] He expressly recognized that the         practical matter the city could not raise its taxes enough
actual line between permissible and impermissible            to pay off its creditors under the old contract terms. The
impairments could well be drawn more narrowly. Thus          composition plan enabled the city to meet its financial
the trial court was not correct when it drew the negative    obligations more effectively. "The necessity compelled
inference that any impairment less oppressive than the       [**1521] by unexpected financial conditions to modify
one in Kavanaugh was necessarily constitutional. The         an original arrangement for discharging a city's debt is
extent of impairment is certainly a relevant factor in       implied in every such obligation for the very reason that
determining its reasonableness. But we cannot sustain the    thereby the obligation is discharged, not impaired." Id., at
repeal of the 1962 covenant simply because the               511. Thus, the Court found that the composition plan was
bondholders' rights were not totally destroyed.              adopted with the purpose and effect of protecting the
                                                             creditors, as evidenced by their more than 85% approval.
       26 In Kavanaugh, the State changed its statutory      Indeed, the market value of the bonds increased sharply
       procedure for enforcing certain municipal             as a result of the plan's adoption. Id., at 513.
       assessments against property owners. The holders
       of bonds for which the assessments were pledged            It is clear that the instant case involves a much more
       as security were found to have contract rights in     serious impairment than occurred in Faitoute. No one has
       the previous statutory scheme.             Without    suggested here that the States acted for the purpose of
       classifying the enforcement statutes as substantive   benefiting the bondholders, and there is no serious
       or remedial, the Court held the change                contention that the value of the bonds was enhanced by
       unconstitutional because it "[took] from the          repeal of the 1962 covenant. Appellees recognized that it
       mortgage the quality of an acceptable investment      would have been impracticable to obtain consent of the
       for a rational investor." 295 U.S., at 60. In the     bondholders for such a change in the 1962 covenant,
       instant case the State has repudiated an express      Brief for Appellees 97-98, even though only 60%
       promise rather than one implied from the statutory    approval would have been adequate. See n. 10, supra.
       scheme in effect at the time of the contract. Thus,   We therefore conclude that repeal of the 1962 covenant
       the instant case may be regarded as a more serious    cannot be sustained on the basis of this Court's prior
       abrogation of the bondholders' expectations than      decisions in Faitoute and other municipal bond cases.
       occurred in Kavanaugh. See n. 17, supra.
                                                                 V
      The only time in this century that alteration of a
municipal bond contract has been sustained by this Court           [***LEdHR1A]       [1C]     [***LEdHR20]         [20]
was in Faitoute Iron & Steel Co. v. City of Asbury Park,     [***LEdHR21A] [21A]Mass transportation, energy
316 U.S. 502 (1942). That case involved the New Jersey       conservation, and environmental [***114] protection
Municipal Finance Act, which provided that a bankrupt        are goals that are important and of legitimate public
local government could be placed in receivership by a        concern. Appellees contend that these goals are so [*29]
state agency. A plan for the composition of creditors'       important that any harm to bondholders from repeal of
claims was required to be approved by the agency, the        the 1962 covenant is greatly outweighed by the public
municipality, and 85% in amount of the creditors. The        benefit. We do not accept this invitation to engage in a
plan would be binding on nonconsenting creditors after a     utilitarian comparison of public benefit and private loss.
                                                                                                                 Page 20
                                       431 U.S. 1, *29; 97 S. Ct. 1505, **1521;
                                     52 L. Ed. 2d 92, ***114; 1977 U.S. LEXIS 1

Contrary to Mr. Justice Black's fear, expressed in sole      is a matter for legislative discretion. But a State is not
dissent in El Paso v. Simmons, 379 U.S., at 517, the         completely free to consider impairing the obligations
Court has not "balanced away" the limitation on state        [*31] of its own contracts on a par with other policy
action imposed by the Contract Clause. Thus a State          alternatives. Similarly, a State is not free to impose a
cannot refuse to meet its legitimate financial obligations   drastic impairment when an evident and more moderate
simply because it would prefer to spend the money to         course would serve its purposes equally well. In El Paso
promote the public good rather than the private welfare of   v. Simmons, supra, the imposition of a five-year statute
its creditors. We can only sustain the repeal of the 1962    of limitations on what was previously a perpetual right of
covenant if that impairment was both reasonable and          redemption was regarded by this Court as "quite clearly
necessary to serve the admittedly important purposes         necessary" to achieve the State's vital interest in the
claimed by the State. 27                                     orderly administration of its school lands program. 379
                                                             U.S., at 515-516. In the instant case the State has failed to
       27    [***LEdHR21A] [21B]                             demonstrate that repeal of the 1962 covenant was
                                                             similarly necessary.
             The dissent suggests, post, at 41-44, that
       such careful scrutiny is unwarranted in this case            28 If in fact the States sought to divert only new
       because the harm to bondholders is relatively                revenues to subsidize mass transit, then the
       small. For the same reason, however, contractual             covenant could have been amended to exclude the
       obligations of this magnitude need not impose                additional bridge and tunnel tolls from the
       barriers to changes in public policy. The States             revenue use limitation that was imposed. Such a
       remain free to exercise their powers of eminent              change would not have reduced the covenant to a
       domain to abrogate such contractual rights, upon             nullity because it would have continued to prevent
       payment of just compensation. See n. 16, supra.              the diminution of revenues and reserves that
                                                                    historically secured the bonds. And even if the
        The more specific justification offered for the             plan contemplated use of current revenues and
repeal of the 1962 covenant was the States' plan for                reserves, the formula for computing "permitted
encouraging users of private automobiles to shift to                deficits" perhaps could have been modified
public transportation. The States intended to discourage            without totally abandoning an objective limitation
private automobile use by raising bridge and tunnel tolls           on the Port Authority's involvement in deficit
and to use the extra revenue from those tolls to subsidize          mass transit. Finally, the procedures for obtaining
improved commuter railroad service. Appellees contend               bondholder approval could have been modified so
that repeal of the 1962 covenant was necessary to                   that such consent would present a feasible means
implement this plan because the new mass transit                    of undertaking new projects. See n. 10, supra.
facilities could not possibly be self-supporting and the
covenant's "permitted deficits" level had already been                    Of course, we express no opinion as to
exceeded. We reject this justification because the repeal           whether any of these lesser impairments would be
was neither necessary to achievement of the plan nor                constitutional.
reasonable in light of the circumstances.

      [***LEdHR22] [22]The determination of necessity
can be considered on two levels. First, it cannot be said           29 Transportation control strategies are available
that total repeal of the covenant [*30] was essential; a            that do not require direct application of revenues
less drastic modification would have permitted the                  from bridge and tunnel tolls to subsidize mass
contemplated plan without entirely removing the                     transit. In calling for air pollution abatement
covenant's limitations on the use of Port Authority                 measures in New Jersey, the Administrator of the
revenues and reserves to subsidize commuter railroads. 28           Environmental Protection Agency encouraged
Second, without [**1522] modifying the covenant at all,             "close examination" of such measures as, inter
the States could have adopted alternative means of                  alia, "State taxes to encourage VMT [vehicle
achieving their twin goals of discouraging automobile use           miles traveled] reductions while raising revenues
and improving [***115] mass transit. 29 Appellees                   to benefit mass transit" and realignment of toll
contend, however, that choosing among these alternatives            structures by "elimination of commuter discounts"
                                                                                                                Page 21
                                       431 U.S. 1, *31; 97 S. Ct. 1505, **1522;
                                     52 L. Ed. 2d 92, ***115; 1977 U.S. LEXIS 1

       and "possibly an increase in tolls during peak        Port Authority into greater involvement in deficit mass
       commuting times to encourage carpools." 38 Fed.       transit.
       Reg. 31389 (1973). Thus, the States could
       discourage automobile use through taxes on                   [**1523] During the 12-year period between
       gasoline or parking, for example, and use the         adoption of the covenant and its repeal, public perception
       revenues to subsidize mass transit projects so they   of the importance of mass transit undoubtedly grew
       would be "self-supporting" within the meaning of      because of increased general concern with environmental
       the covenant. Bridge and tunnel tolls could be        protection and energy conservation. But these concerns
       increased for commuters and decreased at other        were not unknown in 1962, and the subsequent changes
       times, so that there would be no excess revenue       were of degree and not of kind. We cannot say that these
       for purposes of the General Bridge Act of 1946,       changes caused the covenant to have a substantially
       33 U.S.C. § 526.                                      different impact in 1974 than when it was adopted in
                                                             1962. And we cannot conclude that the repeal was
      We also cannot conclude that repeal of the covenant    reasonable in the light of changed circumstances.
was reasonable in light of the surrounding circumstances.
In this regard a comparison with El Paso v. Simmons,             We therefore hold that the Contract Clause of the
supra, again is instructive. There a 19th century statute    United States Constitution prohibits the retroactive repeal
had effects that were unforeseen and unintended by the       of the 1962 covenant. The judgment of the Supreme
legislature when originally adopted. As a result             Court of New Jersey is reversed.
speculators were placed in a position to obtain windfall
                                                                 It is so ordered.
benefits. The Court held that adoption of a statute of
limitation was a reasonable means to "restrict a party to          MR. JUSTICE STEWART took no part in the
those gains reasonably to be expected from the contract"     decision of this case.
when it was adopted. 379 U.S., at 515. 30
                                                                 MR. JUSTICE POWELL took no part in the
       30     This Court previously has regarded the         consideration or decision of this case.
       elimination of unforeseen windfall benefits as a
       reasonable basis for sustaining changes in            CONCUR BY: BURGER
       statutory deficiency judgment procedures. These
       changes were adopted by several States when           CONCUR
       unexpected reductions in property values during
       the Depression permitted some mortgagees to
       recover far more than their legitimate entitlement.   MR. CHIEF JUSTICE BURGER, concurring.
       See Gelfert v. National City Bank, 313 U.S. 221,
       233-235 (1941); Honeyman v. Jacobs, 306 U.S.              In my view, to repeal the 1962 covenant without
       539, 542-543 (1939); Richmond Mortgage &              running afoul of the constitutional prohibition against the
       Loan Corp. v. Wachovia Bank & Trust Co., 300          impairment of contracts, the State must demonstrate that
       U.S. 124, 130-131 (1937).                             the impairment was essential to the achievement of an
                                                             important state purpose. Furthermore, the State must
      By contrast, in the instant case the need for mass     show that it did not know and could not have known the
transportation in the New York metropolitan area was not     impact of the contract on that state interest at the time
a new development, and the likelihood that publicly          that the contract was made. So reading the Court's
owned commuter railroads would produce substantial           opinion, I join it.
deficits was well known. As early as 1922, over a half
century ago, there were pressures to involve the Port             =P1100*33 For emphasis, I note that the Court
Authority in mass transit. It was with [*32] full            pointedly does not hold that, on the facts of this case, any
knowledge of these concerns that the 1962 covenant was       particular "less drastic modification" would pass
adopted. Indeed, the covenant was specifically intended      constitutional muster, ante, at 30, and n. 28.
to protect the pledged revenues and reserves against the
possibility that such concerns [***116] would lead the       DISSENT BY: BRENNAN
                                                                                                                     Page 22
                                         431 U.S. 1, *32; 97 S. Ct. 1505, **1523;
                                       52 L. Ed. 2d 92, ***116; 1977 U.S. LEXIS 1

DISSENT                                                         conclusion that the State acted unreasonably in seeking to
                                                                relieve its citizens from the strictures of this earlier
     MR. JUSTICE BRENNAN, with whom MR.                         legislative policy.
JUSTICE WHITE and MR. JUSTICE MARSHALL join,
dissenting.                                                         A

      Decisions of this Court for at least a century have            In an era when problems of municipal planning
construed the Contract Clause largely to be powerless in        increasingly demand regional rather than local solutions,
binding a State to contracts limiting the authority of          the Port Authority provides the New York-New Jersey
successor legislatures to enact laws in furtherance of the      community with a readymade, efficient regional entity
health, safety, and similar collective interests of the         encompassing some 1,500 square miles surrounding the
polity. In short, those decisions established the principle     Statute of Liberty. As the Court notes, from the outset
that lawful exercises of a State's police powers stand          public officials of both New York and New Jersey were
paramount to private rights held under contract. Today's        well aware of the Authority's heavy dependence on
decision, in invalidating the New Jersey Legislature's          public financing. Consequently, beginning in the decade
1974 repeal of its predecessor's 1962 covenant, rejects         prior to the enactment of the 1962 covenant, the
this previous understanding and remolds the Contract            Authority's general reserve bonds, its primary vehicle of
Clause into a potent instrument for overseeing important        public finance, have featured two rigid security devices
policy determinations of the state legislature. At the          designed to safeguard the investment of bondholders.
same time, by creating a constitutional safe haven for          First, pursuant to a so-called "1.3 test," the Authority has
property rights embodied in a contract, the decision            been disabled from issuing new consolidated bonds
substantially distorts modern constitutional jurisprudence      unless the best one-year net revenues derived from all of
governing regulation of private economic interests. I           the Authority's facilities at least equal 130% of the
might understand, though I could not accept, this revival       prospective debt service for the calendar year during
of the Contract Clause were it [***117] in accordance           which the debt service for all outstanding and proposed
with some coherent and constructive view of public              bonds would be at a maximum. Second, according to a
policy. But elevation of the Clause to the status of            procedure known as a "section 7 certification," [*35] the
regulator of the municipal bond market at the heavy             Authority may not issue bonds to finance additional
price of frustration of sound legislative policymaking is       facilities unless it "shall certify" that the issue "will not,
as demonstrably unwise as it is unnecessary. The                during the ensuing ten years or during the longest term of
justification for today's decision, therefore, remains a        any such bonds proposed to be issued..., whichever shall
mystery to me, and I respectfully dissent.                      be longer,... materially impair the sound credit standing
                                                                of the Authority...." App. 811a-812a.
    I
                                                                     The 1962 covenant existed alongside these security
     The Court holds that New Jersey's repeal of the 1962       provisions. Viewed in simplest terms, the covenant
covenant constitutes an unreasonable invasion of contract       served to preclude Authority investment and participation
rights and hence an impairment of contract. The                 in transportation programs by shifting the financial focal
formulation of [*34] the legal standard by which the            point from the creditworthiness of the Authority's
Court would test asserted impairments of contracts is, to       activities as a whole to the solvency [***118] of each
me, both unprecedented and most troubling. But because          proposed new transit project. Whereas the 1.3 and
the Constitution primarily is "'intended to preserve            section 7 tests permit expanded involvement in mass
practical and substantial rights, not to maintain theories,'"   transportation     provided     that      the     enormous
Faitoute Iron & Steel Co. v. City of Asbury Park, 316           revenue-generating potential of the Authority's bridges
U.S. 502, 514 (1942), it is necessary to sketch the factual     and tunnels aggregately suffice to secure the investments
background of this dispute before discussing the reasons        of creditors, the covenant effectively foreclosed
for my concern. In my [**1524] view, the Court's                participation in any new project that w as not individually
casual consideration both of the substantial public             "self-supporting." 1 Both parties to this litigation are in
policies that prompted New Jersey's repeal of the 1962          apparent agreement that few functional mass transit
covenant, and of the relatively inconsequential burdens         systems are capable of satisfying this requirement.
that resulted for the Authority's creditors, belies its
                                                                                                                 Page 23
                                        431 U.S. 1, *35; 97 S. Ct. 1505, **1524;
                                      52 L. Ed. 2d 92, ***118; 1977 U.S. LEXIS 1

       1 The covenant does enable the Authority to             Allocation Act, 15 U.S.C.§ 751(a)(3) (1970 ed., Supp.
       finance passenger railroad facilities to a level of     V), which signaled "a national energy crisis which is a
       "permitted deficits," defined as one-tenth of the       [***119] threat to the public health, safety, and welfare,"
       General Reserve Fund or 1% of the total bonded          and sought to stimulate [*37] further initiatives toward
       indebtedness. While the Court notes in passing          the development of public transportation and similar
       that this provision "permitted, and perhaps even        programs. See ante, at 14.
       contemplated,      additional    Port     Authority
       involvement in deficit rail mass transit," ante, at            2 The 1962 covenant does not merely bind the
       11, the formula restricts the Authority to a small             Authority's hands for the decades of the 1960's
       percentage of the fund, even though aggregate                  and 1970's. Rather, the covenant will preclude
       reserves and revenues may far exceed expenses                  the deployment of the Authority's toll revenues to
       and creditor claims. In any event, the parties have            public transit needs until all the bonds previously
       stipulated that as a practical matter the Authority            issued under the covenant have been retired.
       has been unable to expand its involvement in                   Appellant trust company advises that the covenant
       rapid transit by reliance on this alternative                  thus continues "as a practical matter until the year
       formula. App. 692a.                                            2007," Brief for Appellant 24, even if now
                                                                      repealed prospectively as suggested ante, at 18 n.
       Whether the 1962 New Jersey Legislature acted                  15.
wisely in accepting this new restriction is, for me, quite
irrelevant. What is important is that the passage of the           It was in response to these societal demands that the
years conclusively demonstrated that this effective barrier    New Jersey and New York Legislatures repealed the
to the development [*36] of rapid transit in the port          1962 covenant. The trial court found: S
region squarely conflicts with the legitimate needs of the
                                                                   "In April 1970 Governors Cahill and Rockefeller
New York metropolitan community, and will persist in
                                                               announced a joint program to increase the Port
doing so into the next century. 2 In the [**1525] Urban
                                                               Authority's role in mass transportation by building a rail
Mass Transportation Assistance Act of 1970, 49 U.S.C.
                                                               link to John F. Kennedy International Airport and
§ 1601a, Congress found that "within urban areas... the
                                                               extending PATH [a commuter rail line under Authority
ability of all citizens to move quickly and at a reasonable
                                                               control] to Newark International Airport and other parts
cost [has become] an urgent national problem."
                                                               of New Jersey." 134 N.J. Super. 124, 168-169, 338 A. 2d
Concurrently, the Clean Air Act, as amended, 42 U.S.C.
                                                               833, 858 (1975).I
§ 1857 et seq., advocated the curtailment of air pollution
through the development of transportation-control
                                                               But, the court found, this expansion "was not
strategies that place heavy emphasis on rapid transit
                                                               economically feasible under the terms of the 1962
alternatives to the automobile. For northern New Jersey
                                                               covenant." Id., at 170, 338 A. 2d, at 859. Consequently,
in particular, with ambient air-quality levels among the
                                                               the States repealed the covenant. On signing the New
worst in the Nation, the Clean Air Act has led to new
                                                               York legislation, Governor Rockefeller stated: S
regulations premised on the policy: S
                                                                    "Passed with overwhelming bipartisan support in
     "The development of large-scale mass transit
                                                               both houses of the Legislature, the bill removes the
facilities and the expansion and modification of existing
                                                               absolute statutory prohibition against the use of the
mass transit facilities is essential to any effort to reduce
                                                               revenues of the Port of New York Authority for railroad
automotive pollution through reductions in vehicle use.
                                                               purposes. That statutory covenant, together with the
The planning, acquisition, and operation of a mass transit
                                                               provision of the bi-state compact creating the Authority
system is, and should remain, a regional or State
                                                               that neither State will construct competing facilities
responsibility. Many improvements are being planned in
                                                               within the Port District, could forever preclude the two
mass transit facilities in the State that will make it
                                                               states from undertaking vitally needed mass
possible for more people to use mass transit instead of
                                                               transportation projects. In removing the present
automobiles." 38 Fed. Reg. 31389 (1973).I
                                                               restriction, the bill would not jeopardize the security of
                                                               Port Authority bondholders or their rights to maintain
Finally, the Court itself cites the Emergency Petroleum
                                                               that security." Quoted ibid.I
                                                                                                                     Page 24
                                          431 U.S. 1, *37; 97 S. Ct. 1505, **1525;
                                        52 L. Ed. 2d 92, ***119; 1977 U.S. LEXIS 1

                                                                 and from longstanding provisions in federal law that
In following suit, New Jersey also expressly grounded its        require the existence of "reasonable and just" expenses --
action upon the necessity of overturning "'the restrictions      which may include diversion to mass transit subsidies --
imposed by the covenant [that] effectively preclude              as a precondition to any increase in interstate bridge tolls.
sufficient port authority participation in the development       7 The Court's various [*40] alternative proposals, while
of a public transportation system in the port district.'" Id.,   perhaps interesting speculations, [***121] simply are
at 172, 338 [*38] A. 2d, at 860. Approximately one year          not responsive to New York's and New [**1527]
later, on April 10, 1975, the Port Authority announced an        Jersey's real environmental and traffic problems, 8 and, in
increase in bridge and tunnel tolls amounting to $ 40            any event, intrude the Court deeply into complex and
million, the resulting revenue designed to assist in the         localized policy matters that are for the States'
financing of passenger transportation facilities without         legislatures and not the judiciary to resolve.
jeopardizing the reserve fund set aside for the Authority's
creditors.                                                              3 See, e. g., infra, at 59, and n. 17.

     The Court's consideration of this factual background
is, I believe, most unsatisfactory. The Court never
                                                                        4 See ante, at 30 n. 28. I am puzzled whether the
explicitly takes issue with the core of New Jersey's
                                                                        Court really intends these alternatives to be taken
defense of the repeal: that the State was faced with
                                                                        seriously in view of the footnote's closing
[**1526] serious and growing environmental, energy,
                                                                        reminder that even these "lesser impairments"
and transportation problems, and the covenant worked at
                                                                        also may be found to be unconstitutional. If the
cross-purposes with efforts at remedying these concerns.
                                                                        Court, in fact, means that New Jersey and New
Indeed, the Court candidly concedes that the State's
                                                                        York could remedy any Contract Clause defects
purposes in effectuating the 1974 repeal were "admittedly
                                                                        merely by modifying their repeal of the 1962
important." Ante, at 29. Instead, the Court's analysis
                                                                        covenant so as to limit transit subsidization solely
focuses upon related, but peripheral, matters.
                                                                        to future toll increases -- the policy that is being
     For example, several hypothetical alternative                      followed by the States in actual practice -- then
methods are proposed whereby New Jersey might hope to                   today's decision would be rendered into a
secure funding for public transportation, and these are                 temporary formalism.
made the basis [***120] for a holding that repeal of the
                                                                        5 Cf. Friends of the Earth v. Carey, 552 F.2d 25
covenant was not "necessary." Ante, at 29-31. Setting
                                                                        (CA2 1977); Friends of the Earth v. Carey, 535 F.
aside the propriety of this surprising legal standard, 3 the
                                                                        2d 165 (CA2 1976); Friends of the Earth v. EPA,
Court's effort at fashioning its own legislative program
                                                                        499 F.2d 1118 (CA2 1974).
for New York and New Jersey is notably unsuccessful.
In fact, except for those proffered alternatives which also             6 Because cars entering or leaving Manhattan
amount to a repeal or substantial modification of the 1962              must pass over bridges or through tunnels, the
covenant, 4 none of the Court's suggestions is compatible               regulation of tolls offers an unusually convenient
[*39]      with      the    basic      antipollution    and             and effective method of discouraging automobile
transportation-control strategies that are crucial to                   usage in addition to promising a highly lucrative
metropolitan New York. As the Court itself accurately                   revenue base.
recognizes, the environmental and transportation program
for the New York area rests upon a two-step campaign:
"The States inten[d] [1] to discourage private automobile
use by raising bridge and tunnel tolls and [2] to use the               7 Thus, if toll funds cannot be diverted to rapid
extra revenue from those tolls to subsidize improved                    transit needs, any increase in bridge revenues
commuter railroad service." Ante, at 29. This                           necessarily would produce an expansion of the
co-ordinated two-step strategy has not been arbitrarily or              Authority's general reserve fund well beyond that
casually created, but is dictated by contemporaneous                    necessary or contemplated for the protection of
federal enactments such as the Clean Air Act, 5 and stems               bondholders. Faced with such a mere
both from New York City's unique geographic situation 6                 accumulation of capital, the Federal Highway
                                                                                                                  Page 25
                                        431 U.S. 1, *40; 97 S. Ct. 1505, **1527;
                                      52 L. Ed. 2d 92, ***121; 1977 U.S. LEXIS 1

       Administrator, acting under § 503 of the General        1962 and 1974 summoned major urban centers like New
       Bridge Act of 1946, 33 U.S.C. § 526, evidently          York and New Jersey to action in the environmental,
       would be obligated to disallow any toll increases       energy, and transportation fields. In short, on this record,
       as not "reasonable and just" under the Act. See         I can neither understand nor accept the Court's
       generally Delaware River Port Authority v.              characterization of New Jersey's action as unreasonable.
       Tiemann, 531 F.2d 699 (CA3 1976). The United
       States Department of Transportation, however,                   9 Indeed, the Court's single-minded emphasis on
       has stated that "in some areas (New York,                       the existence of changed circumstances leads it to
       Philadelphia, San Francisco), bridge toll revenues              embrace a rather perverse constellation of values
       provide significant support for transit capital                 in which New Jersey's desire to care for the
       and/or operating costs, thereby providing transit               health, environmental, and energy needs of its
       service improvements which promote decreased                    citizenry is relegated to lesser importance than the
       dependence on automobile travel." App.                          desire of Texas in El Paso v. Simmons, 379 U.S.
726a-727a. The Department has recommended                       497 (1965), to deny windfall economic gains to
       that a diversion of funds to serve rapid transit                purchasers of school land from the State. Ante, at
       needs should qualify as "reasonable and just,"                  31. I, of course, do not dispute the importance of
       and, therefore, would be capable of supporting a                Texas' stake in Simmons. But surely any
       general increase in toll revenues. Ibid. This is in             reasonable ordering of values and social
       stark contrast with the Court's suggested                       objectives would compel the conclusion that a
       alternative policies outlined ante, at 30 n. 29,                State's concern for its citizens' health and general
       which would permit no general increase in bridge                welfare is far more deserving of this Court's
       tolls and no coordination of the bridge toll and                recognition.
       transit subsidization strategies that are central to
                                                                   B
       the antipollution effort in metropolitan New York,
       and, therefore, until today, have been considered            If the Court's treatment of New Jersey's legitimate
       secondary and inadequate to serve the                   policy interests is inadequate, its consideration of the
       community's needs.                                      countervailing injury ostensibly suffered by the appellant
                                                               is barely discernible at all. For the Court apparently
                                                               holds that a mere "technical impairment" of contract
       8      See, e. g., n. 7, supra. In short, all the       suffices to subject New Jersey's repealer to serious
       alternatives that the Court leaves to the States,       judicial scrutiny and invalidation under the Contract
       ante, at 30 n. 29, deny access to the Authority's       Clause. Ante, at 21. The Court's modest statement of the
       tolls, even though they represent a potentially         economic injury that today attracts its judicial
       lucrative revenue source which can be tapped            intervention is, however, understandable. For fairly read,
       without injury to the bondholders. See Part B,          the record before us makes plain that the repeal of the
       infra.                                                  1962 covenant has occasioned only the most minimal
                                                               damage on the part of the Authority's bondholders.
      Equally unconvincing is the Court's contention that
repeal of the 1962 covenant was unreasonable because                Obviously, the heart of the obligation to the
the environmental and energy concerns that prompted            bondholders -- and the interests ostensibly safeguarded
such action "were not unknown in 1962, and the                 by the 1962 covenant -- is the periodic payment of
subsequent changes were of degree and not of kind."            interest and the repayment of principal when due. The
Ante, at 32. Nowhere are we told why a state policy, no        Court does not, and indeed cannot, contend that either
matter how responsive to the general welfare of its            New Jersey or the Authority has called into question the
citizens, can be reasonable only if it confronts issues that   validity of these underlying obligations. No creditor
previously were absolutely unforeseen. 9 Indeed, [*41]         complains that public authorities have defaulted on a
this arbitrary perspective seems peculiarly inappropriate      coupon payment or failed to redeem a bond that has
in a case like this where at least three new and               matured. In fact, the Court does not [***122] even offer
independent congressional enactments between the years         any reason whatever for fearing that, as a result of the
                                                               covenant's repeal, the securities in appellant's portfolio
                                                                                                                   Page 26
                                        431 U.S. 1, *41; 97 S. Ct. 1505, **1527;
                                      52 L. Ed. 2d 92, ***122; 1977 U.S. LEXIS 1

are jeopardized. Such a contention cannot be made in the              11 Indeed, one of the anomalous aspects of this
face of the finding of the trial judge, who, in referring to          suit is the Court's willingness to invalidate an Act
the increasingly lucrative financial [*42] position of the            of the State of New Jersey, and indirectly of New
Authority at the date of the convenant's repeal in                    York, while apparently recognizing that if this
comparison to 1962, concluded: S                                      were an action by creditors for damages, or an
                                                                      action to fix "just compensation," the trial court's
     "Suffice it to say that between 1962 and 1974 the                findings raise serious doubt that any compensable
security afforded bondholders had been substantially                  monetary loss would be found. Ante, at 19. By
augmented by a vast increase in Authority revenues and                sidestepping the damages question, ibid., and by
reserves, and the Authority's financial ability to absorb             mandating reinstatement of the covenant, the
greater deficits, from whatever source and without any                Court manages to burden the Port Authority with
significant impairment of bondholder security, [**1528]               an unwanted contract, while relieving the
was correspondingly increased." 134 N.J. Super., at                   creditor-appellant of the need to establish any
194-195, 338 A. 2d, at 873. 10I                                       tangible economic injury arising from the
                                                                      covenant's repeal. This suggests that any
       10 The court found: "between 1961 and 1973 the                 protection afforded bondholders today may well
       net revenues of the Authority increased from $                 prove to be purely illusory. Even after the
       68,000,000 to $ 137,000,000, and over that period              mandate issues, New Jersey, we are told, may
       the Authority had available to it $ 582,732,000 in             again condemn or repeal the covenant and offer
       excess of its debt service requirements....                    just compensation to its creditors. See ante, at 29
       Through 1974, the corresponding figures are $                  n. 27. However, in light of the trial court's factual
       161,283,000 and $ 649,750,000, respectively."                  conclusions, this promise of compensation will
       134 N.J. Super., at 195 n. 43, 338 A. 2d, at 873 n.            entitle bondholders to little or no financial
       43. Thus, both prior to and following the repeal of            recovery.
       the covenant, the Authority's revenues and earned
       surplus continued their unhampered and                        Secondly, repeal of the covenant is said to have
       overwhelmingly impressive growth.                       canceled an important [***123] security provision
                                                               enjoyed by the creditors. Ante, at 19. Of course, there is
        By simply ignoring this unchallenged finding           no question that appellant prefers the retention to the
concerning the Authority's overall financial posture, the      removal of the covenant, but surely this alone cannot be
Court is able to argue that the repeal of the 1962 covenant    an acceptable basis for the Court's wooden application of
impaired the Authority's bonds in two particular respects.     the Contract Clause or for its conclusion that the repeal
First, it is suggested that repeal of the covenant may have    unfairly diminished bondholder security. By placing
adversely affected the secondary market for the                reliance on this superficial allegation of economic injury,
securities. Ante, at 19. The Court, however,                   the Court again is able simply to disregard the trial court's
acknowledges that appellant has adduced only ambiguous         contrary finding that appellant's complaint of insecurity is
evidence to support this contention, and that the actual       without factual merit: S
price position of Authority bonds was, at most, only
temporarily affected by the repeal. Ibid. 11 In fact, the           "The claim that bondholder security has been
trial [*43] court also explicitly rejected the ultimate        materially impaired or destroyed by the repeal is simply
significance of this alleged injury: S                         not supported by the record. The pledge of the
                                                               Authority's net revenues and reserves remains intact; the
     "The bottom line of plaintiff's proofs on this issue is   Authority will still be barred from the issuance of any
simply that the evidence fails to demonstrate that the         new consolidated bonds unless the 1.3 test required by
secondary market price of Authority bonds was adversely        the CBR is met, and the Authority will continue to be
affected by the repeal of the covenant,except for a            prohibited from the [*44] issuance of any consolidated
short-term fall-off in price, the effect of which has now
                                                               bonds or other bonds secured by a pledge of the general
been dissipated insofar as it can be related to the            reserve fund without the certification required by section
enactment of the repeal." 134 N.J. Super., at 181-182,         7 of the series resolutions, to wit, that in the opinion of
338 A. 2d, at 866 (emphasis supplied).I                        the Authority the estimated expenditures in connection
                                                                                                                   Page 27
                                         431 U.S. 1, *44; 97 S. Ct. 1505, **1528;
                                       52 L. Ed. 2d 92, ***123; 1977 U.S. LEXIS 1

with any additional facility for which such bonds are to       Framers of our Constitution conceived of the Contract
be issued would not, for the ensuing ten years, impair the     Clause primarily as protection for economic trans-actions
sound credit standing of the Authority, the investment         entered into by purely private parties, rather than
status of its consolidated bonds, or the Authority's           obligations involving the State itself. See G. Gunther,
obligations to its consolidated bondholders." 134 N.J.         Constitutional Law 604 (1975); B. Schwartz, A
Super., at 196, [**1529] 338 A. 2d, at 874 (emphasis           Commentary On the Constitution of the United States, pt.
supplied). 12I                                                 2, The Rights of Property 274 (1965); B. Wright, The
                                                               Contract Clause of the Constitution 15-16 (1938). 13 The
         12 The fundamental soundness of the Authority's       Framers fully recognized that nothing would so
         bonds is reflected in the ratings received from the   jeopardize the legitimacy of a system of government that
         principal financial surveys, Moody's and Standard     relies upon the ebbs and flows of politics to "clean out the
         & Poor's, following repeal of the covenant. The       rascals" than the possibility that those same rascals might
         trial court found: "The bonds carried the same        perpetuate their policies simply by locking them into
         ["A"] rating prior to the enactment of the            binding contracts.
         covenant, after it was enacted, after it was
         prospectively repealed, and after the [retroactive]          13 One scholar for example, after undertaking
         repeal act of 1974." 134 N.J. Super., at 179, 338            extensive research into the history of the
         A. 2d, at 864.                                               Constitutional Convention, concluded that there is
                                                                      no evidence that the Constitution's Framers
     In brief, only by disregarding the detailed factual              perceived of the Contract Clause as applicable to
findings of the trial court in a systematic fashion is the            public agreements. "[I]t is evident that all of them
Court today able to maintain that repeal of the 1962                  discussed the clause only in relation to private
covenant was anything but a minimal interference with                 contracts, i. e., contracts between individuals." B.
the realistic economic interests of the bondholders. The              Wright, The Contract Clause of the Constitution
record in this case fairly establishes that we are presented          15 (1938). Moreover, "[a] careful search has
with a relatively inconsequential infringement of contract            failed to unearth any other statements even
rights in the pursuit of substantial and important public             suggesting that the contract clause was intended
ends. Yet, this meager record is seized upon by the Court             to apply to other than private contracts." Id., at 16.
as the vehicle for resuscitation of long discarded Contract           Indeed, Professor Wright found that only two
Clause doctrine -- a step out of line with both the history           antifederalists, neither of whom was a member of
of Contract Clause jurisprudence and with constitutional              the Convention, ever suggested that the Clause
doctrine generally in its attempt to delineate the reach of           would support "a broader meaning" encompassing
the lawmaking power of state legislatures in the face of              public contracts, but "their interpretations were
adverse claims by property owners.                                    denied by members of the Convention, and the
                                                                      denials were not challenged." Ibid.
    II
                                                                     Following an early opinion of the Court, however,
     The Court today dusts off the Contract Clause and         that [*46] took the first step of applying the Contract
thereby undermines the bipartisan policies of two States       Clause to public undertakings, Fletcher v. Peck, 6 Cranch
that manifestly [*45] seek to further the legitimate needs     87 (1910), later decisions attempted to define the reach of
of their citizens. The Court's analysis, I submit,             the Clause consistently with the demands of our
fundamentally misconceives the nature of the Contract          governing processes. The central principle developed by
Clause guarantee.                                              these decisions, beginning at least a century ago, has been
                                                               that Contract Clause challenges such as that raised by
     One of the fundamental premises [***124] of our
                                                               appellant are to be resolved by according unusual
popular democracy is that each generation of
                                                               deference to the lawmaking authority of state and local
representatives can and will remain responsive to the
                                                               governments. Especially when the State acts in
needs and desires of those whom they represent. Crucial
                                                               furtherance of the variety of broad social interests that
to this end is the assurance that new legislators will not
                                                               came clustered together under the rubric of "police
automatically be bound by the policies and undertakings
                                                               [**1530] powers," see E. Freund, The Police Power
of earlier days. In accordance with this philosophy, the
                                                                                                               Page 28
                                        431 U.S. 1, *46; 97 S. Ct. 1505, **1530;
                                      52 L. Ed. 2d 92, ***124; 1977 U.S. LEXIS 1

(1904) -- in particular, matters of health, safety, and the         14 Parallel doctrines worked to the same end of
preservation of natural resources -- the decisions of this          freeing the States from contractual duties
Court pursued a course of steady return to the intention of         allegedly imposed by earlier legislators. For
the Constitution's Framers by closely circumscribing the            example, it has long been held that in applying the
scope of the Contract Clause.                                       Contract Clause to government contracts, every
                                                                    ambiguity and gap is to be strictly construed in
     This theme of judicial self-restraint and its                  behalf of the State. "[I]n grants by the public,
underlying premise that a State always retains the                  nothing passes by implication." Charles River
sovereign authority to legislate in behalf of its people was        Bridge v. Warren Bridge, 11 Pet. 420, 546 (1837).
commonly expressed by the doctrine that the Contract                "Every reasonable doubt is to be resolved
Clause will not even recognize efforts of a State to enter          adversely [to the private party claiming under the
into contracts limiting the authority of succeeding                 contract]. Nothing is to be taken as conceded but
legislators to enact laws in behalf of the health, safety,          what is given in unmistakable terms, or by an
and similar collective interests of the policy 14 --                implication equally clear. The affirmative must
[***125] in [*47] short, that that State's police power is          be shown. Silence is negation, and doubt is fatal
inalienable by contract. For example, in Fertilizing Co.            to the claim. This doctrine is vital to the public
v. Hyde Park, 97 U.S. 659 (1978), the Illinois General              welfare." Fertilizing Co. v. Hyde Park, 97 U.S.
Assembly granted to a fertilizer company an 1867                    659, 666 (1878).
corporate charter to run for 50 years. The corporation
thereafter invested in a factory and depot on land which it              Along these lines, it is noteworthy that the
owned within the area designated by the charter. Five               state law of New Jersey itself raises serious
years later, the village authorities of Hyde Park adopted           doubts concerning the reasonableness of
an ordinance that rendered the company's charter                    appellant's reliance on the covenant for permanent
valueless [*48] by prohibiting the transportation of offal          protection from later laws enacted by the state
within the village and forbidding the operation of a                legislature. In a case involving an alleged
fertilizer factory within the village confines. This Court          impairment of a township's municipal bonds,
nonetheless rejected the contention that the new                    Hourigan v.. North Bergen Township, 113 N.J.L.
ordinance offended the Contract Clause: S                           143, 149, 172 A. 193, 196 (1934), the State's
                                                                    highest court declared: "It is a well established
     "We cannot doubt that the police power of the State            doctrine that the interdiction of statutes impairing
was applicable and adequate to give an effectual remedy             the obligation of contracts does not prevent the
[to the nuisance]. That power belonged to the States                state from exercising such powers as are vested in
when the Federal Constitution was adopted. They did not             it for the promotion of the common weal, or are
surrender it, and they all have it now....                          necessary for the general good of the public,
                                                                    though contracts entered into between individuals
    .....                                                           may thereby be affected.This power, which in its
                                                                    various ramifications is known as the police
    "... [**1531] Pure air and the comfortable
                                                                    power, is an exercise of the sovereign right of the
enjoyment of property are as much rights belonging to
                                                                    government to protect the lives, health, morals,
[the village residents] as the right of possession and
                                                                    comfort and general welfare of the people, and is
occupancy....
                                                                    paramount to any rights under contracts between
    .....                                                           individuals. While this power is subject to
                                                                    limitations in certain cases, there is wide
     "The [company's] charter was a sufficient license              discretion on the part of the legislature in
until revoked; but we cannot regard it as a contract                determining what is and what is not necessary -- a
[***126] guaranteeing, in the locality originally selected,         discretion which courts ordinarily will not
exemption for fifty years from the exercise of the police           interfere with." In my view, therefore, appellant
power of the State, however serious the nuisance might              should be held to have purchased the Authority's
become in the future...." Id., at 667, 669, 670.I                   bonds subject to the knowledge that under New
                                                                    Jersey law the State's obligation was conditionally
                                                                                                                   Page 29
                                        431 U.S. 1, *48; 97 S. Ct. 1505, **1531;
                                      52 L. Ed. 2d 92, ***126; 1977 U.S. LEXIS 1

       undertaken subject to reasonable future legislative    fee land for use as rights-of-way and similar
       action.                                                transportation activities. The Court recognized that the
                                                              charter was a binding contract, and that the company, in
            The record raises similiar doubts and             reliance on the agreement, had acquired land which it
       ambiguities. Thus, State Senator Farley, who           enjoys as "complete and unqualified" owner. Id., at 556,
       chaired the committee that inquired into the status    558. Yet, the Court brushed aside a constitutional
       of the Authority's bonds prior to enactment of the     challenge to subsequent ordinances that greatly
       covenant, noted: "[W]e well appreciate that... we      circumscribed the railroad's activities on its own land: S
       could not impair any obligation such as contracts
       of bond issues. Likewise, you [Commissioner                 "For it is settled that neither the 'contract' clause nor
       Clancy of the Port Authority] as a lawyer know         the 'due process' clause has the effect of overriding the
       that one legislature cannot bind the other             power of the State to establish all regulations that are
       involving policy five, ten, or twenty years hence."    reasonably necessary to secure the health, safety, good
       App. 89a (emphasis supplied). It may well be that      order, comfort, or general welfare of the community; that
       appellant subjectively believed that the covenant      this power can neither be abdicated nor bargained away,
       was unimpeachable under state law. But given           and is inalienable even by express grant; and that all
       the doubts and hesitancies contained in the record,    contract and property rights are held subject to its fair
       the principles established in earlier cases            exercise." Id., at 558.I
       extending back to John Marshall should require
       that such "doubt is fatal to [appellant's] claim."          In perfect conformity with these earlier cases that
       Fertilizing Co., supra, at 666.                        recognized the States' broad authority to legislate for the
                                                              welfare of their citizens, New Jersey and New York
       Two years later, this principle of the Contract        sought to repeal the 1962 covenant in furtherance of
Clause's subservience to the States' broad lawmaking          "admittedly important" interests, ante, at 29, in
powers was reasserted in another context. In 1867, the        environmental protection, clean air, and safe and efficient
Mississippi Legislature entered into a contract with a        [***127] transportation facilities. The States' policy of
company whereby the latter was chartered to operate a         deploying excess tolls for the maintenance and expansion
lottery within the State "in consideration of a stipulated    [*50] of rapid transit was not oppressively or
sum in cash...." The next year the State adopted a            capriciously chosen; rather, it squarely complies with the
constitutional provision abolishing lotteries. The Court      commands embodied by Congress in several
once again unhesitantly dismissed a challenge to this         contemporaneous national laws. Supra, at 36-37. By
provision grounded on the Contract Clause, Stone v..          invalidating the 1974 New Jersey repeal -- and, by
Mississippi, 101 U.S. 814, 817-818 (1880): S                  necessity, like action by New York -- the Court
                                                              regrettably departs from the virtually unbroken line of our
     "'Irrevocable grants of property and franchises may      cases that remained true to the principle that all private
be made if they do not impair the supreme authority to        rights of property, even if acquired through contract with
make laws for the right government of the State; but no       the State, are subordinated to reasonable exercises of the
legislature can curtail the power of its successors to make   States' lawmaking powers in the areas of health (
[*49] such laws as they may deem proper in matters of         Fertilizing Co. v. Hyde Park, 97 U.S. 659 [**1532]
police'.... No one dnies... that [this legislative power]     (1878); Butchers' Union Co. v. Crescent City Co., 111
extends to all matters affecting the public health or the     U.S. 746 (1884)); environmental protection ( Hudson
public morals."I                                              Water Co. v. McCarter, 209 U.S. 349 (1908); Manigault
                                                              v. Springs, 199 U.S. 473 (1905); cf. Henderson Co. v.
     Later cases continued to read the Contract Clause as     Thompson, 300 U.S. 258, 267 (1937); Illinois Central R.
qualified by the States' powers to legislate for the          Co. v. Illinois, 146 U.S. 387, 452-453 (1892)); and
betterment of their citizens, while further expanding the     transportation ( New Orleans Pub. Serv. v. New Orleans,
range of permissible police powers. For example, in
                                                              281 U.S. 682 (1930); Erie R. Co.v. Public Util. Comm'rs,
Atlantic Coast Line R. Co. v. Goldsboro, 232 U.S. 548         254 U.S. 394 (1921); Denver & R.G.R. Co. v. Denver,
(1914), the State chartered and contracted with the           250 U.S. 241 (1919); Atlantic Coast Line R. Co. v.
plaintiff railway company to operate rail lines within the    Goldsboro, supra; Northern Pac. R. Co. v. Duluth, 208
State. Pursuant to this contract, the railroad acquired in
                                                                                                                 Page 30
                                         431 U.S. 1, *50; 97 S. Ct. 1505, **1532;
                                       52 L. Ed. 2d 92, ***127; 1977 U.S. LEXIS 1
U.S. 583 (1908); Chicago, B. & Q.R. Co. v. Nebraska ex               State to adhere to a contract that surrenders an
rel. Omaha, 170 U.S. 57 (1898); New York & N.E.R. Co.                essential attribute of its sovereignty," ante, at 23,
v. Bristol, 151 U.S. 556 (1894)). In its disregard of these          but in applying this principle, the Court finds that
teachings, the Court treats New Jersey's social and                  the States' "taxing and spending powers," unlike
economic policies with lesser sensitivity than have                  the power of eminent domain, lie outside this rule,
former Members of this Court who stressed the protection             ante, at 24. Before today, one might well have
of contract and property rights. Even Mr. Justice Butler             supposed that the States' authority to tax, spend
recognized that the Contract Clause does not interfere               money, and generally make basic financial
with state legislative efforts in behalf of its citizens'            decisions is among the most important of their
welfare unless such actions S                                        governmental powers. Indeed, only last Term,
                                                                     this Court announced that a State's decision to pay
     "are... clearly unreasonable and arbitrary.... [And in          its employees less than the minimum wage -- a
applying this standard] [u]ndoubtedly the city, acting as            decision of far less importance to the citizens
the arm of the State, has a wide discretion in determining           generally than efforts to derive funding for
what precautions in the public interest are necessary or             improving the facilities that directly and vitally
appropriate under the circumstances." New Orleans Pub.               affect their health and safety -- is immune from
Serv., supra, at 686.I                                               federal regulation under the Commerce Clause, an
                                                                     authority previously thought to be virtually
      [*51] Thus, with at best a passing nod to the long             plenary in nature. The Court there reasoned that
history of judicial deference to state lawmaking in the              the minimum-wage decision falls within the
face of challenges under the Contract Clause, see ante, at           sovereign powers of "States qua States." National
23 n. 20, the Court today imposes severe substantive                 League of Cities v. Usery, 426 U.S. 833, 847
restraints on New Jersey's attempt to free itself from a             (1976).One may rightfully feel unease that the
contractual provision that it deems inconsistent with the            Court is in the process of developing a concept of
broader interests of its citizens. Today's decision cannot           state sovereignty that is marked neither by
be harmonized with our earlier cases by the simple                   consistency nor intuitive appeal.
expedient of labeling the covenant "purely financial,"
ante, at 25, rather than a forfeiture of "an essential                    In any event, in addition to resting on a most
attribute of [New Jersey's] sovereignty," ante, at 23. As            dubious conception of sovereignty, the Court's
either an analytical or practical matter, this distinction is        effort to demonstrate that the States are free to
illusory. It rests upon an analytical foundation that has            contract away their taxing and spending powers --
long been discarded [***128] as unhelpful. 15 And as a               and hence free "to enter into effective financial
[*52] [**1533] purely practical matter, an interference              contracts" notwithstanding later exercises of the
with state policy is no less intrusive because a contract            police power -- must fail because it is untenable.
prohibits the State from resorting to the most realistic and         While it is true that New Jersey v. Wilson, 7
effective financial method of preserving its citizens'               Cranch 164 (1812) (Contract Clause precludes a
legitimate interests in healthy and safe transportation              legislature from repudiating a grant of tax
systems rather than directly proscribing the States from             exemption) has never explicitly been overruled,
exercising their police powers in this area. The day has             subsequent cases have almost uniformly avoided
long since passed when analysis under the Contract                   adherence to either its reasoning or holding. See,
Clause usefully can turn on such formalistic differences.            e. g., New York ex rel. Clyde v. Gilchrist, 262
Cf. Home Bldg. & Loan Assn. v. Blaisdell, 290 U.S.                   U.S. 94 (1923); Seton Hall College v. South
398, 438 (1934).                                                     Orange, 242 U.S. 100 (1916); Rochester R. Co. v.
                                                                     Rochester, 205 U.S. 236 (1907); Wisconsin &
       15            Among other difficulties, the                   M.R. Co. v. Powers, 191 U.S. 379 (1903);
       question-begging attempt to categorize inviolable             Morgan v. Louisiana, 93 U.S. 217 (1876). These
       legislation powers vis-a-vis the Contract Clause              cases appreciate, as today's decision does not, that
       depends upon a conception of state sovereignty                the operative consideration for constitutional
       that is both simplistic and unpersuasive. We are              purposes is not whether a contract can or cannot
       told that the Contract Clause "does not require a             be branded as "financial." Rather, in adjudging
                                                                                                                   Page 31
                                        431 U.S. 1, *52; 97 S. Ct. 1505, **1533;
                                      52 L. Ed. 2d 92, ***128; 1977 U.S. LEXIS 1

       the constitutionality of "an exercise of the            unduly harsh contracts entered into by earlier legislators:
       sovereign authority of the State," Seton Hall           16 Such "an impairment may [***130] be constitutional
       College, supra, at 106 -- be it financial or            [*54] if it is reasonable and necessary to serve an
       otherwise -- the Contract Clause tolerates              important public purpose." [**1534] Ante, at 25. Not
       reasonable legislative Acts in the service of the       only is this apparently spontaneous formulation virtually
       broader interests of the society generally.             assured of frustrating the understanding of court and
                                                               litigant alike, 17 but it [*55] is wholly out of step with
       Nor is the Court's reading of earlier constitutional    the modern attempts of this Court to define the reach of
doctrine aided by cases where the Contract Clause was          the Contract Clause when a State's own contractual
held to forestall state efforts intentionally to withhold      obligations are placed in issue.
from creditors the unpaid interest on, Von Hoffman v.
City of Quincy, 4 Wall. 535 (1867), or principal of,                  16 The Court makes clear that it contemplates
Louisiana ex rel. Hubertv. New Orleans, 215 U.S. 170                  stricter judicial review under the Contract Clause
(1909); Wolff v. New Orleans, 103 U.S. 358 (1881),                    when the government's own obligations are in
outstanding bonded indebtedness. Beyond dispute, the                  issue, but points to no case in support of this
Contract Clause has come to prohibit a State from                     multiheaded view of the scope of the Clause. See
embarking on a policy motivated by a simple desire to                 ante, at 25-26. As noted previously, see n. 13,
escape its financial obligations or to injure others through          supra, this position finds no support in the
"the repudiation of debts or the destruction of [***129]              historical rationale for inclusion of the Contract
contracts or the denial of means to enforce them." Home               Clause in the Constitution. And it is clear that the
Bldg. & Loan Assn. v. Blaisdell, supra, at 439. Nor will              Court's citation to Perry v. United States, 294 U.S.
the Constitution permit [*53] a State recklessly to                   330 (1935), see ante, at 26 n. 25, offers no support
pursue its legitimate policies involving matters of health,           for its rewriting of history. In that case, one of the
safety, and the like with "studied indifference to the                Gold Clause Cases, Perry challenged the
interests of the mortgagee or to his appropriate                      constitutionality of a congressional enactment
protection...." W.B. Worthen Co. v. Kavanaugh, 295 U.S.               which authorized the redemption of outstanding
56, 60 (1935). In this regard, the Court merely creates its           United States gold bonds by payment of legal
own straw man when it characterizes the choice facing it              tender currency rather than "'by the payment of
today either as adopting its new, expansive view of the               10,000 gold dollars each containing 25.8 grains of
scope of the Contract Clause, or holding that the Clause              gold, .9 fine,'" 294 U.S., at 347, the value of the
"would provide no protection at all." Ante, at 26. The                dollar in gold when the bonds were acquired.Perry
Constitution properly prohibits New Jersey and all States             complained that inflation had devalued the worth
from disadvantaging their creditors without reasonable                of legal tender with respect to gold and, therefore,
justification or in a spirit of oppression, and New Jersey            claimed financial injury by the conversion. The
claims no such prerogatives. But if a State, as here,                 Government defended its actions on the ground
manifestly acts in furtherance of its citizens' general               that the gold clause obstructed Congress' express
welfare, and its choice of policy, even though infringing             power to "regulate the Value" of money, Art. I, §
contract rights, is not "plainly unreasonable and                     8, and, accordingly, argued that Congress was free
arbitrary," Denver & R.G.R. Co. v. Denver, 250 U.S., at               to repudiate the gold standard under that power.
244, our inquiry should end: S                                        Although Perry ultimately was denied recovery,
                                                                      the Court found that the authority to "regulate the
    "The question is... whether the legislation is                    Value" of money, while permitting Congress "to
addressed to a legitimate end and the measures taken are              control or interdict the contracts of private
reasonable and appropriate to that end." Home Bldg. &                 parties" with regard to the legal exchange rate,
Loan Assn. v. Blaisdell, supra, at 438.I                              294 U.S., at 350, did not include the power to
                                                                      repudiate the Government's own obligations,
     The Court, however, stands the Contract Clause                   which were governed by entirely different
completely on its head, see supra, at 45, and both                    constitutional provisions: E. g., Congress may
formulates and strictly applies a novel standard for                  "borrow Money on the credit of the United
reviewing a State's attempt to relieve its citizens from              States," Art. I, § 8, cl. 2, and "The validity of the
                                                                                                         Page 32
                                 431 U.S. 1, *55; 97 S. Ct. 1505, **1534;
                               52 L. Ed. 2d 92, ***130; 1977 U.S. LEXIS 1

public debt of the United States... shall not be              meanings in these terms. "Necessary" appears to
questioned," Amdt. 14, § 4. Thus the differential             comport with some notion of a less restrictive
standard in Perry emerged from the collision of               alternative. As applied by the Court in this
competing grants of power to the Federal                      instance, however, the less restrictive alternative
Government, and did not purport to suggest that               bears no relationship to previous uses of that
the Contract Clause -- or its federal counterpart,            analytical tool when economic and social matters
the Fifth Amendment -- standing alone would                   were involved. Thus, the Court does not actually
produce different standards for reviewing                     inquire whether "the government can achieve the
governmental interference with public and private             purposes of the challenged regulation equally
contractual obligations.                                      effectively by one or more narrower regulations."
                                                              Struve, The Less-Restrictive-Alternative Principle
                                                              and Economic Due Process, 80 Harv. L. Rev.
                                                              1463 (1967). Rather, the Court concludes that an
17     The Court's newly announed standard of                 impairment of contract was not "necessary"
review, like all such formulations, can merely                because the Court apparently is able to
hope to suggest the direction that a court's inquiry          hypothesize other means of achieving some or all
should take, and the relative weight to be afforded           of the State's objectives, even though these
a constitutional right. But particular words like             alternatives have long been deemed as secondary
"reasonable" and "necessary" also are fused with              in importance, nn. 7, 8, supra, or arguably are
special meaning, for judges have long experience              unconstitutional, ante, at 30 n. 28. Under this
in applying such standards to constitutional                  approach, few, if any, Contract Clause cases in
contexts. Reasonableness generally has signified              history that have deferred to state policymaking
the most relaxed regime of judicial inquiry. See,             have been correctly decided. See infra, at 59.
e. g., Dandridge v. Williams, 397 U.S. 471, 485
(1970) ("If the classification has some 'reasonable                The "reasonableness" test does no better. No
basis,' it does not offend the Constitution").                longer does it mean that this Court will defer to
Contrariwise, the element of necessity                        the "reasonable judgments" of the authorized
traditionally has played a key role in the most               policymakers. Knebel v. Hein, 429 U.S. 288, 297
penetrating mode of constitutional review. See e.             (1977). Instead, the Court appears to ask whether
g., Shapiro v. Thompson, 394 U.S. 618, 634                    changed circumstances took the state legislature
(1969) (a classification which burdens a                      by surprise, ante, at 31-32. Again, I find no basis
fundamental constitutional right must be                      in this Court's prior cases for adopting such a
"necessary to promote a compelling governmental               constrictive view of that constitutional test. See
interest"). The Court's new test, therefore,                  infra, at 59-60.
represents a most unusual hybrid which manages
to merge the two polar extremes of judicial                   [**1535] Mr. Justice Cardozo's opinion in W.B.
intervention, see generally Gunther, Foreword: In      Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935), is the
Search of Evolving Doctrine on A Changing              prime exposition of the [*56] modern view. As a relief
Court: A Model for a Newer Equal Protection, 86        measure for financially depressed local governments,
Harv. L. Rev. 1, 8 (1972), into one synthesis.         Arkansas enacted a statute that greatly diminished the
Plainly, courts are apt to face considerable           remedies available to creditors under their bonds. This
confusion in wielding such a schizophrenic new         resulted in a remedial scheme whereby creditors were
instrument. And well they might, for until today       "without an effective remedy" for a minimum of 6 1/2
one would have fairly thought that as a matter of      years, during which time the government's obligation to
common sense as well as doctrine, state policies       [***131] pay principal or interest was suspended. Id., at
that are "necessary to serve an important public       61. The Court invalidated the alteration in remedies. It
purpose." ante, at 25, a fortiori would be             did so, however, only after concluding that the challenged
"reasonable."                                          state law cut recklessly and excessively into the value of
                                                       the creditors' bonds: "[W]ith studied indifference to the
    The Court, however, seems to discover new          interests of the mortgagee or to his appropriate protection
                                                                                                                  Page 33
                                        431 U.S. 1, *56; 97 S. Ct. 1505, **1535;
                                      52 L. Ed. 2d 92, ***131; 1977 U.S. LEXIS 1

[the State has] taken from the mortgage the quality of an      Jersey possessed lesser authority in the public interest to
acceptable investment for a rational investor." Id., at 60.    amend its own contracts than to alter private
"So viewed [the State's action is] seen to be an oppressive    undertakings, the Court made clear [***132] that the
and unnecessary destruction of nearly all the incidents        State's powers are more expansive S
that give attractiveness and value to collateral security."
Id., at 62.                                                         "[w]here... the respective parties are not private
                                                               persons... but are persons or corporations whose rights
     In the present case, the trial court expressly applied    and powers were created for public purposes, by
the Kavanaugh standard to New Jersey's repeal of the           legislative acts, and where the subject-matter of the
covenant, and properly found appellant's claim to be           contract is one which affects the safety and welfare of the
wanting in all material respects: In a detailed and            public." Id., at 514 n. 2, quoting Chicago, B. & Q. R. Co.
persuasive discussion, the court concluded that neither        v. Nebraska, 170 U.S., at 72.I
New Jersey nor New York repealed the covenant with the
intention of damaging their creditors' financial position.           [**1536] In my view, the fact that New Jersey's
Rather, the States acted out of "vital interest[s]," for       repeal of the 1962 covenant satisfies the constitutional
"[t]he passage of time and events between 1962 and 1974        standards defined in Kavanaugh and Faitoute should, as
satisfied the Legislatures of the two states that the public   the state courts concluded, terminate this litigation. But
interest which the Port Authority was intended to serve        even were I to agree that the test [*58] in Kavanaugh
could not be met within the terms of the covenant." 134        remains open to further refinement, that, I repeat, would
N.J. Super., at 194, 338 A. 2d, at 873. And the creditors'     hardly justify the Court's attempt to deploy the Contract
corresponding injury did not even remotely reach that          Clause as an apparently unyielding instrument for
proscribed in Kavanaugh: Not only have Authority bonds         policing the policies of New Jersey and New York. For
remained "an 'acceptable investment,'" but "[t]he claim        such an interpretation plainly is at odds with the
that bondholder security has been materially impaired or       principles articulated in Kavanaugh and Faitoute, and
destroyed by the repeal is simply not supported by the         subsequently reconfirmed by El Paso v. Simmons, 379
record." Id., at 196, 338 A. 2d, at 874.                       U.S. 497 (1965). The Court there considered a provision
                                                               of Texas law that abolished an unlimited redemption
     The Court, as I read today's opinion, does not hold       period for landowners whose land had been defaulted to
that [*57] the trial court erred in its application of the     the State for nonpayment of interest, substituting a 5-year
facts of this case to Mr. Justice Cardozo's formulation.       reinstatement period in its place. Unlike appellant here,
Instead, it manages to take refuge in the fact that            Simmons at least could claim to have suffered tangible
Kavanaugh left open the possibility that the test it           economic injury by virtue of the State's modification of
enunciated may merely represent the "'outermost limits'"       his land-sale contract; indeed, as a result of that
of state authority. Ante, at 27. This, I submit, is a          "impairment" he permanently lost property to the State.
slender thread upon which to hang a belated revival of the     And, of course, Texas' "self-interest [was] at stake," ante,
Contract Clause some 40 years later. And, in any event,        at 26, since it alone was the beneficiary of Simmons'
whatever opening remained after Kavanaugh was surely           curtailed right of reinstatement. Yet, properly applying
closed by Mr. Justice Frankfurter in Faitoute Iron & Steel     the teachings of Blaisdell, Kavanaugh, and Faitoute, the
Co. v. Asbury Park, 316 U.S. 502 (1942). Speaking for a        Court had little difficulty in sustaining the measure as a
unanimous Court, id., at 515, he employed the precise          means of removing clouds on title arising from pending
constitutional standard established by Mr. Justice             reinstatement rights, 379 U.S., at 508-509 (citations
Cardozo seven years earlier, and upheld under the              omitted): S
Contract Clause a New Jersey plan to reorganize the
outstanding debt obligations held by creditors of Asbury            "The Blaisdell opinion, which amounted to a
Park. The Court thereby authorized an impairment of            comprehensive restatement of the principles underlying
creditors' financial interests that was far more substantial   the application of the Contract Clause, makes it quite
than that involved here: In fact, the reorganization plan      clear that '[n]ot only is the constitutional provision
both extended the maturity date of the city's bonds by         qualified by the measure of control which the State
some 30 years and reduced the relevant coupon rate. Yet,       retains over remedial processes, but the State also
rather than suggesting, as does the Court today, that New      continues to possess authority to safeguard the vital
                                                                                                                  Page 34
                                        431 U.S. 1, *58; 97 S. Ct. 1505, **1536;
                                      52 L. Ed. 2d 92, ***132; 1977 U.S. LEXIS 1

interests of its people. It does not matter that legislation   either debtor or creditor that a municipality's financial
appropriate to that end "has the result of modifying or        condition might falter as in Faitoute Iron & Steel Co. v.
abrogating contracts already in effect."...' 'Once we are in   City of Asbury Park, supra; indeed, the foreseeability of
this domain of the reserve power of a State we must            that very risk inheres in the process of selecting an
respect the "wide discretion on the part of the legislature    appropriate coupon rate. Yet, in all of these instances this
in determining what is and what is not necessary."'" I         Court did not construe the Contract Clause to prevent the
[*59] It need hardly be said that today's decision is          States from confronting their real problems if and when
markedly out of step with this deferential philosophy.         their legislators came to believe that such action was
The Court's willingness to uphold an impairment of             warranted. It is not our province to contest the
contract -- no matter how "technical" the injury -- only on    "reasonable judgments" of the duly authorized
a showing of "necessity" ante, at 29-31, is particularly       decisionmakers. Knebel v. Hein, supra, at 297.
distressing, for this Court always will be able to devise
abstract alternatives to the concrete [***133] action               Thus, as I had occasion to remark only last Term, the
actually taken by a State. For example, in virtually every     Court again offers a constitutional analysis that rests upon
decided Contract Clause case, the government could have        "abstraction[s] without substance," National League of
exercised the Court's "lesser alternative" of resorting to     Cities v. Usery, 426 U.S. 833, 860 (1976) (dissenting
its powers of taxation as a substitute for modifying overly    opinion). Given that this is the first case in some 40
restrictive contracts. Ante, at 30 n. 29. Nothing, at least    years in which this Court has seen fit to invalidate purely
on the level of abstraction and conjecture engaged in by       economic and social legislation on the strength of the
the Court today, prevented the appropriation of monies         Contract Clause, one may only hope that it will prove a
by Illinois to buy back or modify the corporate charter of     rare phenomenon, turning on the Court's particularized
the polluting fertilizer company in Fertilizing Co. v.         appraisal of the facts before it. But there also is reason
Hyde Park, 97 U.S. 659 (1878); or by New Jersey to             for broader concern. It is worth remembering that there
ensure the financial solvency of Asbury Park bonds,            is nothing sacrosanct about a contract. All property
Faitoute Iron & Steel Co. v. City of Asbury Park, supra;       [***134] rights, no less than a contract, are rooted in
or by Texas to purchase the unlimited redemption rights        certain "expectations" about the sanctity of one's right of
involved in El Paso v. Simmons, supra. Yet, in all these       ownership. Compare ante, at 19-21, n. 17, with J.
cases, modifications of state contracts were                   Bentham, Theory of Legislation c. 8 (1911 ed.). And
countenanced, and this Court did not feel compelled or         other constitutional doctrines are akin to the Contract
qualified to instruct the state legislatures how best to       Clause in directing their protections to the property
pursue their business. In brief, these cases recognized        interests of private parties. Hence the command of the
that when economic matters are concerned, "the                 Fifth Amendment that "private property [shall not] be
availability of alternatives does not render the               taken for public use, without just compensation" also
[decisionmaker's] choice invalid." Knebel v. Hein, 429         "remains a part of our written Constitution." Ante, at 16.
U.S. 288, 294 (1977). State legislation "may not be held       And during the heyday of economic due process
unconstitutional simply because a court finds it               associated with Lochner v. New [*61] York, 198 U.S.
unnecessary, in whole or in part." Whalen v. Roe, 429          45 (1905), and similar cases long since discarded, see
U.S. 589, 597 (1977).                                          Whalen v. Roe, supra, at 597, this Court treated "the
                                                               liberty of contract" under the Due Process Clause as
     By the same token, if unforeseeability is the key to a    virtually indistinguishable from the Contract Clause. G.
"reasonable" decision, as the Court now contends, ante, at     Gunther Constitutional Law, 603-604 (1975); Hale, The
32, almost [**1537] all prior cases again must be              Supreme Court and the Contract Clause: III, 57 Harv. L.
repudiated. Surely the legislators of Illinois could not       Rev. 852, 890-891 (1944). In more recent times,
convincingly have claimed surprise because a fertilizer        however, the Court wisely has come to embrace a
company polluted the air and transported fertilizer to its     coherent, unified interpretation of all such constitutional
factory, Fertilizing Co. v. Hyde [*60] Park, supra. Nor        provisions, and has granted wide latitude to "a valid
was it unforeseeable to Mississippi that a corporation         exercise of [the States'] police powers," Goldblatt v.
which was expressly chartered to operate a lottery, in         Hempstead, 369 U.S. 590, 592 (1962), even if it results in
fact, did so, Stone v. Mississippi, 101 U.S. 814 (1880).       severe violations of property rights. See Pittsburgh v.
And, of course, it was "not unknown," ante, at 32, to          Alco Parking Corp., 417 U.S. 369 (1974); Sproles v.
                                                                                                              Page 35
                                        431 U.S. 1, *61; 97 S. Ct. 1505, **1537;
                                      52 L. Ed. 2d 92, ***134; 1977 U.S. LEXIS 1

Binford, 286 U.S. 374, 388-389 (1932); Miller v.                    to some $ 300 million, is not powerless in
Schoene, 276 U.S. 272, 279-280 (1928); cf. Williamson               protecting its interests either before the state
v. Lee Optical Co., 348 U.S. 483, 488 (1955). If today's            legislature or in the economic marketplace.
case signals a return to substantive constitutional review          Indeed, a myriad of sophisticated investors,
of States' policies, and a new resolve to protect property          investment banks, and market analysts regularly
owners whose interest or circumstances may happen to                oversee the operation of the bond market and the
appeal to Members of this Court, then more than the                 affairs of municipalities which appear in search of
citizens of New Jersey and New York will be the losers.             credit. Accordingly, any city or State that enters
                                                                    the marketplace is well aware that, should it treat
    III                                                             its creditors abusively, the market is apt to exact
                                                                    "justice" that is quicker and surer than anything
     I would not want to be read as suggesting that the             that this Court can hope to offer. In brief,
States should blithely proceed down the path of                     appellant is the paradigm of a litigant who is
repudiating their obligations, financial or otherwise.              neither "discrete" nor "insular" in appealing for
Their credibility in the credit market obviously is highly          this Court's time or protection.
dependent on exercising their vast lawmaking [**1538]
powers with self-restraint and discipline, and I, for one,
have little doubt that few, if any, jurisdictions would
choose to use their authority "so foolish[ly] as to kill a   REFERENCES
goose that lays golden eggs for them," Erie R. Co. v.        16 Am Jur 2d, Constitutional Law 459
Public Util. Comm'rs, 254 U.S., at 410. But in the final
analysis, there is no reason to doubt that appellant's       USCS, Constitution, Article I, Section 10, Clause 1
financial welfare is being adequately policed by the
political processes and the [*62] bond marketplace           US L Ed Digest, Constitutional Law 216
itself. 18 The role to be played by the [***135]
                                                             ALR Digests, Constitutional Law 171
Constitution is at most a limited one. Supra, at 52-53.
For this Court should have learned long ago that the         L Ed Index to Annos, Impairment of Contract
Constitution -- be it through the Contract or Due Process    Obligations
Clause -- can actively intrude into such economic and
policy matters only if my Brethren are prepared to bear      ALR Quick Index, Impairment of Contract Obligations
enormous institutional and social costs. Because I
consider the potential dangers of such judicial              Federal Quick Index, Impairment of Contract Obligations
interference to be intolerable, I dissent.
                                                                     Annotation References:
          18     And, of course, there is every reason to
          expect that appellant, with combined trust and     What constitutes bill of attainder under the Federal
          fiduciary holdings of Authority bonds amounting    Constitution. 90 L. Ed. 1267, 4 L. Ed. 2d 2155.
                                                                                                                   Page 1

                       VALENCIA ENERGY COMPANY, Plaintiff-Appellant, v. ARIZONA
                            DEPARTMENT OF REVENUE, Defendant-Appellee.

                                          Supreme Court No. CV-96-0666-PR

                                          SUPREME COURT OF ARIZONA

                     191 Ariz. 565; 959 P.2d 1256; 1998 Ariz. LEXIS 43; 270 Ariz. Adv. Rep. 3

                                                   May 19, 1998, Filed

PRIOR HISTORY:          [***1] Court of Appeals No. 1          Appellee issued a notice of deficiency assessment. The
CA-TX 94-0015. Arizona Tax Court No. TX 93-00277.              lower court granted summary judgment to appellee,
Appeal from the Tax Court of the State of Arizona. The         which was affirmed by the lower appellate court. On
Honorable William J. Schafer, III, Judge. 178 Ariz. 251,       appeal, the court reversed and remanded the case. It held
872 P.2d 206 (Tax 1994). Opinion of the Court of               that the doctrine of equitable estoppel against appellee in
Appeals, Division One. 189 Ariz. 79, 938 P.2d 474 (App.        tax cases was not precluded by the Ariz. Const. art. IX, §
1996).                                                         1 or art. III. Appellant could establish the affirmative
                                                               defense of estoppel against appellee by proving that
DISPOSITION:     Appeal from the Tax Court of the              appellee's conduct was inconsistent with the position later
State of Arizona REVERSED AND REMANDED.                        assumed, that appellant relied and had a right to rely on
Opinion of the Court of Appeals, Division One                  appellee's conduct, and that appellant therefore sustained
AFFIRMED IN PART, VACATED IN PART.                             damage that would make it unjust to allow appellee to
                                                               maintain the later-taken position.
CASE SUMMARY:
                                                               OUTCOME: The court vacated the opinion of the lower
                                                               appellate court which affirmed the summary judgment
PROCEDURAL POSTURE: Appellant taxpayer sought                  awarded by the lower court to appellee state revenue
review of the order of the Court of Appeals (Arizona)          department on its notice of deficiency assessment against
which affirmed the lower court's grant of summary              appellant taxpayer. The court reversed the lower court's
judgment in favor of appellee state department of revenue      summary judgment. Appellant was not precluded from
on a notice of deficiency for transaction privilege taxes      establishing the affirmative defense of equitable estoppel
on transportation activities. Appellant contended that         against appellee. The case was remanded.
appellee was estopped from assessing back taxes because
its agent had advised appellant that revenue from that         CORE TERMS: estoppel, transportation, taxation,
activity was not taxable.                                      estopped, equitable estoppel, advice..., coal, incorrect,
                                                               taxing, detriment, certificate, unauthorized act, summary
OVERVIEW: Appellant taxpayer obtained from an                  judgment, sovereign immunity, contracting, convention,
agent of appellee state revenue department a letter stating    exemption, handling, separation of powers, estopping,
that appellant's transportation charges were not subject to    corpus, tax commission, power to tax, power of taxation,
tax. In reliance on that advice, appellant did not charge or   unauthorized, surrendered, contracted, suspended, owed,
collect transaction privilege taxes on that activity.
                                                                                                                      Page 2
                                          191 Ariz. 565, *; 959 P.2d 1256, **;
                                    1998 Ariz. LEXIS 43, ***1; 270 Ariz. Adv. Rep. 3

general rule                                                    OPINION BY: STANLEY [***2] G. FELDMAN

LexisNexis(R) Headnotes                                         OPINION

                                                                     [**1259] [*568] En Banc

                                                                    OPINION
Tax Law > State & Local Taxes > Administration &
Proceedings > General Overview                                      FELDMAN, Justice
[HN1] Ariz. Const. art. IX, § 1 is not an absolute ban to
estopping the Department of Revenue from collecting                  P1 The Arizona Department of Revenue
revenue from a single taxpayer for a single event.              ("Department") audited Valencia Energy Company
                                                                ("Valencia") and assessed a deficiency. The court of
                                                                appeals affirmed the grant of summary judgment against
Tax Law > State & Local Taxes > Administration &                Valencia. We granted review to determine whether the
Proceedings > General Overview                                  Department can be estopped from collecting back taxes
[HN2] Neither Ariz. Const. art. III nor Ariz. Const. art.       owed because a Department agent advised Valencia in
IX, § 1 prohibits equitable estoppel against the                writing that the activity now levied on was not subject to
Department of Revenue.                                          tax. We have jurisdiction pursuant to Ariz. Const. art. VI,
                                                                § 5(3) and A.R.S. § 12-102.
Civil Procedure > Pleading & Practice > Defenses,                   FACTS AND PROCEDURAL HISTORY
Demurrers & Objections > Affirmative Defenses >
General Overview                                                    P2 We view the facts in the light most favorable to
[HN3] The three elements of equitable estoppel are              the party against whom summary judgment was granted.
traditionally stated as: (1) the party to be estopped           Martinez v. Woodmar IV Condominiums Homeowners
commits acts inconsistent with a position it later adopts,      Ass'n, Inc., 189 Ariz. 206, 211, 941 P.2d 218, 223 (1997).
(2) reliance by the other party, and (3) injury to the latter
resulting from the former's repudiation of its prior                 P3 Tucson Electric Power Company ("TEP") built
conduct.                                                        and owns a coal-fired electric plant in Springerville,
                                                                Arizona, operated by Alamito Company ("Alamito"). 1
COUNSEL: Ulrich Kessler & Anger P.C., Phoenix, By:              On October 4, 1984, Valencia, a wholly owned
Paul G. Ulrich, David L. Abney, of counsel -and- Hartley        subsidiary of TEP, contracted to supply Alamito's coal
E. Newkirk, Tucson, -and- Walker Ellsworth P.L.C.,              requirements for the Springerville plant. The agreement
Phoenix, By: Francis Migray, -and- Newmark Irvine,              set the price per ton of coal, payable monthly and subject
P.A., Phoenix, By: Stephen C. Newmark, Attorneys for            to renegotiation [***3] as needed. 2 Valencia began
Valencia Energy Company.                                        performance, buying the coal in New Mexico,
                                                                transporting [**1260] [*569] it to Springerville, and
Grant Woods, Arizona Attorney General, Phoenix, By:             then preparing it for burning by Alamito.
James M. Susa, Patrick Irvine, Attorneys for Arizona
Department of Revenue.                                                 1     After 1989, Alamito Company became
                                                                       Century Power Company.
Quarles & Brady, Phoenix, By: Michael G. Galloway,                     2 Section 7 of the agreement provides:
Jeffrey A. Sandquist, Attorneys for Amicus Curiae
General Motors Corporation.                                                       The circumstances attendant to
                                                                               the providing of Coal... are subject
JUDGES: STANLEY G. FELDMAN, Justice.                                           to variation, including, but not
CONCURRING: THOMAS A. ZLAKET, Chief Justice,                                   limited to, the amount of capital
CHARLES E. JONES, Vice Chief Justice, FREDERICK                                equipment which must be provided
J. MARTONE, Justice, JAMES MOELLER, Justice                                    by Valencia, the cost and size of
(Retired).                                                                     inventories necessary to assure
                                                                                                                     Page 3
                                     191 Ariz. 565, *569; 959 P.2d 1256, **1260;
                                   1998 Ariz. LEXIS 43, ***3; 270 Ariz. Adv. Rep. 3

               reliable coal supply, the costs                handling and transportation activities were subject to the
               incurred or to be incurred by                  tax. Valencia Energy Co. v. Arizona Dep't of Revenue,
               various coal and transportation                189 Ariz. 79, 938 P.2d 474 (App. 1996). On the estoppel
               arrangements entered into by                   issue, the court held that Ariz. Const. art. IX, § 1, Crane
               Valencia and the recovery of                   Co. v. Arizona State Tax Comm'n, 63 Ariz. 426, 163 P.2d
               interest expense by Valencia.                  656 (1945), and Duhame v. State Tax Comm'n, 65 Ariz.
268, 179 P.2d 252 (1947), prevent the Department from
                                                              being equitably estopped by its incorrect representations
     P4 Prior to beginning performance, Valencia              that no tax was applicable. Id. at 84, 938 P.2d at 479
questioned "the status of the business for Arizona tax        (citing PCS, Inc. v. Arizona Dep't of Revenue, 186 Ariz.
purposes." Valencia's representatives met with                539, 925 P.2d 680 (App. 1995)). We granted Valencia's
Department officials on December 17, 1985, to ascertain       petition for review on the estoppel issue only.
what taxes would be due on Valencia's operations.
Valencia thereafter corresponded with Mr. Deemer, a                [***6] DISCUSSION
Department tax analyst. [***4] As a tax analyst, Deemer
regularly rendered written advice to taxpayers after such         A. Equitable estoppel against the Department
advice was first cleared with his supervisor. Deemer
                                                                   P8 This case requires us to decide whether and to
issued three letters to Valencia. The third letter, dated
                                                              what extent a taxpayer may assert equitable estoppel
January 31, 1986, stated that Valencia's transportation
                                                              against the Department. The Department first argues that
charges were not subject to tax. In reliance on the
                                                              article IX, section 1 of the Arizona Constitution, which
Department's advice, Valencia did not charge or collect
                                                              provides that the "power of taxation shall never be
transaction privilege taxes from Alamito on the
                                                              surrendered, suspended, or contracted away," absolutely
transportation receipts at issue.
                                                              bars estopping the government from collecting taxes
     P5 The Department conducted a transaction privilege      owed. Valencia and amicus argue that article IX, section
tax audit of Valencia for the period November 1985            1 is inapplicable here because its purpose is only to
through March 1990. Although there were no pertinent,         restrict the Legislature from contracting away its power
substantive changes in the Arizona statutes or                to tax.
Department rules during the audit period, the Department
                                                                   1. Article IX, section 1 and Crane Co. v. Arizona
concluded that the transportation charges were subject to
                                                              State Tax Commission
the transaction privilege tax. In May 1990, the
Department issued a Notice of Deficiency Assessment to             P9 Crane was the genesis of our construction of
Valencia claiming underpayment of almost $ 5 million,         article IX, section 1 as it relates to estopping the state
plus interest.                                                taxing authority. The tax commission had adopted a rule
                                                              excepting from taxation certain items sold to contractors.
     P6 After an adverse administrative decision to its
                                                              The commission later repealed the rule, audited the
challenge to the assessment, Valencia appealed to the
                                                              taxpayer, and assessed back taxes owed on completed
superior court. In a published opinion, the judge presiding
                                                              transactions. We recognized that the taxpayer could no
in the tax division of the superior court granted summary
                                                              longer pass the cost of the tax to its buyers but
judgment in favor of the Department [***5] and denied
                                                              nonetheless upheld the tax and rejected the taxpayer's
Valencia's motion for summary judgment, upholding the
                                                              claim of [***7] estoppel:
assessment of back taxes and interest. Valencia Energy
Co. v. Arizona Dep't of Revenue, 178 Ariz. 251, 872 P.2d
                                                                       The general rule is that the state will not
206 (Tax 1994).
                                                                     be estopped in the collection of its
     P7 Valencia raised numerous issues on appeal,                   revenues by an unauthorized act of its
including whether the Department was estopped from                   officers. In the matter of collecting
assessing back taxes because a Department agent advised              revenues, the state is acting in its
that revenue from coal transportation and handling was               governmental or sovereign [**1261]
not taxable. The court of appeals found for the                      [*570] capacity, and ordinarily there can
Department on all issues, holding that Valencia's coal               be no estoppel. Were this not the rule the
                                                                                                                   Page 4
                                     191 Ariz. 565, *570; 959 P.2d 1256, **1261;
                                   1998 Ariz. LEXIS 43, ***7; 270 Ariz. Adv. Rep. 3

       taxing officials could waive most of the              Revenue, 189 Ariz. 86, 938 P.2d 481 (App. 1996). 3
       state's revenue. The Constitution, Art. 9,
       Sec. 1, provides that the power of taxation                  3     See also State ex rel. Arizona Dep't of
       (which must of necessity include                             Revenue v. Driggs, 189 Ariz. 74, 938 P.2d 469
       collection) "shall never be surrendered,                     (App. 1996); PCS, Inc. v. Arizona Dep't of
       suspended, or contracted away." To hold                      Revenue, 186 Ariz. 539, 925 P.2d 680 (App.
       that the commission by regulation may                        1995); Arizona Dep't of Revenue v. M. Greenberg
       waive taxes which the law required to be                     Const., 182 Ariz. 397, 897 P.2d 699 (App. 1995);
       imposed would be violative of this                           Knoell Bros. Const., Inc. v. State of Arizona, 132
       provision.                                                   Ariz. 169, 644 P.2d 905 (App. 1982).

            The regulation of the tax commission,                 [***9]
       upon which appellant bases its plea of
                                                                  P11 In a different context, however, we held that the
       estoppel, was wholly unauthorized. The
                                                             corporation commission could be estopped to deny the
       tax commission cannot by any rule or
                                                             validity of a certificate of convenience and necessity
       regulation exempt a taxpayer from the
                                                             improperly issued fifty years earlier. In reaching that
       payment of a tax unless such authority has
                                                             conclusion, we disapproved of the "no estoppel against
       been specifically granted to it by the
                                                             the sovereign" rule, stating:
       legislature. Here no such authority exists.

                                                                       Whatever the basis for these exceptions
 63 Ariz. at 441, 163 P.2d at 662 (emphasis added)
                                                                    to the general rule [of no estoppel], it
(citations omitted).
                                                                    would appear that where the application of
    P10 Two years later, in Duhame, we disapproved                  estoppel will not affect the exercise by the
Crane's substantive holding that the sales to contractors           state of its governmental powers and
[***8] were subject to the sales tax. With little                   sovereignty, or bind it by unauthorized
discussion and relying on Crane, we again declined to               acts of its officers and employees, estoppel
apply equitable estoppel against the state taxing                   will, when justice dictates, be applied to
authorities.                                                        the state.

           It is true that during the time plaintiff          Freightways, Inc. v. Arizona Corp. Comm'n, 129 Ariz.
       was engaged in the contracting here in                245, 248, 630 P.2d 541, 544 (1981).
       question he might have passed this tax on
                                                                  P12 Following Freightways, the court of appeals
       to the government had he not been misled,
                                                             distinguished Crane and Duhame to find the Department
       by an improper interpretation of the Act
                                                             estopped because of prior incorrect representations about
       by the Commission, into believing no tax
                                                             procedural requisites for claiming income tax deductions.
       was due. Still, it is the settled law of the
                                                             If not for the procedural errors the taxpayer committed by
       land and of this jurisdiction that as
                                                             following the Department's instructions, it was clearly
       taxation is a governmental function, there
                                                             entitled to the deductions as a matter of substantive law
       can be no estoppel against a government
                                                             and legislative intent. Tucson [***10] Electric Power
       or governmental agency with reference to
                                                             Co. v. Arizona Dep't of Revenue, 174 Ariz. 507, 851 P.2d
       the enforcement of taxes. Were this not the
                                                             132 (App. 1992). The court reasoned:
       rule the taxing officials could waive most
       of the state's revenue. Therefore there is
                                                                        The taxpayer in this case, however,
       no merit to plaintiff's claim of estoppel in
                                                                    presents a very different situation. Here,
       this case.
                                                                    the taxpayer is not relying upon estoppel
                                                                    to avoid the application of a taxing statute
 65 Ariz. at 281, 179 P.2d at 260. Our court of appeals
                                                                    to the activities contemplated by the
has rigidly adhered to the letter of Crane and Duhame.
                                                                    statute.... It is undisputed in the record
See, e.g., General Motors Corp. v. Arizona Dep't of
                                                                    presented to this court that, from a factual
                                                                                                                  Page 5
                                     191 Ariz. 565, *570; 959 P.2d 1256, **1261;
                                  1998 Ariz. LEXIS 43, ***10; 270 Ariz. Adv. Rep. 3

       standpoint, the taxpayer clearly was                                enforcement of this act, to
       entitled to claim the benefits of that                              formulate rules and regulations,
       accelerated amortization.                                           and prescribe the forms and
                                                                           procedure necessary to the efficient
            In advancing its estoppel argument,                            enforcement thereof.
       the taxpayer seeks to enforce, rather than
       avoid, the basic intent of the statute.
                                                                   [***12] P14 In sum, Arizona law governing
  Id. at 515, 851 P.2d at 140 (footnotes omitted).           estoppel against the Department under the Crane rule is
Moreover, the court clarified the scope of the               quite restrictive--the Department may not be estopped
Crane/Duhame prohibition on estoppel [**1262] [*571]         based on its erroneous advice unless doing so results in
in tax cases in light of Freightways' acknowledgment that    substantive compliance with the tax statutes. Under this
the government could be estopped under some                  regime, the court of appeals was correct to reject
circumstances. The court observed:                           Valencia's claim of equitable estoppel based on the
            The central principle underlying past            Department's prior erroneous advice. Valencia and
        Arizona decisions is that the sovereign              amicus argue, however, we should find those cases
        power of the state to impose taxes is                incorrectly decided. It is to that argument we now turn.
        vested in the legislature, and the state
        taxing authorities may not, by their words               2. Whether article IX, section 1 was correctly applied
        or conduct, waive the collection of taxes
                                                                  P15 We begin by noting that Crane and Duhame
        imposed by a valid legislative [***11]
                                                             were decided in an era when the government could do no
        enactment.
                                                             wrong. The rigid rule forbidding estoppel against the
                                                             government was a logical corollary to the previous
Id. (emphasis added).
                                                             notions of sovereign immunity. See John F. Conway,
     P13 But the basic assumption on which Crane and its     Note, Equitable Estoppel of the Federal Government: An
progeny were decided is questionable. Crane stated that      Application of the Proprietary Function Exception to the
estoppel was impermissible when based on the                 Traditional Rule, 55 FORDHAM L.REV. 707, 709
"unauthorized acts" of the taxing authority. 63 Ariz. at     (1987) (citing 2 K. DAVIS, ADMINISTRATIVE LAW
441, 163 P.2d at 662. Thus the case appears to recognize     TREATISE § 17.01, at 492 (1958) ("The theory that the
the possibility of estoppel based on authorized acts but     government cannot be estopped is no doubt a part of the
ignores the fact that the action taken by the officials in   broad doctrine of sovereign [***13] immunity. In the
Crane was actually well within their authority. In Crane,    early days of the American Republic, the government
the transaction in question was exempt from taxation         was liable neither for breach of contract nor for torts of
under a tax commission rule. In adopting the rule, the       its agents. Sovereign immunity from contract and tort
commission exercised authority granted by statute. 4         liability naturally carried with it sovereign immunity
Given that the commission's procedural action was            from equitable estoppel.")).
clearly authorized, the substantive determination that no
                                                                  P16 Significant changes have since occurred with
tax was due could be deemed unauthorized only because
                                                             respect to the sovereign immunity doctrine and,
it was wrong. Thus, under Crane an unauthorized act
                                                             concomitantly, in our view of equitable estoppel against
means any Department decision or action later found to
                                                             the government. See Stone v. Arizona Highway Comm'n,
be incorrect under the tax statutes.
                                                             93 Ariz. 384, 392, 381 P.2d 107, 112 (1963) (sovereign
       4 Ariz. Code § 73-1333 (1939) provided:               immunity doctrine abolished); see also Freightways, 129
                                                             Ariz. at 247-48, 630 P.2d at 543-44. This case provides
                   Immediately upon this act                 the court with its first opportunity to examine how the
              becoming effective, the tax                    abolition of sovereign immunity affects the issue of
              commission is hereby authorized                equitable estoppel against the Department.
              and directed as a preliminary
                                                                 P17 Unlike numerous cases in which equitable
              matter to the application and
                                                             estoppel has been asserted against various other
                                                                                                                      Page 6
                                      191 Ariz. 565, *571; 959 P.2d 1256, **1262;
                                   1998 Ariz. LEXIS 43, ***13; 270 Ariz. Adv. Rep. 3

government agencies, 5 taxation is governed by a specific                     corporations. The desire to
constitutional provision. The parties draw clear battle                       encourage      certain    industries,
lines: [**1263] [*572] the Department contends that                           particularly railroads, led some of
article IX, section 1 is an absolute ban to any interference                  the early legislatures to include in
with the state's taxation and collection activities. Valencia                 the incorporating act a grunt of
argues that, [***14] properly understood, the provision                       partial or total tax immunity.
is irrelevant to the issue before us.                                         Subsequent regret of the generosity
                                                                              of these earlier legislatures led to
       5 See, e.g., Carondelet Health Serv. v. Arizona                        the inclusion in the Constitution of
       Health Care Cost Containment Sys. Admin., 187                          1876, this provision....
       Ariz. 467, 930 P.2d 544 (App. 1996); Rivera v.
       City of Phoenix, 186 Ariz. 600, 925 P.2d 741
       (App. 1996); Carlson v. Arizona Dep't of Econ.
       Sec., 184 Ariz. 4, 906 P.2d 61 (App. 1995);                     [***16] P19 The Dartmouth College case
       Outdoor Sys., Inc. v. Arizona Dep't of Transp.,          subsequently established that the Contract Clause
       171 Ariz. 263, 830 P.2d 475 (App. 1992).                 prevents a state from altering or amending terms in a
                                                                private corporation's charter, unless the state's power to
                                                                amend was reserved in the charter itself or in some
     P18 Article IX, section 1 is best understood in the        general or special law to which it was originally subject.
context of the problem it addresses. In the early               Trustees of Dartmouth College v. Woodward, 17 U.S. (4
nineteenth century, state legislatures frequently included      Wheat.) 518, 4 L. Ed. 629 (1819). The Supreme Court
tax exemptions in the charters of private corporations; 6       applied this principle to protect perpetual tax exemptions
litigation ensued over the power of subsequent                  granted in corporate charters. See Home of the Friendless,
legislatures to eliminate the exemptions. See, e.g., Home       75 U.S. (8 Wall.) 430, 19 L. Ed. 495; Washington Univ.,
of the Friendless v. Rouse, 75 U.S. (8 Wall.) 430, 19 Lans. Ch. 75 U.S. (8 Wall.) 439, 19 L. Ed. 498; Piqua Branch Bank,
Ed. 495 (1869); Washington Univ. v. Rouse, 75 U.S. (8           57 U.S. (16 How.) 369, 14 L. Ed. 977. The Court later
Wall.) 439, 19 L. Ed. 498 (1869); Rector of Christ              acknowledged, however, that grants in a corporate charter
Church v. Philadelphia County, 65 U.S. (24 How.) 300,           would not be protected by the Contract Clause if a state's
16 [***15] L. Ed. 602 (1860); Piqua Branch of State             constitution prohibited the state from granting permanent
Bank of Ohio v. Knoop, 57 U.S. (16 How.) 369, 14 L.             tax exemptions. Home of the Friendless, 75 U.S. at 438.
Ed. 977 (1853); New Jersey v. Wilson, 11 U.S. (7                Accordingly, many states adopted such prohibitions in
Cranch) 164, 3 L. Ed. 303 (1812). The United States             their constitutions. See Stewart E. Sterk & Elizabeth E.
Supreme Court held as early as 1812 that a state                Goldman, Controlling Legislative Shortsightedness; The
legislature's repeal of tax exemptions contracted by the        Effectiveness of Constitutional Debt Limitations, 1991
state violate the Contract Clause of article I, section 10 of   WIS. L. REV. [***17] 1301, 1319 (1991) ("Once the
the United States Constitution. See, e.g., Wilson, 11 U.S.      scope of Contract Clause doctrine became apparent, a
(7 Cranch) 164, 3 L. Ed. 303.                                   number of states adopted constitutional provisions that
                                                                prohibited legislatures from contracting away taxing
       6 See, e.g., Tex. Const. art. VIII, § 4 (Vernon's        power.").
       ann. ed.) (West 1993), which provides that the
       "power to tax corporations and corporate property             P20 Concern for inordinate corporate influence in
       shall not be surrendered or suspended by act of          state affairs was particularly acute in Arizona. Professor
       the Legislature, by any contract or grant to which       John D. Leshy, the most prominent historian of the
       the State shall be a party." As the "Interpretive        Arizona Constitution, described the concerns of Senator
       Commentary" explains:                                    Beveridge, one of Arizona's most respected statesmen
                                                                during the territorial period:
                   Prior to 1874 when the first
               general incorporation statute was                          He [Beveridge] complained bitterly that
               passed in Texas, the sole means of                      the businessmen and rich among the
               incorporation was through special                       statehood proponents wanted nothing
               legislative acts creating private
                                                                                                                    Page 7
                                     191 Ariz. 565, *572; 959 P.2d 1256, **1263;
                                  1998 Ariz. LEXIS 43, ***17; 270 Ariz. Adv. Rep. 3

       except continued escape from taxation,                      corporate property shall not be
       charging that the "mining corporations of                   surrendered or suspended by any contract
       Arizona have taken out... over $                            or grant to which the state shall be a party.
       400,000,000 of mineral wealth; and they
       have paid the Territory nothing in the way           On November 16, the Committee on Public Debt,
       of taxes."                                           Revenue and Taxation recommended an amended
                                                            Proposition No. 106, which ultimately became article IX
Leshy then concluded:                                       of the constitution. See id at 405. The revised section on
              Concern about giant corporations              the power of taxation, now article IX, section 1,
       evading taxation had been repeatedly                 commanded that the "power of taxation shall never be
       rehearsed in the territorial legislature to          surrendered, suspended, or contracted away." (Emphasis
       little avail, demonstrating the railroad and         added.)
       mining companies' strong grip on the
       political process. Small wonder that both                   7 Article IV, section 23 also evinces the framers'
       contemporary reformers and historians                       serious concern with undue corporate influence in
       agreed that the large corporations                          politics:
       "reigned...        virtually         [***18]
       untrammeled" in territorial days.                                       It shall not be lawful for any
                                                                           person holding public office in this
John D. Leshy, The Making of the Arizona Constitution,                     state to accept or use a pass or to
20 ARIZ. ST. L.J. 1, 11-12 (1988).                                         purchase transportation from any
                                                                           railroad or other corporation, other
      [**1264] [*573] P21 An examination of article                        than as such transportation may be
IX's evolution through the 1910 Constitutional                             purchased by the general public....
Convention confirms that the drafters of our constitution
were concerned about legislative capitulation to special           Commenting on this provision, Professor Leshy
interests. 7 Article IX, section 1 was submitted at the            observed that it "reflects the framers'
convention as Substitute Proposition No. 106 and                   preoccupation with potential governmental
ultimately replaced numerous provisions relating to                corruption by corporations, a realistic concern
finance and taxation. One of these provisions was                  given the political dominance, exercised by means
Proposition No. 11, "A Proposition Relative to                     fair and foul, of large railroad and mining
Exemption from Taxation," which demonstrated the                   corporations during the territorial period." JOHN
specific concern with grants of tax immunity to                    D.    LESHY,        THE    ARIZONA          STATE
corporations:                                                      CONSTITUTION: A REFERENCE GUIDE 123
                                                                   (1993).
         That none of the property of any private
       corporation shall ever be exempted from                    [***20] P22 Almost forty years ago, we reviewed
       taxation by the State or by any political            the framers' intent with respect to Proposition No. 106
       subdivision of the State, except property            and article IX, section 1. In determining whether the
       used solely for charitable, religious, or            clause prohibited the City of Phoenix from committing
       other eleemosynary purpose and not for               the proceeds of a fuel tax to repay road repair bonds,
       profit.                                              Justice Struckmeyer thoroughly examined the Minutes of
                                                            the Constitutional Convention, noted that the provision
On November 16, 1910, Proposition No. 11 was deemed         was inserted in our constitution to address the Dartmouth
incorporated into Proposition No. 106 and was therefore     College problem, and concluded:
abandoned. See THE RECORDS OF THE ARIZONA
CONSTITUTIONAL CONVENTION OF 1910, at 406                            Thus, it becomes apparent that the first
(John S. Goff ed.). Section 4 of Proposition [***19] No.           sentence of Substitute Proposition No.
106 provided:                                                      106, now Art. IX, § 1, was adopted for the
           The power to tax corporations and                       purpose of restricting the legislature's right
                                                                                                                   Page 8
                                     191 Ariz. 565, *573; 959 P.2d 1256, **1264;
                                  1998 Ariz. LEXIS 43, ***20; 270 Ariz. Adv. Rep. 3

       to alienate the power to tax anything and             challenge under article III of the Arizona Constitution,
       all persons. The prohibition is against the           arguing that "enforcement of estoppel in tax cases
       irrepealable grant of immunity from                   deprives the legislature of the power to make the law and
       taxation. ...                                         the judiciary the power to interpret it." Following the
                                                             demise of the state-can-do-no-wrong doctrine, the
            Therefore, we are of the opinion that            no-estoppel-against-the-government rule has been most
       the first sentence of Art. IX, § 1 is a               commonly justified on separation of powers principles. 10
       prohibition against the surrender or                  Article IX aside, our cases have long recognized the
       relinquishment of the right to impose a               limitations imposed by article III on exercising judicial
       tax.                                                  power in tax matters. See, e.g., Tanque Verde Enter. v.
                                                             City of Tucson, 142 Ariz. 536, 691 P.2d 302 (1984) (the
 Switzer v. City of Phoenix, 86 Ariz. 121, 127-28, 341       judiciary would usurp legislative function by striking
P.2d 427, 431 (1959). 8                                      down even excessive revenue-raising taxes). While
                                                             Freightways [***23] held that estoppel may lie against
       8       Because we believe all of Justice             the government, we have yet to consider the effect of
       Struckmeyer's discussion is worth reading, we         separation of powers in such a case.
       have reprinted it in the Appendix.
                                                                    10          Frederick S. Kuhlman, Comment,
      [***21] P23 From the foregoing we conclude that               Governmental Estoppel: The Search for
the purpose of article IX, section 1 was to void grants of          Constitutional Limits, 25 LOY. L.A. L. REV.
tax immunity that would otherwise become permanent                  229, 229 (1991) ("Separation of powers has
under article I, section 10 of the federal constitution as          emerged as the linchpin on which the government
interpreted in the Dartmouth College case. Accordingly,             estoppel debate turns."); Deborah Walrath, Note,
this provision of our state constitution prohibits the              Estopping the Federal Government: Still Waiting
Legislature and state agencies from alienating the                  for the Right Case, 53 GEO. WASH. L. REV.
Legislature's fundamental power to tax.                             191, 192 (1985) ("Estoppel traditionally does not
                                                                    lie against the government. This distinction arose
     P24 This understanding of the purpose of article IX,
                                                                    largely as a corollary to the doctrine of sovereign
section 1 casts a different light on the Department's
                                                                    immunity that 'the King can do no wrong.' ... As
claim. The Department maintains that article IX, section
                                                                    Congress has passed legislation waiving
1 restrains all branches of government, not just the
                                                                    sovereign immunity and allowing the government
Legislature, and its purpose is to prevent any waiver of
                                                                    to be sued in limited circumstances, the power of
taxes due. The foregoing discussion illustrates that the
                                                                    this traditional rationale has diminished. One
Department is correct on the first assertion but [**1265]
                                                                    justification frequently invoked to support
[*574] wrong on the second. Article IX, section 1
                                                                    governmental exemptions from equitable estoppel
restrains all branches of government, but only as to
relinquishment of the Legislature's fundamental power to            is the separation of powers doctrine.").
tax. An estoppel from collecting revenue from a single
taxpayer for a single event is not the kind of permanent          P26 "Nowhere in the [***24] United States is this
capitulation with which the framers were concerned. We       system of structured liberty [separation of powers] more
therefore hold that [HN1] article IX, section 1 is not an    explicitly and firmly expressed than in Arizona."
absolute ban to [***22] estopping the Department. 9          Mecham v. Gordon, 156 Ariz. 297, 300, 751 P.2d 957,
                                                             960 (1988). Article III of our constitution provides:
       9 The Legislature seems to have reached the
       same conclusion. In A.R.S. § 42-139.21(C),                      The powers of the government of the
       effective September 21, 1991, the Legislature                State of Arizona shall be divided into three
       effectively overruled Crane and Duhame.
                                                                    separate departments, the Legislative, the
                                                                    Executive, and the Judicial; and, except as
     3. Separation of powers
                                                                    provided in this Constitution, such
    P25 The Department raises a separation of powers                departments shall be separate and distinct,
                                                                                                                        Page 9
                                      191 Ariz. 565, *574; 959 P.2d 1256, **1265;
                                   1998 Ariz. LEXIS 43, ***24; 270 Ariz. Adv. Rep. 3

       and no one of such departments shall                     unauthorized as to violate separation of powers.
       exercise the powers properly belonging to
       either of the others.                                           11 A.R.S. § 42-104(A)(6) provides:

P27 The Department presents several arguments.                                        A. The department shall
Estopping the Department, it contends, violates                                administer and enforce the
separation of powers by (1) binding the Legislature and                        provisions of this title, title 43 and
thus the state's taxing authority through the unauthorized                     other laws assigned to it and has all
act of an executive branch officer, (2) effectively                            the powers and duties prescribed
permitting an executive agent to legislate with respect to                     by law for such purposes. In all
taxpayers who relied on the agent's statements, and (3)                        proceedings prescribed by law the
precluding the judiciary from declaring the existing law.                      department may act on behalf of
                                                                               this state. In addition, the
     P28 On the first point, Valencia responds that                            department shall:
because the Department is statutorily authorized to give
tax advice, 11 and occasional erroneous advice is [***25]                          ***
foreseeable and unavoidable, mistakes are impliedly if
                                                                                    6. Provide information and
not explicitly authorized. While Crane seems to define
                                                                               advice within the scope of its
unauthorized acts as any Department interpretation later
                                                                               duties subject to the laws on
found to be incorrect under the tax statutes, this definition
                                                                               confidentiality of information and
does not comport with more recent decisions. In
                                                                               departmental      rules    adopted
Freightways, we found the corporation commission
                                                                               pursuant to such laws.
estopped from denying the validity of a motor carrier
certificate [**1266] [*575] issued without complying
                                                                [***27]
with statutory requirements because the commission had
                                                                      12 Freightways submitted two applications for a
recognized the validity of the certificate for over fifty
                                                                      certificate: one a renewal filed after a deadline
years. 129 Ariz. at 248, 630 P.2d at 544. The Legislature
                                                                      imposed by commission rule, and the other an
authorized the commission to issue certificates, but
                                                                      original application that, by statute, would have
through deliberate error or oversight it issued
                                                                      required a hearing before being granted. Id. at
Freightways' certificate contrary to the law's
                                                                      246, 630 P.2d at 542. It is unclear which
requirements. 12 We applied estoppel, concluding it
                                                                      application was acted upon in issuing the
would not "affect the exercise by the state of its
                                                                      certificate, but it is irrelevant for our purposes
governmental powers and sovereignty, or bind it by the
                                                                      because issuance of the certificate under either
unauthorized acts of its officers or employees...." Id. at
                                                                      circumstance contravened statutory requirements.
248, 630 P.2d at 544 (emphasis added). Thus the
                                                                      See Tucson Warehouse & Transfer Co. v. Al's
Freightways court found that the act of issuing a
                                                                      Transfer, Inc., 77 Ariz. 323, 327, 271 P.2d 477,
certificate, something the commission was authorized to
                                                                      479-80 (1954) ("The rule is that general rules and
do by statute, did not become unauthorized simply
                                                                      regulations of an administrative board or
because the act was performed [***26] erroneously. This
                                                                      commission prescribing methods of procedure
changed definition of unauthorized was used and applied
                                                                      have the effect of law and are binding on the
by the court of appeals in Tucson Electric Power, 174
                                                                      Commission and must be followed by it so long
Ariz. at 516 n.9, 851 P.2d at 141 n.9. 13 Even if incorrect,
                                                                      as they are in force and effect.").
the acts of the Department in this case, like those of the
                                                                      13 The court of appeals explained in a footnote:
commission in Freightways and the Department in
Tucson Electric Power, were within the general
                                                                                    While the audit supervisor's
parameters of the government agent's authority. Thus, the
                                                                               representations                 were
Crane definition of unauthorized acts is not only patently
                                                                               "unauthorized" in the sense that
illogical but has been effectively modified. We adopt and
                                                                               they were contrary to the
apply the view taken in Freightways and Tucson Electric
                                                                               provisions of the statute as we have
Power. The advice given Valencia was wrong but not so
                                                                                                                  Page 10
                                     191 Ariz. 565, *575; 959 P.2d 1256, **1266;
                                  1998 Ariz. LEXIS 43, ***27; 270 Ariz. Adv. Rep. 3

               interpreted it, there is no evidence           Thus, the argument goes, the Department would
               that he was not acting within the              effectively be exercising the powers properly belonging
               general     parameters      of   his           to the judiciary, in violation of article III of our
               authority.      Therefore,     under           constitution. We do not find a separation of powers
               appropriate            circumstances           violation based on such an attenuated notion. Estoppel is
               otherwise        supporting      the           a judicial doctrine. Its application by the courts can
               application of estoppel, his                   hardly be construed as placing judicial power in the
               representations would be binding               hands of the executive [***30] branch. While estoppel
               on the state.                                  protects the Department's prior incorrect interpretation of
                                                              the law from further judicial review in a particular case, it
       Id. (emphasis added).                                  does not give the Department the judicial power to
                                                              interpret the law in any case before the court. Nor does it
     [***28]                                                  give the Department the authority to determine when,
                                                              where, or in what situation estoppel should be
     P29 The Department next argues that estoppel in          recognized. Judicial application of estoppel does nothing
these circumstances effectively permits an executive          more than preclude the Department from arguing the
agency to change the law, which constitutes a usurpation      substantive issue of law in the first place. The court
of legislative power. This argument fails to recognize that   remains the final arbiter of the law; it alone decides the
the law and its execution are separate and distinct           correct interpretation of the law and whether estoppel will
spheres. See, e.g., Salt River Pima-Maricopa Indian           nevertheless apply in a given case.
Community v. Hull, 190 Ariz. 97, 104, 945 P.2d 818, 825
(1997) ("The Legislature, in the exercise of [its]                P31 Thus, we conclude that [HN2] neither article III
lawmaking power, establishes state policies and priorities    nor article IX, section 1 of the constitution prohibits
and, through the appropriation power, gives those             equitable estoppel against the Department. We must then
policies and priorities effect. Once the Legislature has      consider whether circumstances exist in this case that
acted, however, it becomes the duty of the Executive to       could warrant the application of estoppel against the
'take care that the laws be faithfully executed.'") (citing   Department.
Rios v. Symington, 172 Ariz. 3, 12, 833 P.2d 20, 29
(1992)). The axiom that an administrative agency such as         4. Factual predicate for equitable estoppel against the
the Department must execute the law as it is written does     Department
not lead to the result that the Department asserts here.
Estopping the Department from assessing a tax does not             P32 That the constitution does not prohibit estoppel
work any change in the law but impacts only its               against the Department does not necessarily mean that the
execution. If the Department's absolutist interpretation      Department will be estopped. Estoppel sounds in equity
were true, then the constitution would be similarly           [***31] and will therefore not apply to the detriment of
violated whenever the Department exercises [***29] its        the public interest. Spur Indus., Inc. v. Del E. Webb Dev.
discretion to enter into closing agreements 14 or to abate    Co., 108 Ariz. 178, 184, 494 P.2d 700, 706 (1972) ("the
balances owed. 15 These provisions, like the operation of     courts have long recognized a special responsibility to the
estoppel against the Department, involve administration       public when acting as a court of equity"). Accordingly,
of the law not its creation. The legislative prerogative to   we look carefully to the underlying considerations that
tax was not impaired.                                         traditionally have been advanced for and against the
                                                              application of estoppel against the Department.
       14 See A.R.S. § 42-139.06.
       15 See A.R.S. § 42-104(B).                                  P33 Even the cases applying estoppel against the
                                                              government have recognized that "equitable estoppel...
    P30 We turn, then, to the contention that judicial        generally may not be invoked against the sovereign."
recognition that the Department is estopped from              Freightways, 129 Ariz. at 246, 630 P.2d at 542. We said
correcting its prior, erroneous interpretation of law         the government may be estopped only when its "wrongful
operates as a retroactive concession of judicial power,       conduct threatens to work a serious injustice and ... the
enabling the Department to make determinations                public interest would not be unduly damaged...." Id. at
[**1267] [*576] immunized from judicial revision.             248, 630 P.2d at 544. Despite our holding in Freightways,
                                                                                                                      Page 11
                                       191 Ariz. 565, *576; 959 P.2d 1256, **1267;
                                    1998 Ariz. LEXIS 43, ***31; 270 Ariz. Adv. Rep. 3

however, estoppel has remained all but prohibited as                     it is so intended; (3) the latter must be ignorant of
against the Department under the Crane/Duhame line of                    the true facts; and (4) he must rely on the former's
cases.                                                                   conduct to his injury." 129 Ariz. at 246, 630 P.2d
                                                                         at 542 (citing Hampton v. Paramount Pictures
     P34 We recognize the fundamental importance of the                  Corp., 279 F.2d 100, 104, (9th Cir. 1960)). We
state's taxing power but believe the state's obligation to               note that this four-prong test was not expressly
treat its citizens justly is as essential to the existence of            adopted in Freightways. More important, the test
government [***32] as the Legislature's power to levy                    cited in Freightways is, in substance, no different
taxes. See, e.g., Joint Anti-Fascist Refugee Comm. v.                    than the three-prong test traditionally applied in
McGrath, 341 U.S. 123, 172 n.19, 71 S. Ct. 624, 649                      Arizona.
n.19, 95 L. Ed. 817 (1951) (Frankfurter, J., concurring)
(quoting 5 THE WRITINGS AND SPEECHES OF                                 [***34] P36 The first element requires affirmative
DANIEL WEBSTER 163) ("In a government like ours,                  acts inconsistent with the position later relied on.
entirely popular, care should be taken in every part of the       Common sense tells us that the evidentiary burden in
system, not only to do right, but to satisfy the community        cases such as the present would require that the state's
that right is done.")). Moreover, as our tax system relies        action bear some considerable degree of formalism under
primarily on the good faith of citizens to self report, it is     the circumstances. An off-the-cuff opinion, for example,
imperative that the system itself manifest fairness by            will not suffice if the question presented requires a
requiring that all citizens contribute their fair share. But it   measure of research or deliberation. It is rare that
is patently unjust to permit the erroneous advice of the          satisfactory evidence of an absolute, unequivocal, and
government to cause detriment beyond the tax itself.              formal state action will be found unless it is in writing. In
There is no justice, one might say, if the government can         addition, the action must be taken by or have the approval
punish its citizens for following its instructions. We            of a person authorized to act in the area under
therefore join the many states permitting equitable               consideration. See Freightways, 129 Ariz. at 248, 630
estoppel against the government in tax matters. See, e.g.,        P.2d at 544. In general, the state may not be estopped due
Michael A. Rosenhous, Annotation, Estoppel of State or            to the casual acts, advice, or instructions issued by
Local Government in Tax Matters, 21 A.L.R. 4th 573                nonsupervisory employees. 17
(collecting cases). We overrule Crane and Duhame and
hold that equitable estoppel may lie against [***33] the                 17 We note that an additional standard has been
Department under certain limited circumstances.                          enunciated by our court of appeals. In Carlson v.
                                                                         Arizona Dep't of Econ. Sec., the court of appeals
     P35 [HN3] The three elements of equitable estoppel                  discussed the wrongful conduct element of an
are traditionally stated as: (1) the party to be estopped                estoppel claim against the government, finding
commits acts inconsistent with a position it later adopts;               that estoppel will lie against the state only if the
(2) reliance by the other party; and (3) injury to the latter            government's actions constitute "affirmative
resulting from the former's repudiation [**1268] [*577]                  misconduct." 184 Ariz. 4, 6, 906 P.2d 61, 63
of its prior conduct. 16 See, e.g., Tucson Electric Power,               (App. 1995). Carlson distinguished between mere
174 Ariz. at 516, 851 P.2d at 141. In light of the serious               neglect or oversight and more egregious
considerations implicated by the taxing power, we                        intentional or willful conduct. Id. at 8, 906 P.2d
examine these elements as they apply to the Department                   at 65. The affirmative misconduct standard
in this case.                                                            adopted in Carlson may conflict with
                                                                         Freightways.
        16     The Department argues that Freightways
        promulgated a four-prong standard that governs                  [***35] P37 The second requirement demands both
        estoppel against the government. In Freightways,          that the party claiming estoppel actually relied on the
        we cited a federal case holding that the elements         state's act and that such reliance was reasonable under the
        of estoppel were "(1) The party to be estopped            circumstances. Actual reliance means that the party
        must know the facts; (2) he must intend that his          seeking estoppel has the burden to demonstrate that it
        conduct shall be acted on or must so act that the         prospectively relied on the state action. That the reliance
        party asserting the estoppel has a right to believe       be reasonable requires, among other things, that the party
                                                                                                                   Page 12
                                      191 Ariz. 565, *577; 959 P.2d 1256, **1268;
                                   1998 Ariz. LEXIS 43, ***35; 270 Ariz. Adv. Rep. 3

seeking estoppel have acted in good faith by providing          corpus, was by statute jointly and severally liable. 312
the state with correct information and neither knew nor         F.2d 311, 318 (9th Cir. 1962). The United States Court of
was put on notice that the state's position was erroneous.      Appeals held that the IRS was estopped against the bank
See Heltzel v. Mecham Pontiac, 152 Ariz. 58, 60, 730            but not against Schuster:
P.2d 235, 237 (1986). In general, "reliance should be
considered reasonable if 'a person sincerely desirous of                    We are unaware of any particular
obeying the law would have accepted the information as                 detriment sustained by Schuster in reliance
true, and would not have been put on notice to make                    on the Commissioner's mistake, for she
further inquiries.'" Freightways, 129 Ariz. at 247, 630                did not materially change her position in
P.2d at 543; see also Bohonus v. Amerco, 124 Ariz. 88,                 reliance on his earlier determination. But
90, 602 P.2d 469, 471 (1979) ("As a general rule, it is                the Bank has been greatly prejudiced
essential to the existence of an estoppel that the                     because of the Commissioner's mistake.
representation be relied upon and that such reliance be                After it was informed that the trust corpus
justifiable. Reliance is not justified where knowledge to              was not includable in the decedent's gross
the contrary exists."); [***36] Suburban Pump & Water                  estate, it distributed the corpus [***38] to
Co. v. Linville, 60 Ariz. 274, 283, 135 P.2d 210, 214                  the beneficiary, and thus no longer retains
(1943) (One who acts "with a careless indifference to                  the property which was the subject of the
means of information reasonably at hand or ignores                     deficiency. Therefore, any liability of the
highly suspicious circumstances which should warn him                  Bank would have to come out of its own
of danger or loss cannot invoke the doctrine of                        pocket, not the corpus of the trust. This
estoppel.").                                                           would be grossly unfair to the Bank,
                                                                       especially because it never enjoyed the use
     P38 The third requirement is that there be substantial            of the corpus but merely acted in the
detriment to the party resulting from a repudiation of                 capacity of a trustee. It is difficult to see
prior representations. As asserted against the Department,             what additional action the Bank might
detriment requires a positional change not compelled by                have taken to protect itself from liability,
law. Thus, no detriment is incurred when the party's only              faced with the beneficiary's demand for
injury is that it must pay taxes legitimately owed under               the corpus and the Commissioner's
the correct interpretation of the law. Nor will liability for          determination that it was not taxable. It is
non-punitive interest on the tax legitimately due                      our conclusion that the Bank's equitable
constitute detrimental reliance. State ex rel. Arizona                 interest is so compelling, and the loss
Dep't of Revenue v. Driggs, 189 Ariz. 74, 938 P.2d 469                 which it would sustain so unwarrantable,
(App.1996). Non-punitive interest [**1269] [*578] is,                  as to justify the application of the estoppel
after all, nothing more than compensation for the use of               doctrine against the Commissioner.
money. See, e.g., Dingle v. Prudential Prop. & Cas. Ins.
Co., 85 N.Y.2d 657, 651 N.E.2d 883, 885, 628 N.Y.S.2d           Id. Thus, a detriment must involve some collateral loss
15 (N.Y. 1995). The taxpayer had the benefit of using the       other than payment of the tax due under the law as
funds before paying the tax claim and, in the legal sense,      property interpreted. We note that this is precisely the
[***37] suffers no loss by reason of paying interest on         type of detriment alleged in Crane and Duhame, 18 and
the money it retained in its possession.                        had the law then recognized estoppel against the
                                                                Department, the detriment may have been sufficient.
    P39 A federal decision is illustrative on the question
of detriment. In Schuster v. Commissioner, the Internal                18 "It is true that during the time plaintiff was
Revenue Service assessed a tax deficiency against                      engaged in the contracting here in question he
Schuster, the surviving beneficiary, and the trustee bank,             might have passed this tax on to the government
claiming that it erred in an earlier audit determination that          had he not been misled, by an improper
the corpus of a trust was not a taxable part of the                    interpretation of the Act by the Commission, into
decedent's estate. Schuster was thus liable for the tax that           believing no tax was due." Duhame, 65 Ariz. at
would have been due if the audit had been correctly                    281, 179 P.2d at 260 (citing Crane).
performed, and the bank, which had distributed the entire
                                                                                                                  Page 13
                                     191 Ariz. 565, *578; 959 P.2d 1256, **1269;
                                  1998 Ariz. LEXIS 43, ***38; 270 Ariz. Adv. Rep. 3

       [***39] P40 Finally, all these requirements are               concept that the Commissioner might
conditioned by the general rule that estoppel may apply              always correct a legal mistake regardless
against the state only when the public interest will not be          of the injustice which will result. It is
unduly damaged and when its application will not                     conceivable that a person might sustain
substantially and adversely affect the exercise of                   such a profound and unconscionable
governmental powers. Freightways, 129 Ariz. at 248,                  injury in reliance on the Commissioner's
630 P.2d at 544. This rule requires prudence in the                  action as to require, in accordance with
application of estoppel, recognizing that the state's                any sense of justice and fair [***41] play,
solvency is of paramount importance and that equity will             that the Commissioner not be allowed to
not sacrifice the fundamental welfare of the whole                   inflict the injury. It is to be emphasized
community to accomplish justice for the individual. See,             that such situations must necessarily be
e.g., Trull Nursing Home, Inc. v. Maine Dep't of Human               rare, for the policy in favor of an efficient
Serv., 461 A.2d 490, 499 (Me. 1983) ("Estoppel against               collection of the public revenue outweighs
the government should be 'carefully and sparingly                    the policy of the estoppel doctrine in its
applied,' especially where application would have an                 usual and customary context. But as long
adverse impact on the public fisc.") (citations omitted)).           as the concept of estoppel retains any
                                                                     validity, it is conceivable that such
    P41 We believe the court's comments in Schuster are              situations might arise.
appropriate here:
                                                               312 F.2d at 317 (citations omitted). Such a situation
              We recognize the force of the                   arose in Schuster, and Valencia claims it made a similar
       proposition that estoppel should be applied            case here.
       against the Government with utmost
       caution and restraint, for it is not a happy               B. Valencia's claim of equitable estoppel
       occasion when the Government's hands,
       performing duties in behalf of the public,                  P42 Valencia claims it advanced sufficient facts to
       are tied by the [***40] acts and conduct               justify vacating the tax court's grant of summary
       of particular officials in their relations             judgment in favor of the Department and to require that
       with particular individuals. Estoppel has              its cross-motion for summary judgment be granted.
       been applied against the Commissioner in
                                                                   1. Affirmative acts inconsistent with a claim later
       limited situations, but they have usually
                                                              relied on
       arisen where [**1270] [*579] the
       Commissioner's act involved matters of a                    P43 The Department does not dispute that Deemer,
       purely administrative nature. Indeed the               its tax analyst, stated in his January 31, 1986, letter to
       tendency against Government estoppel is                Valencia that transportation charges were not subject to
       particularly strong where the official's               tax. To Valencia, the letter could have appeared to be the
       conduct involves questions of essentially              Department's official, unequivocal position on the
       legislative significance, as where he                  question. If Valencia is correct on its facts, the letter
       conveys a false impression of the laws of              [***42] was sufficient at best to create a genuine issue
       the country. Obviously, Congress's                     that the state had acted and taken a position inconsistent
       legislative authority should not be readily            with its later claim that the transaction was taxable.
       subordinated to the action of a wayward or
       unknowledgeable administrative official.                   2. Action by a party reasonably relying on such
       Accordingly, the general proposition has               conduct
       been that the estoppel doctrine is
       inapplicable to prevent the Commissioner                    P44 Valencia asserts that it reasonably relied on the
       from correcting a mistake of law.                      Department's statements that the coal transportation
                                                              activities were not subject to the transaction privilege tax.
         But we regard this proposition as one of             The Department concedes that relying on the
       general application, not as embracing the              Department's statements, Valencia did not collect the tax
                                                                                                                   Page 14
                                      191 Ariz. 565, *579; 959 P.2d 1256, **1270;
                                   1998 Ariz. LEXIS 43, ***42; 270 Ariz. Adv. Rep. 3

from its customer, 19 but it argues that Valencia's reliance   whether the tax applied. They were finally advised the
was not reasonable. The Department argues that                 transaction was not taxable. The fact that Valencia's
Valencia, a sophisticated business enterprise, should have     accountants questioned why receipts did not reflect a
known that Deemer's advice was wrong, or at least              greater amount of tax does not conclusively establish that
suspect. The Department issued three letters to Valencia.      Valencia should have known something was amiss
The Department asserts that the first was patently             because the accountants' inquiries occurred after Valencia
incorrect, the second stated concepts Valencia should          received Deemer's letter. We cannot say it was
have recognized as patently erroneous, and the third,          unreasonable as a matter of law for Valencia to disregard
advising that no tax applied and written after Valencia        the accountants' questions in light of the Department's
provided additional information, stated the same               stated position. Nor does the fact that the letters contained
erroneous concepts as the second. 20 Department                references to irrelevant concepts necessarily mean that
[**1271]      [*580]    also argues that Valencia's            the Department's position was patently incorrect. On the
accountants, who worried that too little tax was being         record before us, which contains none of Valencia's
collected, should have put Valencia [***43] on notice          communications with the Department, it is not clear why
that Deemer's letter was incorrect.                            such references were made. It is clear that Valencia
                                                               struggled [***45] to obtain the Department's position
       19 While the Department expressly concedes              and provided information to the Department for that
       that Valencia relied on Deemer's advice, the            purpose. On the present record, there exists a genuine
       Department also points out in a footnote facts that     question of fact whether the errors in the Department's
       indicate otherwise. The Department implies that         letters gave Valencia information that made reliance
       because Valencia had already sold over $ 60             unreasonable.
       million of coal by January 31, 1986, Deemer's
       letter did not cause Valencia's reliance. These              P46 Of course, Valencia's reliance would not have
       facts, if true, present a genuine issue on the          been reasonable if the law clearly precluded its theory of
       question of whether Valencia actually relied. See       nontaxability. Valencia is a sophisticated taxpayer, no
       Virginia v. Washington Gas Light Co., 221 Va.           doubt advised by in-house and private counsel and
       315, 269 S.E.2d 820, 826 (Va. 1980).                    accountants. We assume it approached the Department
       20 The Department also argues that the third            with considerable knowledge and understanding of the
       letter is facially incorrect because it states with     law. Were it clear that the business operations in question
       respect to transportation of the coal that "'title      were subject to tax, Valencia could not in good faith
       passes in New Mexico' -- which is clearly wrong         assert reliance on an erroneous Department interpretation.
       because the sale of coal to Alamito occurs in           In this connection, the Department asserts that the statute
       Arizona at the power plant.'" However, Valencia         clearly imposes the tax, common sense confirms that
       responded in its motion papers that title to the        result, and the case law is unequivocal.
       coal passed from the mine to Valencia in New
       Mexico, and therefore the letter was not facially            P47 The statutes provide that a "transaction privilege
       incorrect. We only note here that the focal point       tax" is imposed on "the volume of business transacted by
       of the inquiry is not whether the letter was facially   persons on account of their business activities...." A.R.S.
       incorrect but whether the facts are such that the       § 42-1306(A) & (C). The tax applies to "the business of
       party asserting estoppel could not have reasonably      selling tangible personal property at retail." A.R.S.
       relied on them.                                         [***46] § 42-1310.01(A) (Supp. 1995). The tax base for
                                                               the sale of retail goods is "the gross proceeds of sales or
                                                               gross income derived from the business." See Arizona
      [***44] P45 We cannot say as a matter of law that        State Tax Comm'n v. Garrett Corp., 79 Ariz. 389, 390,
Valencia acted with "careless indifference to means of         291 P.2d 208, 209 (1955).
information reasonably at hand or ignored highly
suspicious circumstances which should warn ... of danger            P48 Valencia argues, however, that the coal
or loss...." Suburban Pump & Water Co., 60 Ariz. at            transportation and handling operations were nontaxable
284-85, 135 P.2d at 214. Valencia met with Department          services separate and distinct from the taxable sales.
officials and made three separate inquiries regarding          "Services rendered in addition to selling tangible personal
                                                                                                                 Page 15
                                      191 Ariz. 565, *580; 959 P.2d 1256, **1271;
                                   1998 Ariz. LEXIS 43, ***46; 270 Ariz. Adv. Rep. 3

property at retail" are not subject to the sales tax. A.R.S.   therefore, we conclude that Valencia could have believed
§ 42-1310.01(A)(2). Therefore, the dispositive legal issue     that it had taken sufficient measures to structure its
was whether it was reasonable to think that Valencia's         transaction, as confirmed by Deemer's letter. In hindsight,
transportation and handling operations could be deemed         Valencia's position was wrong, but we cannot say it was
services separable from the sales for tax purposes.            unreasonable as a matter of law. That question can be
                                                               resolved only by the tax court.
            Where it can be readily ascertained
       without substantial difficulty which                         P51 The Department also argues that it is
       portion of the business is for non-taxable              inappropriate to apply estoppel in this case because,
       professional services..., the amounts in                while the Department's answer to Valencia's inquiries is
       relation to the company's total taxable                 clearly presented in Deemer's letters, the inquiries
       Arizona business are not inconsequential,               themselves have yet to be disclosed. As the Department
       and those services cannot be said to be                 said in response to Valencia's petition for review, to
       incidental to the contracting business, the             "simply read the 'answer' without knowing the 'question'
       professional services are not merged for                is of dubious value." No doubt this is true, but for
       tax purposes into the taxable contracting               summary judgment purposes, Valencia's factual
       business and are not subject to [***47]                 statements are [***49] sufficient to raise a genuine issue
       taxation.                                               of material fact. We note, however, that the facts, though
                                                               not Valencia's conclusions, may be germane and even
 State Tax Comm'n v. Holmes & Narver, Inc., 113 Ariz.          necessary to prove Valencia acted in good faith when
165, 169, 548 P.2d 1162, 1166 (1976).                          dealing with the Department. Equitable estoppel will not
                                                               apply in favor of a party that has misled or deceived the
     P49 Thus, to be considered separable, the activities      government into making erroneous representations. As
must be (1) easily ascertainable, (2) not inconsequential,     Justice Holmes observed long ago, "Men must turn
and (3) not incidental to the taxable activity. Valencia       square corners when they deal with the Government."
maintains that the transportation and handling charges         Rock Island. Arkansas & Louisiana R. Co. v. United
were accounted for separately, were substantial in that        States, 254 U.S. 141, 143, 41 S. Ct. 55, 56, 65 L. Ed. 188
they comprised nearly one-half of the business, and were       (1920).
not incidental to the sales activities. It also argues that
transportation [**1272] [*581] was both inseparable                 P52 Finally, the Department contends Valencia did
from and interwoven with the principal business.               not follow Deemer's advice, which assumed that the
                                                               transportation, sales, and handling operations would be
     P50 We did not grant review of Valencia's challenge       segregated in Valencia's records and invoices. The
to the court of appeals' ruling on the substantive issue of    Department contends there was no segregation, but
whether the transportation and handling operations were        Valencia argues the charges were segregated when the
subject to tax. We therefore consider only whether             invoices were read-in light of a tariff sheet. Again, a
Valencia's position was reasonable in light of the             genuine issue of material fact exists.
circumstances. The court of appeals' opinion is
instructive on this issue. The court acknowledged that              3. Injury to Valencia resulting from reliance on the
"Valencia might have been able to avoid taxation of the        state's conduct
services by selling coal separately from the services." 189
                                                                    P53 Valencia presented affidavits stating that the tax
Ariz. at 83 n.5, 938 P.2d at 478 n.5. However, the court
                                                               would have been passed on to the customer but for
held that the transportation and handling charges [***48]
                                                               reliance on the [***50] Department's advice. The
were not separate from the sales, primarily because
                                                               Department concedes that "Valencia did not collect the
Valencia had not entered into separate sales and
                                                               tax that it could have [from its customers] because it
transportation contracts and had failed to separately bill
                                                               relied upon the Department's advice...." Therefore, we
for those charges. Id. at 83, 938 P.2d at 478. But as the
                                                               only note here that the detriment incurred was substantial
court of appeals' opinion indicates, it is possible to
                                                               (about $ 5 million, not including interest) and exceeded
structure a transaction in such a manner as to avoid the
                                                               the mere payment of a tax owed in that Valencia lost the
tax. Id. at 83 n.5, 938 P.2d at 478 n.5. On this record,
                                                               opportunity for recoupment from its customer.
                                                                                                                Page 16
                                      191 Ariz. 565, *581; 959 P.2d 1256, **1272;
                                   1998 Ariz. LEXIS 43, ***50; 270 Ariz. Adv. Rep. 3

    4. The public interest                                           In discussing the background of article IX, [***52]
                                                                section 1, Justice Struckmeyer said:
     P54 Finally, we observe that on this record estopping
the Department does not threaten undue damage to the                     This proposition [Substitute Proposition
public interest, nor will the application of estoppel                  No. 106] came before the Convention for
substantially and adversely affect the exercise of                     discussion     on   Saturday     morning,
governmental powers. The state's solvency has not been                 November 19, 1910. At that time, the
threatened by its inability to collect this particular tax             Honorable George W.P. Hunt, who later
liability, now eight years past due, from this single                  became the seven-time Governor of
taxpayer. Moreover, in this case estoppel only applies                 Arizona, said:
retroactively to the transactions completed by Valencia; it
does not impair the state from exercising its authority                            In regard to that first
prospectively. Thus, there is no substantial and adverse                      section. The Committee on
effect on the state's taxing power.                                           Taxation had a memorial
                                                                              gotten up by the Tax
     [**1273] [*582] CONCLUSION                                               Association composed of
                                                                              men all over the United
    P55 We hold that recognition of the doctrine of
                                                                              States who have made this
equitable estoppel against the Department of Revenue
                                                                              a study for years, and I
[***51] in tax cases is not precluded by either article IX,
                                                                              have on my desk here
§ 1 or article III of the Arizona Constitution. Crane and
                                                                              letters from nearly every
Duhame are accordingly overruled insofar as they hold to
                                                                              professor on economics in
the contrary. A taxpayer may establish the affirmative
                                                                              all the universities of the
defense of estoppel against the Department of Revenue
                                                                              country, from Harvard, in
by proving the Department's conduct was inconsistent
                                                                              Massachusetts to Stanford,
with a position later assumed, the taxpayer relied and had
                                                                              in California, and they are
a right to rely on the Department's conduct, and the
                                                                              for anyone who wants to
taxpayer therefore sustained damage that would make it
                                                                              look at these letters. They
unjust to allow the Department to maintain the later-taken
                                                                              one and all believe this is
position.
                                                                              the only way to put this in
     P56 On the record before us, we are unable to affirm                     the constitution, and if the
or direct the grant of summary judgment to either party.                      members of the convention
Therefore, the court of appeals' opinion is vacated insofar                   will allow me to read them
as it conflicts with this opinion, the tax court's opinion is                 a letter from Washington,
vacated, its judgment is reversed, and the case is                            which is a sample of the
remanded to the tax court for further action consistent                       letters I have received, it
with this opinion.                                                            will throw some light on
                                                                              the subject. It is from J.E.
    STANLEY G. FELDMAN, Justice                                               Frost, President of the State
                                                                              Board          of        Tax
    CONCURRING:                                                               Commissioners of the State
                                                                              of Washington, at Olympia,
    THOMAS A. ZLAKET, Chief Justice                                           Washington....
    CHARLES E. JONES, Vice Chief Justice                                           Dear Sir: I am just in
                                                                              receipt of a letter from the
    FREDERICK J. MARTONE, Justice
                                                                              Hon. Allen R. Foote, of
    JAMES MOELLER, Justice (Retired)                                          Columbus, Ohio, President
                                                                              [***53]         of       the
    APPENDIX                                                                  International      Tax
                                                                                                       Page 17
                               191 Ariz. 565, *582; 959 P.2d 1256, **1273;
                            1998 Ariz. LEXIS 43, ***53; 270 Ariz. Adv. Rep. 3

       Association, asking me to                             taxation," the Convention meant [***54]
       express to you my views on                            "the power to impose taxes."
       the subject of constitutional
       provisions     relative    to                              The complete text of the Memorial
       taxation.                                             referred to in the statement by the
                                                             Honorable George W.P. Hunt can be
            ***                                              found in the [**1274] [*583] report of
                                                             State and Local Taxation, 5th National
            The right to impose                              Conference of the National Tax
       taxes is a legislative power,                         Association held in Richmond, Virginia,
       inherent      in    organized                         September, 1911, pp. 451 through 457. A
       government. In the absence                            reading of the Memorial leads us to the
       of               constitutional                       conclusion that the language contained in
       limitations, a legislature                            the first sentence of Art. IX, § 1 was
       may enact such tax laws as                            designed       to     leave    legislators
       it sees fit, subject only to                          unencumbered in so far as their power to
       the restrictions contained in                         impose taxes. We note also from the report
       the constitution of the                               of the Third Conference of the same
       United States. Everything                             Association, p. 88, that one M.H. Carver
       over which the authority of                           of the Louisiana State Tax Commission is
       the state reaches may be the                          quoted as stating:
       subject of taxation, whether
       it be person, property, or                                       There is little necessity
       occupation.                                                  for putting anything at all
                                                                    in the constitution about
            ***                                                     taxation,      and      some
                                                                    distinguished      authorities
           There     are   certain
                                                                    hold that everything on the
       safeguards, however, that
                                                                    subject in a constitution is
       should be provided: First;
                                                                    dangerous. To meet the
       the legislature should be
                                                                    decision of the Supreme
       prohibited from contracting
                                                                    Court of the United States,
       away the right to tax
                                                                    though, in the Dartmouth
       anything      or    person
                                                                    College case [Trustees of
       whatsoever,      or   from
                                                                    Dartmouth       College     v.
       making any irrepealable
       grant of exemption.                                          Woodward], 17 U.S. 518, 4
Wheat. 518, [4 L. Ed. 629],
                                                                    it is well to provide: "That
                                                                    the power of taxation shall
                                                                    never      be     suspended,
   From the content of the letter, it can be
                                                                    surrendered or contracted
gleaned that since the legislature should be
                                                                    away...."
prohibited from contracting away the right
to tax, the Convention intent was to
accomplish the converse; that is, that the
legislature would have the right to tax
                                                       [***55] 86 Ariz. at 126-27, 341 P.2d at 430-31 (footnote
anything and all persons whatsoever.
                                                      omitted).
Viewed in this light, it would appear that
by the use of the words "power of
    ("""

                               Genera·! Acts
                           of Specia I Application
                                     and
                               SPECIAL ACTS
                                ADOPTED BY THE

                    SECOND LEGISLATURE OF FLORJ·DA
                        UNDER THE CONSTITUTJO·N
            .~
                           ·AS REVISED 'IN l 968             .t
             .·.·
;     )

                            At Its First Regular Session
                               April 6 to June 4, 197:1      I

                                                             •'
                                                             ;
                                 and Special Session
           .i>--
(_)          J~
              '·               June 9 to June 24, 1971.

              ".l
              ::·
               '

                                      Volume II
L!
                            Published by Authority of Law
                                Under the Direction of
                    FLORIDA LEGISLATIVE PRINTING COMMITTEE
                                 TALLAHASSEE
            .J                        1971

u
                                    EXHIBIT A
                                                                    ,.
     '= .

                                                       LAWS OF FLORIDA                    CHAPTER 71-980
     _r;--
         .1   dis-             a ke ef -teB- dolla}:s. Photographs .6:r microphotographs of any
         rut to                i~ecords made in compliance ·with ·section 608.36;         Flori;da Stat-
. ·sua!1t                      .utes, .shall be acceptable.·and have the· same_ force and effect as
:.~                             the origin_als thereof.· Restoration shall be ef~eetive from the
     c-;~r     or               date of dissolution or cancellation of perniit. _.
. i' with.                         (3) Should the name of the dissolved eexporatioE: entity
         ection                 have been lawfully approp1iatea by anothe~ -eorporation entity
            privi-            - the app'licants shall be permitted to amend- the application by
          ion or                adopting another name -and thereafter the €01-pora;f.;ien entity
         ttePeat                shall continue under the .name so adopted-;-, pro'l)ided ho1»ever,
         '.xe·and               the na:-rne of the dissolved ent-ity shall not b~ a.va.ilable fo?' use by
          llation               another entity until after the pa.ssage of one (1) year from the
         .elit e:E              date of. the final
         !ffi\4· ffi                  \        .  . dissolution.                     ·             ·

/.Ce!    •gether-
                                   ( 4.) Restored e-~·ationo entities shall ·be subject to the
                                ~ ~ privilege tax fro~ the effective date of restora~ion .

                                 Section 7. Chapter · 608, Florida Statutes, is a"fllended by
         follars ..
         ~o-mpli-'
                               adding a new section to read·: ·
      eptable                     In ·such co..ses where the·:depwrtment of state ]J,a-8 cau.se.d to be
:' . ,hereof.                  made copies of any records maintained by· it by miniatwre pho-
;: '.;~ion·· or                tographic miarofi!Jming or Qther processes as· authorized by sec-
                               tion· 15.-16, Flo1ida Statutes, the departrnent 9f state rnay de-
                               str_oy the original of said documents! pursuant to ~VJ~ .            .
         l stock
         oration                ·Section 8. This act shall         ta~e       effect immediately upon be-
~- -L-1-      staek            coming law.
                                                       ..                       .
'""'ssolved            :;.
                                 Approved by the Governor December 16,.1971.
    'er 16; 1971.
   Filed in Office SeCJ.·etarJ: of State December 17, 1971.

                                    52
                            1991 R.R.S. Neb. § 77-2901
                              1991 Nebraska Code Archive

REVISED STATUTES OF NEBRASKA 1943 > CHAPTER 77 REVENUE AND TAXATION
 > ARTICLE 29 MULTISTATE TAX COMPACT

77-2901 to 77-2903. Repealed

History
Laws 1985, LB 344, § 9.
REVISED STATUTES OF NEBRASKA 1943

                                    EDWARD BEEBY
                               W. Va. Code Ch. 11, Art. 10A Note
 Text Current through Acts of the 2015 Regular Session with effective dates February 13, 2015 or
                                            earlier.

Michie’s ™ West Virginia Code > Chapter 11. Taxation. > Article 10A. West Virginia Office of Tax
Appeals.

Article 10A. West Virginia Office of Tax Appeals.

Annotations

Notes

Editor’s notes. —

Former article ten-a, concerning the multistate tax compact, was repealed by Acts 1985, c. 160.

Effective dates. —

Acts 2002, c. 303, provided that the act take effect June 6, 2002.

Research References & Practice Aids

Hierarchy Notes:

W. Va. Code Ch. 11
Michie’s ™ West Virginia Code
Copyright © 2015 Matthew Bender & Company, Inc.,
A member of the LexisNexis Group.
All rights reserved. All rights reserved.

                                            EDWARD BEEBY
                                           36 M.R.S. § 7101
 Current with Legislation through the 2013 Second Regular Session of the 126th Legislature. The
   Second Regular Session convened January 8, 2014 and adjourned May 2, 2014. The general
                                 effective date is August 1, 2014

Maine Revised Statutes > TITLE 36. TAXATION > PART 10. INTERSTATE TAX COMPACTS >
CHAPTER 920. MULTISTATE TAX COMPACT [REPEALED]

§§ 7101 to 7103. Repealed. Laws 2005, c. 332, § 29
Maine Revised Statutes Annotated by LexisNexis®

                                              EDWARD BEEBY
                                          2012 Cal SB 1015
                                          Enacted, June 27, 2012

Reporter
2012 Cal ALS 37; 2012 Cal SB 1015; 2012 Cal Stats. ch. 37

DEERING’S CALIFORNIAADVANCE LEGISLATIVE SERVICE > 2012 REGULAR SESSION
> CHAPTER 37 > (Senate Bill No. 1015)

Notice

    Urgency legislation is effective immediately, Non-urgency legislation will become effective
January 1, 2013
Added: Text highlighted in green
Deleted: Red text with a strikethrough

Digest

Taxation: administration.

(1) Existing law authorizes the state to issue a withholding order for taxes to collect a state tax liability,
including any penalties, accrued interest, and costs, in accordance with certain procedures. Existing
law defines ″state tax liability″ to mean an amount for which the state has a state tax lien created
pursuant to specified provisions.

This bill would expand the definition of ″state tax liability″ to also include any liability under the
Personal Income Tax Law, the Corporation Tax Law, or specified franchise and income tax provisions
that is due and payable and that is unpaid, as specified.

(2) Existing laws require the Franchise Tax Board to administer specified taxes and collect those taxes
from delinquent tax debtors and requires the Franchise Tax Board, in coordination with financial
institutions doing business in this state, to operate a Financial Institution Record Match System
utilizing automated data exchanges to the maximum extent feasible in order to allow the Franchise Tax
Board to match its list of delinquent tax debtors, as defined, with the lists provided by the financial
institutions. Existing law authorizes the Franchise Tax Board to disclose specified taxpayer information
for purposes of data matching, and provides that the specified use of certain data is a misdemeanor.

This bill would expand the definition of delinquent tax debtor to include a person liable for specified
taxes, fees, surcharges, debts, penalties, interest, or other amounts required to be paid to the State
Board of Equalization or paid or referred to the Employment Development Department, as provided.
This bill would authorize the State Board of Equalization and the Employment Development
Department to provide the Franchise Tax Board with information relating to delinquent tax debtors,
would allow that information to be used in the collection of delinquent amounts under the Financial
Institution Record Match System (FIRM), and would require the State Board of Equalization and the
Employment Development Department to reimburse the Franchise Tax Board for its costs in the
implementation and administration of FIRM.
                                              EDWARD BEEBY
                                                                                                Page 2 of 8
                                             2012 Cal SB 1015

By expanding the definition of an existing crime, this bill would impose a state-mandated local
program.

(3) Existing law has enacted the Multistate Tax Compact, which contains provisions regarding state
tax laws, forms the Multistate Tax Commission, and requires the budget of the Multistate Tax
Commission to be funded by party states. Existing law provides that, notwithstanding the provisions
of the Multistate Tax Compact, including a provision that would allow a taxpayer to apportion its
business income in accordance with a specified 3-factor formula, business income derived from or
attributable to sources both within and without this state shall be apportioned between this state and
other states and foreign countries in accordance with a specified 4-factor formula based on the
property, payroll, and sales within and without this state, except that in the case of an apportioning
trade or business that derives more than 50% of its gross business receipts from conducting one or
more qualified business activities, as defined, business income is apportioned in accordance with a
specified 3-factor formula. That law, for taxable years beginning on or after January 1, 2011, allows
a taxpayer to apportion its income in accordance with a single sales factor formula, except as provided,
pursuant to an irrevocable annual election, as specified.

This bill would repeal all provisions related to the Multistate Tax Compact. This bill would find and
declare that the doctrine of election provides that an election affecting the computation of tax must be
made on an original timely filed return for the taxable period for which the election is to apply and once
made is binding, and that the doctrine of election applies to any election that affects the computation
of tax, as specified, which does not constitute a change in, but is declaratory of, existing law. This bill
would also provide that the repeal of the Multistate Tax Compact in this bill shall not be construed to
create any inference that a change in interpretation with respect to the compact or any reference to the
compact prior to its repeal is implied by this bill.

(4) This bill would appropriate $1,000 from the General Fund to the Franchise Tax Board for
administrative costs.

(5) The California Constitution requires the state to reimburse local agencies and school districts for
certain costs mandated by the state. Statutory provisions establish procedures for making that
reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

(6) This bill would declare that it is to take effect immediately as a bill providing for appropriations
related to the Budget Bill.

Appropriation: yes.

Synopsis

An act to amend Section 706.070 of the Code of Civil Procedure, and to amend Section 19266 of, and
to repeal Part 18 (commencing with Section 38001) of Division 2 of, the Revenue and Taxation Code,
relating to taxation, and making an appropriation therefor, to take effect immediately, bill related to the
budget.
                                            EDWARD BEEBY
                                                                                                Page 3 of 8
                                              2012 Cal SB 1015

Text
The people of the State of California do enact as follows:
SECTION 1. Section 706.070 of the Code of Civil Procedure is amended to read:
  § 706.070.

  As used in this article:
             (a) ″State″ means the State of California and includes any officer, department, board, or
              agency thereof.

         (b) ″State tax liability″ means an amount for which the state has a state tax lien as defined in
       Section 7162 of the Government Code excluding a state tax lien created pursuant to the Fish and
       Game Code. (C)         FOR PURPOSES OF AN EARNINGS WITHHOLDING ORDER FOR
       TAXES ISSUED BY THE FRANCHISE TAX BOARD, ″STATE TAX LIABILITY″ ALSO
       INCLUDES ANY LIABILITY UNDER PART 10 (COMMENCING WITH SECTION 17001),
       PART 10.2 (COMMENCING WITH SECTION 18401), OR PART 11 (COMMENCING WITH
       SECTION 23001) OF DIVISION 2 OF THE REVENUE AND TAXATION CODE THAT IS
       DUE AND PAYABLE WITHIN THE MEANING OF SUBDIVISION (B) OF SECTION 19221
       OF THE REVENUE AND TAXATION CODE, AND UNPAID. THE AMENDMENTS TO
       THIS SECTION BY THE ACT ADDING THIS SUBDIVISION SHALL APPLY TO ANY
       AMOUNT THAT IS UNPAID ON OR AFTER THE EFFECTIVE DATE OF THAT ACT, OR
       ANY AMOUNT THAT FIRST BECOMES DUE AND PAYABLE, AND UNPAID, AFTER
       THE EFFECTIVE DATE OF THAT ACT.
SEC. 2. Section 19266 of the Revenue and Taxation Code is amended to read:
  § 19266.
       (a)
               (1) The Franchise Tax Board, in coordination with financial institutions doing business in
                  this state, shall operate a Financial Institution Record Match System utilizing automated
                  data exchanges to the maximum extent feasible.
                 (2) The Franchise Tax Board shall prescribe any rules and regulations that may be
                  necessary or appropriate to implement this section. These rules and regulations shall
                  include all of the following:
                      (A) A structure by which financial institutions, or their designated data-processing
                      agents, shall receive from the Franchise Tax Board the file or files of delinquent
                      debtors that the institution shall match with its own list of accountholders to
                      identify delinquent tax debtor accountholders at the institution.
                     (B) An option by which financial institutions without the technical ability to process
                      the data exchange, or without the ability to employ a third-party data processor to
                      process the data exchange, may forward to the Franchise Tax Board a list of all
                      accountholders and their social security numbers or other taxpayer identification
                      numbers, so that the Franchise Tax Board shall match that list with the file or files
                                              EDWARD BEEBY
                                                                              Page 4 of 8
                            2012 Cal SB 1015

    of delinquent tax debtors.
     (C) Authority for the Franchise Tax Board to exempt a financial institution from
    the requirements of this section if the Franchise Tax Board determines that the
    financial institution participation would not generate sufficient revenue to be cost
    effective for the Franchise Tax Board.
   (D) Authority for the Franchise Tax Board to temporarily suspend the requirements
    of this section for a financial institution if the financial institution provides the
    Franchise Tax Board with a written notice from its supervisory banking authority
    that it is determined to be undercapitalized, significantly undercapitalized, or
    critically undercapitalized as defined by FDIC Regulation 325.103(b)(3), (4), and
    (5) or NCUA Regulation 702.102. The notice provided pursuant to this subparagraph
    shall be subject to the protections of Section 19542.

(b) The Financial Institution Record Match System shall not be subject to any limitation
set forth in Chapter 20 (commencing with Section 7460) of Division 7 of Title 1 of the
Government Code. However, any use of the information provided pursuant to this
section for any purpose other than the collection of delinquent franchise or income tax
or other debts referred to the Franchise Tax Board for collection, as imposed under Part
5 (commencing with Section 10701), Part 10 (commencing with Section 17001), Part
10.2 (commencing with Section 18401), or Part 11 (commencing with Section 23001)
AMOUNTS IDENTIFIED IN PARAGRAPHS (1), (2), AND (3) shall be a violation of
Section 19542. (1) DELINQUENT AMOUNTS DUE THE BOARD, AS IMPOSED
UNDER PART 1 (COMMENCING WITH SECTION 6001), PART 1.5
(COMMENCING WITH SECTION 7200), PART 1.6 (COMMENCING WITH
SECTION 7251), PART 1.7 (COMMENCING WITH SECTION 7280), PART 3
(COMMENCING WITH SECTION 8601), PART 3.5 (COMMENCING WITH
SECTION 9401), PART 6 (COMMENCING WITH SECTION 11201), PART 13
(COMMENCING WITH SECTION 30001), PART 14 (COMMENCING WITH
SECTION 32001), PART 18.5 (COMMENCING WITH SECTION 38101), PART 19
(COMMENCING WITH SECTION 40001), PART 20 (COMMENCING WITH
SECTION 41001), PART 22 (COMMENCING WITH SECTION 43001), PART 22.5
(COMMENCING WITH SECTION 44000), PART 23 (COMMENCING WITH
SECTION 45001), PART 24 (COMMENCING WITH SECTION 46001), PART 26
(COMMENCING WITH SECTION 50101), PART 30 (COMMENCING WITH
SECTION 55001), OR PART 31 (COMMENCING WITH SECTION
60001).       (2)        DELINQUENT AMOUNTS DUE THE EMPLOYMENT
DEVELOPMENT DEPARTMENT, AS IMPOSED UNDER THE UNEMPLOYMENT
INSURANCE CODE, OR OTHER DEBTS OR PENALTY ASSESSMENTS
REFERRED TO THE EMPLOYMENT DEVELOPMENT DEPARTMENT FOR
COLLECTION. (3) DELINQUENT FRANCHISE OR INCOME TAX OR OTHER
DEBTS REFERRED TO THE FRANCHISE TAX BOARD FOR COLLECTION, AS
IMPOSED UNDER PART 5 (COMMENCING WITH SECTION 10701), PART 10
(COMMENCING WITH SECTION 17001), PART 10.2 (COMMENCING WITH
SECTION 18401), OR PART 11 (COMMENCING WITH SECTION 23001).
                            EDWARD BEEBY
                                                                                        Page 5 of 8
                                     2012 Cal SB 1015

(c)
      (1) To effectuate the Financial Institution Record Match System, financial institutions
        subject to this section shall provide to the Franchise Tax Board on a quarterly basis the
        name, record address, and other addresses, social security number or other taxpayer
        identification number, and other identifying information for each delinquent tax debtor,
        as identified by the Franchise Tax Board by name and social security number or other
        taxpayer identification number, who maintains an account at the institution.
      (2) The first data file created by the Franchise Tax Board for purposes of matching tax
        debtor records to financial institution accountholder records shall be limited to 600,000
        tax debtor records. The number of tax debtor records included in a subsequent data file
        created by the Franchise Tax Board may be increased by no more than 600,000 tax
        debtor records greater than the number of tax debtor records included in the
        immediately preceding data file until all eligible tax debtor records are included in the
        data match file.
(d) Unless otherwise required by law, a financial institution furnishing a report or providing
    information to the Franchise Tax Board pursuant to this section shall not disclose to a
    depositor or an accountholder, or a codepositor or coaccountholder, that the name, address,
    social security number or other taxpayer identification number, or other identifying
    information of that delinquent tax debtor has been received from or furnished to the
    Franchise Tax Board.
(e) A financial institution shall incur no obligation or liability to any person arising from any
    of the following:
      (1) Furnishing information to the Franchise Tax Board as required by this section.
       (2) Failing to disclose to a depositor or accountholder that the name, address, social
        security number or other taxpayer identification number, or other identifying information
        of that delinquent tax debtor was included in the data exchange with the Franchise Tax
        Board required by this section.
      (3) Any other action taken in good faith to comply with the requirements of this section.
(f) The Franchise Tax Board may institute civil proceedings to enforce this section.
(g) Any financial institution that willfully fails to comply with the rules and regulations
    promulgated by the Franchise Tax Board for the administration of delinquent tax
    collections, unless it is shown to the satisfaction of the Franchise Tax Board that the failure
    is due to reasonable cause, shall be assessed a penalty upon notice and demand of the
    Franchise Tax Board and collected in the same manner as tax. The penalty imposed under
    this section shall be in an amount equal to fifty dollars ($50) for each record not provided,
    but the total imposed on that financial institution for all such failures during any calendar
    year shall not exceed one hundred thousand dollars ($100,000).
(h) For purposes of this section:
      (1) ″Account″ means a demand deposit account, share or share draft account, checking
        or negotiable withdrawal order account, savings account, time deposit account, or
        money market mutual fund account, regardless of whether the account bears interest.
                                     EDWARD BEEBY
                                                                                         Page 6 of 8
                                     2012 Cal SB 1015

      (2) ″Financial institution″ means:
            (A) A depository institution, as defined in Section 1813(c) of Title 12 of the United
            States Code.
            (B) An institution-affiliated party, as defined in Section 1813(u) of Title 12 of the
            United States Code.
            (C) A federal credit union or state credit union, as defined in Section 1752 of Title
            12 of the United States Code, including an institution-affiliated party of a credit
            union, as defined in Section 1786(r) of Title 12 of the United States Code.
           (D) A benefit association, insurance company, safe deposit company, money-market
            fund, or similar entity authorized to do business in this state.

            (3) ″Delinquent tax debtor″ means any OF THE FOLLOWING: (A)                        ANY
        PERSON LIABLE FOR ANY TAX, FEE, OR SURCHARGE AMOUNTS, AND ANY
        PENALTY, INTEREST, OR OTHER AMOUNTS REQUIRED TO BE PAID TO THE
        BOARD, WHERE THE LIABILITY REMAINS UNPAID AFTER 30 DAYS FROM
        DEMAND FOR PAYMENT BY THE BOARD, AND THE PERSON IS NOT
        MAKING CURRENT TIMELY INSTALLMENT PAYMENTS ON THE LIABILITY
        UNDER AN INSTALLMENT PAYMENT AGREEMENT AS PROVIDED BY
        LAW. (B) ANY PERSON LIABLE FOR ANY AMOUNTS REQUIRED TO BE
        PAID TO THE EMPLOYMENT DEVELOPMENT DEPARTMENT OR FOR ANY
        DEBTS OR PENALTY ASSESSMENTS REFERRED TO THE EMPLOYMENT
        DEVELOPMENT DEPARTMENT FOR COLLECTION AND THE PERSON IS NOT
        MAKING CURRENT TIMELY INSTALLMENT PAYMENTS ON THE LIABILITY
        UNDER AN APPROVED INSTALLMENT PAYMENT AGREEMENT AS PROVIDED
        BY LAW. (C) ANY person liable for any income or franchise tax or other debt
        referred to the Franchise Tax Board for collection as imposed under Part 5 (commencing
        with Section 10701), Part 10 (commencing with Section 17001), Part 10.2 (commencing
        with Section 18401), or Part 11 (commencing with Section 23001), including tax,
        penalties, interest, and fees, where the tax or debt, including the amount, if any, referred
        to the Franchise Tax Board for collection remains unpaid after 30 days from demand for
        payment by the Franchise Tax Board, and the person is not making current timely
        installment payments on the liability under an agreement pursuant to Section 19006
        19008 .
(i) A financial institution shall be reimbursed by the Franchise Tax Board for actual costs
    incurred to implement the provisions of this section. Upon receipt of an invoice from the
    financial institution, cost reimbursement by the Franchise Tax Board shall be limited to the
    following:
      (1) For one-time startup costs of a financial institution, no more than two thousand five
        hundred dollars ($2,500).
      (2) For data matching costs of a financial institution, other than one-time startup costs,
        no more than two hundred fifty dollars ($250) per calendar quarter.
(j) The first data exchange for purposes of matching tax debtor records to financial institution
                                     EDWARD BEEBY
                                                                                               Page 7 of 8
                                            2012 Cal SB 1015

          accountholder records shall occur no earlier than April 1, 2012.

      (k) This section shall be operative 120 days after the effective date of the act adding this section
      and shall apply with respect to persons that are delinquent tax debtors on and after that date.
      (1)      NOTWITHSTANDING ANY OTHER PROVISION OF LAW, ON OR AFTER
      JANUARY 1, 2013, AND ON A QUARTERLY BASIS THEREAFTER, THE BOARD AND
      THE EMPLOYMENT DEVELOPMENT DEPARTMENT SHALL, IN THE FORMAT AND
      MANNER SPECIFIED BY THE FRANCHISE TAX BOARD, PROVIDE THEIR
      RESPECTIVE DELINQUENT TAX DEBTOR INFORMATION TO THE FRANCHISE TAX
      BOARD FOR INCLUSION IN THE FINANCIAL INSTITUTIONS RECORDS MATCH
      SYSTEM. (2) THE FRANCHISE TAX BOARD SHALL INCLUDE THE DELINQUENT
      TAX DEBTOR INFORMATION PROVIDED BY THE BOARD AND THE EMPLOYMENT
      DEVELOPMENT DEPARTMENT IN ITS DATA FILE USED TO MATCH DELINQUENT
      TAX DEBTOR RECORDS TO FINANCIAL INSTITUTION ACCOUNTHOLDER
      RECORDS. (3) THE FRANCHISE TAX BOARD SHALL PROVIDE THE BOARD OR
      THE EMPLOYMENT DEVELOPMENT DEPARTMENT, AS APPLICABLE, WITH ANY
      MATCHED FINANCIAL INSTITUTION ACCOUNTHOLDER RECORD INFORMATION
      RESULTING FROM THE DELINQUENT TAX DEBTOR INFORMATION PROVIDED BY
      THE BOARD OR THE EMPLOYMENT DEVELOPMENT DEPARTMENT. (4)                                        THE
      BOARD AND THE EMPLOYMENT DEVELOPMENT DEPARTMENT SHALL REIMBURSE
      THE FRANCHISE TAX BOARD FOR ANY COSTS INCURRED BY THE FRANCHISE
      TAX BOARD RELATED TO THE IMPLEMENTATION AND ADMINISTRATION OF THIS
      SECTION WITH RESPECT TO DELINQUENT TAX DEBTORS DESCRIBED IN
      SUBPARAGRAPH (A) OR (B), RESPECTIVELY, OF PARAGRAPH (3) OF SUBDIVISION
      (H).
SEC. 3. Part 18 (commencing with Section 38001) of Division 2 of the Revenue and Taxation Code
is repealed.
SEC. 4.

The Legislature finds and declares the following:
  (a) The doctrine of election (see generally Pacific Nat. Co. v. Welch (1938) 304 U.S. 191), provides
      that an election affecting the computation of tax must be made on an original timely filed return
      for the taxable period for which the election is to apply and once made is binding.
  (b) The doctrine of election described in subdivision (a) applies to any election that affects the
      computation of tax under Part 10 (commencing with Section 17001), Part 10.2 (commencing
      with Section 18401), and Part 11 (commencing with Section 23001) of Division 2 of the Revenue
      and Taxation Code, unless otherwise provided.
  (c) Subdivision (b) does not constitute a change in, but is declaratory of, existing law.

SEC. 5.

The repeal of Part 18 (commencing with Section 38001) of Division 2 of the Revenue and Taxation
Code in Section 3 of this act shall not be construed to create any inference that a change in
                                           EDWARD BEEBY
                                                                                                    Page 8 of 8
                                              2012 Cal SB 1015

interpretation with respect to that part, or any reference to that part, prior to its repeal is implied by this
act.

SEC. 6.

There is hereby appropriated one thousand dollars ($1,000) from the General Fund to the Franchise Tax
Board for administrative costs.

SEC. 7.

No reimbursement is required by this act pursuant to Section 6 of Article XIII B of the California
Constitution because the only costs that may be incurred by a local agency or school district will be
incurred because this act creates a new crime or infraction, eliminates a crime or infraction, or changes
the penalty for a crime or infraction, within the meaning of Section 17556 of the Government Code,
or changes the definition of a crime within the meaning of Section 6 of Article XIII B of the California
Constitution.

SEC. 8.

This act is a bill providing for appropriations related to the Budget Bill within the meaning of
subdivision (e) of Section 12 of Article IV of the California Constitution, has been identified as related
to the budget in the Budget Bill, and shall take effect immediately.

History

Approved by Governor June 27, 2012.

Filed with Secretary of State June 27, 2012.
DEERING’S CALIFORNIA ADVANCE LEGISLATIVE SERVICE
Copyright © 2015 Matthew Bender & Company, Inc. a member of the LexisNexis Group. All rights reserved.

                                              EDWARD BEEBY
 Checkpoint Contents
  State & Local Tax Library
   State Legislation
    Prior Legislative Sessions
      2013
         Full Text of Prior Enacted Legislation
          Minnesota
           House
            2013 MN H 6 - 2013 MN H 1444
              2013 MN H 677, Adopted

2013 Minnesota House File No. 677, Minnesota First Regular Session of the Eighty-Eighth Legislative
Session

TITLE: Omnibus Tax Bill.

Author: Lenczewski, Skoe
Version: Adopted
Version date: 20130523

Changes are annotated clearly to make it easy to review modifications. See the color scheme listed
below.

          A. [D] Text Deleted [D]

          B. [A] Text Added [A]

          C. [V] Text Vetoed [V]

Full Text

TEXT: Minnesota Office of the Revisor of Statutes HF 677 4th Engrossment - 88th Legislature (2013 -
2014) Posted on 05/21/2013 02:49pm Bill Text Versions Engrossments Introduction Pdf Posted on
02/21/2013 1st Engrossment Pdf Posted on 04/18/2013 2nd Engrossment Pdf Posted on 04/20/2013 3rd
Engrossment Pdf Posted on 04/24/2013 4th Engrossment Pdf Posted on 05/21/2013 Unofficial
Engrossments 1st Unofficial Engrossment Pdf Posted on 04/30/2013 Conference Committee Reports
LS88-CCR-HF0677 Pdf Posted on 05/19/2013
A bill for an act relating to financing and operation of state and local government; making changes to
individual income, corporate franchise, property, sales and use, estate, mineral, tobacco, alcohol, special,
local, and other taxes and tax-related provisions modifying the property tax refund; changing property tax
aids and credits; modifying the Sustainable Forest Incentive Act; modifying education aids and levies;
providing additional pension funding; modifying definitions and distributions for property taxes; providing
for property tax exemptions; modifying the payment in lieu of tax provisions; modifying education aids and
levies; modifying tobacco tax provisions; making changes to additions and subtractions from federal
taxable income; providing for federal conformity; changing income tax rates for individuals, estates, and
trusts; providing income tax credits; modifying estate tax provisions; providing for a state gift tax;
expanding the sales tax base; modifying the duty to collect and remit sales taxes for certain sellers;
imposing the sales tax on digital products and selected services; modifying the definition of sale and
purchase; modifying provisions for the rental motor vehicle tax rate; providing for multiple points of use
certificates; modifying sales tax exemptions; authorizing local sales taxes; authorizing economic
development powers; modifying tax increment financing rules; providing authority, organization, powers,
duties, and requiring a prevailing wage for development of a Destination Medical Center; authorizing state
infrastructure aid; modifying the distribution of taconite production taxes; authorizing taconite production
tax bonds for grants to school districts; modifying and providing provisions for public finance; providing
funding for legislative office facilities; modifying the definition of market value for tax, debt, and other
purposes; making conforming, policy, and technical changes to tax provisions; requiring studies and
reports; appropriating money;amending Minnesota Statutes 2012, sections 13.792; 16A.46; 16A.727;
38.18; 40A.15, subdivision 2; 69.011, subdivision 1; 69.021, subdivisions 7, 8; 88.51, subdivision 3;
103B.102 , subdivision 3; 103B.245 , subdivision 3; 103B.251 , subdivision 8; 103B.335 ; 103B.3369 ,
subdivision 5; 103B.635 , subdivision 2; 103B.691 , subdivision 2; 103C.501 , subdivision 4; 103D.905 ,
subdivisions 2, 3, 8; 103F.405 , subdivision 1; 116J.8737 , subdivisions 1, 2, 8; 117.025 , subdivision 7;
118A.04 , subdivision 3; 118A.05 , subdivision 5; 123A.455 , subdivision 1; 126C.10 , subdivision 1, by
adding a subdivision; 126C.13 , subdivision 4; 126C.17 ; 126C.48 , subdivision 8; 127A.48 , subdivision 1;
138.053 ; 144F.01 , subdivision 4; 162.07 , subdivisions 3, 4; 163.04 , subdivision 3; 163.06 , subdivision
6; 165.10 , subdivision 1; 168.012 , subdivision 9, by adding a subdivision; 216C.436 , subdivision 7;
237.52 , subdivision 3, by adding a subdivision; 270.077 ; 270.41 , subdivisions 3, 5, by adding a
subdivision; 270.45 ; 270B.01 , subdivision 8; 270B.03 , subdivision 1; 270B.12 , subdivision 4; 270C.03 ,
subdivision 1; 270C.34 , subdivision 1; 270C.38 , subdivision 1; 270C.42 , subdivision 2; 270C.56 ,
subdivision 1; 271.06 , subdivision 2a, as added; 272.01 , subdivision 2; 272.02 , subdivisions 39, 97, by
adding subdivisions; 272.03 , subdivision 9, by adding subdivisions; 273.032 ; 273.061 , subdivision 2;
273.0645 ; 273.11 , subdivision 1; 273.114 , subdivision 6; 273.117 ; 273.124 , subdivisions 3a, 13;
273.13 , subdivisions 21b, 23, 25; 273.1398 , subdivisions 3, 4; 273.19 , subdivision 1; 273.372 ,
subdivision 4; 273.39 ; 275.011 , subdivision 1; 275.077 , subdivision 2; 275.71 , subdivision 4; 276.04 ,
subdivision 2; 276A.01 , subdivisions 10, 12, 13, 15; 276A.06 , subdivision 10; 279.01 , subdivision 1, by
adding a subdivision; 279.02 ; 279.06 , subdivision 1; 279.37 , subdivisions 1a, 2; 281.14 ; 281.17 ;
287.05 , by adding a subdivision; 287.08 ; 287.20 , by adding a subdivision; 287.23 , subdivision 1;
287.385 , subdivision 7; 289A.08 , subdivision 3; 289A.10 , subdivision 1, by adding a subdivision;
289A.12 , subdivision 14, by adding a subdivision; 289A.18 , by adding a subdivision; 289A.20 ,
subdivisions 3, 4, by adding a subdivision; 289A.26 , subdivisions 3, 4, 7, 9; 289A.55 , subdivision 9;
289A.60 , subdivision 4; 290.01 , subdivisions 19, as amended, 19b, 19c, 19d; 290.06 , subdivisions 2c,
2d, by adding a subdivision; 290.0677 , subdivision 2; 290.068 , subdivisions 3, 6a; 290.0681 ,
subdivisions 1, 3, 4, 5, 10; 290.091 , subdivisions 1, 2, 6; 290.0921 , subdivision 3; 290.0922 , subdivision
1; 290.095 , subdivision 2; 290.10 , subdivision 1; 290.17 , subdivision 4; 290.191 , subdivision 5; 290.21 ,
subdivision 4; 290.9705 , subdivision 1; 290A.03 , subdivision 3; 290A.04 , subdivisions 2, 2a, 4; 290B.04
, subdivision 2; 290C.02 , subdivision 6; 290C.03 ; 290C.055 ; 290C.07 ; 291.005 , subdivision 1; 291.03 ,
subdivisions 1, 8, 9, 10, 11, by adding a subdivision; 296A.01 , subdivisions 7, 8, 14, 19, 20, 23, 24, 26,
by adding a subdivision; 296A.09 , subdivision 2; 296A.17 , subdivision 3; 296A.22 , subdivisions 1, 3;
297A.61 , subdivisions 3, 4, 10, 25, 38, 45, by adding subdivisions; 297A.64 , subdivision 1; 297A.66 ,
subdivision 3, by adding a subdivision; 297A.665 ; 297A.668 , by adding a subdivision; 297A.67 ,
subdivisions 7, 13, by adding a subdivision; 297A.68 , subdivisions 2, 5, 42, by adding a subdivision;
297A.70 , subdivisions 2, 4, 5, 7, 13, 14, by adding subdivisions; 297A.71 , by adding subdivisions;
297A.75 , subdivisions 1, 2, 3; 297A.82 , subdivision 4, by adding a subdivision; 297A.99 , subdivision 1;
297B.11 ; 297E.021 , subdivision 3; 297E.14 , subdivision 7; 297F.01 , subdivisions 3, 19, 23, by adding
subdivisions; 297F.05 , subdivisions 1, 3, 4, by adding subdivisions; 297F.09 , subdivision 9; 297F.18 ,
subdivision 7; 297F.24 , subdivision 1; 297F.25 , subdivision 1; 297G.04 , subdivision 2; 297G.09 ,
subdivision 8; 297G.17 , subdivision 7; 297I.05 , subdivisions 7, 11, 12; 297I.30 , subdivisions 1, 2;
297I.80 , subdivision 1; 298.01 , subdivisions 3, 3b; 298.018 ; 298.17 ; 298.227 , as amended; 298.24 ,
subdivision 1; 298.28 , subdivisions 4, 6, 9c, 10; 325D.32 , subdivision 2; 325F.781 , subdivision 1;
349.166 , subdivision 1; 353G.08 , subdivision 2; 360.531 ; 360.66 ; 365.025 , subdivision 4; 366.095 ,
subdivision 1; 366.27 ; 368.01 , subdivision 23; 368.47 ; 370.01 ; 373.01 , subdivisions 1, 3; 373.40 ,
subdivisions 1, 2, 4; 375.167 , subdivision 1; 375.18 , subdivision 3; 375.555 ; 383A.80 , subdivision 4;
383B.152 ; 383B.245 ; 383B.73 , subdivision 1; 383B.80 , subdivision 4; 383D.41 , by adding a
subdivision; 383E.20 ; 383E.23 ; 385.31 ; 394.36 , subdivision 1; 398A.04 , subdivision 8; 401.05 ,
subdivision 3; 403.02 , subdivision 21, by adding subdivisions; 403.06 , subdivision 1a; 403.11 ,
subdivision 1, by adding subdivisions; 410.32 ; 412.221 , subdivision 2; 412.301 ; 428A.02 , subdivision 1;
428A.101 ; 428A.21 ; 430.102 , subdivision 2; 447.10 ; 450.19 ; 450.25 ; 458A.10 ; 458A.31 , subdivision
1; 465.04 ; 469.033 , subdivision 6; 469.034 , subdivision 2; 469.053 , subdivisions 4, 4a, 6; 469.071 ,
subdivision 5; 469.107 , subdivision 1; 469.169 , by adding a subdivision; 469.176 , subdivisions 4c, 4g,
6; 469.177 , subdivisions 1a, 9, by adding subdivisions; 469.180 , subdivision 2; 469.187 ; 469.206 ;
469.319 , subdivision 4; 469.340 , subdivision 4; 471.24 ; 471.571 , subdivisions 1, 2; 471.73 ; 473.325 ,
subdivision 2; 473.39 , by adding a subdivision; 473.606 , subdivision 3; 473.629 ; 473.661 , subdivision
3; 473.667 , subdivision 9; 473.671 ; 473.711 , subdivision 2a; 473F.02 , subdivisions 12, 14, 15, 23;
473F.08 , subdivisions 3a, 10, by adding a subdivision; 474A.04 , subdivision 1a; 474A.062 ; 474A.091 ,
subdivision 3a; 475.521 , subdivisions 1, 2, 4; 475.53 , subdivisions 1, 3, 4; 475.58 , subdivisions 2, 3b;
475.73 , subdivision 1; 477A.011 , subdivisions 20, 30, 34, 42, by adding subdivisions; 477A.0124 ,
subdivision 2; 477A.013 , subdivisions 1, 8, 9, by adding a subdivision; 477A.015 ; 477A.03 , subdivisions
2a, 2b, by adding a subdivision; 477A.11 , subdivisions 3, 4, by adding subdivisions; 477A.12 ,
subdivisions 1, 2, 3; 477A.14 , subdivision 1, by adding a subdivision; 641.23 ; 641.24 ; 645.44 , by
adding a subdivision; Laws 1971, chapter 773, section 1, subdivision 2, as amended; Laws 1988, chapter
645, section 3, as amended; Laws 1993, chapter 375, article 9, section 46, subdivisions 2, as amended,
5, as amended; Laws 1998, chapter 389, article 8, section 43, subdivisions 1, 3, as amended, 5, as
amended; Laws 1999, chapter 243, article 6, section 11; Laws 2002, chapter 377, article 3, section 25, as
amended; Laws 2005, First Special Session chapter 3, article 5, section 37, subdivisions 2, 4; Laws 2006,
chapter 259, article 11, section 3, as amended; Laws 2008, chapter 366, article 5, sections 26; 33; 34, as
amended; article 7, section 19, subdivision 3, as amended; Laws 2009, chapter 88, article 2, section 46,
subdivisions 1, 3; Laws 2010, chapter 216, sections 11; 55; Laws 2010, chapter 389, article 1, section 12;
article 5, section 6, subdivision 6; proposing coding for new law in Minnesota Statutes, chapters 116J;
116V; 124D; 136A; 270C; 287; 290A; 292; 403; 423A; 469; 477A; repealing Minnesota Statutes 2012,
sections 16A.725; 97A.061; 256.9658 ; 272.69 ; 273.11 , subdivisions 1a, 22; 276A.01 , subdivision 11;
289A.60 , subdivision 31; 290.01 , subdivision 6b; 290.06 , subdivision 22a; 290.0921 , subdivision 7;
290.171 ; 290.173 ; 290.174 ; 297A.61 , subdivision 27; 297A.68 , subdivision 35; 473F.02 , subdivision
13; 477A.011 , subdivisions 2a, 19, 21, 29, 31, 32, 33, 36, 39, 40, 41; 477A.013 , subdivisions 11, 12;
477A.0133 ; 477A.0134 ; Laws 1973, chapter 567, section 7, as amended; Laws 2009, chapter 88, article
4, section 23, as amended.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: ARTICLE 1 HOMESTEAD
CREDIT REFUND AND RENTER PROPERTY TAX REFUND

Section 1. AMEND Minnesota Statutes 2012, section 290A.03, subdivision 3 , is amended to read: Subd.
3. Income. (1) "Income" means the sum of the following:

(a) federal adjusted gross income as defined in the Internal Revenue Code; and

(b) the sum of the following amounts to the extent not included in clause (a):

(i) all nontaxable income;

(ii) the amount of a passive activity loss that is not disallowed as a result of section 469, paragraph (i) or
(m) of the Internal Revenue Code and the amount of passive activity loss carryover allowed under section
469(b) of the Internal Revenue Code;

(iii) an amount equal to the total of any discharge of qualified farm indebtedness of a solvent individual
excluded from gross income under section 108(g) of the Internal Revenue Code;

(iv) cash public assistance and relief;

(v) any pension or annuity (including railroad retirement benefits, all payments received under the federal
Social Security Act, Supplemental Security Income, and veterans benefits), which was not exclusively
funded by the claimant or spouse, or which was funded exclusively by the claimant or spouse and which
funding payments were excluded from federal adjusted gross income in the years when the payments
were made;
(vi) interest received from the federal or a state government or any instrumentality or political subdivision
thereof;

(vii) workers' compensation;

(viii) nontaxable strike benefits;

(ix) the gross amounts of payments received in the nature of disability income or sick pay as a result of
accident, sickness, or other disability, whether funded through insurance or otherwise;

(x) a lump-sum distribution under section 402(e)(3) of the Internal Revenue Code of 1986, as amended
through December 31, 1995;

(xi) contributions made by the claimant to an individual retirement account, including a qualified voluntary
employee contribution; simplified employee pension plan; self-employed retirement plan; cash or deferred
arrangement plan under section 401(k) of the Internal Revenue Code; or deferred compensation

plan under section 457 of the Internal Revenue Code
    [A>, to the extent the

sum of amounts exceeds the retirement base amount for the claimant and spouse to the extent not included in federal adjusted gross income,

distributions received by the claimant or spouse from a traditional or Roth style retirement account or
plan; (xiii) (xiii) (xiv) (xiv) (xv) (xv) (xvi) of deducted for required to be added to income under section 290.01, subdivision 19 a , clause (12); under
section 222 of the Internal Revenue Code; and (xvi) (xvii) ; and . (xvii) unemployment compensation. to the extent included in federal adjusted gross income, amounts

contributed by the claimant or spouse to a traditional or Roth style retirement account or plan, but not to
exceed the retirement base amount reduced by the amount of contributions excluded from federal
adjusted gross income, but not less than zero; (d) (d) (e) (e) (f) (f) (g) ; "retirement base amount" means the

deductible amount for the taxable year for the claimant and spouse under section 219(b)(5)(A) of the
Internal Revenue Code, adjusted for inflation as provided in section 219(b)(5)(D) of the Internal Revenue
Code, without regard to whether the claimant or spouse claimed a deduction; and "traditional or Roth
style retirement account or plan" means retirement plans under sections 401, 403, 408, 408A, and 457 of
the Internal Revenue Code EFFECTIVE DATE. This section is effective beginning with refunds based on property taxes payable
in 2014 and rent paid in 2013.  ; homestead credit refund               Household Income Percent of Income Percent Paid by Claimant Maximum State
Refund $0 to 1,549 1.0 percent 15 percent $ 2,460 1,550 to 3,089 1.1 percent 15 percent $ 2,460 3,090
to 4,669 1.2 percent 15 percent $ 2,460 4,670 to 6,229 1.3 percent 20 percent $ 2,460 6,230 to 7,769 1.4
percent 20 percent $ 2,460 7,770 to 10,879 1.5 percent 20 percent $ 2,460 10,880 to 12,429 1.6 percent
20 percent $ 2,460 12,430 to 13,989 1.7 percent 20 percent $ 2,460 13,990 to 15,539 1.8 percent 20
percent $ 2,460 15,540 to 17,079 1.9 percent 25 percent $ 2,460 17,080 to 18,659 2.0 percent 25 percent
$ 2,460 18,660 to 21,759 2.1 percent 25 percent $ 2,460 21,760 to 23,309 2.2 percent 30 percent $ 2,460
23,310 to 24,859 2.3 percent 30 percent $ 2,460 24,860 to 26,419 2.4 percent 30 percent $ 2,460 26,420
to 32,629 2.5 percent 35 percent $ 2,460 32,630 to 37,279 2.6 percent 35 percent $ 2,460 37,280 to
46,609 2.7 percent 35 percent $ 2,000 46,610 to 54,369 2.8 percent 35 percent $ 2,000 54,370 to 62,139
2.8 percent 40 percent $ 1,750 62,140 to 69,909 3.0 percent 40 percent $ 1,440 69,910 to 77,679 3.0
percent 40 percent $ 1,290 77,680 to 85,449 3.0 percent 40 percent $ 1,130 85,450 to 90,119 3.5 percent
45 percent $ 960 90,120 to 93,239 3.5 percent 45 percent $ 790 93,240 to 97,009 3.5 percent 50 percent
$ 650 97,010 to 100,779 3.5 percent 50 percent $ 480 Household Income Percent of Income
Percent Paid by Claimant Maximum State Refund $0 to 1,619 1.0 percent 15 percent $ 2,580 1,620 to
3,229 1.1 percent 15 percent $ 2,580 3,230 to 4,889 1.2 percent 15 percent $ 2,580 4,890 to 6,519 1.3
percent 20 percent $ 2,580 6,520 to 8,129 1.4 percent 20 percent $ 2,580 8,130 to 11,389 1.5 percent 20
percent $ 2,580 11,390 to 13,009 1.6 percent 20 percent $ 2,580 13,010 to 14,649 1.7 percent 20 percent
$ 2,580 14,650 to 16,269 1.8 percent 20 percent $ 2,580 16,270 to 17,879 1.9 percent 25 percent $ 2,580
17,880 to 22,779 2.0 percent 25 percent $ 2,580 22,780 to 24,399 2.0 percent 30 percent $ 2,580 24,400
to 27,659 2.0 percent 30 percent $ 2,580 27,660 to 39,029 2.0 percent 35 percent $ 2,580 39,030 to
56,919 2.0 percent 35 percent $ 2,090 56,920 to 65,049 2.0 percent 40 percent $ 1,830 65,050 to 73,189
2.1 percent 40 percent $ 1,510 73,190 to 81,319 2.2 percent 40 percent $ 1,350 81,320 to 89,449 2.3
percent 40 percent $ 1,180 89,450 to 94,339 2.4 percent 45 percent $ 1,000 94,340 to 97,609 2.5 percent
45 percent $ 830 97,610 to 101,559 2.5 percent 50 percent $ 680 101,560 to 105,499 2.5 percent 50
percent $ 500 $100,780

$105,500 EFFECTIVE DATE. This section is effective for refund claims based on taxes payable in 2014 and
thereafter. $0 to 3,589 1.0 percent 5 percent $ 1,190 3,590 to 4,779 1.0

percent 10 percent $ 1,190 4,780 to 5,969 1.1 percent 10 percent $ 1,190 5,970 to 8,369 1.2 percent 10
percent $ 1,190 8,370 to 10,759 1.3 percent 15 percent $ 1,190 10,760 to 11,949 1.4 percent 15 percent
$ 1,190 11,950 to 13,139 1.4 percent 20 percent $ 1,190 13,140 to 15,539 1.5 percent 20 percent $ 1,190
15,540 to 16,729 1.6 percent 20 percent $ 1,190 16,730 to 17,919 1.7 percent 25 percent $ 1,190 17,920
to 20,319 1.8 percent 25 percent $ 1,190 20,320 to 21,509 1.9 percent 30 percent $ 1,190 21,510 to
22,699 2.0 percent 30 percent $ 1,190 22,700 to 23,899 2.2 percent 30 percent $ 1,190 23,900 to 25,089
2.4 percent 30 percent $ 1,190 25,090 to 26,289 2.6 percent 35 percent $ 1,190 26,290 to 27,489 2.7
percent 35 percent $ 1,190 27,490 to 28,679 2.8 percent 35 percent $ 1,190 28,680 to 29,869 2.9 percent
40 percent $ 1,190 29,870 to 31,079 3.0 percent 40 percent $ 1,190 31,080 to 32,269 3.1 percent 40
percent $ 1,190 32,270 to 33,459 3.2 percent 40 percent $ 1,190 33,460 to 34,649 3.3 percent 45 percent
$ 1,080 34,650 to 35,849 3.4 percent 45 percent $ 960 35,850 to 37,049 3.5 percent 45 percent $ 830
37,050 to 38,239 3.5 percent 50 percent $ 720 38,240 to 39,439 3.5 percent 50 percent $ 600 38,440 to
40,629 3.5 percent 50 percent $ 360 40,630 to 41,819 3.5 percent 50 percent $ 120 $0 to 4,909
1.0 percent 5 percent $ 2,000 4,910 to 6,529 1.0 percent 10 percent $ 2,000 6,530 to 8,159 1.1 percent
10 percent $ 1,950 8,160 to 11,439 1.2 percent 10 percent $ 1,900 11,440 to 14,709 1.3 percent 15
percent $ 1,850 14,710 to 16,339 1.4 percent 15 percent $ 1,800 16,340 to 17,959 1.4 percent 20 percent
$ 1,750 17,960 to 21,239 1.5 percent 20 percent $ 1,700 21,240 to 22,869 1.6 percent 20 percent $ 1,650
22,870 to 24,499 1.7 percent 25 percent $ 1,650 24,500 to 27,779 1.8 percent 25 percent $ 1,650 27,780
to 29,399 1.9 percent 30 percent $ 1,650 29,400 to 34,299 2.0 percent 30 percent $ 1,650 34,300 to
39,199 2.0 percent 35 percent $ 1,650 39,200 to 45,739 2.0 percent 40 percent $ 1,650 45,740 to 47,369
2.0 percent 45 percent $ 1,500 47,370 to 49,009 2.0 percent 45 percent $ 1,350 49,010 to 50,649 2.0
percent 45 percent $ 1,150 50,650 to 52,269 2.0 percent 50 percent $ 1,000 52,270 to 53,909 2.0 percent
50 percent $ 900 53,910 to 55,539 2.0 percent 50 percent $ 500 55,540 to 57,169 2.0 percent 50 percent
$ 200 $41,820

$57,170 EFFECTIVE DATE. This section is effective for claims based on rent paid in 2013 and following years.
2011 2013 2000 2013 EFFECTIVE DATE. This section is effective for refund claims based on taxes payable in 2014 and
rent paid in 2013 and following years.  [290A.28 ] NOTIFICATION OF POTENTIAL ELIGIBILITY. Subdivision 1. Notification of eligibility. (a) By September 1, 2014, the commissioner shall notify, in writing or electronically, individual
homeowners whom the commissioner determines may be eligible for a homestead credit refund under
this chapter for that property taxes payable year as provided in this section. In determining whether to
notify a homeowner, the commissioner shall consider the property tax information available to the
commissioner under paragraph (b) for the homeowner and must estimate the homeowner's household
income using the most recent income information available to the commissioner from filing under this
chapter for the prior year, under chapter 290 for the current or prior year, and any other income
information available to the commissioner. For each homeowner, the commissioner must estimate the
homestead credit refund amount under the schedule in section 290A.04, subdivision 2 , using the
homeowner's property tax amount and estimated household income. If the estimated homestead credit
refund is at least $1,000, the commissioner must notify the homeowner of potential eligibility for the
homestead credit refund. The notification must include information on how to file for the homestead credit
refund. The notification requirement under this section does not apply to a homeowner who has already
filed for the homestead credit refund for the current or prior year. (b) By May 15, 2014, each county auditor shall transmit to the commissioner of revenue the following
information for each property classified as a residential or agricultural homestead under section 273.13,
subdivision 22 or 23: (1) the property taxes payable; (2) the name and address of the owner; (3) the Social Security number or numbers of the owners; and (4) any other information the commissioner deems necessary or useful to carry out the provisions of
this section. The information must be provided in the form and manner prescribed by the commissioner.
Subd. 2. Reports. (a) By March 15, 2015, the commissioner must provide a written report to the chairs and ranking
minority members of the legislative committees with jurisdiction over taxes, in compliance with sections
3.195 and 3.197. The report must provide information on the number and dollar amount of homeowner
property tax refund claims based on taxes payable in 2014, including: (1) the number and dollar amount of claims projected for homestead credit refunds based on taxes
payable in 2014 prior to enactment of the notification requirement in this section; (2) the number of notifications issued as provided in this section, including the number issued by
county; (3) preliminary information on the number and dollar amount of claims for homestead credit refunds
based on taxes payable in 2014; and (4) a description of any outreach efforts undertaken by the commissioner for homestead credit refunds
based on taxes payable in 2014, in addition to the notification required in this section. (b) By February 1, 2016, the commissioner must provide a written report to the chairs and ranking
minority members of the legislative committees with jurisdiction over taxes, in compliance with sections
3.195 and 3.197. The report must include the information required in paragraph (a) and must also include
final information on the number and dollar amount of claims for homestead credit refunds based on taxes
payable in 2014. EFFECTIVE DATE. This section is effective for refund claims based on property taxes payable in
2014. 2.3 1.9 2.3 1.9 EFFECTIVE DATE. This section is effective beginning with taxes payable in 2014. or land

exceeding 60,000 acres that is subject to a single conservation easement funded under section 97A.056
or a comparable permanent easement conveyed to a governmental or nonprofit entity; (iv) any land that
becomes subject to a conservation easement funded under section 97A.056 or a comparable permanent
easement conveyed to a governmental or nonprofit entity after May 30, 2013; or (v) EFFECTIVE DATE. This section is effective for certifications and applications due in 2013 and
thereafter. and motorized access on established and maintained

roads and trails, unless the road or trail is temporarily closed for safety, natural resource, or road damage
reasons EFFECTIVE DATE. This section is effective for calculations made in 2013 and thereafter. (a) (b) (c) : (1) ; or (2) at the request of the claimant after a reduction in payments due to changes in the payment formula
under section 290C.07 EFFECTIVE DATE. This section is effective for calculations made in 2013 and thereafter. (a) (b) The annual payment for each Social Security number or state or federal business tax identification
number must not exceed $100,000. EFFECTIVE DATE. This section is effective for calculations made in 2013 and thereafter.  [423A.022 ] POLICE AND FIREFIGHTER RETIREMENT SUPPLEMENTAL STATE AID. Subdivision 1. Supplemental state aid. Annually, the commissioner of revenue shall allocate police
and firefighter retirement supplemental state aid appropriated under subdivision 6 as provided in
subdivision 2 and paid as provided in subdivision 4. Subd. 2. Allocation. Of the total amount appropriated as supplemental state aid: (1) 58.065 percent must be paid to the executive director of the Public Employees Retirement
Association for deposit in the public employees police and fire retirement fund established by section
353.65, subdivision 1 ; (2) 35.484 percent must be paid to municipalities other than municipalities solely employing firefighters
with retirement coverage provided by the public employees police and fire retirement plan which qualified
to receive fire state aid in that calendar year, allocated in proportion to the most recent amount of fire
state aid paid under section 69.021, subdivision 7 , for the municipality bears to the most recent total fire
state aid for all municipalities other than the municipalities solely employing firefighters with retirement
coverage provided by the public employees police and fire retirement plan paid undersection 69.021,
subdivision 7 , with the allocated amount for fire departments participating in the voluntary statewide
lump-sum volunteer firefighter retirement plan paid to the executive director of the Public Employees
Retirement Association for deposit in the fund established by section 353G.02, subdivision 3 , and
credited to the respective account and with the balance paid to the treasurer of each municipality for
transmittal within 30 days of receipt to the treasurer of the applicable volunteer firefighter relief association
for deposit in its special fund; and (3) 6.452 percent must be paid to the executive director of the Minnesota State Retirement System for
deposit in the state patrol retirement fund. Subd. 3. Reporting; definitions. (a) On or before September 1, annually, the executive director of the Public Employees Retirement
Association shall report to the commissioner of revenue the following: (1) the municipalities which employ firefighters with retirement coverage by the public employees
police and fire retirement plan; (2) the number of firefighters with public employees police and fire retirement plan coverage employed
by each municipality; (3) the fire departments covered by the voluntary statewide lump-sum volunteer firefighter retirement
plan; and (4) any other information requested by the commissioner to administer the police and firefighter
retirement supplemental state aid program. (b) For this subdivision, (i) the number of firefighters employed by a municipality who have public
employees police and fire retirement plan coverage means the number of firefighters with public
employees police and fire retirement plan coverage that were employed by the municipality for not less
than 30 hours per week for a minimum of six months prior to December 31 preceding the date of the
payment under this section and, if the person was employed for less than the full year, prorated to the
number of full months employed; and (ii) the number of active police officers certified for police state aid
receipt under section 69.011, subdivisions 2 and 2b, means, for each municipality, the number of police
officers meeting the definition of peace officer in section 69.011, subdivision 1 , counted as provided and
limited by section 69.011, subdivisions 2 and 2b. Subd. 4. Payments; conditions prerequisite. (a) The payments under this section must be made on October 1 each year, with interest at one
percent for each month, or portion of a month, that the amount remains unpaid after October 1. Any
necessary adjustments must be made to subsequent payments. (b) The provisions of sections 69.011 to 69.051 that prevent municipalities and relief associations from
being eligible for, or receiving fire state aid under sections 69.011 to 69.051 until the applicable financial
reporting requirements have been complied with, apply to the amounts payable to municipalities and relief
associations under this section. Subd. 5. Aid termination. The aid program under this section ends on the December 1 next following
the actuarial valuation date on which the assets of the retirement plan on a market value basis equals or
exceeds 90 percent of the total actuarial accrued liabilities of the retirement plan as disclosed in an
actuarial valuation prepared under section 356.215 and the Standards for Actuarial Work promulgated by
the Legislative Commission on Pensions and Retirement, for the State Patrol retirement plan or the public
employees police and fire retirement plan, whichever occurs last. Subd. 6. Appropriation. $15,500,000 is appropriated annually to the commissioner of revenue for this
aid program. EFFECTIVE DATE. This section is effective beginning in the fiscal year beginning July 1, 2013. (a) Except as provided in paragraph (b), federal census by

the United States Bureau of the Census For aids payable in 2014, "pre-1940 housing percentage" shall
be based on 2010 housing data. (b) For the city of East Grand Forks only, "pre-1940 housing percentage" is equal to 100 times the
1990 federal census count of all housing units in the city built before 1940, divided by the most recent
count by the United States Bureau of the Census of all housing units in the city. Housing units includes
both occupied and vacant housing units as defined by the federal census. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. Subd. 30a. Percent of housing built between 1940 and 1970. " Percent of housing built between
1940 and 1970" is equal to 100 times the most recent count by the United States Bureau of the Census of
all housing units in the city built after 1939 but before 1970, divided by the total number of all housing
units in the city. Housing units includes both occupied and vacant housing units as defined by the federal
census. For aids payable in 2014, "percent of housing built between 1940 and 1970" shall be based on
2010 housing data. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. 2,50010,000 the greater of 285 or 1.15
times 5.0734098 4.59 19.141678 times the population decline

percentage 0.622 times the percent of housing built between 1940 and 1970

2504.06334 times the road accidents factor 169.415times the jobs per capita 355.0547; minus (5) the

metropolitan area factor; minus (6) 49.10638 times the household size the sparsity adjustment;
plus (5) 307.664 (b) For a city with a population equal to or greater than 2,500 and less than 10,000, "city revenue
need" is 1.15 times the sum of (1) 572.62 ; plus (2) 5.026 times the pre-1940 housing percentage; minus
(3) 53.768 times household size; plus (4) 14.022 times peak population decline. (b) (c) (1) 2.387 times the pre-1940 housing percentage; plus (2) 2.67591 times the commercial industrial
percentage; plus (3) 3.16042 times the population decline percentage; plus (4) 1.206 times the
transformed population; minus (5) 62.772 410 plus 0.367 times the city's population over 100. The
city revenue need under this paragraph shall not exceed 630 (c) (d) at least or

more and a population in one of the most recently available five years that was less than 2,500, "city
revenue need" is the sum of (1) its city revenue need calculated under paragraph (a) multiplied by its
transition factor; plus (2) its city revenue need calculated under the formula in paragraph (b) multiplied by the difference between one and its transition factor. For purposes of this paragraph, a
city's "transition factor" is equal to 0.2 multiplied by the number of years that the city's population estimate
has been 2,500 or more. This provision only applies for aids payable in calendar years 2006 to 2008 to
cities with a 2002 population of less than 2,500. It applies to any city for aids payable in 2009 and
thereafter but less than 3,000, the "city revenue need" equals (1) the transition factor times the
city's revenue need calculated in paragraph (b) plus (2) 630 times the difference between one and the
transition factor. For a city with a population of at least 10,000 but less than 10,500, the "city revenue
need" equals (1) the transition factor times the city's revenue need calculated in paragraph (a) plus (2) the
city's revenue need calculated under the formula in paragraph (b) times the difference between one and
the transition factor. For purposes of this paragraph "transition factor" is 0.2 percent times the amount that
the city's population exceeds the minimum threshold in either of the first two sentences (d) (e) (e) (f) 2005 2015 (d) (e) 2003 2013 EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter.  City jobs base  Jobs per capita (a) "City jobs base" for a city with a population of 5,000 or more is equal to the product of (1) $25.20,
(2) the number of jobs per capita in the city, and (3) its population. For cities with a population less than
5,000, the city jobs base is equal to zero. For a city receiving aid under subdivision 36 , paragraph (k), its
city jobs base is reduced by the lesser of 36 percent of the amount of aid received under that paragraph
or $1,000,000. No city's city jobs base may exceed $4,725,000 under this paragraph. (b) For calendar year 2010 and subsequent years, the city jobs base for a city, as determined in
paragraph (a), is multiplied by the ratio of the appropriation under section 477A.03, subdivision 2 a , for
the year in which the aid is paid to the appropriation under that section for aids payable in 2009. (c) For purposes of this subdivision, as of May 1, 2008 November 1 of every odd-numbered

year June 1, 2008 January 1, of every even-numbered year beginning with January 1, 2014 June 20, 2008 December 1

of every odd-numbered year July 15, 2008 January 1 of all

even-numbered years For aids payable in 2014,
"jobs per capita" shall be based on the annual number of employees and population for calendar year
2010 without additional review. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. Subd. 44. Peak population decline. " Peak population decline" is equal to 100 times the
difference between one and the ratio of the city's current population, to the highest city population
reported in a federal census from the 1970 census or later. " Peak population decline" shall not be less
than zero. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. Subd. 45. Sparsity adjustment. For a city with a population of 10,000 or more, the sparsity
adjustment is 100 for any city with an average population density less than 150 per square mile,
according to the most recent federal census, and the sparsity adjustment is zero for all other cities. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. In 2002, no town is eligible for a distribution under this subdivision. In
2014 and thereafter, each town is eligible for a distribution under this subdivision equal to the product of
(i) its agricultural property factor, (ii) its town area factor, (iii) its population factor, and (iv) 0.0045. As used
in this subdivision, the following terms have the meanings given them: (1) "agricultural property factor" means the ratio of the adjusted net tax capacity of agricultural
property located in a town, divided by the adjusted net tax capacity of all other property located in the
town. The agricultural property factor cannot exceed eight; (2) "agricultural property" means property classified under section 273.13 , as homestead and
nonhomestead agricultural property, rural vacant land, and noncommercial seasonal recreational
property; (3) "town area factor" means the most recent estimate of total acreage, not to exceed 50,000 acres,
located in the township available as of July 1 in the aid calculation year, estimated or established by: (i) the United States Bureau of the Census; (ii) the State Land Management Information Center; or (iii) the secretary of state; and (4) "population factor" means the square root of the towns' population. If the sum of the aids payable
to all towns under this subdivision exceeds the limit under section 477A.03, subdivision 2 c, the
distribution to each town must be reduced proportionately so that the total amount of aids distributed
under this section does not exceed the limit in section 477A.03, subdivision 2 c. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. (a) For aids payable in 2014 only, the formula aid for a city is equal to the sum of (1) its 2013 certified
aid and (2) the product of (i) the difference between its unmet need and its 2013 certified aid and (ii) the
aid gap percentage. (b) For aids payable in 2015 and thereafter, city jobs base, (2) its small city aid

base, and (3) the need increase percentage multiplied by the average of its unmet need for the most
recently available two years formula aid in the previous year and (2) the product of (i) the
difference between its unmet need and its certified aid in the previous year under subdivision 9, and (ii)
the aid gap percentage need increase aid gap need increase aid gap except that the data used to compute "net levy" in

subdivision 9 is the data most recently available at the time of the aid computation EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. 2013 2014 city aid base aid adjustment under

subdivision 13 (b) For aids payable in 2013 and 2014 only, the total aid in the previous year for any city shall mean
the amount of aid it was certified to receive for aids payable in 2012 under this section. For aids payable
in 2015 and thereafter, the total aid in the previous year for any city means the amount of aid it was
certified to receive under this section in the previous payable year. (c) For aids payable in 2010 and thereafter, the total aid for any city shall not exceed the sum of (1)
ten percent of the city's net levy for the year prior to the aid distribution plus (2) its total aid in the previous
year. For aids payable in 2009 and thereafter, the total aid for any city with a population of 2,500 or more
may not be less than its total aid under this section in the previous year minus the lesser of $10 multiplied
by its population, or ten percent of its net levy in the year prior to the aid distribution. (d) (b) For aids payable in 2014 only, the total aid for a city may not be less than the amount it was
certified to receive in 2013. 2010 2015 with a population less than 2,500 its 2003 certified aid
amount. For aids payable in 2009 only, the total aid for a city with a population less than 2,500 must not
be less than what it received under this section in the previous year unless its total aid in calendar year
2008 was aid under section477A.011 , subdivision 36, paragraph (s), in which case its minimum aid is
zero its net levy in the year prior to the aid distribution (e) A city's aid loss under this section may not exceed $300,000 in any year in which the total city aid
appropriation under section 477A.03, subdivision 2 a , is equal or greater than the appropriation under
that subdivision in the previous year, unless the city has an adjustment in its city net tax capacity under
the process described in section 469.174, subdivision 28 . (f) If a city's net tax capacity used in calculating aid under this section has decreased in any year by
more than 25 percent from its net tax capacity in the previous year due to property becoming tax-exempt
Indian land, the city's maximum allowed aid increase under paragraph (c) shall be increased by an
amount equal to (1) the city's tax rate in the year of the aid calculation, multiplied by (2) the amount of its
net tax capacity decrease resulting from the property becoming tax exempt. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. Subd. 13. Certified aid adjustments. (a) A city that received an aid base increase under Minnesota Statutes 2012,section 477A.011,
subdivision 36 , paragraph (e), shall have its total aid under subdivision 9 increased by an amount equal
to $150,000 for aids payable in 2014 through 2018. (b) A city that received an aid base increase under section 477A.011, subdivision 36 , paragraph (r),
shall have its total aid under subdivision 9 increased by an amount equal to $160,000 for aids payable in
2014 and thereafter. (c) A city that received a temporary aid increase under Minnesota Statutes 2012, section 477A.011,
subdivision 36 , paragraph (o), shall have its total aid under subdivision 9 increased by an amount equal
to $1,000,000 for aids payable in 2014 only. For aids payable in 2013 only, a city that is located in an
area deemed a disaster area during the month of April 2013, as defined in section 12A.02, subdivision 5 ,
shall receive its December 26, 2013 payment with its July 20, 2013 payment. EFFECTIVE DATE.
This section is effective for aids payable in calendar year 2013 and thereafter. 2013 2014 and thereafter $426,438,012

$507,598,012. The total aid paid under section 477A.013, subdivision 9 , is $509,098,012 for aids
payable in 2015. For aids payable in 2016 and thereafter, the total aid paid under section 477A.013,
subdivision 9 , is $511,598,012 EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. 2013 2014 $80,795,000

$100,795,000 of this appropriation For calendar year 2004, the amount shall be in
addition to the payments authorized under section 477A.0124, subdivision 1 . For calendar year 2005 and
subsequent years, the amount shall be deducted from the appropriation under this paragraph. 2013 2014 $84,909,575

$104,909,575 commissioner of management and budget shall bill the shall transfer to the commissioner of management and budget

$207,000 annually not to exceed $207,000 in fiscal year 2004 and

thereafter and other local government activities commissioner of education shall bill the for the cost of preparation of local impact notes for school districts as required by section 3.987 , not
to exceed $7,000 in fiscal year 2004 and thereafter shall transfer to the commissioner of
education $7,000 annually for the cost of preparation of local impact notes for school districts as required
by section 3.987 billed

transferred deducted transferred for the preparation of local impact notes respectively EFFECTIVE DATE. This section is effective for aid payable in 2014 and thereafter. Subd. 2c. Towns. For aids payable in 2014, the total aids paid under section 477A.013,
subdivision 1 , is limited to $10,000,000. For aids payable in 2015 and thereafter, the total aids paid under
section 477A.013, subdivision 1 , is limited to the amount certified to be paid in the previous year. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter.  [477A.085 ] DEBT SERVICE AID; CITY OF MINNEAPOLIS. On or before November 1,
2016, and the first day of each November thereafter, the commissioner shall pay to the city of Minneapolis
an amount equal to 40 percent of the city's otherwise required levy to pay its general obligation library
referendum bonds for the following calendar year. The levy excludes any amount to pay bonds, other
than refunding bonds, issued after May 1, 2013. An amount sufficient to pay the aid under this section is
appropriated from the general fund to the commissioner of revenue.  [477A.10 ] NATURAL RESOURCES LAND PAYMENTS IN LIEU; PURPOSE. The purposes
of sections 477A.11 to 477A.14 are: (1) to compensate local units of government for the loss of tax base from state ownership of land and
the need to provide services for state land; (2) to address the disproportionate impact of state land ownership on local units of government with a
large proportion of state land; and (3) to address the need to manage state lands held in trust for the local taxing districts. any , other than wildlife management land, EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. other , other than

acquired natural resource land or wildlife management land, EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. Subd. 6. Military game refuge. " Military game refuge" means land owned in fee by another state
agency for military purposes and designated as a state game refuge under section 97A.085. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. Subd. 7. Transportation wetland. " Transportation wetland" means land administered by the
Department of Transportation in which the state acquired, by purchase from a private owner, a fee title
interest in over 500 acres of land within a county to replace wetland losses from transportation projects.
EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. Subd. 8. Wildlife management land. " Wildlife management land" means land administered by
the commissioner in which the state acquired, from a private owner by purchase, condemnation, or gift, a
fee interest under the authority granted in chapter 94 or 97A for wildlife management purposes and
actually used as a wildlife management area. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. (a) As an offset for expenses incurred by counties and towns in support of natural resources lands,
, based on the acreage as of July 1 of each year prior to the

payment year, for acquired natural resources land, $5.133, multiplied by the total number of acres of transportation

wetland or, at the county's option, three-fourths of one percent of the appraised value of all acquired
natural resources land in the county, whichever is greater; (3) three-fourths of one percent of the appraised value of all wildlife management land in the county;
(4) 50 percent of the dollar amount as determined under clause (1), multiplied by the number of acres
of military refuge land in the county; $1.283 (5) $1.50, in the county (3) $1.283 (6) $5.133, in the county and (4) 64.2 cents (7) $1.50, located each the as of July 1 of each year prior to the

payment year. ; and (8) without regard to acreage, $300,000 for local assessments under section 84A.55, subdivision 9 .
(b) The amount determined under paragraph (a), clause (1), is payable for land that is acquired from a
private owner and owned by the Department of Transportation for the purpose of replacing wetland losses
caused by transportation projects, but only if the county contains more than 500 acres of such land at the
time the certification is made under subdivision 2. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. Lands for which payments in lieu are made pursuant to section 97A.061, subdivision 3 ,
and Laws 1973, chapter 567, shall not be eligible for payments under this section. , wildlife management land, and military refuge land land transportation wetland described in subdivision 1, paragraph (b) in a county EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. for the first five years after

acquisition until the next six-year appraisal required under this subdivision fivesix after the land is acquired All reappraisals shall be done in the same year as county assessors are required to assess exempt
land under section 273.18 . EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. subdivision 2 or in section 97A.061, subdivision 5

subdivisions 2 and 3 , 51.3 cents

for each acre of acquired natural resources land and each acre of land described in section 477A.12,
subdivision 1 , paragraph (b), and 12.8 cents for each acre of other natural resources land and each acre
of land utilization project land located within its boundaries ten percent of the amount received
under section 477A.12, subdivision 1 , clauses (1), (2), and (5) to (7) EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. Subd. 3. Distribution for wildlife management lands and military refuge lands. (a) The county treasurer shall allocate the payment for wildlife management land and military game
refuge land among the county, towns, and school districts on the same basis as if the payments were
taxes on the land received in the year. Payment of a town's or a school district's allocation must be made
by the county treasurer to the town or school district within 30 days of receipt of the payment to the
county. The county's share of the payment shall be deposited in the county general revenue fund. (b) The county treasurer of a county with a population over 39,000, but less than 42,000, in the 1950
federal census shall allocate the payment only among the towns and school districts on the same basis
as if the payments were taxes on the lands received in the current year. (c) If a town received a payment in calendar year 2006 or thereafter under this subdivision, and
subsequently incorporated as a city, the city shall continue to receive any future year's allocations of
wildlife land payments that would have been made to the town had it not incorporated, provided that the
payments shall terminate if the governing body of the city passes an ordinance that prohibits hunting
within the boundaries of the city. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. $600,000 $1,200,000 $450,000$900,000 $80,000 $160,000 $70,000 $140,000

2008 2013 EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter.  INELIGIBILITY; SUSTAINABLE FOREST INCENTIVE PROGRAM. Lands that no longer
qualify as forest land under Minnesota Statutes, section 290C.02, subdivision 6 , item (iii), are released
from the covenant required under Minnesota Statutes, section 290C.04. EFFECTIVE DATE. This section is effective the day following final enactment.  REENROLLMENT; SUSTAINABLE FOREST INCENTIVE PROGRAM. A person who
elected to terminate participation in the sustainable forest incentive program, as provided in Laws 2011,
First Special Session chapter 7, article 6, section 12, may reenroll lands for which the claimant terminated
participation and be eligible for a payment in October 2013. A person must apply for reenrollment under
this section within 60 days after the effective date of this section. EFFECTIVE DATE. This section is effective the day following final enactment.  REPEALER. (a) AMEND Minnesota Statutes 2012, sections 477A.011 , subdivisions 2a , 19, 29, 31, 32, 33, 36, 39,
40, and 41;AMEND 477A.013 , subdivisions 11 and 12 ;REPEAL 477A.0133 ; andREPEAL 477A.0134 ,
are repealed.(b) REPEAL Minnesota Statutes 2012, section 97A.061 , and Laws 1973, chapter
567, section 7, as amended by Laws 1977, chapter 403, section 12, are repealed on July 1, 2013.EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter.  [124D.862 ] ACHIEVEMENT AND INTEGRATION REVENUE. Subdivision 1. Initial achievement and integration revenue. (a) An eligible district's initial achievement and integration revenue equals the sum of (1) $350 times
the district's adjusted pupil units for that year times the ratio of the district's enrollment of protected
students for the previous school year to total enrollment for the previous school year and (2) the greater of
zero or 66 percent of the difference between the district's integration revenue for fiscal year 2013 and the
district's integration revenue for fiscal year 2014 under clause (1). (b) In each year, 0.3 percent of each district's initial achievement and integration revenue is
transferred to the department for the oversight and accountability activities required under this section and
section 124D.861 . Subd. 2. Incentive revenue. An eligible school district's maximum incentive revenue equals $10 per
adjusted pupil unit. In order to receive this revenue, a district must be implementing a voluntary plan to
reduce racial and economic enrollment disparities through intradistrict and interdistrict activities that have
been approved as a part of the district's achievement and integration plan. Subd. 3. Achievement and integration revenue. Achievement and integration revenue equals the sum
of initial achievement and integration revenue and incentive revenue. Subd. 4. Achievement and integration aid. For fiscal year 2015 and later, a district's achievement and
integration aid equals 70 percent of its achievement and integration revenue. Subd. 5. Achievement and integration levy. A district's achievement and integration levy equals its
achievement and integration revenue times 30 percent. For Special School District No. 1, Minneapolis;
Independent School District No. 625, St. Paul; and Independent School District No. 709, Duluth, 100
percent of the levy certified under this subdivision is shifted into the prior calendar year for purposes of
sections 123B.75, subdivision 5 , and 127A.441 . Subd. 6. Revenue uses. (a) At least 80 percent of a district's achievement and integration revenue received under this section
must be used for innovative and integrated learning environments, school enrollment choices, family
engagement activities, and other approved programs providing direct services to students. (b) Up to 20 percent of the revenue may be used for professional development and staff development
activities and placement services. (c) No more than ten percent of the total amount of revenue may be spent on administrative services.
Subd. 7. Revenue reserved. Integration revenue received under this section must be reserved and
used only for the programs authorized in subdivision 2. Subd. 8. Commissioner authority to withhold revenue. (a) The commissioner must review the results of each district's integration and achievement plan by
August 1 at the end of the third year of implementing the plan and determine if the district met its goals.
(b) If a district met its goals, it may submit a new three-year plan to the commissioner for review. (c) If a district has not met its goals, the commissioner must: (1) develop a district improvement plan and timeline, in consultation with the affected district, that
identifies strategies and practices designed to meet the district's goals under this section and section
120B.11 ; and (2) use up to 20 percent of the district's integration revenue, until the district's goals are reached, to
implement the improvement plan. EFFECTIVE DATE. This section is effective for revenue for fiscal year 2014 and later. Subdivision 5 is
effective for taxes payable in 2014 only. (a) For fiscal years 2013 and 2014, training and experience revenue, (b) For fiscal year 2015 and later, the general education revenue for each district equals the sum of
the district's basic revenue, extended time revenue, gifted and talented revenue, declining enrollment
revenue, location equity revenue, small schools revenue, basic skills revenue, secondary sparsity
revenue, elementary sparsity revenue, transportation sparsity revenue, total operating capital revenue,
equity revenue, pension adjustment revenue, and transition revenue. Subd. 2d. Location equity revenue. (a) For a school district with any of its area located within the seven-county metropolitan area, location
equity revenue equals $424 times the adjusted pupil units of the district for that school year. (b) For all other school districts with more than 2,000 pupils in adjusted average daily membership for
the fiscal year ending in the year before the levy is certified, location equity revenue equals $212 times
the adjusted pupil units of the district for that year. (c) A district's location equity levy equals its location equity revenue times the lesser of one or the ratio
of its referendum market value per resident pupil unit to $510,000. The location equity revenue levy must
be spread on referendum market value. (d) A district's location equity aid equals its location equity revenue less its location equity levy, times
the ratio of the actual amount levied to the permitted levy. (e) A school district may elect not to participate in the location equity revenue program by a board vote
taken prior to September 1 of the fiscal year before the fiscal year for which the decision not to participate
becomes effective. The board resolution must state which fiscal years the district will not participate. A
copy of the board resolution to not participate must be submitted to the commissioner. EFFECTIVE DATE. This section is effective for revenue for fiscal year 2015 and later. (a) 2007 2013 later

2014 only (b) For fiscal year 2015 and later, a district's general education aid equals: (1) general education revenue, excluding operating capital revenue, equity revenue, location equity
revenue, and transition revenue, minus the student achievement levy, multiplied times the ratio of the
actual amount of student achievement levy levied to the permitted student achievement levy; plus (2) equity aid under section 126C.10, subdivision 30 ; plus (3) transition aid under section 126C.10, subdivision 33 ; plus (4) shared time aid under section 126C.10, subdivision 7 ; plus (5) referendum aid under section 126C.17 , subdivisions 7 and 7a; (6) online learning aid under section 124D.096 ; plus (7) location equity aid according to section 126C.10, subdivision 2 d, paragraph (d). (a) For fiscal year 2003 and later, a district's initial referendum revenue allowance equals the sum of
the allowance under section 126C.16, subdivision 2 , plus any additional allowance per resident marginal
cost pupil unit authorized under subdivision 9 before May 1, 2001, for fiscal year 2002 and later, plus the
referendum conversion allowance approved under subdivision 13, minus $415. For districts with more
than one referendum authority, the reduction must be computed separately for each authority. The
reduction must be applied first to the referendum conversion allowance and next to the authority with the
earliest expiration date. A district's initial referendum revenue allowance may not be less than zero. (b) For fiscal year 2003, a district's referendum revenue allowance equals the initial referendum
allowance plus any additional allowance per resident marginal cost pupil unit authorized under subdivision
9 between April 30, 2001, and December 30, 2001, for fiscal year 2003 and later. (c) For fiscal year 2004 and later, a district's referendum revenue allowance equals the sum of: (1) the product of (i) the ratio of the resident marginal cost pupil units the district would have counted
for fiscal year 2004 under Minnesota Statutes 2002, section 126C.05 , to the district's resident marginal
cost pupil units for fiscal year 2004, times (ii) the initial referendum allowance plus any additional
allowance per resident marginal cost pupil unit authorized under subdivision 9 between April 30, 2001,
and May 30, 2003, for fiscal year 2003 and later, plus (2) any additional allowance per resident marginal cost pupil unit authorized under subdivision 9 after
May 30, 2003, for fiscal year 2005 and later. (a) A district's initial referendum allowance for fiscal year 2015 equals the result of the following
calculations: (1) multiply the referendum allowance the district would have received for fiscal year 2015 under
Minnesota Statutes 2012, section 126C.17, subdivision 1 , based on elections held before July 1, 2013,
by the resident marginal cost pupil units the district would have counted for fiscal year 2015 under
Minnesota Statutes 2012, section 126C.05 ; (2) add to the result of clause (1) the adjustment the district would have received under Minnesota
Statutes 2012, section 127A.47, subdivision 7 , paragraphs (a), (b), and (c), based on elections held before July 1, 2013; (3) divide the result of clause (2) by the district's adjusted pupil units for fiscal year 2015; and (4) if the result of clause (3) is less than zero, set the allowance to zero. (b) A district's referendum allowance equals the sum of the district's initial referendum allowance for
fiscal year 2015, plus any additional referendum allowance per adjusted pupil unit authorized after June
30, 2013, minus (i) the location equity revenue subtraction, and (ii) any allowances expiring in fiscal year
2016 or later, provided that the allowance may not be less than zero. For a district with more than one
referendum allowance for fiscal year 2015 under Minnesota Statutes 2012, section 126C.17 , the
allowance calculated under paragraph (a) must be divided into components such that the same
percentage of the district's allowance expires at the same time as the old allowances would have expired
under Minnesota Statutes 2012, section 126C.17 . (c) For purposes of this subdivision, a district's location equity revenue subtraction equals $424 for a
district receiving location equity revenue undersection 126C.10, subdivision 2 d, paragraph (a), $212 for a
district receiving location equity revenue under section 126C.10, subdivision 2 d, paragraph (b), and zero
for all other school districts. 2007 2015 the greater

of: (1) the sum of: (i) a district's referendum allowance for fiscal year 1994 times 1.177 times the annual
inflationary increase as calculated under paragraph (b) plus (ii) its referendum conversion allowance for
fiscal year 2003, minus (iii) $215; (2) the greater of (i): 26 percent of the formula allowance or (ii) $1,294

times ; or times the greatest of: (1) $1,845; (2) the sum of the referendum revenue the district would have received for fiscal year 2015 under
Minnesota Statutes 2012, section 126C.17, subdivision 4 , based on elections held before July 1, 2013,
and the adjustment the district would have received under Minnesota Statutes 2012, section 127A.47,
subdivision 7 , paragraphs (a), (b), and (c), based on elections held before July 1, 2013, divided by the district's adjusted pupil units for fiscal
year 2015; or (3) the product of the referendum allowance limit the district would have received for fiscal year 2015
under Minnesota Statutes 2012, section 126C.17, subdivision 2 , and the resident marginal cost pupil
units the district would have received for fiscal year 2015 under Minnesota Statutes 2012, section
126C.05, subdivision 6 , plus the adjustment the district would have received under Minnesota Statutes
2012, section 127A.47, subdivision 7 , paragraphs (a), (b), and (c), based on elections held before July 1,
2013, divided by the district's adjusted pupil units for fiscal year 2015; minus $424 for a district receiving
location equity revenue under section 126C.10, subdivision 2 d, paragraph (a), minus $212 for a district
receiving location equity revenue under section 126C.10, subdivision 2 d, paragraph (b), or (3) (4) 2006

2013 resident marginal

cost adjusted 2005 2016 2004 2015 years 2009 year 2016 (1) (3) the inflationary increase
for fiscal year 2008 plus 2008 2015 resident marginal cost adjusted For fiscal year 2003 and later, , and the

third tier referendum equalization revenue resident marginal cost adjusted For fiscal year 2006, a district's first tier referendum equalization
allowance equals the lesser of the district's referendum allowance under subdivision 1 or $500. For fiscal
year 2007, a district's first tier referendum equalization allowance equals the lesser of the district's
referendum allowance under subdivision 1 or $600. For fiscal year 2008 and later, $700 $300 resident marginal cost adjusted For fiscal year 2006, a district's second tier referendum

equalization allowance equals the lesser of the district's referendum allowance under subdivision 1 or
18.6 percent of the formula allowance, minus the district's first tier referendum equalization allowance. For
fiscal year 2007 and later, 26 percent of the formula allowance $760

Notwithstanding paragraph (e), the second tier referendum allowance

for a district qualifying for secondary sparsity revenue under section 126C.10, subdivision 7 , or
elementary sparsity revenue under section 126C.10, subdivision 8 , equals the district's referendum
allowance under subdivision 1 minus the district's first tier referendum equalization allowance. A
district's third tier referendum equalization revenue equals the district's third tier referendum equalization
allowance times the district's adjusted pupil units for that year. (g) A district's third tier referendum equalization allowance equals the lesser of the district's
referendum allowance under subdivision 1 or 25 percent of the formula allowance, minus the sum of the
district's first tier referendum equalization allowance and second tier referendum equalization allowance.
(h) Notwithstanding paragraph (g), the third tier referendum allowance for a district qualifying for
secondary sparsity revenue under section 126C.10, subdivision 7 , or elementary sparsity revenue under
section 126C.10, subdivision 8 , equals the district's referendum allowance under subdivision 1 minus the
sum of the district's first tier referendum equalization allowance and second tier referendum equalization
allowance. and , and the third tier referendum

equalization levy marginal cost $476,000 $880,000 marginalcost $270,000 $510,000 (d) A district's third tier referendum equalization levy equals the district's third tier referendum
equalization revenue times the lesser of one or the ratio of the district's referendum market value per
resident pupil unit to $290,000. or , ,

or third 26 25 resident marginal

cost adjusted Subd. 7b. Referendum aid guarantee. (a) Notwithstanding subdivision 7, a district's referendum equalization aid for fiscal year 2015 must not
be less than the sum of the referendum equalization aid the district would have received for fiscal year
2015 under Minnesota Statutes 2012, section 126C.17, subdivision 7 , and the adjustment the district
would have received under Minnesota Statutes 2012, section 127A.47, subdivision 7 , paragraphs (a),
(b), and (c). (b) Notwithstanding subdivision 7, referendum equalization aid for fiscal year 2016 and later, for a
district qualifying for additional aid under paragraph (a) for fiscal year 2015, must not be less than the
product of (1) the district's referendum equalization aid for fiscal year 2015, times (2) the lesser of one or
the ratio of the district's referendum revenue for that school year to the district's referendum revenue for
fiscal year 2015, times (3) the lesser of one or the ratio of the district's referendum market value used for fiscal year 2015
referendum equalization calculations to the district's referendum market value used for that year's
referendum equalization calculations. resident marginal cost adjusted resident marginal cost adjusted resident marginal cost adjusted residentmarginal cost adjusted resident marginal

cost adjusted Subd. 9a. Board-approved referendum allowance. Notwithstanding subdivision 9, a school district may
convert up to $300 per adjusted pupil unit of referendum authority from voter approved to board approved
by a board vote. A district with less than $300 per adjusted pupil unit of referendum authority may
authorize new referendum authority up to the difference between $300 per adjusted pupil unit and the
district's referendum authority. The board may authorize this levy for up to five years and may
subsequently reauthorize that authority in increments of up to five years. EFFECTIVE DATE. This section is effective for revenue for fiscal year 2015 and later.  OPERATING REFERENDUM FREEZE, FISCAL YEAR 2015. (a) Notwithstanding Minnesota Statutes, section 126C.17, subdivision 9 , a school district may not
authorize an increase to its operating referendum in fiscal year 2015. A school district may reauthorize an
operating referendum that is expiring in fiscal year 2015. (b) Paragraph (a) shall not apply to a district if, prior to June 30, 2013, the board adopted a resolution
to conduct a referendum in 2013. (c) Paragraph (a) shall not apply to a district if the district did not authorize an operating referendum in
fiscal year 2014. (d) Paragraph (a) shall not apply to a district if the district is in statutory operating debt under
Minnesota Statutes, section 123B.81 , as of June 30, 2013, and has an approved plan with the
Department of Education. as determined by the board based on budget and

operations of the local water management entity five ten or a

comprehensive watershed management plan as defined in section 103B.3363 increased or a comprehensive watershed management plan as defined in

section 103B.3363 sufficient to generate a minimum amount

The fee authorized in section
40A.152 may be used as a local match or as a supplement to state funding to accomplish implementation
of comprehensive plans, watershed management plans, local water management plans, or
comprehensive watershed management plans under chapter 103B, 103C, or 103D. at least 70 percent of the statewide (b) , for the technical assistance portion of the grant funds to

leverage federal or other nonstate funds, or to address high-priority needs identified in local water
management plans or comprehensive watershed management plans (b) The remaining cost-sharing funds may be allocated to districts as follows: (1) for technical and administrative assistance, not more than 20 percent of the funds; and (2) for conservation practices for lower priority erosion, sedimentation, or water quality problems. Soil Natural Resources , or another method

approved by the Board of Water and Soil Resources, within the metropolitan areadefined in section 473.121 local water

management plans adopted under section 103B.235 a comprehensive plan, local water
management plan, or watershed management plan developed or amended, adopted, and approved
according to chapter 103B, 103C, or 103D or limited dealer, as defined in section 327B.04 , under subdivision 9a EFFECTIVE DATE. This section is effective for taxes payable in 2014 and thereafter. Subd. 9a. Manufactured home as dealer inventory. Manufactured homes as defined in section 327.31,
subdivision 6 , shall be considered as dealer inventory, on the January 2 assessment date, if the home is:
(1) listed as inventory and held by a licensed or limited dealer; (2) unoccupied and not available for rent; (3) connected or not connected to utilities when located in a manufactured home park; and (4) connected or not connected to utilities when located at a dealer's sales center. The exemption
under this subdivision is allowable for up to five assessment years after the date a home is initially
claimed as dealer inventory. EFFECTIVE DATE. This section is effective for taxes payable in 2014 and thereafter.  Licenses; refusal or revocation  Assessor sanctions; refusal to license (a) (i) , or (ii) censure, warn, or fine any licensed

assessor, or any other person employed by an assessment jurisdiction or contracting with an assessment
jurisdiction for the purpose of valuing or classifying property for property tax purposes, or (5) failure to faithfully and fully perform his or her duties through malfeasance, misfeasance, or
nonfeasance; or (5) (6) or suspension or revocation of or

the imposition of a sanction provided under this subdivision (b) When appropriate for the level of infraction, a written warning must be given to assessors who
have no prior identified infractions. The warning must identify the infraction and, as appropriate, detail
future expectations of performance and behavior. Fines must not exceed $1,000 for the first occurrence
and must not exceed $3,000 for each occurrence thereafter, and suspensions must not exceed one year
for each occurrence, depending in each case upon the severity of the infraction and the level of
negligence or intent. An action by the board to impose a sanction is subject to review in a contested case
hearing under chapter 14. EFFECTIVE DATE. This section is effective beginning July 1, 2013. Subd. 3a. Report on disciplinary actions. Each odd-numbered year, the board must publish a report
detailing the number and types of disciplinary actions recommended by the commissioner of revenue
under section 273.0645, subdivision 2 , and the disposition of those recommendations by the board. The
report must be presented to the house of representatives and senate committees with jurisdiction over
property taxes by February 1 of each odd-numbered year. EFFECTIVE DATE. This section is effective beginning July 1, 2013. AND FINESand fines EFFECTIVE DATE. This section is effective beginning July 1, 2013.  [270C.9901 ] ASSESSOR ACCREDITATION. Every individual who appraises or physically
inspects real property for the purpose of determining its valuation or classification for property tax
purposes must obtain licensure as an accredited Minnesota assessor from the State Board of Assessors
by July 1, 2019, or within four years of that person having become licensed as a certified Minnesota
assessor, whichever is later. EFFECTIVE DATE. This section is effective beginning January 1, 2014. : (1) 5,000 20,000 .

; and (2) for any property that was acquired on or after January 1, 2000, and on or before December 31,
2010, and is located in a city, the period must not exceed 15 years. EFFECTIVE DATE. This section is effective for assessment year 2013 and thereafter and for taxes
payable in 2014 and thereafter. Subd. 98. Certain property owned by an Indian tribe. (a) Property is exempt that: (1) was classified as 3a under section 273.13, subdivision 24 , for taxes payable in 2013; (2) is located in a city of the first class with a population greater than 300,000 as of the 2010 federal
census; (3) was on January 2, 2012, and is for the current assessment owned by a federally recognized Indian
tribe, or its instrumentality, that is located within the state of Minnesota; and (4) is used exclusively for tribal purposes or institutions of purely public charity as defined in
subdivision 7. (b) For purposes of this subdivision, a "tribal purpose" means a public purpose as defined in
subdivision 8 and includes noncommercial tribal government activities. Property that qualifies for the
exemption under this subdivision is limited to no more than two contiguous parcels and structures that do
not exceed in the aggregate 20,000 square feet. Property acquired for single-family housing, market-rate
apartments, agriculture, or forestry does not qualify for this exemption. The exemption created by this
subdivision expires with taxes payable in 2024. EFFECTIVE DATE. This section is effective beginning with taxes payable in 2014. Subd. 99. Electric generation facility; personal property. (a) Notwithstanding subdivision 9, clause (a), and section 453.54, subdivision 20 , attached machinery
and other personal property which is part of an electric generation facility that exceeds five megawatts of
installed capacity and meets the requirements of this subdivision is exempt. At the time of construction,
the facility must be: (1) designed to utilize natural gas as a primary fuel; (2) owned and operated by a municipal power agency as defined in section 453.52, subdivision 8 ; (3) designed to utilize reciprocating engines paired with generators to produce electrical power; (4) located within the service territory of a municipal power agency's electrical municipal utility that
serves load exclusively in a metropolitan county as defined in section 473.121, subdivision 4 ; and (5) designed to connect directly with a municipality's substation. (b) Construction of the facility must be commenced after June 1, 2013, and before June 1, 2017.
Property eligible for this exemption does not include electric transmission lines and interconnections or
gas pipelines and interconnections appurtenant to the property or the facility. EFFECTIVE DATE. This section is effective for assessment year 2013, taxes payable in 2014, and
thereafter. The commissioner of revenue may recommend to the state Board of Assessors the
nonrenewal, suspension, or revocation of an assessor's license as provided in sections 270.41 to 270.50 .
EFFECTIVE DATE. This section is effective beginning July 1, 2013. LOCALSubdivision 1. Local
assessment practices.

Subd. 2. Nonfeasance, misfeasance, and malfeasance. County assessors may file a written complaint
with the commissioner of revenue detailing allegations of nonfeasance, misfeasance, or malfeasance by a
local assessor. After receiving a complaint from a county assessor, the commissioner must complete an
investigation and recommend an appropriate action to the State Board of Assessors. The commissioner is
not required to have a written complaint from a county assessor in order to conduct an investigation and
recommend an action to the board. Active investigative data relating to the investigation of complaints
against an assessor by the commissioner of revenue are subject to section 13.39. EFFECTIVE DATE. This section is effective July 1, 2013. may be adjusted shall not be reduced and This section does not apply to (1) conservation restrictions or easements covering riparian buffers
along lakes, rivers, and streams that are used for water quantity or quality control; or (2) to easements in
a county that has adopted, by referendum, a program to protect farmland and natural areas since 1999.
EFFECTIVE DATE. This section is effective for assessment year 2013 and thereafter, and for taxes
payable in 2014 and thereafter. : (1) (2) (f) The first tier of market value of The
remaining value of class 4d property has a class rate of 0.25 percent. For the purposes of this paragraph,
the "first tier of market value of class 4d property" means the market value of each housing unit up to the
first tier limit. For the purposes of this paragraph, all class 4d property value must be assigned to
individual housing units. The first tier limit is $100,000 for assessment year 2014. For subsequent years,
the limit is adjusted each year by the average statewide change in estimated market value of property
classified as class 4a and 4d under this section for the previous assessment year, excluding valuation
change due to new construction, rounded to the nearest $1,000, provided, however, that the limit may
never be less than $100,000. Beginning with assessment year 2015, the commissioner of revenue must
certify the limit for each assessment year by November 1 of the previous year. EFFECTIVE DATE. This section is effective beginning with assessment year 2014. subdivision subdivisions or 4

to 5 Subd. 5. Federal active service exception. In the case of a homestead property owned by an individual
who is on federal active service, as defined in section 190.05, subdivision 5 c, as a member of the
National Guard or a reserve component, a four-month grace period is granted for complying with the due
dates imposed by subdivision 1. During this period, no late fees or penalties shall accrue against the
property. The due date for property taxes owed under this chapter for an individual covered by this
subdivision shall be September 15 for taxes due on May 15, and February 15 of the following year for
taxes due on October 15. A taxpayer making a payment under this subdivision must accompany the
payment with a signed copy of the taxpayer's orders or form DD214 showing the dates of active service
which clearly indicate that the taxpayer was in active service as a member of the National Guard or a
reserve component on the date the payment was due. This grace period applies to all homestead
property owned by individuals on federal active service, as herein defined, for all of that property's due
dates which fall on a day that is included in the taxpayer's federal active service. Subdivision 1. Delinquent property; rates.

Subd. 2. Federal active service exception. Notwithstanding subdivision 1, a homestead property
owned by an individual who is on federal active service, as defined in section 190.05, subdivision 5 c, as
a member of the National Guard or a reserve component, shall not be deemed delinquent under this
section if the due dates imposed under section 279.01 fall on a day in which the individual was on federal
active service. and had a total market value of

$500,000 or less for that same assessment with the approval of the county auditor

(d) (f) A municipality as defined
in section 429.011 , cities of the first class, and other special assessment authorities, that have certified
special assessments against any parcel of property, may, through resolution, waive the requirement of
payment of all current and delinquent special assessments at the time the confession is entered. If the
municipality, city, or authority grants the waiver, 100 percent of all current year taxes, special
assessments, and penalties due at the time, along with 20 percent of all delinquent taxes, special
assessments, penalties, interest, and fees must be paid. The balance remaining shall be subject to and
included in the installment plan. (d) When there are current and delinquent special assessments certified and billed against a parcel,
the assessment authority or municipality as defined in section 429.011 may abate under section 375.192,
subdivision 2 , all special assessments and the penalty and interest affiliated with the special
assessments, and reassess the special assessments, penalties, and interest accrued thereon, under
section 429.071, subdivision 2 . The municipality shall notify the county auditor of its intent to reassess as
a precondition to the entry of the confession of judgment. Upon the notice to abate and reassess, the
municipality shall, through resolution, notify the county auditor to remove all current and delinquent
special assessments and the accrued penalty and interest on the special assessments, and the payment
of all or a portion of the current and delinquent assessments shall not be required as part of the down
payment due at the time the confession of judgment is entered in accordance with paragraph (c). (d) (e) (f) The county auditor may require conditions on properties including, but not limited to, environmental
remediation action plan requirements, restrictions, or covenants, when considering a request for approval
of eligibility for composition into a confession of judgment for delinquent taxes upon a parcel of property
which was classified class 3a for the previous year's assessment. Unless the property is subject to subdivision 1a,
(i) shall (ii) or one-fifth or four 281.13 281.17 if the land is within an incorporated area unless it is: (a) nonagricultural homesteaded land as defined
in section 273.13, subdivision 22 ; (b) homesteaded agricultural land as defined in section 273.13,
subdivision 23 , paragraph (a); or (c) seasonal residential recreational land as defined in section 273.13,
subdivision 22 , paragraph (c), or 25, paragraph (d), clause (1), for which the period of redemption is five
years from the date of sale to the state of Minnesota The period of redemption for all other lands sold to the state at a
tax judgment sale shall be five years from the date of sale, except that the period of redemption for
nonhomesteaded agricultural land as defined in section 273.13, subdivision 23 , paragraph (b), shall be two years from the date of sale if at that time that property is owned by a person who
owns one or more parcels of property on which taxes are delinquent, and the delinquent taxes are more
than 25 percent of the prior year's school district levy. Subd. 10. Hennepin and Ramsey Counties. For properties located in Hennepin and Ramsey Counties,
the county may impose an additional mortgage registry tax as defined in sections 383A.80 and 383B.80 .
EFFECTIVE DATE. This section is effective for deeds and mortgages acknowledged on or after July
1, 2013.  [287.40 ] HENNEPIN AND RAMSEY COUNTIES. For properties located in Hennepin and
Ramsey Counties, the county may impose an additional deed tax as defined in sections 383A.80 and
383B.80 . EFFECTIVE DATE. This section is effective for deeds and mortgages acknowledged on or after July
1, 2013. 2013 2028 EFFECTIVE DATE. This section is effective for all deeds and mortgages acknowledged on or after
July 1, 2013. 2013 2028 EFFECTIVE DATE. This section is effective for all deeds and mortgages acknowledged on or after
July 1, 2013. 2013

2028 EFFECTIVE
DATE. This section is effective the day following final enactment. 2013

2028 EFFECTIVE DATE. This section is effective the day following final enactment. (a) 2018 2014

(b) For property taxes payable from 2015 through 2018, the administrative auditor shall increase the
areawide net tax capacity each year by an amount equal to ten percent of the total additional areawide
levy distributed to Bloomington under this subdivision from 1988 to 1999, divided by the areawide tax rate
for taxes payable in the previous year. The administrative auditor must notify the commissioner of
revenue of the amount determined by multiplying the increase in the areawide net tax capacity by the
areawide tax rate determined under subdivision 5. The commissioner of revenue must pay the amount
determined each payable year to the administrative auditor in two installments on July 10 and November
10, for distribution and settlement as provided in subdivision 7a. (c) A sum sufficient to meet the obligations under this subdivision is annually appropriated from the
general fund to the commissioner of revenue. EFFECTIVE DATE. This section is effective beginning with taxes payable in 2015. solely by the Cook ambulance service and the Orr ambulanceservice capital expenditures as it relates to

: (1) and not ; (2) attached and portable equipment for use in and for the ambulances; and (3) parts and replacement parts for maintenance and repair of the ambulances.
The money may not be used , operation, (c) in equal amounts held in trust until funding for a new ambulance is needed by either the Cook ambulance service or the
Orr ambulance service used for the purposes in paragraph (b) Subdivision 1. Levy authorized.

annually township territory up to $1,000 annually
, beginning with taxes payable in 2000 and

ending with taxes payable in 2009 Subd. 2. Effective date. This section is effective June 1, 1999, without local approval. EFFECTIVE DATE; LOCAL APPROVAL. This section applies to taxes payable in 2014 and thereafter,
and is effective the day after the Carlton County Board of Commissioners and its chief clerical officer
timely complete their compliance with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. 2013 2018 2014 2019 EFFECTIVE DATE. This section is effective beginning with taxes payable in 2014. and or , or both, and or , or both, Upon application, that is contiguous to a

municipality that is a member of the district in the

district as provided in this subdivision This The board shall annually determine the
total amount of the levy that is attributable to the cost of providing fire services and the cost of providing
ambulance services within the primary service area. For those municipalities that only receive ambulance
services, the costs for the provision of ambulance services shall be levied against taxable property within
those municipalities at a rate necessary not to exceed 0.019 percent of the estimated market value. For
those municipalities that receive both fire and ambulance services, the taxable estimated for taxes payable in 2010.

The board shall annually determine the separate amounts of the levy that are attributable to the cost of
providing fire services and the cost of providing ambulance services. Costs for the provision of ambulance
services shall be levied against taxable property within the area of the district that receive the services.
Costs for the provision of fire services shall be levied against taxable property within the area of the
district that receive the services a member municipality opts to receive fire service from the districtor
additional ambulance and municipality will community shall years year2011, for taxes payable in 2011 and 2012 thereafter
EFFECTIVE DATE. This section is effective for assessment year 2012 and thereafter.  MINNEAPOLIS AND ST. PAUL ENTERTAINMENT FACILITIES COORDINATION STUDY;
APPROPRIATION. Subdivision 1. Statement of purpose. The legislature finds that the national economic structure of
professional sports financing, as directly or indirectly sanctioned by federal law, compels state and local
governments in smaller metropolitan areas, such as Minneapolis and St. Paul, to help finance the
construction and operation of venues for professional sports franchises as a condition of hosting these
franchises. The burden and risk associated with providing this assistance justifies authorizing and
directing the cities and any associated private entities to enter into arrangements that attempt to maximize
the combined revenues of these facilities from direct users, including those unrelated to professional
sports, such as, but not limited to, joint booking of concerts and other events, to minimize the cost and
risk to general taxpayers. Any efforts to put in place such joint marketing, promotion, and scheduling
arrangements by the cities or associated private entities, in the view of the legislature, is a petition for
enactment of this or subsequent enabling legislation under the Noerr-Pennington doctrine or state action
under the Parker antitrust doctrine. This legislation and any resulting arrangements are intended to
minimize the potential burden on general taxpayers of financing and operation of the arenas. Subd. 2. Study and report. On or before February 1, 2014, the cities of Minneapolis and St. Paul, in
consultation with representatives of the primary professional sports team tenant of each arena, shall study
and report to the legislature on establishing a joint governing structure to be responsible for the joint
administration, financing, and operations of the facilities and the possible effects of joint governance on
the finances of each arena and each city. The commissioner of administration, in consultation with the two
cities, shall contract with an independent consultant to conduct all or a portion of the study. The cities of
Minneapolis and St. Paul together shall pay one-half of the cost of the consultant contract. The
commissioner may accept funding from other public entities and private organizations to pay for the
contract. The study must: (1) examine the current finances of each arena including past and projected costs and revenues,
projected capital improvements, and the current and projected impact of each arena on each city's
general fund; (2) determine the impact of joint governance on the future finances of each city; (3) examine joint scheduling, marketing, and promotion of events at the arenas, either within a joint
governance structure or as separate entities; and (4) estimate the amount of funding, if any, that would be required to operate and maintain the arenas
under a joint governing structure. Subd. 3. Appropriation. Up to $50,000 is appropriated to the commissioner of administration from the
general fund for fiscal year 2014 to pay up to one-half of the costs of the consultant contract under
subdivision 2. EFFECTIVE DATE. This section is effective the day following final enactment.  REIMBURSEMENT FOR PROPERTY TAX ABATEMENTS; APPROPRIATION. Subdivision 1. Reimbursement. The commissioner of revenue shall reimburse taxing jurisdictions for
property tax abatements granted in Hennepin County under Laws 2011, First Special Session chapter 7,
article 5, section 13, notwithstanding the time limits contained in that section. The reimbursements must
be made to each taxing jurisdiction pursuant to the certification of the Hennepin County auditor. Subd. 2. Appropriation. In fiscal year 2014 only, $336,000 is appropriated to the commissioner of
revenue from the general fund to make the payments required in this section. EFFECTIVE DATE. This section is effective the day following final enactment.  ST. PAUL BALLPARK PROPERTY TAX EXEMPTION; SPECIAL ASSESSMENT. Any real
or personal property acquired, owned, leased, controlled, used, or occupied by the city of St. Paul for the
primary purpose of providing a ballpark for a minor league baseball team is declared to be acquired,
owned, leased, controlled, used, and occupied for public, governmental, and municipal purposes, and is
exempt from ad valorem taxation by the state or any political subdivision of the state, provided that the
properties are subject to special assessments levied by a political subdivision for a local improvement in
amounts proportionate to and not exceeding the special benefit received by the properties from the
improvement. In determining the special benefit received by the properties, no possible use of any of the
properties in any manner different from their intended use for providing a minor league ballpark at the
time may be considered. Notwithstanding Minnesota Statutes, section 272.01 , subdivision 2, or 273.19 ,
real or personal property subject to a lease or use agreement between the city and another person for
uses related to the purposes of the operation of the ballpark and related parking facilities is exempt from
taxation regardless of the length of the lease or use agreement. This section, insofar as it provides an
exemption or special treatment, does not apply to any real property that is leased for residential,
business, or commercial development or other purposes different from those necessary to the provision
and operation of the ballpark. EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city
of St. Paul with Minnesota Statutes, section 645.021 , subdivisions 2 and 3.  PUBLIC ENTERTAINMENT FACILITY; PROPERTY TAX EXEMPTION; SPECIAL
ASSESSMENT. Any real or personal property acquired, owned, leased, controlled, used, or occupied by
the city of Minneapolis for the primary purpose of providing an arena for a professional basketball team is
declared to be acquired, owned, leased, controlled, used, and occupied for public, governmental, and
municipal purposes, and is exempt from ad valorem taxation by the state or any political subdivision of the
state, provided that the properties are subject to special assessments levied by a political subdivision for
a local improvement in amounts proportionate to and not exceeding the special benefit received by the
properties from the improvement. In determining the special benefit received by the properties, no
possible use of any of the properties in any manner different from their intended use for providing a
professional basketball arena at the time may be considered. Notwithstanding Minnesota Statutes,
section 272.01 , subdivision 2, or 273.19 , real or personal property subject to a lease or use agreement
between the city and another person for uses related to the purposes of the operation of the arena and
related parking facilities is exempt from taxation regardless of the length of the lease or use agreement.
This section, insofar as it provides an exemption or special treatment, does not apply to any real property
that is leased for residential, business, or commercial development, or for other purposes different from
those necessary to the provision and operation of the arena. EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city
of Minneapolis with Minnesota Statutes, section 645.021 , subdivisions 2 and 3.  PUBLIC ENTERTAINMENT FACILITY; CONSTRUCTION MANAGER AT RISK. (a) For any real or personal property acquired, owned, leased, controlled, used, or occupied by the
city of Minneapolis for the primary purpose of providing an arena for a professional basketball team, the
city of Minneapolis may contract for construction, materials, supplies, and equipment in accordance with
Minnesota Statutes, section 471.345 , except that the city may employ or contract with persons, firms, or
corporations to perform one or more or all of the functions of an engineer, architect, construction
manager, or program manager with respect to all or any part of a project to renovate, refurbish, and
remodel the arena under either the traditional design-bid-build plan or construction manager at risk plan,
or a combination thereof. (b) The city may prepare a request for proposals for one or more of the functions described in
paragraph (a).

The request must be published in a newspaper of general circulation. The city may prequalify offerors by
issuing a request for qualifications, in advance of the request for proposals, and select a short list of
responsible offerors to submit proposals. (c) As provided in the request for proposals, the city may conduct discussions and negotiations with
responsible offerors in order to determine which proposal is most advantageous to the city and to
negotiate the terms of an agreement. In conducting discussions, there shall be no disclosure of any
information derived from proposals submitted by competing offerors and the content of all proposals is
nonpublic data under Minnesota Statutes, chapter 13, until such time as a notice to award a contract is
given by the city. (d) Upon agreement on the guaranteed maximum price, the construction manager or program
manager may enter into contracts with subcontractors for labor, materials, supplies, and equipment for
the renovation project through the process of public bidding, except that the construction manager or
program manager may, with the consent of the city: (1) narrow the listing of eligible bidders to those that the construction manager or program manager
determines to possess sufficient expertise to perform the intended functions; (2) award contracts to the subcontractors that the construction manager or program manager
determines provide the best value under a request for proposals, as described in Minnesota Statutes,
section 16C.28, subdivision 1 , paragraph (a), clause (2), that are not required to be the lowest
responsible bidder; and (3) for work the construction manager or program manager determines to be critical to the completion
schedule, perform work with its own forces without soliciting competitive bids or proposals, if the
construction manager or program manager provides evidence of competitive pricing. EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city
of Minneapolis with Minnesota Statutes, section 645.021 , subdivisions 2 and 3.  EXTENSION OF PROPERTY TAX DUE DATE; COMMERCIAL SEASONAL
RECREATIONAL PROPERTIES. Notwithstanding the provisions of Minnesota Statutes, section 279.01,
subdivision 1 , for taxes payable in 2013 only, the penalty on first-half property taxes does not accrue until
June 15 on commercial use real property used for seasonal residential recreational purposes and
classified as class 1c or 4c, and on other commercial use real property classified as class 3a, provided
that over 60 percent of the gross income earned by the enterprise on the class 3a property is earned
during the months of May, June, July, and August. In order for the first half of the tax due on class 3a
property to be paid after May 15 and before June 15 without penalty, the owner of the property must
attach an affidavit to the payment attesting to compliance with the income provision of this subdivision.
EFFECTIVE DATE. This section is effective the day following final enactment.  REPORT ON CLASS 4D TIER STRUCTURE. The commissioners of revenue and housing
finance shall report to the legislature by January 31, 2015, on the implementation of a second tier of
market value for class 4d property under Minnesota Statutes, section 273.13, subdivision 25 , paragraph
(f).

The report shall include the number of class 4d properties subject to the second tier of market value for
taxes payable in 2015 and the tax impact of the application of the second tier of market value. The report
shall also include an analysis of the characteristics of the properties to which the second tier of market
value applies, such as location, building type, and number of units. EFFECTIVE DATE. This section is effective July 1, 2013.  REPORT AND STUDY ON CERTAIN PROPERTY USED IN BUSINESS AND
PRODUCTION; ASSESSMENT MORATORIUM. Subdivision 1. Study and report. (a) In order to facilitate a legislative review of property tax assessment procedures for facilities used in
the production of biofuels, wine, beer, distilled beverages, and dairy products, and the development of
standards and criteria for determining the taxable status of these facilities, the commissioner of revenue
must conduct a study and report the findings of the study. The study must: (1) include a detailed survey of counties identifying the components and tax status of biofuel facilities;
(2) identify the function of components in facilities of the affected industries; (3) consider the taxability for certain components related to size, function, and use; (4) develop recommendations for assessment guidelines and policies for facilities of the affected
industries; and (5) identify possible impacts to state and local taxes resulting from study recommendations. (b) The commissioner shall request the involvement and participation of stakeholders, including the
affected industries, the assessment community, and others identified by the commissioner. (c) The commissioner shall report the findings to the chairs of the house of representatives and senate
committees with jurisdiction over taxes, agriculture, and economic development as well as the
commissioners of agriculture and employment and economic development by February 1, 2014. Subd. 2. Moratorium on changes in assessment practices. (a) For the 2013 and 2014 assessments, assessors must continue to use assessment practices or
policies in effect in that county on January 2, 2012, for determining the taxable status of property used in
the production of biofuels, wine, beer, distilled beverages, or dairy products. (b) An assessor must not change the taxable status of any existing property described in paragraph
(a) from its status on January 2, 2012, unless the change is due to a change in the use of property, or to
correct an error. For taxable properties, the assessor may change the estimated market value of the
property and add value for any new construction that would have been taxable under practices and
policies in place on January 2, 2012. (c) This subdivision expires on December 31, 2014. Any changes to the taxable status of the
properties in paragraph (a) resulting from the study will not be effective until the 2015 assessment.  PROPERTY TAX SAVINGS REPORT. (a) In addition to the certification of its proposed property tax levy underMinnesota Statutes, section
275.065 , each city that has a population over 500 and each county shall also include the amount of sales
and use tax paid, or was estimated to be paid, in 2012. (b) At the time the notice of the proposed property taxes is mailed as required under Minnesota
Statutes, section 275.065, subdivision 3 , the county treasurer shall also include a separate statement
providing a list of sales and use tax certified by the county and cities within their jurisdiction. (c) At the public hearing required under Minnesota Statutes, section 275.065, subdivision 3 , the
county and city must discuss the estimated savings realized to their budgets that resulted from the sales
tax exemption authorized under Minnesota Statutes, section 297A.70, subdivision 2 , and how those
savings will be used for property tax levy reductions, fee reductions, and other purposes as deemed
appropriate. Reasonable costs of preparing the notice required in this section must be apportioned
between taxing jurisdictions as follows: (1) one-half is allocated to the county; and (2) one-half is allocated among the cities. The amount allocated in clause (2) must be further
apportioned among all the cities in the proportion that the number of parcels in the city bears to the
number of parcels in all the cities that have populations over 500. EFFECTIVE DATE. This section is effective the day following final enactment, for taxes levied in 2013
and payable in 2014.  LEVY LIMITS FOR TAXES LEVIED IN 2013. Subdivision 1. Population. " Population" means the population for the local governmental unit as
established by the last federal census, by a census taken under section Minnesota Statutes, section
275.14 , or by an estimate made by the metropolitan council or by the state demographer under
Minnesota Statutes, section 4A.02 , whichever is most recent as to the stated date of the count or
estimate up to and including June 1 of the current levy year. Subd. 2. Local government unit. " Local governmental unit" means a county with a population greater
than 5,000, or a statutory or home rule charter city with a population greater than 2,500. Subd. 3. Levy limit base. " Levy limit base" for a local governmental unit for levy year 2013 means the
sum of its certified net tax capacity levy plus the total of aids and reimbursements that the local
governmental unit is certified to receive underMinnesota Statutes, sections 477A.011 to 477A.014 , minus
any amounts that would qualify as a special levy under Minnesota Statutes, section 275.70, subdivision 5
, clauses (1) to (4) and (7), for taxes levied in 2011 or 2012, whichever is greater. The levy limit base must be increased by
three percent. Subd. 4. Property tax levy limit. For taxes levied in 2013, the net tax capacity levy limit for a local
governmental unit is equal to its levy limit base determined under subdivision 3 plus any additional levy
authorized under Minnesota Statutes, section 275.73 , which is levied against net tax capacity, reduced
by the total amount of aids and reimbursements that the local governmental unit is certified to receive
under Minnesota Statutes, sections 477A.011 to 477A.014 . The property tax levy limit for any local
government cannot be less than the greater of its certified net tax capacity levies for taxes levied in 2011
or 2012. Subd. 5. Limit on levies. Notwithstanding any other provision of law or municipal charter to the
contrary which authorize ad valorem taxes in excess of the limits established by this section, the
provisions of this section apply to local governmental units for all purposes other than those for which
special levies under Minnesota Statutes, section 275.70, subdivision 5 , clauses (1) to (5) and (7), and
special assessments are made. Subd. 6. Levies in excess of levy limits. If the levy made by a city or county exceeds the levy limit
provided in this section, except when the excess levy is due to the rounding of the rate in accordance with
Minnesota Statutes, section 275.28 , the county auditor shall only extend the amount of taxes permitted
under this section as provided for inMinnesota Statutes, section 275.16. Subd. 7. Calculation and notification. The commissioner of revenue shall make all necessary
calculations for determining levy limits for local governmental units and notify the affected governmental
units of their levy limits directly by September 1, 2013. The local governmental units shall, upon request,
provide the commissioner with any information needed to make the calculations. The local governmental
unit shall report by September 30, in a manner prescribed by the commissioner, the maximum amount of
taxes it plans to levy for each of the purposes listed under special levies and any additional levy
authorized under Minnesota Statutes, section 275.73 , along with any necessary documentation. The
commissioner shall review the proposed special levies and make any adjustments needed. The
commissioner's decision is final. The final allowed special levy amounts and any levy limit adjustments
must be certified back to the local governments by December 10. In addition, the commissioner of
revenue shall notify all county auditors on or before five working days after December 20 of the sum of
the levy limit plus the total of allowed special levies for each local governmental unit located within their
boundaries so that they may fix the levies as required inMinnesota Statutes, section 275.16. The local
governmental units shall provide the commissioner of revenue with all information that the commissioner
deems necessary to make the calculations provided for in this section. Subd. 8. Information necessary to calculate levy limit base. A local governmental unit must provide the
commissioner with the information required to calculate the amount under subdivision 3, by July 20, 2013.
If the information is not received by the commissioner by that date, or is not deemed sufficient to make
the calculation under that clause, the commissioner has the discretion to set the local governmental unit's
levy limit for all purposes including those purposes for which special levies may be made, equal to the
amount of the local governmental unit's certified levy for the prior year. EFFECTIVE DATE. This section is effective for taxes levied in 2013, payable in 2014, only.  APPROPRIATION. $2,000,000 in fiscal year 2014 only is appropriated from the general fund
to the commissioner of revenue for a grant to the city of Moose Lake to reimburse for costs related to
connection of state facilities to the sewer line. EFFECTIVE DATE. This section is effective July 1, 2013. 256.9658 , EFFECTIVE DATE. This section is effective July 1, 2013.  Jet fuel and the same rate 15 cents as the aviation gasoline EFFECTIVE DATE. This section is effective July 1, 2014, and applied to sales and purchases made
on or after that date. and the airflight property tax under section 270.72 EFFECTIVE DATE. This section is effective July 1, 2014, and applied to sales and purchases made
on or after that date. (f) The sale or purchase of the following items that relate to aircraft operated under Federal Aviation
Regulations, Parts 91 and 135, and associated installation charges: equipment and parts necessary for
repair and maintenance of aircraft; and equipment and parts to upgrade and improve aircraft. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 4a. Deposit in state airports fund. Tax revenue collected from the sale or purchase of an aircraft
taxable under this chapter must be deposited in the state airports fund, established in section 360.017 .
EFFECTIVE DATE. This section is effective July 1, 2013, and applied to sales and purchases made
on or after that date. ,

that weighs 4.5 pounds or less per thousand: (1) ; or (2) wrapped in any substance containing tobacco, however labeled or named, which, because of its
appearance, size, the type of tobacco used in the filler, or its packaging, pricing, marketing, or labeling, is
likely to be offered to or purchased by consumers as a cigarette, as defined in clause (1), unless it is
wrapped in whole tobacco leaf and does not have a cellulose acetate or other cigarette-like filter EFFECTIVE DATE. This section is effective July 1, 2013. Subd. 10b. Moist snuff. " Moist snuff" means any finely cut, ground, or powdered smokeless tobacco
that is intended to be placed or dipped in the mouth. EFFECTIVE DATE. This section is effective January 1, 2014. Subd. 13a. Premium cigar. " Premium cigar" means any cigar that is hand-constructed and
hand-rolled, has a wrapper that is made entirely from whole tobacco leaf, has a filler and binder that is
made entirely of tobacco, except for adhesives or other materials used to maintain size, texture, or flavor,
and has a wholesale price of no less than $2. EFFECTIVE DATE. This section is effective July 1, 2013. (a) little cigars; (b) Except for the imposition of tax under section 297F.05 , subdivisions 3 and 4, tobacco products
includes a premium cigar, as defined in subdivision 13a. EFFECTIVE DATE. This section is effective July 1, 2013. 24

141.5 48

283 EFFECTIVE DATE. This section is effective July 1, 2013. Subd. 1a. Annual indexing. (a) Each year the commissioner shall adjust the tax rates under subdivision 1, including any
adjustment made in prior years under this subdivision, by multiplying the mill rates for the current calendar
year by an adjustment factor and rounding the result to the nearest mill. The adjustment factor equals the
in-lieu sales tax rate that applies to the following calendar year divided by the in-lieu sales tax rate for the
current calendar year. For purposes of this subdivision, "in-lieu sales tax rate" means the tax rate
established under section 297F.25, subdivision 1 . For purposes of the calculations under this subdivision
to be made in any year in which an increase in the federal or state excise tax on cigarettes is
implemented, the commissioner shall exclude from the calculated average price for the current year an
amount equal to any increase in the state or federal excise tax rate. (b) The commissioner shall publish the resulting rate by November 1 and the rate applies to sales
made on or after January 1 of the following year. (c) The determination of the commissioner under this subdivision is not a rule and is not subject to the
Administrative Procedure Act in chapter 14. EFFECTIVE DATE. This section is effective July 1, 2014. (a) Except as provided in subdivision 3a, 35 95 (b) Notwithstanding paragraph (a), a minimum tax equal to the rate imposed on a pack of 20
cigarettes weighing not more than three pounds per thousand, as established under subdivision 1, is
imposed on each container of moist snuff. For purposes of this subdivision, a "container" means the
smallest consumer-size can, package, or other container that is marketed or packaged by the
manufacturer, distributor, or retailer for separate sale to a retail purchaser. When more than one container
is packaged together, each container is subject to tax. EFFECTIVE DATE. This section is effective July 1, 2013, except the minimum tax under paragraph
(b) is effective January 1, 2014. Subd. 3a. Rates; tobacco. (a) A tax is imposed upon all premium cigars in this state and upon any person engaged in business
as a tobacco product distributor, at the lesser of: (1) the rate of 95 percent of the wholesale sales price of the premium cigars; or (2) $3.50 per premium cigar. (b) The tax imposed under paragraph (a) is imposed at the time the tobacco products distributor: (1) brings, or causes to be brought, into this state from outside the state premium cigars for sale; (2) makes, manufactures, or fabricates premium cigars in this state for sale in this state; or (3) ships or transports premium cigars to retailers in this state, to be sold by those retailers. EFFECTIVE DATE. This section is effective July 1, 2013. Except as provided in subdivision 4a, 35 95 or the minimum tax under subdivision 3,

paragraph (b), whichever is greater EFFECTIVE DATE. This section is effective July 1, 2013. Subd. 4a. Use tax; premium cigars. A tax is imposed upon the use or storage by consumers of all
premium cigars in this state, and upon such consumers, at the lesser of: (1) the rate of 95 percent of the cost to the consumer of the premium cigars; or (2) $3.50 per premium cigar. EFFECTIVE DATE. This section is effective July 1, 2013. 1.75 2.5 EFFECTIVE DATE. This section is effective July 1, 2013. 6.5 percent of the combined tax rate under

section 297A.62 , multiplied by EFFECTIVE DATE. This section is effective July 1, 2013. 100,000

250,000 EFFECTIVE DATE. This section is effective for determinations based on calendar year 2012
production and thereafter. wholeleaf, and includes any cigarette as defined in section

297F.01, subdivision 3 EFFECTIVE DATE. This section is effective July 1, 2013. and .

; and (3) premium cigars as defined in section 297F.01, subdivision 13 a. EFFECTIVE DATE. This section is effective July 1, 2013. or, if the organization is a
501(c)(3) organization, if the value of all raffle prizes awarded by the organization at one event in a
calendar year does not exceed $5,000 EFFECTIVE DATE. This section is effective July 1, 2013. at the rate of one percent of value; provided that the

minimum tax on an aircraft subject to the provisions of sections 360.511 to360.67 shall not be less than
25 percent of the tax on said aircraft computed on its base price or $50 whichever is the higher. as follows: Base Price Tax Under $499,999 $100 $500,000 to $999,999 $200 $1,000,000 to
$2,499,999 $2,000 $2,500,000 to $4,999,999 $4,000 $5,000,000 to $7,499,999 $7,500 $7,500,000 to
$9,999,999 $10,000 $10,000,000 to $12,499,999 $12,500 $12,500,000 to $14,999,999 $15,000
$15,000,000 to $17,499,999 $17,500 $17,500,000 to $19,999,999 $20,000 $20,000,000 to $22,499,999
$22,500 $22,500,000 to $24,999,999 $25,000 $25,000,000 to $27,499,999 $27,500 $27,500,000 to
$29,999,999 $30,000 $30,000,000 to $39,999,999 $50,000 $40,000,000 and over $75,000 from which

depreciation in value at a fixed percent per annum can be counted, such , the base such Subd. 6. Depreciation. After the first year of aircraft life the base value for taxation purposes shall be
reduced as follows: ten percent the second year, and 15 percent the third and each succeeding year
thereafter, but in no event shall such tax be reduced below the minimum. EFFECTIVE DATE. This section is effective July 1, 2014, and applies to aircraft tax due on or after
that date. 360.54

360.531 360.54 360.531 EFFECTIVE DATE. This section is effective July 1, 2014, and applies to aircraft tax due on or after
that date.  REPORT. On or before June 30, 2016, and every four years thereafter, the commissioner of
transportation, in consultation with the commissioner of revenue, shall prepare and submit to the chairs
and ranking minority members of the senate and house of representatives committees with jurisdiction
over transportation policy and budget, a report that identifies the amount and sources of annual revenues
attributable to each type of aviation tax, along with annual expenditures from the state airports fund, and
any other transfers out of the fund, during the previous four years. The report must include draft
legislation for any recommended statutory changes to ensure the future adequacy of the state airports
fund. EFFECTIVE DATE. This section is effective July 1, 2014, and applies to aircraft tax due on or after
that date.  FLOOR STOCKS TAX. Subdivision 1. Cigarettes. (a) A floor stocks tax is imposed on every person engaged in the business in this state as a distributor,
retailer, subjobber, vendor, manufacturer, or manufacturer's representative of cigarettes, on the stamped
cigarettes and unaffixed stamps in the person's possession or under the person's control at 12:01 a.m. on
July 1, 2013. The tax is imposed at the rate of 80 mills on each cigarette plus the additional cigarette
sales tax determined by an adjustment to the weighted average retail price which reflects the price
including the increased tax. (b) Each distributor, on or before July 11, 2013, shall file a return with the commissioner of revenue, in
the form the commissioner prescribes, showing the stamped cigarettes and unaffixed stamps on hand at
12:01 a.m. on July 1, 2013, and the amount of tax due on the cigarettes and unaffixed stamps. Each
retailer, subjobber, vendor, manufacturer, or manufacturer's representative, on or before July 11, 2013,
shall file a return with the commissioner, in the form the commissioner prescribes, showing the cigarettes
on hand at 12:01 a.m. on July 1, 2013, and the amount of tax due on the cigarettes. The tax imposed by
this section is due and payable on or before September 4, 2013, and after that date bears interest at the
rate of one percent per month. Subd. 2. Audit and enforcement. The tax imposed by this section is subject to the audit, assessment,
interest, appeal, refund, penalty, enforcement, administrative, and collection provisions of Minnesota
Statutes, chapters 270C and 297F. The commissioner of revenue may require a distributor to receive and
maintain copies of floor stocks fee returns filed by all persons requesting a credit for returned cigarettes.
Subd. 3. Deposit of proceeds. (a) The commissioner of revenue shall deposit $26,500,000 of the revenues from the tax under this
section in the state treasury and credit them to the general reserve account established under Minnesota
Statutes 297E.021, subdivision 4 . (b) The commissioner of revenue shall deposit any revenue remaining after the transfer under
paragraph (a) to the general fund. EFFECTIVE DATE. This section is effective July 1, 2013.  INTERIM SALES TAX RATE. Notwithstanding the provisions of Minnesota Statutes, section
297F.25 , the commissioner shall adjust the weighted average retail price in section 297F.25, subdivision
1 , on July 1, 2013, to reflect the price changes under this act. This weighted average shall be used to
compute cigarette sales tax underMinnesota Statutes, section 297F.25, subdivision 1 , until December 31,
2013, when the commissioner shall resume annual adjustments to the weighted average sales price. The
commissioner's determination of the adjustment that takes effect on January 1, 2014, must be limited to
the change in the weighted average retail price that occurs during calendar year 2013 but after July 15,
2013. EFFECTIVE DATE. This section is effective July 1, 2013.  TOBACCO TAX COLLECTION REPORT. Subdivision 1. Report to legislature. (a) The commissioner of revenue shall report to the 2014 legislature on the tobacco tax collection
system, including recommendations to improve compliance under the excise tax for both cigarettes and
other tobacco products. The purpose of the report is to provide information and guidance to the
legislature on improvements to the tobacco tax collection system to: (1) provide a unified system of collecting both the cigarette and other tobacco taxes, regardless of
category, size, or shape, that ensures the highest reasonable rates of tax collection; (2) discourage tax evasion; and (3) help to prevent illegal sale of tobacco products, which may make these products more accessible
to youth. (b) In the report, the commissioner shall: (1) provide a detailed review of the present excise tax collection and compliance system as it applies
to both cigarettes and other tobacco products. This must include an assessment of the levels of
compliance for each category of products and the effect of the stamping requirement on compliance for
each category of products and the effect of the stamping requirement on compliance rates for cigarettes
relative to other tobacco products. It also must identify any weaknesses in the system; (2) survey the methods of collection and enforcement used by other states or nations, including
identifying and discussing emerging best practices that ensure tracking of both cigarettes and other
tobacco products and result in the highest rates of tax collection and compliance. These best practices
must consider high-technology alternatives, such as use of bar codes, radio-frequency identification tags,
or similar mechanisms for tracking compliance; (3) evaluate the adequacy and effectiveness of the existing penalties and other sanctions for
noncompliance; (4) evaluate the adequacy of the resources allocated by the state to enforce the tobacco tax and
prevention laws; and (5) make recommendations on implementation of a comprehensive tobacco tax collection system for
Minnesota that can be implemented by January 1, 2014, including: (i) recommendations on the specific steps needed to institute and implement the new system,
including estimates of the state's costs of doing so and any additional personnel requirements; (ii) recommendations on methods to recover the cost of implementing the system from the industry;
(iii) evaluation of the extent to which the proposed system is sufficiently flexible and adaptable to
adjust to modifications in the construction, packaging, formatting, and marketing of tobacco products by
the industry; and (iv) recommendations to modify existing penalties or to impose new penalties or other sanctions to
ensure compliance with the system. Subd. 2. Due date. The report required by subdivision 1 is due February 15, 2014. Subd. 3. Procedure. The report required under this section must be made in the manner provided
under Minnesota Statutes, section 3.195. In addition, copies must be provided to the chairs and ranking
minority members of the legislative committees and divisions with jurisdiction over taxation. Subd. 4. Appropriation. (a) $100,000 is appropriated from the general fund to the commissioner of revenue for fiscal year
2014 for the cost of preparing the report under subdivision 1. (b) The appropriation under this subdivision is a onetime appropriation and is not included in the base
budget. EFFECTIVE DATE. This section is effective the day following final enactment.  REPEALER.           REPEAL Minnesota Statutes 2012, sections 16A.725 ;

andREPEAL 256.9658 , are repealed.EFFECTIVE DATE. This section is effective July 1, 2013.
(i) "Liquidation event" means a conversion of qualified investment for cash, cash and other
consideration, or any other form of equity or debt interest. EFFECTIVE DATE. This section is effective for qualified small businesses certified after June 30,
2013. (i) , or (ii) the

business has not been in operation for more than 20 years if the business is engaged in the research,
development, or production of medical devices or pharmaceuticals for which United States Food and
Drug Administration approval is required for use in the treatment or diagnosis of a disease or condition
and .

; and (10) the business has not issued securities that are traded on a public exchange. , : (1) .

; (2) the business must not have issued securities that are traded on a public exchange; (3) the business must not issue securities that are traded on a public exchange within 180 days after
the date on which the qualified investment was made; and (4) the business must not have a liquidation event within 180 days after the date on which the qualified
investment was made. EFFECTIVE DATE. This section is effective for qualified small businesses certified after June 30,
2013, except the amendments to paragraph (c), clause (7), are effective the day following final
enactment. , mailing address, telephone number, e-mail address, contact

person's name, and industry type EFFECTIVE DATE. This section is effective the day following final enactment.  [136A.129 ] GREATER MINNESOTA INTERNSHIP PROGRAM. Subdivision 1. Definitions. (a) For the purposes of this section, the terms defined in this subdivision have the meanings given to
them. (b) "Eligible employer" means a taxpayer under section 290.01 with employees located in greater
Minnesota. (c) "Eligible institution" means a Minnesota public postsecondary institution or a Minnesota private,
nonprofit, baccalaureate degree-granting college or university. (d) "Eligible student" means a student enrolled in an eligible institution who has completed one-half of
the credits necessary for the respective degree or certification. (e) "Greater Minnesota" means the area of the state outside of the counties of Anoka, Carver,
Chisago, Dakota, Hennepin, Isanti, Ramsey, Scott, Sherburne, Washington, and Wright. Subd. 2. Program established. The Office of Higher Education shall administer a greater Minnesota
internship program through eligible institutions to provide credit at the eligible institution for internships
and tax credits for eligible employers who hire interns for employment in greater Minnesota. Subd. 3. Program components. (a) An intern must be an eligible student who has been admitted to a major program that is related to
the intern experience as determined by the eligible institution. (b) To participate in the program, an eligible institution must: (1) enter into written agreements with eligible employers to provide internships that are at least 12
weeks long and located in greater Minnesota; (2) determine that the work experience of the internship is related to the eligible student's course of
study; and (3) provide academic credit for the successful completion of the internship or ensure that it fulfills
requirements necessary to complete a vocational technical education program. (c) To participate in the program, an eligible employer must enter into a written agreement with an
eligible institution specifying that the intern: (1) would not have been hired without the tax credit described in subdivision 4; (2) did not work for the employer in the same or a similar job prior to entering the agreement; (3) does not replace an existing employee; (4) has not previously participated in the program; (5) will be employed at a location in greater Minnesota; (6) will be paid at least minimum wage for a minimum of 16 hours per week for a period of at least 12
weeks; and (7) will be supervised and evaluated by the employer. (d) The written agreement between the eligible institution and the eligible employer must certify a
credit amount to the employer, not to exceed $2,000 per intern. The total dollar amount of credits that an
eligible institution certifies to eligible employers in a calendar year may not exceed the amount of its
allocation under subdivision 4. (e) Participating eligible institutions and eligible employers must report annually to the office. The
report must include at least the following: (1) the number of interns hired; (2) the number of hours and weeks worked by interns; and (3) the compensation paid to interns. (f) An internship required to complete an academic program does not qualify for the greater Minnesota
internship program under this section. Subd. 4. Tax credit allowed. An employer is entitled to a tax credit as provided in section 290.06,
subdivision 36 . The total amount of credits allocated in a calendar year must not exceed $2,000,000. The
office shall determine relevant criteria to allocate the tax credits including the geographic distribution of
credits to work locations outside the metropolitan area, and shall allocate credits to eligible institutions
that meet the criteria on a first come, first served basis. Any credits allocated to an institution but not used
may be reallocated to eligible institutions. The office shall allocate a portion of the administrative fee
under section 290.06, subdivision 36 , to participating eligible institutions for their administrative costs. Subd. 5. Reports to the legislature. (a) By February 1, 2015, the office and the Department of Revenue shall report to the legislature on
the greater Minnesota internship program. The report must include at least the following: (1) the number and dollar amount of credits allowed; (2) the number of interns employed under the program; and (3) the cost of administering the program. (b) By February 1, 2016, the office and the Department of Revenue shall report to the legislature with
an analysis of the effectiveness of the program in stimulating businesses to hire interns and in assisting
participating interns in finding permanent career positions. This report must include the number of
students who participated in the program who were subsequently employed full-time by the employer. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2013. , except that a

foreign operating corporation as defined in section 290.01, subdivision 6 b , is not required to file a return
EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. The provisions of sections 315 and 331 of the American Taxpayer Relief
Act of 2012, Public Law 112-240, extension of increased expensing limitations and treatment of certain
real property as section 179 property and extension and modification of bonus depreciation, are effective
at the same time they become effective for federal purposes. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. (15) (12) (15) (12) (16) (13) (16) (13) and ; and (18) the amount of expenses not allowed for federal income tax purposes due to claiming the railroad
track maintenance credit under section 45G(a) of the Internal Revenue Code EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. (8) the exempt foreign trade income of a foreign sales corporation under sections 921(a) and 291 of
the Internal Revenue Code; (9) (8) (10) (9) (11) the amount of any deemed dividend from a foreign operating corporation determined pursuant to
section 290.17, subdivision 4 , paragraph (g).

The deemed dividend shall be reduced by the amount of the addition to income required by clauses (20),
(21), (22), and (23); (12) (10) (13) the amount of net income excluded under section 114 of the Internal Revenue Code; (14) (11) (15) (12) (16) (13) (17) (14) (18) for taxable years beginning before January 1, 2013, the exclusion allowed under section 139A of
the Internal Revenue Code for federal subsidies for prescription drug plans; (19) (15) and (20) an amount equal to the interest and intangible expenses, losses, and costs paid, accrued, or
incurred by any member of the taxpayer's unitary group to or for the benefit of a corporation that is a
member of the taxpayer's unitary business group that qualifies as a foreign operating corporation. For
purposes of this clause, intangible expenses and costs include: (i) expenses, losses, and costs for, or related to, the direct or indirect acquisition, use, maintenance or
management, ownership, sale, exchange, or any other disposition of intangible property; (ii) losses incurred, directly or indirectly, from factoring transactions or discounting transactions; (iii) royalty, patent, technical, and copyright fees; (iv) licensing fees; and (v) other similar expenses and costs. For purposes of this clause, "intangible property" includes
stocks, bonds, patents, patent applications, trade names, trademarks, service marks, copyrights, mask
works, trade secrets, and similar types of intangible assets. This clause does not apply to any item of
interest or intangible expenses or costs paid, accrued, or incurred, directly or indirectly, to a foreign
operating corporation with respect to such item of income to the extent that the income to the foreign
operating corporation is income from sources without the United States as defined in subtitle A, chapter 1,
subchapter N, part 1, of the Internal Revenue Code; (21) except as already included in the taxpayer's taxable income pursuant to clause (20), any interest income and income generated from intangible property received or accrued by a
foreign operating corporation that is a member of the taxpayer's unitary group. For purposes of this
clause, income generated from intangible property includes: (i) income related to the direct or indirect acquisition, use, maintenance or management, ownership,
sale, exchange, or any other disposition of intangible property; (ii) income from factoring transactions or discounting transactions; (iii) royalty, patent, technical, and copyright fees; (iv) licensing fees; and (v) other similar income. For purposes of this clause, "intangible property" includes stocks, bonds,
patents, patent applications, trade names, trademarks, service marks, copyrights, mask works, trade
secrets, and similar types of intangible assets. This clause does not apply to any item of interest or
intangible income received or accrued by a foreign operating corporation with respect to such item of
income to the extent that the income is income from sources without the United States as defined in
subtitle A, chapter 1, subchapter N, part 1, of the Internal Revenue Code; (22) the dividends attributable to the income of a foreign operating corporation that is a member of the
taxpayer's unitary group in an amount that is equal to the dividends paid deduction of a real estate
investment trust under section 561(a) of the Internal Revenue Code for amounts paid or accrued by the
real estate investment trust to the foreign operating corporation; (23) the income of a foreign operating corporation that is a member of the taxpayer's unitary group in
an amount that is equal to gains derived from the sale of real or personal property located in the United
States; (24) for taxable years beginning before January 1, 2010, the additional amount allowed as a deduction
for donation of computer technology and equipment under section 170(e)(6) of the Internal Revenue
Code, to the extent deducted from taxable income; and (25) (16) EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. (9) (8) section 290.01, (10) 80 percent of royalties, fees, or other like income accrued or received from a foreign operating
corporation or a foreign corporation which is part of the same unitary business as the receiving
corporation, unless the income resulting from such payments or accruals is income from sources within
the United States as defined in subtitle A, chapter 1, subchapter N, part 1, of the Internal Revenue Code;
(11) (10) (12) (11) (13) (12) (14) (13) (15) for a corporation whose foreign sales corporation, as defined in section 922 of the Internal
Revenue Code, constituted a foreign operating corporation during any taxable year ending before
January 1, 1995, and a return was filed by August 15, 1996, claiming the deduction under section 290.21,
subdivision 4 , for income received from the foreign operating corporation, an amount equal to 1.23
multiplied by the amount of income excluded under section 114 of the Internal Revenue Code, provided
the income is not income of a foreign operating company; (16) (14) (17) (15) (15) (12) (15) (12) (18) (16) (16) (13) and (19) (17) section 290.01,

(25). (16); and (18) the amount of expenses not allowed for federal income tax purposes due to claiming the railroad
track maintenance credit under section 45G(a) of the Internal Revenue Code. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. $25,680 $35,480 $25,680 $35,480 $102,030

$140,960 $102,030 $140,960, but not over $250,000 .

; (4) On all over $250,000, 9.85 percent. $17,570 $24,270 $17,570 $24,270 $57,710

$79,730 $57,710 $79,730, but not over $150,000 .

; (4) On all over $150,000, 9.85 percent. $21,630 $29,880 $21,630 $29,880 $86,910

$120,070 $86,910 $120,070, but not over $200,000 .

; (4) On all over $200,000, 9.85 percent. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. 2000 2013 19992012 2001 2014 "1999" "2012" 2001 2014 1999 2012
2000 2013 1999

2012 EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. Subd. 36. Greater Minnesota internship credit. (a) A taxpayer who is an eligible employer may take a credit against the tax due under this chapter
equal to the lesser of: (1) 40 percent of the compensation paid to an intern qualifying under the program established under
section 136A.129 , but not to exceed $2,000 per intern; or (2) the amount certified to the taxpayer by an eligible institution out of the institution's allocation of
credits for the calendar year, as provided in section 136A.129 . (b) Credits allowed to a partnership, a limited liability company taxed as a partnership, an S
corporation, or multiple owners of property are passed through to the partners, members, shareholders,
or owners, respectively, pro rata to each partner, member, shareholder, or owner based on their share of
the entity's income for the taxable year. (c) If the amount of credit which the taxpayer is eligible to receive under this subdivision exceeds the
taxpayer's tax liability under this chapter, the commissioner of revenue shall refund the excess to the
taxpayer. (d) An amount necessary to pay claims for refund provided in this subdivision is appropriated from the
general fund to the commissioner of revenue. (e) An amount equal to one percent of the total amount of the credits authorized under section
136A.129, subdivision 4 , for an administrative fee for the Office of Higher Education and participating
eligible institutions is appropriated from the general fund to the commissioner of revenue, for a transfer to
the Office of Higher Education. (f) For purposes of this subdivision, the terms "eligible employer" and "eligible institution" have the
meanings given in section 136A.129 . EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2013. , : either (i) met one of the following criteria: (i) has or ; or (iii) has been determined by the military to be eligible for compensation from a pension or other
retirement pay from the federal government for service in the military, as computed under United States
Code, title 10, sections 1401 to 1414, 1447 to 1455, or 12733; EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. and after December 31, 2012, sum of the subdivision subdivisions and 2c , on all of the entities required to

be included on the combined report of the unitary business. If the amount of the credit allowed exceeds
the liability for tax of the taxpayer, but is allowed as a result of the liability for tax of other members of the
unitary group for the taxable year, the taxpayer must allocate the excess as a research credit to another
member of the unitary group including amounts allocated

to other members of the unitary group EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. and before

January 1, 2013, and before January 1, 2013, EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. under section 47(a)(2) of the

Internal Revenue Code (f) "Federal credit" means the credit allowed under section 47(a)(2) of the Internal Revenue Code. (g) "Placed in service" has the meaning used in section 47 of the Internal Revenue Code. (h) "Qualified rehabilitation expenditures" has the meaning given in section 47 of the Internal Revenue
Code. EFFECTIVE DATE. This section is effective the day following final enactment. $5,000 0.5

percent of qualified rehabilitation expenditures, up to $40,000 expenses expenditures of revenue and must notify the developer in writing of its determination

of revenue (e) Any decision of the office under paragraph (c) may be challenged as a contested case under
chapter 14. The contested case proceeding must be initiated within 45 days of the date of written
notification by the office. EFFECTIVE DATE. This section is effective the day following final enactment and the change in
paragraph (a) applies to applications first received on or after the day following final enactment.  ; grants An assignment is not valid
unless the assignee notifies the commissioner within 30 days of the date that the assignment is made.
notifying the

commissioner of the assignment of a credit certificate and for (c) Credits passed through to partners, members, shareholders, or owners pursuant to subdivision 5
are not an assignment of a credit certificate under this subdivision. (d) A grant agreement between the office and the recipient of a grant may allow the grant to be issued
to another individual or entity. EFFECTIVE DATE. This section is effective the day following final enactment. or any other executed agreement EFFECTIVE DATE. This section is effective the day following final enactment. 2015 2021 2016 2022 2018 2024

2019

2025 EFFECTIVE DATE. This section is effective the day following final enactment. 6.4 6.75 EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. 6.4 6.75 EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. 6.4 6.75 EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. (15) (12) (17) (15) (6) The special rule for dividends from section 936 companies under section 56(g)(4)(C)(iii) does not
apply. (7) (6) (8) (7) (9) (8) (10) (9) (11) (10) (12) (11) (13) (12) or , or (iii) the amount of royalties, fees or

other like income subtracted as provided in section 290.01, subdivision 19 d , clause (10) (14) (13) (15) (14) EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. less than $ 500,000 $

0 $ 500,000 to $ 999,999 $ 100 $ 1,000,000 to $ 4,999,999 $ 300 $ 5,000,000 to $ 9,999,999 $ 1,000 $
10,000,000 to $ 19,999,999 $ 2,000 $ 20,000,000 or more $ 5,000 less than $ 930,000 $ 0 $
930,000 to $ 1,869,999 $ 190 $ 1,870,000 to $ 9,339,999 $ 560 $ 9,340,000 to $ 18,679,999 $ 1,870 $
18,680,000 to $ 37,359,999 $ 3,740 $ 37,360,000 or more $ 9,340 less than $ 500,000 $ 0 $ 500,000 to $

999,999 $ 100 $ 1,000,000 to $ 4,999,999 $ 300 $ 5,000,000 to $ 9,999,999 $ 1,000 $ 10,000,000 to $
19,999,999 $ 2,000 $ 20,000,000 or more $ 5,000 less than $ 930,000 $ 0 $ 930,000 to $
1,869,999 $ 190 $ 1,870,000 to $ 9,339,999 $ 560 $ 9,340,000 to $ 18,679,999 $ 1,870 $ 18,680,000 to $
37,359,999 $ 3,740 $ 37,360,000 or more $ 9,340 (c) The commissioner shall adjust the dollar amounts of both the tax and the property, payrolls, and
sales or receipts thresholds in paragraphs (a) and (b) by the percentage determined pursuant to the
provisions of section 1(f) of the Internal Revenue Code, except that in section 1(f)(3)(B) the word "2012"
must be substituted for the word "1992." For 2014, the commissioner shall determine the percentage
change from the 12 months ending on August 31, 2012, to the 12 months ending on August 31, 2013,
and in each subsequent year, from the 12 months ending on August 31, 2012, to the 12 months ending
on August 31 of the year preceding the taxable year. The determination of the commissioner pursuant to
this subdivision is not a "rule" subject to the Administrative Procedure Act contained in chapter 14. The
tax amounts as adjusted must be rounded to the nearest $10 amount and the threshold amounts must be
adjusted to the nearest $10,000 amount. For tax amounts that end in $5, the amount is rounded up to the
nearest $10 amount and for the threshold amounts that end in $5,000, the amount is rounded up to the
nearest $10,000. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. and the modification provided in section 290.01,

subdivision 19d , clause (10), EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. Except as provided in section 290.17, subdivision 4 ,
paragraph (i), is not deemed to does not a corporation is two or more corporations are that corporation is a member of a group of two or more business entities and

member of the group

corporation ; except that the income and apportionment

factors of a foreign entity, other than an entity treated as a C corporation for federal income tax purposes,
that are included in the federal taxable income, as defined in section 63 of the Internal Revenue Code as
amended through the date named in section 290.01, subdivision 19 , of a domestic corporation, domestic
entity, or individual must be included in determining net income and the factors to be used in the
apportionment of net income pursuant to section 290.191 or 290.20 not included on a

combined report and which is The net income and apportionment factors under section 290.191 or 290.20 of foreign
operating corporations shall not be included in the net income or the apportionment factors of the unitary
business except as provided in paragraph (g). (g) The adjusted net income of a foreign operating corporation shall be deemed to be paid as a
dividend on the last day of its taxable year to each shareholder thereof, in proportion to each
shareholder's ownership, with which such corporation is engaged in a unitary business. Such deemed
dividend shall be treated as a dividend under section 290.21, subdivision 4 . Dividends actually paid by a
foreign operating corporation to a corporate shareholder which is a member of the same unitary business
as the foreign operating corporation shall be eliminated from the net income of the unitary business in
preparing a combined report for the unitary business. The adjusted net income of a foreign operating
corporation shall be its net income adjusted as follows: (1) any taxes paid or accrued to a foreign country, the commonwealth of Puerto Rico, or a United
States possession or political subdivision of any of the foregoing shall be a deduction; and (2) the subtraction from federal taxable income for payments received from foreign corporations or
foreign operating corporations under section 290.01, subdivision 19 d , clause (10), shall not be allowed.
If a foreign operating corporation incurs a net loss, neither income nor deduction from that corporation
shall be included in determining the net income of the unitary business. (h) (g) other than

foreign operating corporations ; except that the income and apportionment factors of a foreign

entity, other than an entity treated as a C corporation for federal income tax purposes, that is included in
the federal taxable income, as defined in section 63 of the Internal Revenue Code as amended through
the date named in section 290.01, subdivision 19 , of a domestic corporation, domestic entity, or
individual must be included in determining net income and the factors to be used in the apportionment of
net income pursuant to section 290.191 or 290.20 (i) Deductions for expenses, interest, or taxes otherwise allowable under this chapter that are
connected with or allocable against dividends, deemed dividends described in paragraph (g), or royalties,
fees, or other like income described in section 290.01, subdivision 19 d , clause (10), shall not be
disallowed. (j) (h) (h) (g) (h) (g) Except as otherwise provided by
paragraph (f), all sales of the unitary business made within this state pursuant to section 290.191 or
290.20 must be included on the combined report of a corporation or other entity that is a member of the
unitary business and is subject to the jurisdiction of this state to impose tax under this chapter. (k) (i) EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. and ; and . (6) royalties, fees, or other like income of a type which qualify for a subtraction from federal taxable
income under section 290.01, subdivision 19 d , clause (10). not described in paragraph (a), clause

(6), EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. The dividend
deduction provided in this subdivision does not apply to a dividend received from a real estate investment
trust as defined in section 856 of the Internal Revenue Code. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. (9) (8) (11) (10) costs of rehabilitation are first paid under construction contracts entered into after May 1, 2010 rehabilitation expenditures are first paid by the developer or taxpayer after May 1, 2010, for
rehabilitation that occurs after May 1, 2010, provided that the application under subdivision 3 is submitted
before the project is placed in service EFFECTIVE DATE. This section is effective the day following final enactment and applies retroactively
for taxable years beginning after December 31, 2009, and for certified historic structures placed in service
after May 1, 2010, but the office may not issue certificates allowed under the change to this section until
July 1, 2013.  ESTIMATED TAXES; EXCEPTIONS. No addition to tax, penalties, or interest may be made
under Minnesota Statutes, section 289A.25 , for any period before September 15, 2013, with respect to
an underpayment of estimated tax, to the extent that the underpayment was created or increased by the
increase in income tax rates under this article. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012.  REPEALER.           AMEND Minnesota Statutes 2012, sections 290.01, subdivision
6b

;AMEND 290.06 , subdivision 22a ; andAMEND 290.0921 , subdivision 7 , are repealed.EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. 292, EFFECTIVE DATE. This section is effective for gifts made after December 31, 2012. and .

; and (9) in the case of a gift return, the donor. EFFECTIVE DATE. This section is effective the day following final enactment. sum of the and federal adjusted

taxable gifts made within three years of the date of the decedent's death EFFECTIVE DATE. This section is effective for estates of decedents dying after December 31, 2012.
April 14, 2011 January 3, 2013 sections 501 and 901 of Public Law

107-16, as amended by Public Law 111-312, and section 301(c) of Public Law 111-312 section
2011, paragraph (f), of the Internal Revenue Code (ii) the amount of taxable gifts, as defined in section 292.16 , and made by the decedent within three
years of the decedent's date of death; (ii) (iii) : (i) with respect to (ii) or for a

gift of tangible personal property within three years of death, the state or country in which it was normally
kept or located when the gift was executed

with respect to (iii) or for a gift of intangible personal

property within three years of death, the state or country in which the decedent was domiciled when the
gift was executed For a nonresident decedent with an ownership interest in a pass-through entity
with assets that include real or tangible personal property, situs of the real or tangible personal property is
determined as if the pass-through entity does not exist and the real or tangible personal property is
personally owned by the decedent. If the pass-through entity is owned by a person or persons in addition
to the decedent, ownership of the property is attributed to the decedent in proportion to the decedent's
capital ownership share of the pass-through entity. (10) "Pass-through entity" includes the following: (i) an entity electing S corporation status under section 1362 of the Internal Revenue Code; (ii) an entity taxed as a partnership under subchapter K of the Internal Revenue Code; (iii) a single-member limited liability company or similar entity, regardless of whether it is taxed as an
association or is disregarded for federal income tax purposes under Code of Federal Regulations, title 26,
section 301.7701 -3; or (iv) a trust to the extent the property is includible in the decedent's federal gross estate. EFFECTIVE DATE. This section is effective for decedents dying after December 31, 2012. The tax is reduced by: (1) the gift tax paid by the decedent under section 292.17 on gifts included in the Minnesota adjusted
taxable estate and not subtracted as qualified farm or small business property; and (2) any credit allowed under subdivision 1c. EFFECTIVE DATE. This section is effective for decedents dying after December 31, 2012. Subd. 1c. Nonresident decedent tax credit. (a) The estate of a nonresident decedent that is subject to tax under this chapter on the value of
Minnesota situs property held in a pass-through entity is allowed a credit against the tax due under this
section equal to the lesser of: (1) the amount of estate or inheritance tax paid to another state that is attributable to the Minnesota
situs property held in the pass-through entity; or (2) the amount of tax paid under this section attributable to the Minnesota situs property held in the
pass-through entity. (b) The amount of tax attributable to the Minnesota situs property held in the pass-through entity must
be determined by the increase in the estate or inheritance tax that results from including the market value
of the property in the estate or treating the value as a taxable inheritance to the recipient of the property.
EFFECTIVE DATE. This section is effective for decedents dying after December 31, 2012. , or a trust whose present beneficiaries are

all family members as defined in section 2032A(e)(2) of the Internal Revenue Code from upon the death of (6) (7) (4) (5) EFFECTIVE DATE. This section is effective retroactively for estates of decedents dying after June 30,
2011. The decedent or the
decedent's spouse must have materially participated in the trade or business within the meaning of
section 469 of the Internal Revenue Code during the taxable year that ended before the date of the
decedent's death. For
purposes of this subdivision, an ownership interest includes the interest the decedent is deemed to own
under sections 2036, 2037, and 2038 of the Internal Revenue Code. During the taxable year that ended before the decedent's death, the

trade or business must not have been a passive activity within the meaning of section 469(c) of the
Internal Revenue Code, and the decedent or the decedent's spouse must have materially participated in
the trade or business within the meaning of section 469(h) of the Internal Revenue Code, excluding
section 469(h)(3) of the Internal Revenue Code and any other provision provided by United States
Treasury Department regulation that substitutes material participation in prior taxable years for material
participation in the taxable year that ended before the decedent's death. (4) (4) (5) or , , publicly traded securities, or assets not used in the

operation of the trade or business amount value or , , publicly traded securities, or assets not used in the

operation of the trade or business (5) (6) , including

property the decedent is deemed to own under sections 2036, 2037, and 2038 of the Internal Revenue
Code, In the case of a sole
proprietor, if the property replaced similar property within the three-year period, the replacement property
will be treated as having been owned for the three-year period ending on the date of death of the
decedent. (6) A family member continuously uses the property in the operation of the trade or business for three
years following the date of death of the decedent. For three years following the date of death of the decedent, the

trade or business is not a passive activity within the meaning of section 469(c) of the Internal Revenue
Code, and a family member materially participates in the operation of the trade or business within the
meaning of section 469(h) of the Internal Revenue Code, excluding section 469(h)(3) of the Internal
Revenue Code and any other provision provided by United States Treasury Department regulation that
substitutes material participation in prior taxable years for material participation in the three years
following the date of death of the decedent. (8) EFFECTIVE DATE. This section is effective retroactively for estates of decedents dying after June 30,
2011. a farm meeting the requirements of

agricultural land and is owned by a person or entity that is either not

subject to or is in compliance with , and was

classified for property tax purposes as the homestead of the decedent or the decedent's spouse or both
under section 273.124 , and as class 2a property under section 273.13, subdivision 23 For property taxes payable in the taxable year of the decedent's

death, the property is classified as class 2a property under section 273.13, subdivision 23 , and is
classified as agricultural homestead, agricultural relative homestead, or special agricultural homestead
under section 273.124 . (4) , including

property the decedent is deemed to own under sections 2036, 2037, and 2038 of the Internal Revenue
Code, either by ownership of the agricultural land or

pursuant to holding an interest in an entity that is not subject to or is in compliance with section 500.24
(4) A family member continuously uses the property in the operation of the trade or business (5) The property is classified for property tax purposes as class 2a property under section 273.13,
subdivision 23 , (5) (6) EFFECTIVE DATE. This section is effective retroactively for estates of decedents dying after June 30,
2011. use the qualified property which was acquired or passed

from the decedent satisfy the requirement under subdivision 9, clause (7); or 10, clause (5) In the case of a sole proprietor, if the qualified heir
replaces qualified small business property excluded under subdivision 9 with similar property, then the
qualified heir will not be treated as having disposed of an interest in the qualified property. EFFECTIVE DATE. This section is effective retroactively for estates of decedents dying after June 30,
2011.  [292.16 ] DEFINITIONS. (a) For purposes of this chapter, the following definitions apply. (b) The definitions of terms defined in section 291.005 apply. (c) "Resident" has the meaning given in section 290.01, subdivision 7 , paragraph (a). (d) "Taxable gifts" means: (1) the transfers by gift which are included in taxable gifts for federal gift tax purposes under the
following sections of the Internal Revenue Code: (i) section 2503; (ii) sections 2511 to 2514; and (iii) sections 2516 to 2519; less (2) the deductions allowed in sections 2522 to 2524 of the Internal Revenue Code. EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013.  [292.17 ] GIFT TAX. Subdivision 1. Imposition. (a) A tax is imposed on the transfer of property by gift by any individual resident or nonresident in an
amount equal to ten percent of the amount of the taxable gift. (b) The donor is liable for payment of the tax. If the gift tax is not paid when due, the donee of any gift
is personally liable for the tax to the extent of the value of the gift. Subd. 2. Lifetime credit. A credit is allowed against the tax imposed under this section equal to
$100,000. This credit applies to the cumulative amount of taxable gifts made by the donor during the
donor's lifetime. Subd. 3. Out-of-state gifts. Taxable gifts exclude the transfer of: (1) real property located outside of this state; (2) tangible personal property that was normally kept at a location outside of the state on the date the
gift was executed; and (3) intangible personal property made by an individual who is not a resident at the time the gift was
executed. EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013.  [292.18 ] RETURNS. (a) Any individual who makes a taxable gift during the taxable year shall file a gift tax return in the form
and manner prescribed by the commissioner. (b) If the donor dies before filing the return, the executor of the donor's will or the administrator of the
donor's estate shall file the return. If the donor becomes legally incompetent before filing the return, the
guardian or conservator shall file the return. (c) The return must include: (1) each gift made during the calendar year which is to be included in computing the taxable gifts; (2) the deductions claimed and allowable under section 292.16 , paragraph (d), clause (2); (3) a description of the gift, and the donee's name, address, and Social Security number; (4) the fair market value of gifts not made in money; and (5) any other information the commissioner requires to administer the gift tax. EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013.  [292.19 ] FILING REQUIREMENTS. Gift tax returns must be filed by the April 15 following
the close of the calendar year, except if a gift is made during the calendar year in which the donor dies,
the return for the donor must be filed by the last date, including extensions, for filing the gift tax return for
federal gift tax purposes for the donor. EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013.  [292.20 ] APPRAISAL OF PROPERTY; DECLARATION BY DONOR. The commissioner
may require the donor or the donee to show the property subject to the tax under section 292.17 to the
commissioner upon demand and may employ a suitable person to appraise the property. The donor shall
submit a declaration, in a form prescribed by the commissioner and including any certification required by
the commissioner, that the property shown by the donor on the gift tax return includes all of the property
transferred by gift for the calendar year and not deductible under section292.16 , paragraph (d), clause
(2). EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013.  [292.21 ] ADMINISTRATIVE PROVISIONS. Subdivision 1. Payment of tax; penalty for late payment. The tax imposed under section 292.17 is due
and payable to the commissioner by the April 15 following the close of the calendar year during which the
gift was made. The return required under section 292.19 must be included with the payment. If a taxable
gift is made during the calendar year in which the donor dies, the due date is the last date, including
extensions, for filing the gift tax return for federal gift tax purposes for the donor. If any person fails to pay
the tax due within the time specified under this section, a penalty applies equal to ten percent of the
amount due and unpaid or $100, whichever is greater. The unpaid tax and penalty bear interest at the
rate under section 270C.40 from the due date of the return. Subd. 2. Extensions. The commissioner may, for good cause, extend the time for filing a gift tax
return, if a written request is filed with a tentative return accompanied by a payment of the tax, which is
estimated in the tentative return, on or before the last day for filing the return. Any person to whom an
extension is granted must pay, in addition to the tax, interest at the rate under section 270C.40 from the
date on which the tax would have been due without the extension. Subd. 3. Changes in federal gift tax. If the amount of a taxpayer's taxable gifts for federal gift tax
purposes, as reported on the taxpayer's federal gift tax return for any calendar year, is changed or
corrected by the Internal Revenue Service or other officer of the United States or other competent
authority, the taxpayer shall report the change or correction in federal taxable gifts within 180 days after
the final determination of the change or correction, and concede the accuracy of the determination or
provide a letter detailing how the federal determination is incorrect or does not change the Minnesota gift
tax. Any taxpayer filing an amended federal gift tax return shall also file within 180 days an amended
return under this chapter and shall include any information the commissioner requires. The time for filing
the report or amended return may be extended by the commissioner upon due cause shown.
Notwithstanding any limitation of time in this chapter, if, upon examination, the commissioner finds that
the taxpayer is liable for the payment of an additional tax, the commissioner shall, within a reasonable
time from the receipt of the report or amended return, notify the taxpayer of the amount of additional tax,
together with interest computed at the rate under section 270C.40 from the date when the original tax was
due and payable. Within 30 days of the mailing of the notice, the taxpayer shall pay the commissioner the
amount of the additional tax and interest. If, upon examination of the report or amended return and
related information, the commissioner finds that the taxpayer has overpaid the tax due the state, the
commissioner shall refund the overpayment to the taxpayer. Subd. 4. Application of federal rules. In administering the tax under this chapter, the commissioner
shall apply the provisions of sections 2701 to 2704 of the Internal Revenue Code. The words "secretary
or his delegate," as used in those sections of the Internal Revenue Code, mean the commissioner. EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013.  [116J.3738 ] QUALIFIED EXPANSIONS OF GREATER MINNESOTA BUSINESSES. Subdivision 1. Definitions. (a) For purposes of this section, the following terms have the meanings given unless the context
clearly indicates otherwise. (b) "Agricultural processing facility" means one or more facilities or operations that transform,
package, sort, or grade livestock or livestock products, agricultural commodities, or plants or plant
products into goods that are used for intermediate or final consumption including goods for nonfood use,
and surrounding property. (c) "Business" means an individual, corporation, partnership, limited liability company, association, or
any other entity engaged in operating a trade or business located in greater Minnesota. (d) "City" means a statutory or home rule charter city. (e) "Greater Minnesota" means the area of the state that excludes the metropolitan area, as defined in
section 473.121, subdivision 2 . (f) "Qualified business" means a business that satisfies the requirements of subdivision 2, has been
certified under subdivision 3, and has not been terminated under subdivision 5. Subd. 2. Qualified business. (a) A business is a qualified business if it satisfies the requirement of this paragraph and is not
disqualified under the provisions of paragraph (b). To qualify, the business must: (1) have operated its trade or business in a city or cities in greater Minnesota for at least one year
before applying under subdivision 3; (2) pay or agree to pay in the future each employee compensation, including benefits not mandated by
law, that on an annualized basis equal at least 120 percent of the federal poverty level for a family of four;
(3) plan and agree to expand its employment in one or more cities in greater Minnesota by the
minimum number of employees required under subdivision 3, paragraph (c); and (4) received certification from the commissioner under subdivision 3 that it is a qualified business. (b) A business is not a qualified business if it is either: (1) primarily engaged in making retail sales to purchasers who are physically present at the business's
location or locations in greater Minnesota; or (2) a public utility, as defined in section 336B.01 . (c) The requirements in paragraph (a) that the business' operations and expansion be located in a city
do not apply to an agricultural processing facility. Subd. 3. Certification of qualified business. (a) A business may apply to the commissioner for certification as a qualified business under this
section. The commissioner shall specify the form of the application, the manner and times for applying,
and the information required to be included in the application. The commissioner may impose an
application fee in an amount sufficient to defray the commissioner's cost of processing certifications. A
business must file a copy of its application with the chief clerical officer of the city at the same time it
applies to the commissioner. For an agricultural processing facility located outside the boundaries of a
city, the business must file a copy of the application with the county auditor. (b) The commissioner shall certify each business as a qualified business that: (1) satisfies the requirements of subdivision 2; (2) the commissioner determines would not expand its operations in greater Minnesota without the tax
incentives available under subdivision 4; and (3) enters a business subsidy agreement with the commissioner that pledges to satisfy the minimum
expansion requirements of paragraph (c) within three years or less following execution of the agreement.
The commissioner must act on an application within 60 days after its filing. Failure by the commissioner to
take action within the 60-day period is deemed approval of the application. (c) The following minimum expansion requirements apply, based on the number of employees of the
business at locations in greater Minnesota: (1) a business that employees 50 or fewer full-time equivalent employees in greater Minnesota when
the agreement is executed must increase its employment by five or more full-time equivalent employees;
(2) a business that employees more than 50 but fewer than 200 full-time equivalent employees in
greater Minnesota when the agreement is executed must increase the number of its full-time equivalent
employees in greater Minnesota by at least ten percent; or (3) a business that employees 200 or more full-time equivalent employees in greater Minnesota when
the agreement is executed must increase its employment by at least 21 full-time equivalent employees.
(d) The city, or a county for an agricultural processing facility located outside the boundaries of a city,
in which the business proposes to expand its operations may file comments supporting or opposing the
application with the commissioner. The comments must be filed within 30 days after receipt by the city of
the application and may include a notice of any contribution the city or county intends to make to
encourage or support the business expansion, such as the use of tax increment financing, property tax
abatement, additional city or county services, or other financial assistance. (e) Certification of a qualified business is effective for the 12-year period beginning on the first day of
the calendar month immediately following execution of the business subsidy agreement. Subd. 4. Available tax incentives. A qualified business is entitled to a sales tax exemption, as provided
insection 297A.68, subdivision 49 , for purchases made during the period the business was certified as a
qualified business under this section. Subd. 5. Termination of status as a qualified business. (a) The commissioner shall put in place a system for monitoring and ensuring that each certified
business meets within three years or less the minimum expansion requirement in its business subsidy
agreement and continues to satisfy those requirements for the rest of the duration of the certification
under subdivision 3. This system must include regular reporting by the business to the commissioner of
its baseline and current employment levels and any other information the commissioner determines may
be useful to ensure compliance and for legislative evaluation of the effectiveness of the tax incentives.
(b) A business ceases to be a qualified business and to qualify for the sales tax exemption under
section 297A.68, subdivision 49 , under this subdivision upon the earlier of the following dates: (1) the end of the duration of its designation under subdivision 3, paragraph (e), effective as provided
under this subdivision or other provision of law for the tax incentive; or (2) the date the commissioner finds that the business has breached its business subsidy agreement
and failed to satisfy the minimum expansion required by subdivision 3 and its agreement. (c) A business may contest the commissioner's finding that it breached its business subsidy
agreement under paragraph (b), clause (2), under the contested case procedures in the Administrative
Procedure Act, chapter 14. (d) The commissioner, after consulting with the commissioner of revenue, may waive a breach of the
business subsidy agreement and permit continued receipt of tax incentives, if the commissioner
determines that termination of the tax incentives is not in the best interest of the state or the local
government units and the business' breach of the agreement is a result of circumstances beyond its
control including, but not limited to: (1) a natural disaster; (2) unforeseen industry trends; (3) a decline in economic activity in the overall or greater Minnesota economy; or (4) loss of a major supplier or customer of the business. EFFECTIVE DATE. This section is effective the day following final enactment. In applying the provisions of this chapter, the terms "tangible personal
property" and "retail sale" include the taxable services listed in paragraph (g), clause (6), items (i) to (vi)
and (viii), and the provision of these taxable services, unless specifically provided otherwise. Services
performed by an employee for an employer are not taxable. Services performed by a partnership or
association for another partnership or association are not taxable if one of the entities owns or controls
more than 80 percent of the voting power of the equity interest in the other entity. Services performed
between members of an affiliated group of corporations are not taxable. For purposes of the preceding
sentence, "affiliated group of corporations" means those entities that would be classified as members of
an affiliated group as defined under United States Code, title 26, section 1504, disregarding the
exclusions in section 1504(b). .

For purposes of this clause, "road construction" means construction of: (i) public roads; (ii) cartways; and (iii) private roads in townships located outside of the seven-county metropolitan area up to the point of
the emergency response location sign or any organization at the

direction of a county In applying the provisions of this
chapter, the terms "tangible personal property" and "retail sale" include taxable services listed in clause
(6), items (i) to (vi) and (viii), and the provision of these taxable services, unless specifically provided
otherwise. Services performed by an employee for an employer are not taxable. Services performed by a
partnership or association for another partnership or association are not taxable if one of the entities owns
or controls more than 80 percent of the voting power of the equity interest in the other entity. Services
performed between members of an affiliated group of corporations are not taxable. For purposes of the
preceding sentence, "affiliated group of corporations" means those entities that would be classified as
members of an affiliated group as defined under United States Code, title 26, section 1504, disregarding
the exclusions in section 1504(b).

For purposes of clause (5), "road construction" means construction of (1) public roads, (2) cartways, and
(3) private roads in townships located outside of the seven-county metropolitan area up to the point of the
emergency response location sign. cable and pay , and direct satellite services (l) A sale and a purchase includes furnishing for a consideration of specified digital products or other
digital products or granting the right for a consideration to use specified digital products or other digital
products on a temporary or permanent basis and regardless of whether the purchaser is required to make
continued payments for such right. Wherever the term "tangible personal property" is used in this chapter,
other than in subdivisions 10 and 38, the provisions also apply to specified digital products, or other digital
products, unless specifically provided otherwise or the context indicates otherwise. (m) A sale and purchase includes the furnishing for consideration of the following services: (1) repairing and maintaining electronic and precision equipment, which service can be deducted as a
business expense under the Internal Revenue Code. This includes, but is not limited to, repair or
maintenance of electronic devices, computers and computer peripherals, monitors, computer terminals,
storage devices, and CD-ROM drives; other office equipment such as photocopying machines, printers,
and facsimile machines; televisions, stereos, sound systems, video or digital recorders and players;
two-way radios and other communications equipment; radar and sonar equipment, scientific instruments,
microscopes, and medical equipment; (2) repairing and maintaining commercial and industrial machinery and equipment. For purposes of
this subdivision, the following items are not commercial or industrial machinery and equipment: (i) motor
vehicles; (ii) furniture and fixtures; (iii) ships; (iv) railroad stock; and (v) aircraft; and (3) warehousing or storage services for tangible personal property, excluding: (i) agricultural products; (ii) refrigerated storage; (iii) electronic data; and (iv) self-storage services and storage of motor vehicles, recreational vehicles, and boats, not eligible
to be deducted as a business expense under the Internal Revenue Code. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013,
except that paragraph (m), clause (3), is effective for sales and purchases made after March 31, 2014.
: (1) of tangible personal property ;

and (2) any sale of a service enumerated in subdivision 3, for any purpose other than resale by the
purchaser in the normal course of business as defined in subdivision 21 (n) A sale of motor vehicle repair paint and materials by a motor vehicle repair or body shop business
is a retail sale and the sales tax is imposed on the gross receipts from the retail sale of the paint and
materials. The motor vehicle repair or body shop that purchases motor vehicle repair paint and motor
vehicle repair materials for resale must either: (1) separately state each item of paint and each item of materials, and the sales price of each, on the
invoice to the purchaser; or (2) in order to calculate the sales price of the paint and materials, use a method which estimates the
amount and monetary value of the paint and materials used in the repair of the motor vehicle by
multiplying the number of labor hours by a rate of consideration for the paint and materials used in the
repair of the motor vehicle following industry standard practices that fairly calculate the gross receipts
from the retail sale of the motor vehicle repair paint and motor vehicle repair materials. An industry
standard practice fairly calculates the gross receipts if the sales price of the paint and materials used or
consumed in the repair of a motor vehicle equals or exceeds the purchase price paid by the motor vehicle
repair or body shop business. Under this clause, the invoice must either separately state the "paint and
materials" as a single taxable item, or separately state "paint" as a taxable item and "materials" as a
taxable item. This clause does not apply to wholesale transactions at an auto auction facility. (o) A sale of specified digital products or other digital products to an end user with or without rights of
permanent use and regardless of whether rights of use are conditioned upon payment by the purchaser is
a retail sale. When a digital code has been purchased that relates to specified digital products or other
digital products, the subsequent receipt of or access to the related specified digital products or other
digital products is not a retail sale. (p) A payment made to a cooperative electric association or public utility as a contribution in aid of
construction is a contract for improvement to real property and is not a retail sale. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. and . ; and (5) specified digital products, or other digital products, transferred electronically. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013.  Cable       Pay      Cable Pay direct to home

satellite , or

any similar or comparable method of service basic, extended, premium, all programming

services, including subscriptions, digital video recorders, digital, EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. , including specified digital

products or other digital products EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. of a telecommunication service A ring tone does not include ring back tones or other digital audio
files that are not stored on the purchaser's communication device. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 49. Motor vehicle repair paint and motor vehicle repair materials. " Motor vehicle repair paint"
means a substance composed of solid matter suspended in a liquid medium and applied as a protective
or decorative coating to the surface of a motor vehicle in order to restore the motor vehicle to its original
condition, and includes primer, body paint, clear coat, and paint thinner used to paint motor vehicles, as
defined in section 297B.01 . " Motor vehicle repair materials" means items, other than motor vehicle repair
paint or motor vehicle parts, that become a part of a repaired motor vehicle or are consumed in repairing
the motor vehicle at retail, and include abrasives, battery water, body filler or putty, bolts and nuts, brake
fluid, buffing pads, chamois, cleaning compounds, degreasing compounds, glaze, grease, grinding discs,
hydraulic jack oil, lubricants, masking tape, oxygen and acetylene, polishes, rags, razor blades,
sandpaper, sanding discs, scuff pads, sealer, solder, solvents, striping tape, tack cloth, thinner, waxes,
and welding rods. Motor vehicle repair materials do not include items that are not used directly on the
motor vehicle, such as floor dry that is used to clean the shop, or cleaning compounds and rags that are
used to clean tools, equipment, or the shop and are not used to clean the motor vehicle. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 50. Digital audio works. " Digital audio works" means works that result from a fixation of a series
of musical, spoken, or other sounds, that are transferred electronically. Digital audio works includes such
items as the following which may either be prerecorded or live: songs, music, readings of books or other
written materials, speeches, ring tones, or other sound recordings. Digital audio works does not include
audio greeting cards sent by electronic mail. Unless the context provides otherwise, in this chapter digital
audio works includes the digital code, or a subscription to or access to a digital code, for receiving,
accessing, or otherwise obtaining digital audio works. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 51. Digital audiovisual works. " Digital audiovisual works" means a series of related
images which, when shown in succession, impart an impression of motion, together with accompanying
sounds, if any, that are transferred electronically. Digital audiovisual works includes such items as motion
pictures, movies, musical videos, news and entertainment, and live events. Digital audiovisual works does
not include video greeting cards sent by electronic mail. Unless the context provides otherwise, in this
chapter digital audiovisual works includes the digital code, or a subscription to or access to a digital code,
for receiving, accessing, or otherwise obtaining digital audiovisual works. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 52. Digital books. " Digital books" means any literary works, other than digital audiovisual
works or digital audio works, expressed in words, numbers, or other verbal or numerical symbols or
indicia so long as the product is generally recognized in the ordinary and usual sense as a "book." It
includes works of fiction and nonfiction and short stories. It does not include periodicals, magazines,
newspapers, or other news or information products, chat rooms, or weblogs. Unless the context provides
otherwise, in this chapter digital books includes the digital code, or a subscription to or access to a digital
code, for receiving, accessing, or otherwise obtaining digital books. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 53. Digital code. " Digital code" means a code which provides a purchaser with a right to
obtain one or more specified digital products or other digital products. A digital code may be transferred
electronically, such as through electronic mail, or it may be transferred on a tangible medium, such as on
a plastic card, a piece of paper or invoice, or imprinted on another product. A digital code is not a code
that represents a stored monetary value that is deducted from a total as it is used by the purchaser, and it
is not a code that represents a redeemable card, gift card, or gift certificate that entitles the holder to
select a digital product of an indicated cash value. The end user of a digital code is any purchaser except
one who receives the contractual right to redistribute a digital product which is the subject of the
transaction. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 54. Other digital products. " Other digital products" means the following items when
transferred electronically: (1) greeting cards; and (2) online video or electronic games. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 55. Specified digital products. " Specified digital products" means digital audio works,
digital audiovisual works, and digital books that are transferred electronically to a customer. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 56. Transferred electronically. " Transferred electronically" means obtained by the
purchaser by means other than tangible storage media. For purposes of this subdivision, it is not
necessary that a copy of the product be physically transferred to the purchaser. A product will be
considered to have been transferred electronically to a purchaser if the purchaser has access to the
product. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 58. Self-storage service. " Self-storage service" means a storage service that provides
secure areas, such as rooms, units, compartments or containers, whether accessible from outside or from
within a building, that are designated for the use of a purchaser, where the purchaser retains the care
custody and control of their property, including self-storage units, mini-storage units, and areas by any
other name to which the purchaser retains either unlimited free access or free access within reasonable
business hours or upon reasonable notice to the service provider to add or remove property, but does not
mean the rental of an entire building, such as a warehouse. Self-storage service does not include general
warehousing and storage services where the warehouse typically handles, stores, and retrieves a
purchaser's property using the warehouse's staff and equipment, and does not allow the purchaser free
access to the storage space and does not include bailments. EFFECTIVE DATE. This section is effective July 1, 2013. 6.2 9.2 EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. the laws
of the United States in accordance with the terms and conditions of federal remote seller law , . (b) To the extent allowed by the United States Constitution and the laws of the United States, a retailer
making retail sales from outside this state to a destination within this state and not maintaining a place of
business in this state shall collect sales and use taxes and remit them to the commissioner under section
297A.77 , EFFECTIVE DATE. This section is effective the day after final enactment. Subd. 4a. Solicitor. (a) "Solicitor," for purposes of subdivision 1, paragraph (a), means a person, whether an independent
contractor or other representative, who directly or indirectly solicits business for the retailer. (b) A retailer is presumed to have a solicitor in this state if it enters into an agreement with a resident
under which the resident, for a commission or other substantially similar consideration, directly or
indirectly refers potential customers, whether by a link on an Internet Web site, or otherwise, to the seller.
This paragraph only applies if the total gross receipts are at least $10,000 in the 12-month period ending
on the last day of the most recent calendar quarter before the calendar quarter in which the sale is made.
For purposes of this paragraph, gross receipts means receipts from sales to customers located in the
state who were referred to the retailer by all residents with this type of agreement with the retailer. (c) The presumption under paragraph (b) may be rebutted by proof that the resident with whom the
seller has an agreement did not engage in any solicitation in the state on behalf of the retailer that would
satisfy the nexus requirement of the United States Constitution during the 12-month period in question.
Nothing in this section shall be construed to narrow the scope of the terms affiliate, agent, salesperson,
canvasser, or other representative for purposes of subdivision 1, paragraph (a). (d) For purposes of this paragraph, "resident" includes an individual who is a resident of this state, as
defined in section 290.01 , or a business that owns tangible personal property located in this state or has
one or more employees providing services for the business in this state. (e) This subdivision does not apply to chapter 290 and does not expand or contract the jurisdiction to
tax a trade or business under chapter 290. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. or ;

(3) in the case of drop shipment sales, a seller engaged in drop shipping may claim a resale
exemption based on an exemption certificate provided by its customer or reseller, or any other acceptable
information available to the seller engaged in drop shipping evidencing qualification for a resale
exemption, regardless of whether the customer or reseller is registered to collect and remit sales and use
tax in the state EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 6a. Multiple points of use. (a) Notwithstanding the provisions of subdivisions 2 and 3, a business purchaser that has not received
authorization to pay the tax directly to the commissioner may use an exemption certificate indicating
multiple points of use if: (1) the purchaser knows at the time of its purchase of a digital good, computer software delivered
electronically, or a service that the good or service will be concurrently available for use in more than one
taxing jurisdiction; and (2) the purchaser delivers to the seller the exemption certificate indicating multiple points of use at the
time of purchase. (b) Upon receipt of the fully completed exemption certificate indicating multiple points of use, the seller
is relieved of the obligation to collect, pay, or remit the applicable tax and the purchaser is obligated to
collect, pay, or remit the applicable tax on a direct pay basis. The provisions of section 297A.665 apply to
this paragraph. (c) The purchaser delivering the exemption certificate indicating multiple points of use may use any
reasonable but consistent and uniform method of apportionment that is supported by the purchaser's
business records as they exist at the time of the consummation of the sale. (d) The purchaser shall provide the exemption certificate indicating multiple points of use to the seller
at the time of purchase. (e) A purchaser that has received authorization to pay the tax directly to the commissioner is not
required to deliver to the seller an exemption certificate indicating multiple points of use. A purchaser that
has received authorization to pay the tax directly to the commissioner shall follow the provisions of
paragraph (c) in apportioning the tax due on a digital good, computer software delivered electronically, or
a service that will be concurrently available for use in more than one taxing jurisdiction. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. (b) Items purchased in transactions covered by: (1) Medicare as defined under title XVIII of the Social Security Act, United States Code, title 42,
section 1395, et seq.; or (2) Medicaid as defined under title XIX of the Social Security Act, United States Code, title 42, section
1396, et seq. (b) (c) including single-patient use items, but does not include including (8) A transaction is covered by Medicare or Medicaid if any portion of the cost of the item purchased in
the transaction is paid for or reimbursed by the federal government or the state of Minnesota pursuant to
the Medicare or Medicaid program, by a private insurance company administering the Medicare or
Medicaid program on behalf of the federal government or the state of Minnesota, or by a managed care
organization for the benefit of a patient enrolled in a prepaid program that furnishes medical services in
lieu of conventional Medicare or Medicaid coverage pursuant to agreement with the federal government
or the state of Minnesota. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 7a. Accessories and supplies. Accessories and supplies required for the effective use of
durable medical equipment for home use only or purchased in a transaction covered by medicare or
Medicaid, that are not already exempt under section 297A.67, subdivision 7 , are exempt. Accessories
and supplies for the effective use of a prosthetic device that are not already exempt under section
297A.67, subdivision 7 , are exempt. For purposes of this subdivision "durable medical equipment,"
"prosthetic device," "Medicare," and "Medicaid" have the definitions given in section 297A.67, subdivision
7 . EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. , including digital books, EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. tangible , , or paragraph

(m) EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. The tax must be imposed and collected as if the
rate under section 297A.62, subdivision 1 , applied, and then refunded in the manner provided in section
297A.75 . EFFECTIVE DATE. This section is effective for sales and purchases made after August 31, 2014. , or a qualified refurbished
data center, ,

or a qualified refurbished data center , or a

qualified refurbished data center, 30,000 25,000 $50,000,000 $30,000,000 24 48 30,000 25,000 ; and , including: (i) installation of enterprise information technology equipment, environmental control, computer
software, and energy efficiency improvements; and (ii) building improvements; and For purposes of this subdivision, "computer software" includes, but is not limited to,
software utilized or loaded at the qualified data center, including maintenance, licensing, and software
customization. (d) For purposes of this subdivision, a "qualified refurbished data center" means an existing facility
that qualifies as a data center under paragraph (c), clauses (2) and (3), but that is comprised of one or
more buildings that consist in the aggregate of at least 25,000 square feet, and that are located on a
single parcel or contiguous parcels, where the total cost of construction or refurbishment, investment in
enterprise information technology equipment, and computer software is at least $50,000,000 within a
24-month period. (d) (e) (e) (f) (f) (g) (g) (h) EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 49. Greater Minnesota business expansions. (a) Purchases and use of tangible personal property or taxable services by a qualified business, as
defined in section 116J.3738 , are exempt if: (1) the business subsidy agreement provides that the exemption under this subdivision applies; (2) the property or services are primarily used or consumed in greater Minnesota; and (3) the purchase was made and delivery received during the duration of the certification of the
business as a qualified business under section 116J.3738 . (b) Purchase and use of construction materials and supplies used or consumed in, and equipment
incorporated into, the construction of improvements to real property in greater Minnesota are exempt if
the improvements after completion of construction are to be used in the conduct of the trade or business
of the qualified business, as defined in section 116J.3738 . This exemption applies regardless of whether
the purchases are made by the business or a contractor. (c) The exemptions under this subdivision apply to a local sales and use tax. (d) The tax on purchases imposed under this subdivision must be imposed and collected as if the rate
under section 297A.62 applied, and then refunded in the manner provided in section 297A.75 . No more
than $7,000,000 may be refunded in a fiscal year for all purchases under this subdivision. Refunds must
be allocated on a first come, first served basis. If more than $7,000,000 of eligible claims are made in a
fiscal year, claims by qualified businesses carryover to the next fiscal year, and the commissioner must
first allocate refunds to qualified businesses eligible for a refund in the preceding fiscal year. Any portion
of the balance of funds allocated for refunds under this paragraph does not cancel and shall be carried
forward to and available for refunds in subsequent fiscal years. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2014. local governments, and ; and . (7) towns. town local government (d) As used in this subdivision, "local governments" means cities, counties, and townships. (d) (e) EFFECTIVE DATE. This section is effective for sales and purchases made after December 31, 2013.
or as allowed under

subdivision 9a EFFECTIVE DATE. This section is effective retroactively for sales and purchases made after June 30,
2012. is or services are EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013.  and  , 

, and critical access dental providers (c) (d) (c) (d) Sales, except for those listed in paragraph (d), to a critical access

dental provider are exempt, if the items purchased are used in providing critical access dental care
services. For the purposes of this subdivision, "critical access dental provider" means a dentist or dental
clinic that qualifies under section 256B.76, subdivision 4 , paragraph (b) and, in the previous calendar
year, had no more than 15 percent of its patients covered by private dental insurance. (d) or , or critical access dental provider, or ,
, or critical access dental provider or ,, or critical access dental provider or, , or critical access dental

provider (d) (e) (e) (f) EFFECTIVE DATE. This section is effective retroactively for sales and purchases made after June 30,
2007. Purchasers may apply for a refund of tax paid for qualifying purchases under this subdivision made
after June 30, 2007, and before July 1, 2013, in the manner provided in Minnesota Statutes, section
297A.75. Notwithstanding limitations on claims for refunds under Minnesota Statutes, section 297A.40 ,
claims may be filed with the commissioner until June 30, 2014. Subd. 9a. Established religious orders. (a) Sales of lodging, prepared food, candy, soft drinks, and alcoholic beverages at noncatered events
between an established religious order and an affiliated institution of higher education are exempt. (b) For purposes of this subdivision, "established religious order" means an organization directly or
indirectly under the control or supervision of a church or convention or association of churches, where
members of the organization: (1) normally live together as part of a community; (2) make long-term commitments to live under a strict set of moral and spiritual rules; and (3) work or engage full time in a combination of prayer, religious study, church reform or renewal, or
other religious, educational, or charitable goals of the organization. (c) For purposes of this subdivision, an institution of higher education is "affiliated" with an established
religious order if members of the religious order are represented on the governing board of the institution
of higher education and the two organization share campus space and common facilities. EFFECTIVE DATE. This section is effective retroactively for sales and purchases made after June 30,
2012. and services or services EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. or services EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 18. Nursing homes and boarding care homes. (a) All sales, except those listed in paragraph (b), to a nursing home licensed under section 144A.02
or a boarding care home certified as a nursing facility under title 19 of the Social Security Act are exempt
if the facility: (1) is exempt from federal income taxation pursuant to section 501(c)(3) of the Internal Revenue
Code; and (2) is certified to participate in the medical assistance program under title 19 of the Social Security Act,
or certifies to the commissioner that it does not discharge residents due to the inability to pay. (b) This exemption does not apply to the following sales: (1) building, construction, or reconstruction materials purchased by a contractor or a subcontractor as
a part of a lump-sum contract or similar type of contract with a guaranteed maximum price covering both
labor and materials for use in the construction, alteration, or repair of a building or facility; (2) construction materials purchased by tax-exempt entities or their contractors to be used in
constructing buildings or facilities that will not be used principally by the tax-exempt entities; (3) lodging as defined under section 297A.61, subdivision 3 , paragraph (g), clause (2), and prepared food, candy, soft drinks, and alcoholic beverages as defined in section 297A.67,
subdivision 2 ; and (4) leasing of a motor vehicle as defined in section 297B.01, subdivision 11 , except as provided in
paragraph (c). (c) This exemption applies to the leasing of a motor vehicle as defined insection 297B.01, subdivision
11 , only if the vehicle is: (1) a truck, as defined in section 168.002 ; a bus, as defined in section168.002 ; or a passenger
automobile, as defined in section 168.002 , if the automobile is designed and used for carrying more than
nine persons including the driver; and (2) intended to be used primarily to transport tangible personal property or residents of the nursing
home or boarding care home. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 45. Biopharmaceutical manufacturing facility. (a) Materials and supplies used or consumed in, capital equipment incorporated into, and privately
owned infrastructure in support of the construction, improvement, or expansion of a biopharmaceutical
manufacturing facility in the state are exempt if the following criteria are met: (1) the facility is used for the manufacturing of biologics; (2) the total capital investment made at the facility exceeds $50,000,000; and (3) the facility creates and maintains at least 190 full-time equivalent positions at the facility. These
positions must be new jobs in Minnesota and not the result of relocating jobs that currently exist in
Minnesota. (b) The tax must be imposed and collected as if the rate under section297A.62 applied, and refunded
in the manner provided in section 297A.75 . (c) To be eligible for a refund, the owner of the biopharmaceutical manufacturing facility must: (1) initially apply to the Department of Employment and Economic Development for certification no
later than one year from the final completion date of construction, improvement, or expansion of the
facility; and (2) for each year that the owner of the biopharmaceutical manufacturing facility applies for a refund,
the owner must have received written certification from the Department of Employment and Economic
Development that the facility has met the criteria of paragraph (a). (d) The refund is to be paid annually at a rate of 25 percent of the total allowable refund payable to
date, with the commissioner making annual payments of the remaining refund until all of the refund has
been paid. (e) For purposes of this subdivision, "biopharmaceutical" and "biologics" are interchangeable and
mean medical drugs or medicinal preparations produced using technology that uses biological systems,
living organisms or derivatives of living organisms, to make or modify products or processes for specific
use. The medical drugs or medicinal preparations include but are not limited to proteins, antibodies,
nucleic acids, and vaccines. EFFECTIVE DATE. This section is effective retroactively to capital investments made and jobs
created after December 31, 2012, and effective retroactively for sales and purchases made after
December 31, 2012, and before July 1, 2019. Subd. 46. Research and development facility. Materials and supplies used or consumed in, and
equipment incorporated into, the construction or improvement of a research and development facility that
has laboratory space of at least 400,000 square feet and utilizes both high-intensity and low-intensity
laboratories, provided that the project has a total construction cost of at least $140,000,000 within a
24-month period. The tax on purchases imposed under this subdivision must be imposed and collected as
if the rate under section 297A.62 applied and then refunded in the manner provided in section 297A.75 .
EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013, and
before September 1, 2015. Subd. 47. Industrial measurement manufacturing and controls facility. (a) Materials and supplies used or consumed in, capital equipment incorporated into, fixtures installed
in, and privately owned infrastructure in support of the construction, improvement, or expansion of an
industrial measurement manufacturing and controls facility are exempt if: (1) the total capital investment made at the facility is at least $60,000,000; (2) the facility employs at least 250 full-time equivalent employees that are not employees currently
employed by the company in the state; and (3) the Department of Employment and Economic Development determines that the expansion,
remodeling, or improvement of the facility has a significant impact on the state economy. (b) The tax must be imposed and collected as if the rate under section297A.62 applied and refunded
in the manner provided in section 297A.75 , only after the following criteria are met: (1) a refund may not be issued until the owner of the facility has received certification from the
Department of Employment and Economic Development that the company meets the requirements in
paragraph (a); and (2) to receive the refund, the owner of the industrial measurement manufacturing and controls facility
must initially apply to the Department of Employment and Economic Development for certification no later
than one year from the final completion date of construction, improvement, or expansion of the industrial
measurement manufacturing and controls facility. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013, and
before December 31, 2015. (1) capital equipment exempt under section 297A.68, subdivision 5 ; (2) (1) (3) (2) (4) (3) (5) (4) (6) (5) (7) (6) (8) (7) (9) (8) (10) (9) (11) (10) (12) (11) (13) (12) (14) (13) : (i) (ii) a biopharmaceutical manufacturing facility exempt under section 297A.71, subdivision 45 ; (iii) a research and development facility exempt under section 297A.71, subdivision 4 b; and (iv) an industrial measurement manufacturing and controls facility exempt under section 297A.71,
subdivision 47 ; (15) (14) and (16) (15) ; (16) items purchased for use in providing critical access dental services exempt under section
297A.70, subdivision 7 , paragraph (c); and (17) items and services purchased under a business subsidy agreement for use or consumption
primarily in greater Minnesota exempt under section 297A.68, subdivision 49 EFFECTIVE DATE. The change to clause (1) is effective for sales and purchases made after August
31, 2014. The changes in clauses (13), (16), and (17), are effective the day following final enactment. to (3) , (2), and (16) (4) (3) (7) (6) (5) (4) (6) (5) (8) (7) (9) (8) (10), (9), (12), , and (15) and (17) (10), (12), (16) (15) EFFECTIVE DATE. This section is effective the day following final enactment. clause (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14), clauses (3) to (16) (17) EFFECTIVE DATE. This section is effective the day following final enactment. (e) Notwithstanding paragraph (d), only : (1) .

; (2) disseminate information included in the resolution adopted under subdivision 2; (3) provide notice of, and conduct public forums at which proponents and opponents on the merits of
the referendum are given equal time to express their opinions on the merits of the referendum; (4) provide facts and data on the impact of the proposed sales tax on consumer purchases; and (5) provide facts and data related to the programs and projects to be funded with the sales tax. EFFECTIVE DATE. This section is effective the day following final enactment. , except as provided

in paragraph (e), In each of calendar years 2006 to 2014, revenue not to exceed

$3,500,000 may be used to pay the principal of bonds issued for capital projects of the city. After
December 31, 2014, revenue from the tax imposed under subdivision 1 may not be used for this purpose.
If the amount necessary to meet obligations under paragraphs (a) and (d) are less than 40
percent of the revenue from the tax in any year, the city may place the difference between 40 percent of
the revenue and the amounts allocated under paragraphs (a) and (d) in an economic development fund to
be used for any economic development purposes. EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city
of St. Paul with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. 2030 2042 EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city
of St. Paul with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. one three one three design, Complex infrastructure, including but not limited to,

$43,500,000 $50,000,000 infrastructure,

including but not limited to, and the

food and beverage tax authorized under Laws 2009, chapter 88, article 4, section 23, The authority of the city to impose a tax under subdivision 1a
shall expire when the principal and interest on any bonds or other obligations issued prior to December
31, 2014, to finance the construction, renovation, improvement, and expansion of the Mayo Civic Center
Complex and related skyway access, lighting, parking, or landscaping have been paid, including any
bonds issued to refund such bonds, or at an earlier time as the city shall, by ordinance, determine. Any
funds remaining after completion of the project and retirement or redemption of the bonds shall be placed
in the general fund of the city. The city may, by ordinance, repeal the tax provided that: (1) the revenues raised before the repeal are sufficient to meet all bond or other obligations backed by
revenues of the tax; and (2) the repeal date meets the requirements of section 297A.99, subdivision 12 . EFFECTIVE DATE. This section is effective the day after the governing body of the city of Rochester
and its chief fiscal officer comply with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. or extending the tax regional or extending the tax EFFECTIVE DATE. This section is effective for the city that approves them the day after compliance
by the governing body of each city with Minnesota Statutes, section 645.021, subdivision 3 . Notwithstanding Minnesota Statutes, section 297A.99,
subdivision 3 , paragraphs (a), (c), and (d), a city may extend the tax imposed under subdivision 1
through December 31, 2038, if approved by voters of the city no later than November 7, 2017, at either a
general election or at a special election held on a first Tuesday after a first Monday in November. EFFECTIVE DATE. This section is effective for the city that approves them the day after compliance
by the governing body of each city with Minnesota Statutes, section 645.021, subdivision 3 . improvements to the Sportsman Park/Ballfields, Riverside

Park, Lions Park/Pavilion, Cedar South Park also known as Eldorado Park, and Spring Street Park;
improvements to and extension of the River County Bike

Trail; , and , improvement,

and development of regional parks, bicycle trails, park land, open space, and

of a walkways, as described in the city improvement
plan adopted by the city council by resolution on December 12, 2006, and walkway over Interstate
94 and State Highway 24; and the acquisition of

construction of EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city
of Clearwater with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. Authorized
expenses for each organization include, but are not limited to, acquiring property; predesign; design; and
paying construction, furnishing, and equipment costs related to these facilities and paying debt service on
bonds or other obligations issued by the city. EFFECTIVE DATE. This section is effective the day following final enactment.  CITY OF MARSHALL; VALIDATION OF PRIOR ACT. (a) Notwithstanding the time limits in Minnesota Statutes, section 645.021 , the city of Marshall may
approve Laws 2010, chapter 389, article 5, section 6, as amended by Laws 201l, First Special Session
chapter 7, article 4, section 9, and file its approval with the secretary of state by June 15, 2013. If
approved as authorized under this paragraph, actions undertaken by the city pursuant to the approval of
the voters on November 6, 2012, and otherwise in accordance with Laws 2010, chapter 389, article 5,
section 6, as amended by Laws 201l, First Special Session chapter 7, article 4, section 9, are validated.
(b) Notwithstanding the time limit on the imposition of tax under Laws 2010, chapter 389, article 5,
section 6, subdivision 1, as amended by Laws 201l, First Special Session chapter 7, article 4, section 9,
and subject to local approval under paragraph (a), the city of Marshall may impose the tax on or before
July 1, 2013. EFFECTIVE DATE. This section is effective the day following final enactment.  CITY OF PROCTOR; VALIDATION OF PRIOR ACT. Notwithstanding the time limits in
Minnesota Statutes, section 645.021 , the city of Proctor may approve, by resolution, Laws 2008, chapter
366, article 7, section 13, and Laws 2010, chapter 389, article 5, sections 1 and 2, and file its approval
with the secretary of state by January 1, 2014. If approved under this paragraph, actions undertaken by
the city pursuant to the approval of the voters on November 2, 2010, and otherwise in accordance with
those laws are validated. EFFECTIVE DATE. This section is effective the day following final enactment.  REPEALER. (a) AMEND Minnesota Statutes 2012, sections 297A.61, subdivision 27 ; andAMEND 297A.68 ,
subdivision 35 , are repealed.(b) Laws 2009, chapter 88, article 4, section 23, as amended by
Laws 2010, chapter 389, article 5, section 4, is repealed. EFFECTIVE DATE. Paragraph (a) is effective for sales and purchases made after June 30, 2013.
Paragraph (b) is effective the day following final enactment. or other public improvements or , , or other funds of the port authority and the city of Bloomington

EFFECTIVE DATE. This section is effective upon compliance of the governing body of the city of
Bloomington with the requirements of Minnesota Statutes, section 645.021, subdivision 3 . Subd. 19. Additional border city allocation; 2013. (a) In addition to the tax reductions authorized in subdivisions 12 to 18, the commissioner shall
allocate $750,000 for tax reductions to border city enterprise zones in cities located on the western border
of the state. The commissioner shall allocate this amount among cities on a per capita basis.

Allocations made under this subdivision may be used for tax reductions under section 469.171 , or for
other offsets of taxes imposed on or remitted by businesses located in the enterprise zone, but only if the
municipality determines that the granting of the tax reduction or offset is necessary to retain a business
within or attract a business to the zone. The city alternatively may elect to use any portion of the allocation
under this paragraph for tax reductions under section 469.1732 or 469.1734 . (b) The commissioner shall allocate $750,000 for tax reductions under section 469.1732 or 469.1734
to cities with border city enterprise zones located on the western border of the state. The commissioner
shall allocate this amount among the cities on a per capita basis. The city alternatively may elect to use
any portion of the allocation provided in this paragraph for tax reductions under section 469.171 . EFFECTIVE DATE. This section is effective July 1, 2013. or qualified border retail facilities; or (7) (6) (5) (d) Notwithstanding the requirements of paragraph (a) and the finding requirements of section
469.174, subdivision 12 , tax increments from an economic development district may be used to provide
improvements, loans, subsidies, grants, interest rate subsidies, or assistance in any form to
developments consisting of buildings and ancillary facilities, if all the following conditions are met: (1) the municipality finds that the project will create or retain jobs in this state, including construction
jobs, and that construction of the project would not have commenced before July 1, 2012, without the
authority providing assistance under the provisions of this paragraph; (2) construction of the project begins no later than July 1, 2012; (3) the request for certification of the district is made no later than June 30, 2012; and (4) for development of housing under this paragraph, the construction must begin before January 1,
2012. The provisions of this paragraph may not be used to assist housing that is developed to qualify
under section 469.1761, subdivision 2 or 3, or similar requirements of other law, if construction of the
project begins later than July 1, 2011. EFFECTIVE DATE. This section is effective for districts for which the request for certification was
made after June 30, 2012. (c)(1) Tax increments may not be used to pay for the cost of public improvements, equipment, or other
items, if: (i) the improvements, equipment, or other items are located outside of the area of the tax increment
financing district from which the increments were collected; and (ii) the improvements, equipment, or items that (A) primarily serve a decorative or aesthetic purpose,
or (B) serve a functional purpose, but their cost is increased by more than 100 percent as a result of the
selection of materials, design, or type as compared with more commonly used materials, designs, or
types for similar improvements, equipment, or items. (2) The provisions of this paragraph do not apply to expenditures related to the rehabilitation of
historic structures that are: (i) individually listed on the National Register of Historic Places; or (ii) a contributing element to a historic district listed on the National Register of Historic Places. EFFECTIVE DATE. This section is effective the day following final enactment for all tax increment
financing districts, regardless of when the request for certification was made, but applies only to amounts
spent after final enactment. increased to
six years deemed to end on December 31, 2016 EFFECTIVE DATE. This section is effective the day following final enactment and applies to districts
certified on or after January 1, 2005, and before April 20, 2009. ,

excluding that portion of the school rate attributable to the general education levy under section 126C.13 ,
EFFECTIVE DATE. This section is effective for districts for which the request for certification is made
after April 15, 2013. Subd. 1d. Original net tax capacity adjustment; homestead market value exclusion. (a) Upon approval by the municipality, by resolution, the authority may elect to reduce the original net
tax capacity of a qualified district by the amount of the tax capacity attributable to the market value
exclusion undersection 273.13, subdivision 35 , for taxes payable in the year preceding the election. The
amount of the reduction may not reduce the original net tax capacity below zero. (b) For purposes of this subdivision, a qualified district means a tax increment financing district that
satisfies the following conditions: (1) for taxes payable in 2011, the authority received a homestead market value credit reimbursement
under section 273.1384 for the district of $10,000 or more; (2) for taxes payable in 2013, the reduction in captured tax capacity resulting from the market value
exclusion for the district was equal to or greater than 1.75 percent of the district's captured tax capacity;
and (3) either (i) the authority is permitted to expend increments on activities under the provisions of
section 469.1763, subdivision 3 , or an equivalent provision of special law on July 1, 2013, or (ii) the
district's tax increments received for taxes payable in 2012 exceeded the amount of debt service
payments due during calendar year 2012 on bonds issued under section 469.178 to which the district's
increments are pledged. The calculation of the amount under clause (2) must reflect any adjustments to
original net tax capacity made under subdivision 1, paragraphs (d) and (e), for the homestead market
value exclusion. (c) The authority must notify the county auditor of its election under this section no later than July 1,
2014. Notifications made by July 1, 2013, are effective beginning for taxes payable in 2014, and
notifications made after July 1, 2013, are effective beginning for taxes payable in 2015. EFFECTIVE DATE. This section is effective the day following final enactment and applies to all tax
increment financing districts regardless of when the request for certification was made. Subd. 1e. Adjustments; qualifying districts. (a) For any tax increment financing district that satisfies the requirements of paragraph (b), the original
net tax capacity must be reduced by the full amount of the original net tax capacity or $20,000, whichever
is less. (b) A tax increment financing district qualifies under this subdivision if it satisfies the following
conditions: (1) the district was certified after January 1, 2011, and before January 1, 2012; (2) for assessment year 2012, at least 75 percent of the tax capacity of the district is class 4d property;
and (3) for assessment year 2012, the average estimated market value is over $115,000 per housing unit
for the portion of the property that is class 4d. (c) An authority or a property owner within a tax increment financing district must notify the county
assessor of a district that qualifies under this subdivision by July 1, 2013. (d) This subdivision expires on December 31, 2021. EFFECTIVE DATE. This section is effective beginning for taxes payable in 2014. , except

increment attributable to the general education levy, (d) The amount of taxes attributable to imposing the general education levy under section 126C.13
must be returned to the school district within which the tax increment financing district is located. EFFECTIVE DATE. This section is effective for districts for which the request for certification is made
after April 15, 2013. Subd. 3c. Mall of America. (a) When computing the net tax capacity under section 473F.05 , the Hennepin County auditor shall
exclude the captured tax capacity of Tax Increment Financing Districts No. 1-C and No. 1-G in the city of
Bloomington. (b) Notwithstanding the provisions of subdivision 2, paragraph (a), the commercial-industrial
contribution percentage for the city of Bloomington is the contribution net tax capacity divided by the total
net tax capacity of commercial-industrial property in the city, excluding any commercial-industrial property
that is captured tax capacity of Tax Increment Financing Districts No. 1-C and No. 1-G. (c) The property taxes to be paid on commercial-industrial tax capacity that is included in the captured
tax capacity of Tax Increment Financing Districts No. 1-C and No. 1-G in the city of Bloomington must be
determined as described in subdivision 6, except that the portion of the tax that is based on the areawide
tax rate is to be treated as tax increment under section 469.176 . (d) The provisions of this subdivision take effect only if the clerk of the city of Bloomington certifies to
the Hennepin County auditor that the city has entered into a binding written agreement with the
Metropolitan Council to repair and restore, or to replace, the old Cedar Avenue bridge for use by bicycle
commuters and recreational users. (e) This subdivision expires on the earliest of the following dates: (1) when the tax increment financing districts have been decertified in 2024 or 2035, as provided by
section 22, subdivision 2 or 4; or (2) on January 1, 2014, if the city clerk fails to make the certification provided in paragraph (d) or if the
city fails to file its local approval of section 23 with the secretary of state by December 31, 2013. EFFECTIVE DATE. This section is effective beginning for property taxes payable in 2014. (a) ten-year 15-year (b) Notwithstanding the provisions of Minnesota Statutes, section 469.176 , or any other law to the
contrary, the city of Bloomington and its port authority may extend the duration limits of the district for a
period through December 31, 2039. (c) Effective for taxes payable in 2014, tax increment for the district must be computed using the
current local tax rate, notwithstanding the provisions of Minnesota Statutes, section 469.177, subdivision
1 a. EFFECTIVE DATE. Paragraphs (a) and (c) are effective upon compliance by the governing body of
the city of Bloomington with the requirements of Minnesota Statutes, section 645.021, subdivision 3 .
Paragraph (b) is effective upon compliance by the governing bodies of the city of Bloomington, Hennepin
County, and Independent School District No. 271 with the requirements of Minnesota Statutes, sections
469.1782, subdivision 2 , and 645.021 , subdivision 3.  ORIGINAL TAX CAPACITY                PARCELS DEEMED OCCUPIED

(a) The provisions of this section apply to redevelopment tax increment financing districts created by
the Housing and Redevelopment Authority in and for the city of Oakdale in the areas comprised of the
parcels with the following parcel identification numbers: (1) 3102921320053; 3102921320054;
3102921320055; 3102921320056; 3102921320057; 3102921320058; 3102921320062; 3102921320063;
3102921320059; 3102921320060; 3102921320061; 3102921330005; and 3102921330004; and (2)
2902921330001 and 2902921330005. (b) For a district subject to this section, the Housing and Redevelopment Authority may, when
requesting certification of the original tax capacity of the district under Minnesota Statutes, section
469.177 , elect to have the original tax capacity of the district be certified as the tax capacity of the land.
(c) The authority to request certification of a district under this section expires on July 1, 2013. (a) Parcel numbers 3102921320054, 3102921320055, 3102921320056, 3102921320057,
3102921320061, and 3102921330004 are deemed to meet the requirements of Minnesota Statutes,
section 469.174, subdivision 10 , paragraph (d), notwithstanding any contrary provisions of that
paragraph, if the following conditions are met: (1) a building located on any part of each of the specified parcels was demolished after the Housing
and Redevelopment Authority for the city of Oakdale adopted a resolution under Minnesota Statutes,
section 469.174, subdivision 10 , paragraph (d), clause (3); (2) the building was removed either by the authority, by a developer under a development agreement
with the Housing and Redevelopment Authority for the city of Oakdale, or by the owner of the property
without entering into a development agreement with the Housing and Redevelopment Authority for the
city of Oakdale; and (3) the request for certification of the parcel as part of a district is filed with the county auditor by
December 31, 2017. (b) The provisions of this section allow an election by the Housing and Redevelopment Authority for
the city of Oakdale for the parcels deemed occupied under paragraph (a), notwithstanding the provisions
of Minnesota Statutes, sections 469.174, subdivision 10 , paragraph (d), and 469.177 , subdivision 1,
paragraph (f). (c) The city may elect, in the tax increment financing plan, to collect increment from a redevelopment
district created under the provisions of this section for an additional ten years beyond the limit in
Minnesota Statutes, section 469.176, subdivision 1 b. EFFECTIVE DATE. This section is effective upon compliance by the governing body of the city of
Oakdale with the requirements of Minnesota Statutes, section 645.021, subdivision 3 , except that the
provisions of paragraph (c) are effective only upon compliance with Minnesota Statutes, section
469.1782, subdivision 2 , by Ramsey County and Independent School District No. 622. 2024 2040 area parcels described in clause (2) :

or parcel numbers 3102921320053, 3102921320054, 3102921320055, 3102921320056,
3102921320057, 3102921320058, 3102921320059, 3102921320060, 3102921320061, 3102921320062,
3102921320063, 3102921330004, and 3102921330005,

of the referenced in this subdivision that serves any of the referenced parcels , except the authority under this clause

does not apply to increments collected after the conclusion of the duration limit under general law EFFECTIVE DATE. This section is effective upon compliance by the governing body of the city of
Oakdale with the requirements of Minnesota Statutes, section 645.021, subdivision 3 , except that the
amendments to subdivision 1 are effective only upon compliance with Minnesota Statutes, section
469.1782, subdivision 2 , by Ramsey County and Independent School District No. 622.  ST. CLOUD; TAX INCREMENT FINANCING. The request for certification of Tax Increment
Financing District No. 2, commonly referred to as the Norwest District, in the city of St. Cloud is deemed
to have been made on or after August 1, 1979, and before July 1, 1982. Revenues derived from tax
increment for that district must be treated for purposes of any law as revenue of a tax increment financing
district for which the request for certification was made during that time period. EFFECTIVE DATE. This section is effective upon approval by the governing body of the city of St.
Cloud and compliance with Minnesota Statutes, section 645.021, subdivision 3 .  CITY OF GLENCOE; TAX INCREMENT FINANCING DISTRICT EXTENSION. Subdivision 1. Duration of district. Notwithstanding the provisions of Minnesota Statutes, section
469.176, subdivision 1 b, paragraph (a), clause (4), or any other law to the contrary, the city of Glencoe
may collect tax increments from Tax Increment Financing District No. 4 (McLeod County District No. 007)
through December 31, 2023, subject to the conditions in subdivision 2. Subd. 2. Exclusive use of revenues. (a) All tax increments derived from Tax Increment Financing District No. 4 (McLeod County District
No. 007) that are collected after December 31, 2013, must be used only to pay debt service on or to
defease bonds that were outstanding on January 1, 2013 and that were issued to finance improvements
serving: (1) Tax Increment Financing District No. 14 (McLeod County District No. 033) (Downtown); (2) Tax Increment Financing District No. 15 (McLeod County District No. 035) (Industrial Park); and
(3) benefited properties as further described in proceedings related to the city's series 2007A bonds,
dated September 1, 2007, and any bonds issued to refund those bonds. (b) Increments may also be used to pay debt service on or to defease bonds issued to refund the
bonds described in paragraph (a), if the refunding bonds do not increase the present value of debt service
due on the refunded bonds when the refunding is closed. (c) When the bonds described in paragraphs (a) and (b) have been paid or defeased, the district must
be decertified and any remaining increment returned to the city, county, and school district as provided in
Minnesota Statutes, section 469.176, subdivision 2 , paragraph (c), clause (4). EFFECTIVE DATE. This section is effective upon compliance by the governing bodies of the city of
Glencoe, McLeod County, and Independent School District No. 2859 with the requirements of Minnesota
Statutes, sections 469.1782, subdivision 2 , and645.021 , subdivision 3.  CITY OF ELY; TAX INCREMENT FINANCING. Subdivision 1. Extension of district. Notwithstanding Minnesota Statutes, section 469.176, subdivision
1 b, or any other law to the contrary, the city of Ely may collect tax increment from Tax Increment
Financing District No. 1 through December 31, 2021. Increments from the district may only be used to pay
binding obligations and administrative expenses. Subd. 2. Binding obligations. For purposes of this section, "binding obligations" means the binding
contractual or debt obligation of Tax Increment Financing District No. 1 entered into before January 1,
2013. Subd. 3. Expenditures outside district. Notwithstanding Minnesota Statutes, section 469.1763,
subdivision 2 , the governing body of the city of Ely may elect to transfer revenues derived from
increments from its Tax Increment Financing District No. 3 to the tax increment account established under
Minnesota Statutes, section 469.177, subdivision 5 , for Tax Increment Financing District No. 1. The
amount that may be transferred is limited to the lesser of: (1) $168,000; or (2) the total amount due on binding obligations and outstanding on that date, less the amount of
increment collected by Tax Increment Financing District No. 1 after December 31, 2012, and
administrative expenses of Tax Increment Financing District No. 1 incurred after December 31, 2012. EFFECTIVE DATE. This section is effective upon approval by the governing bodies of the city of Ely,
St. Louis County, and Independent School District No. 696 with the requirements of Minnesota Statutes,
sections 469.1782, subdivision 2 , and645.021 , subdivision 3.  DAKOTA COUNTY COMMUNITY DEVELOPMENT AGENCY; TAX INCREMENT
FINANCING DISTRICT. Subdivision 1. Authorization. Notwithstanding the provisions of any other law, the Dakota County
Community Development Agency may establish a redevelopment tax increment financing district
comprised of the properties that (1) were included in the CDA 10 Robert Street and Smith Avenue district
in the city of West St. Paul, and (2) were not decertified before July 1, 2012. The district created under
this section terminates no later than December 31, 2023. Subd. 2. Special rules. The requirements for qualifying a redevelopment district under Minnesota
Statutes, section 469.174, subdivision 10 , do not apply to parcels located within the district. Minnesota
Statutes, section 469.176, subdivision 4 j, do not apply to the district. The original tax capacity of the
district is $93,239. Subd. 3. Authorized expenditures. Tax increment from the district may be expended to pay for any
eligible activities authorized by Minnesota Statutes, chapter 469, within the redevelopment area that
includes the district provided that the boundaries of the redevelopment area may not be expanded to add
new area after April 1, 2013.

All such expenditures are deemed to be activities within the district underMinnesota Statutes, section
469.1763 , subdivisions 2 and 4. Subd. 4. Adjusted net tax capacity. The captured tax capacity of the district must be included in the
adjusted net tax capacity of the city, county, and school district for the purposes of determining local
government aid, education aid, and county program aid. The county auditor shall report to the
commissioner of revenue the amount of the captured tax capacity for the district at the time the
assessment abstracts are filed. EFFECTIVE DATE. This section is effective upon compliance by the governing body of the Dakota
County Community Development Agency with the requirements of Minnesota Statutes, section 645.021,
subdivision 3 .  CITY OF APPLE VALLEY; TAX INCREMENT FINANCING DISTRICT. Subdivision 1. Definitions. (a) For the purposes of this section, the following terms have the meanings given to them. (b) "City" means the city of Apple Valley. (c) "Project area" means the following parcels: parcel numbers 01-03500-25-010, 01-03500-03-011,
01-03500-02-010, 01-03500-52-011, 01-03500-78-011, 01-03500-77-014, 01-03500-75-010,
01-03400-05-050, (d) "Soil deficiency district" means a type of tax increment financing district consisting of a portion of
the project area in which the city finds by resolution that the following conditions exist: (1) unusual terrain or soil deficiencies that occurred over 70 percent of the acreage in the district
require substantial filling, grading, or other physical preparation for use; and (2) the estimated cost of the physical preparation under clause (1), but excluding costs directly related
to roads as defined in Minnesota Statutes, section 160.01 , and local improvements as described in
Minnesota Statutes, sections 429.021, subdivision 1 , other than clauses (8) to (10), and 430.01 ,
exceeds the fair market value of the land before completion of the preparation. Subd. 2. Special rules. (a) If the city elects, upon the adoption of the tax increment financing plan for a district, the rules under
this section apply to a redevelopment district, renewal and renovation district, soil condition district, or soil
deficiency district established by the city or a development authority of the city in the project area. The
city, or a development authority acting on its behalf, may establish one or more soils deficiency districts
within the project area. (b) Prior to or upon the adoption of the first tax increment plan subject to the special rules under this
subdivision, the city must find by resolution that parcels consisting of at least 70 percent of the acreage of
the project area, excluding street and railroad rights-of-way, are characterized by one or more of the
following conditions: (1) peat or other soils with geotechnical deficiencies that impair development of commercial buildings
or infrastructure; (2) soils or terrain that requires substantial filling in order to permit the development of commercial
buildings or infrastructure; (3) landfills, dumps, or similar deposits of municipal or private waste; (4) quarries or similar resource extraction sites; (5) floodway; and (6) substandard buildings, within the meaning of Minnesota Statutes, section 469.174, subdivision 10 .
(c) For the purposes of paragraph (b), clauses (1) to (5), a parcel is characterized by the relevant
condition if at least 60 percent of the area of the parcel contains the relevant condition. For the purposes
of paragraph (b), clause (6), a parcel is characterized by substandard buildings if substandard buildings
occupy at least 30 percent of the area of the parcel. (d) The five-year rule under Minnesota Statutes, section 469.1763, subdivision 3 , is extended to ten
years for any district, and the period underMinnesota Statutes, section 469.1763, subdivision 4 , is
extended to 11 years. (e) Notwithstanding any provision to the contrary in Minnesota Statutes, section 469.1763, subdivision
2 , paragraph (a), not more than 80 percent of the total revenue derived from tax increments paid by
properties in any district, measured over the life of the district, may be expended on activities outside the
district but within the project area. (f) For a soil deficiency district: (1) increments may be collected through 20 years after the receipt by the authority of the first
increment from the district; and (2) except as otherwise provided in this subdivision, increments may be used only to: (i) acquire parcels on which the improvements described in item (ii) will occur; (ii) pay for the cost of correcting the unusual terrain or soil deficiencies and the additional cost of
installing public improvements directly caused by the deficiencies; and (iii) pay for the administrative expenses of the authority allocable to the district. (g) The authority to approve tax increment financing plans to establish tax increment financing districts
under this section expires December 31, 2022. EFFECTIVE DATE. This section is effective upon compliance with Minnesota Statutes, section
645.021, subdivision 3 .  CITY OF APPLE VALLEY; USE OF TAX INCREMENT FINANCING. Subdivision 1. Developments consisting of building and ancillary facilities.

Notwithstanding Minnesota Statutes, section 469.176 , subdivisions 4c and 4m, the city of Apple Valley
may use tax increment financing to provide improvements, loans, subsidies, grants, interest rate
subsidies, or assistance in any form to developments consisting of buildings and ancillary facilities, if all of
the following conditions are met: (1) the city of Apple Valley finds that the project will create or retain jobs in Minnesota, including
construction jobs; (2) the city of Apple Valley finds that construction of the project will not commence before July 1, 2014,
without the use of tax increment financing; (3) the request for certification of the district is made no later than June 30, 2014; (4) construction of the project begins no later than July 1, 2014; and (5) for development of housing, construction of the project begins no later than December 31, 2013.
Subd. 2. Extension of authority to spend tax increments. Notwithstanding the time limits in Minnesota
Statutes, section 469.176, subdivision 4 m, the city of Apple Valley has the authority to spend tax
increments under Minnesota Statutes, section 469.176, subdivision 4 m, until December 31, 2014. EFFECTIVE DATE. This section is effective upon approval by the governing body of the city of Apple
Valley and timely compliance with Minnesota Statutes, section 645.021, subdivision 3 .  CITY OF MINNEAPOLIS; STREETCAR FINANCING. Subdivision 1. Definitions. (a) For purposes of this section, the following terms have the meanings given them. (b) "City" means the city of Minneapolis. (c) "County" means Hennepin County. (d) "District" means the areas certified by the city under subdivision 2 for collection of value capture
taxes. (e) "Project area" means the area including one city block on either side of a streetcar line designated
by the city to serve the downtown and adjacent neighborhoods of the city. Subd. 2. Authority to establish district. (a) The governing body of the city may, by resolution, establish a value capture district consisting of
some or all of the taxable parcels located within one or more of the following areas of the city, as
described in the resolution: (1) the area bounded by Nicollet Avenue on the west, 16th Street East on the south, First Avenue
South on the east, and 14th Street East on the north; (2) the area bounded by Spruce Place on the west, 14th Street West on the south, LaSalle Avenue on
the east, and Grant Street West on the north; (3) the area bounded by Nicollet Avenue or Mall on the west, Fifth Street South on the south,
Marquette Avenue on the east, and Fourth Street South on the north; (4) the area bounded by First Avenue North on the west, Washington Avenue on the south, Hennepin
Avenue on the east, and Second Street North on the north; and (5) the area bounded by Fifth Street North East on the west, Central Avenue North East on the
southeast, Sixth Street North East on the east, Hennepin Avenue East on the south, and First Avenue
North East on the north. (b) The city may establish the district and the project area only after holding a public hearing on its
proposed creation after publishing notice of the hearing and the proposal at least once not less than ten
days nor more than 30 days before the date of the hearing. Subd. 3. Calculation of value capture district; administrative provisions. (a) If the city establishes a value capture district under subdivision 2, the city shall request the county
auditor to certify the district for calculation of the district's tax revenues. (b) For purposes of calculating the tax revenues of the district, the county auditor shall treat the district
as if it were a request for certification of a tax increment financing district under the provisions of
Minnesota Statutes, section 469.177, subdivision 1 , and shall calculate the tax revenues of the district for
each year of its duration under subdivision 5 as equaling the amount of tax increment that would be
computed by applying the provisions of Minnesota Statutes, section 469.177 , subdivisions 1, 2, and 3, to
determine captured tax capacity and multiplying by the current tax rate, excluding the state general tax
rate. The city shall provide the county auditor with the necessary information to certify the district,
including the option for calculating revenues derived from the areawide tax rate under Minnesota
Statutes, chapter 473F. (c) The county auditor shall pay to the city at the same times provided for settlement of taxes and
payment of tax increments the tax revenues of the district. The city must use the tax revenues as
provided under subdivision 4. Subd. 4. Permitted uses of district tax revenues. (a) In addition to paying for reasonable administrative costs of the district, the city may spend tax
revenues of the district for property acquisition, improvements, and equipment to be used for operations
within the project area, along with related costs, for: (1) planning, design, and engineering services related to the construction of the streetcar line; (2) acquiring property for, constructing, and installing a streetcar line; (3) acquiring and maintaining equipment and rolling stock and related facilities, such as maintenance
facilities, which need not be located in the project area; (4) acquiring, constructing, or improving transit stations; and (5) acquiring or improving public space, including the construction and installation of improvements to
streets and sidewalks, decorative lighting and surfaces, and plantings related to the streetcar line. (b) The city may issue bonds or other obligations under Minnesota Statutes, chapter 475, without an
election, to fund acquisition or improvement of property of a capital nature authorized by this section,
including any costs of issuance. The city may also issue bonds or other obligations to refund those bonds
or obligations. Payment of principal and interest on the bonds or other obligations issued under this
paragraph is a permitted use of the district's tax revenues. (c) Tax revenues of the district may not be used for the operation of the streetcar line. Subd. 5. Duration of the district. A district established under this section is limited to the lesser of (1)
25 years of tax revenues, or (2) the time necessary to collect tax revenues equal to the amount of the
capital costs permitted under subdivision 4 or the amount needed to pay or defease bonds or other
obligations issued under subdivision 4, whichever is later. EFFECTIVE DATE. This section is effective the day following final enactment.  CITY OF MAPLEWOOD; TAX INCREMENT FINANCING DISTRICT; SPECIAL RULES. (a) If the city of Maplewood elects, upon the adoption of a tax increment financing plan for a district,
the rules under this section apply to one or more redevelopment tax increment financing districts
established by the city or the economic development authority of the city. The area within which the
redevelopment tax increment districts may be created is parcel 362922240002 (the "parcel") or any
replatted parcels constituting a part of the parcel and the adjacent rights-of-way. For purposes of this
section, the parcel is the "3M Renovation and Retention Project Area" or "project area." (b) The requirements for qualifying redevelopment tax increment districts under Minnesota Statutes,
section 469.174, subdivision 10 , do not apply to the parcel, which is deemed eligible for inclusion in a
redevelopment tax increment district. (c) The 90 percent rule under Minnesota Statutes, section 469.176, subdivision 4 j, does not apply to
the parcel. (d) The expenditures outside district rule under Minnesota Statutes, section 469.1763, subdivision 2 ,
does not apply; the five-year rule under Minnesota Statutes, section 469.1763, subdivision 3 , is extended
to ten years; and expenditures must only be made within the project area. (e) If, after one year from the date of certification of the original net tax capacity of the tax increment
district, no demolition, rehabilitation, or renovation of property has been commenced on a parcel located
within the tax increment district, no additional tax increment may be taken from that parcel, and the
original net tax capacity of the parcel shall be excluded from the original net tax capacity of the tax
increment district. If 3M Company subsequently commences demolition, rehabilitation, or renovation, the
authority shall certify to the county auditor that the activity has commenced, and the county auditor shall
certify the net tax capacity thereof as most recently certified by the commissioner of revenue and add it to
the original net tax capacity of the tax increment district. The authority must submit to the county auditor
evidence that the required activity has taken place for each parcel in the district. (f) The authority to approve a tax increment financing plan and to establish a tax increment financing
district under this section expires December 31, 2018. EFFECTIVE DATE. This section is effective upon approval by the governing body of the city of
Maplewood and upon compliance with Minnesota Statutes, section 645.021, subdivision 3 .  CITY OF BLOOMINGTON; TAX INCREMENT FINANCING. Subdivision 1. Addition of property to Tax Increment Financing District No. 1-G. (a) Notwithstanding the provisions of Minnesota Statutes, section 469.175, subdivision 4 , or any other
law to the contrary, the governing bodies of the Port Authority of the city of Bloomington and the city of
Bloomington may elect to eliminate the real property north of the existing building line on Lot 1, Block 1,
Mall of America 7th Addition, exclusive of Lots 2 and 3 from Tax Increment Financing District No. 1-C
within Industrial Development District No. 1 Airport South in the city of Bloomington, Minnesota, and
expand the boundaries of Tax Increment Financing District No. 1-G to include that property. (b) If the city elects to transfer parcels under this authority, the county auditor shall transfer the original
tax capacity of the affected parcels from Tax Increment Financing District No. 1-C to Tax Increment
Financing District No. 1-G. Subd. 2. Authority to extend duration limit; computation of increment. (a) Notwithstanding Minnesota Statutes, section 469.176 , or Laws 1996, chapter 464, article 1,
section 8, or any other law to the contrary, the city of Bloomington and its port authority may extend the
duration limits of Tax Increment Financing Districts No. 1-C and No. 1-G through December 31, 2034. (b) Effective for property taxes payable in 2017 through 2034, the captured tax capacity of Tax
Increment Financing District No. 1-C must be included in computing the tax rates of each local taxing
district and the tax increment equals only the amount of tax computed under Minnesota Statutes, section
473F.08, subdivision 3 c, paragraph (c). (c) Effective for property taxes payable in 2019 through 2034, the captured tax capacity of Tax
Increment Financing District No. 1-G must be included in computing the tax rates of each local taxing
district and the tax increment for the district equals only the amount of tax computed under Minnesota
Statutes, section 473F.08, subdivision 3 c, paragraph (c). Subd. 3. Treatment of increment. Increments received under the provisions of subdivision 2,
paragraph (b) or (c), and Minnesota Statutes, section 473F.08, subdivision 3 c, are deemed to be tax
increments of Tax Increment Financing District No. 1-G, notwithstanding any law to the contrary, and
without regard to whether they are attributable to captured tax capacity of Tax Increment Financing
District No. 1-C. Subd. 4. Condition. The authority under this section expires and Tax Increment Financing Districts No.
1-C and No. 1-G must be decertified for taxes payable in 2024 and thereafter, if the total estimated
market value of improvements for parcels located in Tax Increment Financing District No. 1-G, as
modified, do not exceed $100,000,000 by taxes payable in 2023. EFFECTIVE DATE. This section is effective upon compliance of the governing body of the city of
Bloomington with the requirements of Minnesota Statutes, section 645.021, subdivision 3 , but only if the
city enters into a binding written agreement with the Metropolitan Council to repair and restore, or to
replace, the old Cedar Avenue bridge for use by bicycle commuters and recreational users. This section
is effective without approval of the county and school district under Minnesota Statutes, section 469.1782,
subdivision 2 . The legislature finds that the county and school district are not "affected local government
units" within the meaning of Minnesota Statutes, section 469.1782 , because the provision allowing
extended collection of increment by the tax increment financing districts does not affect their tax bases
and tax rates dissimilarly to other counties and school districts in the metropolitan area.  CITY OF BLOOMINGTON; OLD CEDAR AVENUE BRIDGE. (a) Notwithstanding any law to the contrary, the city of Bloomington shall transfer from the tax
increment financing accounts for its Tax Increment Financing District No. 1-C and Tax Increment
Financing District No. 1-G an amount equal to the tax increment for each district that is computed under
the provisions of Minnesota Statutes, section 473F.08, subdivision 3 c, for taxes payable in 2014 to an
account or fund established for the repair, restoration, or replacement of the Old Cedar Avenue bridge for
use by bicycle commuters and recreational users. The city is authorized to and must use the transferred
funds to complete the repair, renovation, or replacement of the bridge. (b) No signs, plaques, or markers acknowledging or crediting donations for, sponsorships of, or
naming rights may be posted on or in the vicinity of the Old Cedar Avenue bridge. EFFECTIVE DATE. This section is effective upon compliance by the city of Bloomington with the
requirements of Minnesota Statutes, section 645.021, subdivision 3 . the Destination Medical Center Corporation established pursuant to section469.41 , Subd. 48. Construction materials, public infrastructure related to the destination medical center.
Materials and supplies used in, and equipment incorporated into, the construction and improvement of
publicly owned buildings and infrastructure included in the development plan adopted under section
469.43 , and financed with public funds, are exempt. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2015, and
before July 1, 2049.  [469.40 ] DEFINITIONS. Subdivision 1. Application. For the purposes of sections 469.40 to 469.47 , the terms defined in this
section have the meanings given them. Subd. 2. City. " City" means the city of Rochester. Subd. 3. County. " County" means Olmsted County. Subd. 4. Destination Medical Center Corporation, corporation, DMCC. "Destination Medical Center
Corporation," "corporation," or "DMCC" means the nonprofit corporation created by the city as provided in
section 469.41 , and organized under chapter 317A. Subd. 5. Destination Medical Center Development District. " Destination medical center development
district" or "development district" means a geographic area in the city identified in the DMCC development
plan in which public infrastructure projects are implemented. Subd. 6. Development plan. " Development plan" means the plan adopted by the DMCC under section
469.43 . Subd. 7. Financial interest. " Financial interest" means a person's direct or indirect ownership or
investment interest or compensation arrangement, whether through business, investment, or family,
including spouse, children and stepchildren, and other relatives living with the person, as follows: (1) ownership or investment interest in the development, acquisition, or construction of a project in the
development district; (2) compensation arrangement with respect to the development, acquisition, or construction of a
project in the development district; or (3) potential ownership or investment interest in, or compensation arrangement with respect to, the
development, acquisition, or construction of a project in the development district. Subd. 8. Medical business entity. " Medical business entity" means a medical business entity with its
principal place of business in the city that, as of the effective date of this section, together with all
business entities of which it is the sole member or sole shareholder, collectively employs more than
30,000 persons in the state. Subd. 9. Nonprofit economic development agency, agency. " Nonprofit economic development
agency" or "agency" means the nonprofit agency required under section 469.43 to provide experience
and expertise to the DMCC for purposes of developing and marketing the destination medical center. Subd. 10. Project. "Project" means a project to implement the development plan, whether public or
private. Subd. 11. Public infrastructure project. (a) "Public infrastructure project" means a project financed in part or in whole with public money in
order to support the medical business entity's development plans, as identified in the DMCC development
plan. A public infrastructure project may: (1) acquire real property and other assets associated with the real property; (2) demolish, repair, or rehabilitate buildings; (3) remediate land and buildings as required to prepare the property for acquisition or development;
(4) install, construct, or reconstruct elements of public infrastructure required to support the overall
development of the destination medical center development district including, but not limited to, streets,
roadways, utilities systems and related facilities, utility relocations and replacements, network and
communication systems, streetscape improvements, drainage systems, sewer and water systems,
subgrade structures and associated improvements, landscaping, façade construction and restoration,
wayfinding and signage, and other components of community infrastructure; (5) acquire, construct or reconstruct, and equip parking facilities and other facilities to encourage
intermodal transportation and public transit; (6) install, construct or reconstruct, furnish, and equip parks, cultural, and recreational facilities,
facilities to promote tourism and hospitality, conferencing and conventions, broadcast and related
multimedia infrastructure; (7) make related site improvements including, without limitation, excavation, earth retention, soil
stabilization and correction, and site improvements to support the destination medical center development
district; (8) prepare land for private development and to sell or lease land; (9) costs of providing relocation benefits to occupants of acquired properties; and (10) construct and equip all or a portion of one or more suitable structures on land owned by the city
for sale or lease to private development; provided, however, that the portion of any structure directly
financed by the city as a public infrastructure project must not be sold or leased to a medical business
entity. (b) A public infrastructure project is not a business subsidy under section116J.993 . Subd. 12. Year. "Year" means a calendar year, except where otherwise provided.  [469.41 ] DESTINATION MEDICAL CENTER CORPORATION ESTABLISHED. Subdivision 1. DMCC created. The city must establish a destination medical center corporation as a
nonprofit corporation under chapter 317A to provide the city with expertise in preparing and implementing
the development plan to establish the city as a destination medical center. Except as provided in sections
469.40 to 469.47 , the nonprofit corporation is not subject to laws governing the city. Subd. 2. Membership; quorum. (a) The corporation's governing board consists of eight members appointed, as follows: (1) the mayor of the city, or the mayor's designee, subject to approval by the city council; (2) the city council president, or the city council president's designee, subject to approval by the city
council; (3) the chair or member of the county board, appointed by the county board; (4) a representative of the medical business entity appointed by and serving at the pleasure of the
medical business entity; and (5) four members appointed by the governor, subject to confirmation by the senate. (b) Appointing authorities must make their respective appointments as soon as practicable after the
effective date of this section, but no later than 60 days after enactment of this section. (c) A quorum of the board is six members. Subd. 3. Terms. (a) A member first appointed after the effective date of this section under subdivision 2, paragraph (a),
clauses (1), (2), and (3), serves for a term coterminous with the term of the elected office, but may be
reappointed. (b) Two members first appointed after the effective date of this section under subdivision 2, paragraph
(a), clause (5), serve from the date of appointment until the first Tuesday after the first Monday in January
2017, and two members first appointed after the effective date of this section under subdivision 2,
paragraph (a), clause (5), serve from the date of appointment until the first Tuesday after the first Monday
in January 2020. Thereafter, members appointed by the governor serve six-year terms. Subd. 4. Vacancies. A vacancy occurs as provided in section 351.02 or upon a member's removal
under subdivision 7. A vacancy on the board must be filled by the appointing authority for the balance of
the term in the same manner as a regular appointment. Subd. 5. Chair. The board must elect a chair from among the governor's appointees. The governor
must convene the first meeting within 30 days of completion of all appointments to the board. Subd. 6. Pay. Members must be compensated as provided in section 15.0575, subdivision 3 . For the
purposes of this subdivision, the member representing the medical business entity shall be treated as if
an employee of a political subdivision. All money paid for compensation or reimbursement must be paid
out of the corporation's budget. Subd. 7. Removal for cause. A member may be removed by the board for inefficiency, neglect of duty,
or misconduct in office. A member may be removed only after a hearing of the board. A copy of the
charges must be given to the board member at least ten days before the hearing. The board member
must be given an opportunity to be heard in person or by counsel at the hearing. When written charges
have been submitted against a board member, the board may temporarily suspend the member. If the
board finds that those charges have not been substantiated, the board member must be immediately
reinstated. If a board member is removed, a record of the proceedings, together with the charges and
findings, must be filed with the office of the appointing authority. Subd. 8. Open meeting law; data practices. Meetings of the corporation and any committee or
subcommittee of the corporation are subject to the open meeting law in chapter 13D. The corporation is a
government entity for purposes of chapter 13. Subd. 9. Conflicts of interest. Except for the member appointed by the medical business entity, a
member must not be a director, officer, or employee of the medical business entity. A member must not
participate in or vote on a decision of the corporation relating to any project authorized by or under
consideration by the corporation in which the member has either a direct or indirect financial interest. No
member may serve as a lobbyist, as defined under section 10A.01, subdivision 21 . Subd. 10. Public official. A member of the corporation is a public official, as defined in section 10A.01,
subdivision 35 . Subd. 11. Powers. The corporation may exercise any other powers that are granted by its articles of
incorporation and bylaws to the extent that those powers are not inconsistent with the provisions of
sections 469.40 to 469.47 . Subd. 12. Contract for services. (a) The corporation may contract for the services of the nonprofit economic development agency,
financial advisors, other consultants, agents, public accountants, legal counsel, and other persons
needed to perform its duties and exercise its powers. The corporation may contract with the city or county
to provide administrative, clerical, and accounting services to the corporation. (b) The corporation must contract with the nonprofit agency for the services enumerated in section
469.43, subdivision 6 , paragraph (a).

The requirement to contract with the nonprofit agency does not limit the corporation's authority to contract
with other providers for the services. Subd. 13. DMCC approval of projects. A project must be approved by the corporation before it is
proposed to the city. The corporation must review the project proposed for consistency with the adopted
development plan. Subd. 14. Dissolution. The city must provide for the terms for dissolution of the corporation in the
articles of incorporation.  [469.42 ] OFFICERS; DUTIES; ORGANIZATIONAL MATTERS. Subdivision 1. Bylaws, rules, seal. The corporation may adopt bylaws and rules of procedure and may
adopt an official seal. Subd. 2. Officers. The corporation must annually elect a treasurer. The chair must appoint a secretary
and assistant treasurer. The secretary and assistant treasurer need not, but may, be members of the
board. Subd. 3. Duties and powers. The officers have the usual duties and powers of their offices. They may
be given other duties and powers by the corporation. The corporation must establish and maintain a Web
site. Subd. 4. Treasurer's duties. The treasurer: (1) must receive and is responsible for corporation money; (2) is responsible for the acts of the assistant treasurer; (3) must disburse corporation money by check or electronic procedures; (4) must keep an account of the source of all receipts, and of the nature, purpose, and authority of all
disbursements; and (5) must file the corporation's detailed financial statement with its secretary at least once a year at
times set by the authority. Subd. 5. Secretary. The secretary must perform duties as required by the board. Subd. 6. Assistant treasurer. The assistant treasurer has the powers and duties of the treasurer if the
treasurer is absent or disabled.  [469.43 ] DEVELOPMENT PLAN. Subdivision 1. Development plan; adoption by DMCC; notice; findings. (a) The corporation, working with the city and the nonprofit economic development agency, must
prepare and adopt a development plan. The corporation must hold a public hearing before adopting a
development plan. At least 60 days before the hearing, the corporation must make copies of the proposed
plan available to the public at the corporation and city offices during normal business hours, on the
corporation's and city's Web site, and as otherwise determined appropriate by the corporation. At least
ten days before the hearing, the corporation must publish notice of the hearing in the official newspaper of
the city. The development plan may not be adopted, unless the corporation finds, by resolution, that: (1) the plan provides an outline for the development of the city as a destination medical center, and
the plan is sufficiently complete, including the identification of planned and anticipated projects, to indicate
its relationship to definite state and local objectives; (2) the proposed development affords maximum opportunity, consistent with the needs of the city,
county, and state, for the development of the city by private enterprise as a destination medical center;
(3) the proposed development conforms to the general plan for the development of the city and is
consistent with the city comprehensive plan; (4) the plan includes: (i) strategic planning consistent with a destination medical center in the core areas of commercial
research and technology, learning environment, hospitality and convention, sports and recreation, livable
communities, including mixed-use urban development and neighborhood residential development,
retail/dining/entertainment, and health and wellness; (ii) estimates of short- and long-range fiscal and economic impacts; (iii) a framework to identify and prioritize short- and long-term public investment and public
infrastructure project development and to facilitate private investment and development, including the
criteria and process for evaluating and underwriting development proposals; (iv) land use planning; (v) transportation and transit planning; (vi) operational planning required to support the medical center development district; and (vii) ongoing market research plans; and (5) the city has approved the plan. (b) The identification of planned and anticipated projects under paragraph (a), clause (1), must give priority to projects that will pay wages at least equal to the basic cost of living wage as
calculated by the commissioner of employment and economic development for the county in which the
project is located. The calculation of the basic cost of living wage must be done as provided for under
section 116J.013 , if enacted by the 2013 legislature. Subd. 2. Development plan approval by city. Section 15.99 does not apply to review and approval of the development plan.

The city shall act on the development plan within 60 days following its submission by the corporation. The
city may incorporate the development plan into the city's comprehensive plan. Subd. 3. Subject to city requirements. All projects are subject to the planning, zoning, sanitary, and
building laws; ordinances; regulations; and land use plans that apply to the city. Subd. 4. Modification of development plan. The corporation may modify the development plan at any
time. The corporation must update the development plan not less than every five years. A modification or
update under this subdivision must be adopted by the corporation upon the notice and after the public
hearing and findings required for the original adoption of the development plan, including approval by the
city. Subd. 5. Medical center development districts; creation; notice; findings. As part of the development
plan, the corporation may create and define the boundaries of medical center development districts and
subdistricts at any place or places within the city. Projects may be undertaken within defined medical
center development districts consistent with the development plan. Subd. 6. Nonprofit economic development agency. (a) The medical business entity must establish a nonprofit economic development agency organized
under chapter 317A to provide experience and expertise in developing and marketing the destination
medical center. The corporation must engage the agency to assist the corporation in preparing the
development plan. The governing board of the agency must be comprised of members of the medical
community, city, and county. The agency must collaborate with city, county, and other community
representatives. The nonprofit agency must provide services to assist the corporation and city in
implementing the goals, objectives, and strategies in the development plan including, but not limited to:
(1) facilitating private investment through development of a comprehensive marketing program to
global interests; (2) developing and updating the criteria for evaluating and underwriting development proposals; (3) drafting and implementing the development plan, including soliciting and evaluating proposals for
development and evaluating and making recommendations to the authority and the city regarding those
proposals; (4) providing transactional services in connection with approved projects; (5) developing patient, visitor, and community outreach programs for a destination medical center
development district; (6) working with the corporation to acquire and facilitate the sale, lease, or other transactions involving
land and real property; (7) seeking financial support for the corporation, the city, and a project; (8) partnering with other development agencies and organizations, the city, and the county in joint
efforts to promote economic development and establish a destination medical center; (9) supporting and administering the planning and development activities required to implement the
development plan; (10) preparing and supporting the marketing and promotion of the medical center development district;
(11) preparing and implementing a program for community and public relations in support of the
medical center development district; (12) assisting the corporation or city and others in applications for federal grants, tax credits, and other
sources of funding to aid both private and public development; and (13) making other general advisory recommendations to the corporation and the city, as requested.
(b) The nonprofit economic development agency must disclose to the city and to the corporation the
existence, nature, and all material facts regarding any financial interest its employees or contractors have
in any public infrastructure project submitted to the city for approval and any financial interest its
employees or contractors have in the destination medical center development. " Contractors" includes
affiliates of the contractors or members or shareholders with an ownership interest of more than 20
percent in the contractor. Subd. 7. Audit of nonprofit economic development agency contract. Any contract for services between
the corporation and the nonprofit economic development agency paid, in whole or in part, with public
money provides the corporation, the city, and the state auditor the right to audit the books and records of
the agency that are necessary to certify: (1) the nature and extent of the services furnished pursuant to the contract; and (2) that the payment for services and related disbursements complies with all state laws, regulations,
and the terms of the contract. Any contract for services between the corporation and the agency paid, in
whole or in part, with public money must require the corporation to maintain for the life of the corporation
accurate and complete books and records directly relating to the contract. Subd. 8. Report. By February 15 of each year, the corporation and city must jointly submit a report to
the chairs and ranking minority members of the legislative committees and divisions with jurisdiction over
local and state government operations, economic development, and taxes, and to the commissioners of
revenue and employment and economic development, and the county. The corporation and city must also
submit the report as provided in section 3.195. The report must include: (1) the development plan and any proposed changes to the development plan; (2) progress of projects identified in the development plan; (3) actual costs and financing sources, including the amount paid with state aid under section 469.47 ,
and required local contributions of projects completed in the previous two years by the corporation, city,
county, and the medical business entity; (4) estimated costs and financing sources for projects to be started in the next two years by the
corporation, city, county, and the medical business entity; and (5) debt service schedules for all outstanding obligations of the city for debt issued for projects
identified in the plan.  [469.44 ] CITY POWERS, DUTIES; AUTHORITY TO ISSUE BONDS. Subdivision 1. Port authority powers. The city may exercise the powers of a port authority under
sections 469.048 to469.068 for the purposes of implementing the destination medical center development
plan. Subd. 2. Support to the corporation. The city must provide financial and administrative support, and
office and other space, to the corporation. The city may appropriate city funds to the corporation for its
work. Subd. 3. City to issue debt. The city may issue general obligation bonds, revenue bonds, or other
obligations, as it determines appropriate, to finance public infrastructure projects, as provided by chapter
475. Notwithstanding section 475.53 , obligations issued under this section are not subject to the limits on
net debt, regardless of their source of security or payment. Notwithstanding section 475.58 or any other
law or charter provision to the contrary, issuance of obligations under the provisions of this section are not
subject to approval of the electors. The city may pledge any of its revenues, including property taxes, the
taxes authorized by sections 469.45 and 469.46 , and the state aid under section469.47 , as security for
and to pay the obligations. The city must not issue obligations that are only payable from or secured by
state aid under section 469.47 . Subd. 4. Local government tax base not reduced. Nothing in sections 469.40 to 469.47 reduces the
tax base or affects the taxes due and payable to the city, the county, or any school district within the
boundaries of the city, including without limitation, the city's general local sales tax. Subd. 5. Project implementation before plan adoption. The city may exercise the powers under
subdivision 3 with respect to any public infrastructure project commenced within the area that will be in
the destination medical center development district after the effective date of this section but before the
development plan is adopted subject to approval by the corporation. Actions taken under this authority
must be approved by the corporation to be credited against the local contribution required under section
469.47, subdivision 4 . Subd. 6. American made steel. The city must require that a public infrastructure project use American
steel products to the extent practicable. In determining whether it is practicable, the city may consider the
exceptions to the requirement in Public Law 111-5, section 1605. Subd. 7. City contracts; construction requirements. For all public infrastructure projects, the city must
make every effort to hire and cause the construction manager and any subcontractors to employ women
and members of minority communities. Goals for construction contracts must be established in the
manner required under the city's minority and women-owned business enterprises utilization plan. Subd. 8. Conduit bond issuance. (a) Upon the request of the corporation or the nonprofit agency, the city or its economic development
authority shall issue revenue bonds or other similar obligations for a qualifying project. Revenue bonds or
other obligations as used in this subdivision means bonds or other obligations issued under sections
469.152 to 469.165 or under chapter 462C, the interest on which is tax exempt. The city or its
development authority shall use its best efforts to issue the bonds or other obligations as promptly and
efficiently as possible following the request and the provision of the information and completion of the
actions by the corporation or the nonprofit agency that are necessary for the issuance.

Upon request of the corporation or nonprofit agency, the city or its economic development authority shall
adopt methods and procedures that preserve the confidentiality of private donors or other private
participants in the qualifying project, including structures and methods that do not require disclosing
information on the donors or participants to the city or its economic development authority, and shall
segregate in separate accounts all funds related to a qualifying project from other city and authority funds.
(b) For purposes of this section, a "qualifying project" means a project, as that term is defined in
section 469.153 , or a project that would qualify for financing under chapter 462C, that: (1) the corporation finds is consistent with and will further the goals of the development plan; (2) is located in a medical development district; and (3) has a commitment of private funding sources such as donations of money or in-kind contributions,
other than revenues generated by the project, equal to at least ten percent of the total capital cost of the
project. Subd. 9. Public bidding exemption. (a) Notwithstanding section 469.068 or any other law to the contrary, the city need not require
competitive bidding with respect to a parking facility or other public improvements constructed in
conjunction with, and directly above or below, or adjacent and integrally related to, a private development
financed or developed under the development plan. (b) For purposes of this section, "city" includes the development authority established by the city.  [469.45 ] CITY TAX AUTHORITY. Subdivision 1. Rochester, other local taxes authorized. (a) Notwithstanding section 477A.016 , or any other contrary provision of law, ordinance, or city
charter, and in addition to any taxes the city may impose on these transactions under another statute or
law, the city of Rochester may, by ordinance, impose at a rate or rates, determined by the city, any of the
following taxes: (1) a tax on the gross receipts from the furnishing for consideration of lodging and related services as
defined in section 297A.61, subdivision 3 , paragraph (g), clause (2); the city may choose to impose a
differential tax based on the number of rooms in the facility; (2) a tax on the gross receipts of food and beverages sold primarily for consumption on the premises
by restaurants and places of refreshment that occur in the city of Rochester; the city may elect to impose
the tax in a defined district of the city; and (3) a tax on the admission receipts to entertainment and recreational facilities, as defined by
ordinance, in the city of Rochester. (b) The provisions of section 297A.99 , subdivisions 4 to 13, govern the administration, collection, and
enforcement of any tax imposed by the city under paragraph (a). (c) The proceeds of any taxes imposed under this subdivision, less refunds and costs of collection,
must be used by the city only to meet its share of obligations for public infrastructure projects contained in
the development plan and approved by the corporation, including any associated financing costs.

Any tax imposed under paragraph (a) expires at the earlier of December 31, 2049, or when the city council determines that sufficient
funds have been raised from the tax plus all other local funding sources authorized in this article to meet
the city obligation for financing public infrastructure projects contained in the development plan and
approved by the corporation, including any associated financing costs. Subd. 2. General sales tax authority. The city may elect to extend the existing local sales and use tax
under section 13 or to impose an additional rate of up to one quarter of one percent tax on sales and use
under section 11. The proceeds of any extended or additional taxes imposed under this subdivision, less
refunds and costs of collection, must be used by the city only to meet its share of obligations for public
infrastructure projects contained in the development plan and approved by the corporation, including all
financing costs. Revenues collected in any year to meet the obligations must be used for payment of
obligations or expenses for public infrastructure projects approved by the corporation. Subd. 3. Special abatement rules. (a) If the city or the county elects to use tax abatement under sections469.1812 to 469.1815 to finance
costs of public infrastructure projects, including all financing costs, the special rules under this subdivision
apply. Taxes abated for public infrastructure projects must be used only for obligations or other
infrastructure projects approved by the corporation. (b) The limitations under section 469.1813, subdivision 6 , do not apply to the city or the county. (c) The limitations under section 469.1813, subdivision 8 , do not apply and property taxes abated by
the city or the county to finance costs of public infrastructure projects are not included for purposes of
applying section 469.1813, subdivision 8 , to the use of tax abatement for other purposes of the city or the
county; however, the total amount of property taxes abated by the city and the county under this authority
must not exceed $87,750,000. Subd. 4. Special tax increment financing rules. If the city elects to establish one or more
redevelopment tax increment financing districts within the area of the destination medical center
development district to fund public infrastructure projects, the requirements, definitions, limitations, or
restrictions in the following statutes do not apply: sections 469.174 , subdivisions 10 and 25, clause (2);
469.176 , subdivisions 4j, 4l, and 5; and 469.1763 , subdivisions 2, 3, and 4. The provisions of this
subdivision expire effective for tax increments expended after December 31, 2049. After that date, the
provisions of section 469.1763, subdivision 4 , apply to any remaining unspent or unobligated increments.
 [469.46 ] COUNTY TAX AUTHORITY. (a) Notwithstanding sections 297A.99 , 297A.993 , and 477A.016 , or any other contrary provision of
law, ordinance, or charter, and in addition to any taxes the county may impose under another law or
statute, the Board of Commissioners of Olmsted County may, by resolution, impose a transit tax of up to
one quarter of one percent on retail sales and uses taxable under chapter 297A. The provisions of section
297A.99 , subdivisions 4 to 13, govern the imposition, administration, collection, and enforcement of the
tax authorized under this paragraph. (b) The Board of Commissioners of Olmsted County may, by resolution, levy an annual wheelage tax
of up to $10 on each motor vehicle kept in the county when not in operation which is subject to annual
registration and taxation under chapter 168, for transportation projects within the county. The wheelage
tax must not be imposed on the vehicles exempt from wheelage tax under section 163.051, subdivision 1
. The board, by resolution, may provide for collection of the wheelage tax by county officials, or it may
request that the tax be collected by the state registrar on behalf of the county. The provisions of section
163.051 , subdivisions 2, 2a, 3, and 7, must govern the administration, collection, and enforcement of the
tax authorized under this paragraph. The tax authorized under this section is in addition to any tax the
county may be authorized to impose under section 163.051 , but until January 1, 2018, the county tax
imposed under this paragraph, in combination with any tax imposed under section 163.051 , must equal
the specified rate under section 163.051 . (c) The proceeds of any taxes imposed under paragraph (a), less refunds and costs of collection, must
be first used by the county to meet its local matching contributions under section 469.47, subdivision 6 ,
for financing transit infrastructure related to the public infrastructure projects contained in the development
plan and approved by the corporation, including any financing costs. Revenues collected in any calendar
year in excess of the county obligation to pay for projects contained in the development plan may be
retained by the county and used for funding other transportation projects, including roads and bridges,
airports, and transportation improvements. (d) Any taxes imposed under paragraph (a) expire December 31, 2049, or at an earlier time if
approved by resolution of the county board of commissioners. The taxes must not terminate before the
county board of commissioners determines that revenues from these taxes and any other revenue source
the county dedicates are sufficient to pay the county share of transit project costs and financing costs
under the development plan.  [469.47 ] STATE INFRASTRUCTURE AID. Subdivision 1. Definitions. (a) For purposes of this section, the following terms have the meanings given them. (b) "Commissioner" means the commissioner of employment and economic development. (c) "Construction projects" means: (1) for expenditures by a medical business entity, construction of buildings in the city for which the
building permit was issued after June 30, 2013; and (2) for any other expenditures, construction of privately owned buildings and other improvements that
are undertaken pursuant to or as part of the development plan and are located within a medical center
development district. (d) "Expenditures" means expenditures made by a medical business entity or by an individual or
private entity on construction projects for the capital cost of the project including, but not limited to: (1) design and predesign, including architectural, engineering, and similar services; (2) legal, regulatory, and other compliance costs of the project; (3) land acquisition, demolition of existing improvements, and other site preparation costs; (4) construction costs, including all materials and supplies of the project; and (5) equipment and furnishings that are attached to or become part of the real property. Expenditures
excludes supplies and other items with a useful life of less than a year that are not used or consumed in
constructing improvements to real property or are otherwise chargeable to capital costs. (e) "Qualified expenditures" has the following meaning. In the first year in which aid is paid under this
section, "qualified expenditures" means the total certified expenditures since June 30, 2013, through the
end of the preceding year, minus $200,000,000. For subsequent years, "qualified expenditures" means
the certified expenditures for the preceding year. (f) "Transit costs" means the portions of a public infrastructure project that are for public transit
intended primarily to serve the district, such as transit stations, equipment, rights-of-way, and similar
costs. Subd. 2. Certification of expenditures. By April 1 of each year, the medical business entity must certify
to the commissioner the amount of expenditures made by the medical business entity in the preceding
year. For expenditures made by an individual or entity other than the medical business entity, the
corporation shall compile the information on the expenditures and may certify the amount to the
commissioner. The certification must be made in the form that the commissioner prescribes and include
any documentation of and supporting information regarding the expenditures that the commissioner
requires. By August 1 of each year, the commissioner must determine the amount of the expenditures for
the preceding year. Subd. 3. General state infrastructure aid. (a) General state infrastructure aid may not be paid out under this section until total expenditures
exceed $200,000,000. (b) The amount of the general state infrastructure aid for a fiscal year equals the sum of qualified
expenditures, multiplied by 2.75 percent. The maximum amount of state aid payable in any year is limited
to no more than $30,000,000. If the aid entitlement for the year exceeds the maximum annual limit, the
excess is an aid carryover to later years. The carryover aid must be paid in the first year in which the aid
entitlement for the current year is less than the maximum annual limit, but only to the extent the carryover,
when added to the current year aid, is less than the maximum annual limit. If the commissioner
determines that the city has made the required matching local contribution under subdivision 4, the
commissioner must pay to the city the amount of general state infrastructure aid for the year by
September 1. (c) The city must use general state infrastructure aid it receives under this subdivision for
improvements and other capital costs related to the public infrastructure projects approved by the
corporation, other than transit costs. The city must maintain appropriate records to document the use of
the funds under this requirement. (d) The commissioner, in consultation with the commissioner of management and budget, and
representatives of the city and the corporation, must establish a total limit on the amount of state aid
payable under this subdivision that will be adequate to finance, in combination with the local contribution,
$455,000,000 of general public infrastructure projects. Subd. 4. General aid; local matching contribution. In order to qualify for general state infrastructure
aid, the city must enter a written agreement with the commissioner that requires the city to make a
qualifying local matching contribution to pay for $128,000,000 of the cost of public infrastructure projects
approved by the corporation, including financing costs, using funds other than state aid received under
this section. The $128,000,000 required local matching contribution is reduced by one half of the amounts
the city pays for operating and administrative costs of the corporation up to a maximum amount agreed to
by the board and the city. The agreement must provide for the manner, timing, and amounts of the city
contributions, including the city's commitment for each year. Notwithstanding any law to the contrary, the
agreement may provide that the city contributions for public infrastructure project principal costs may be
made over a 20-year period at a rate not greater than $1 from the city for each $2.55 from the state. The
local match contribution may be provided by the city from any source identified in section 469.45 and any
other local tax proceeds or other funds from the city and may include providing funds to assist developers
undertaking projects in accordance with the development plan or by the city directly undertaking public
infrastructure projects in accordance with the development plan, provided the projects have been
approved by the corporation. City contributions that are in excess of this ratio carry forward and are
credited towards subsequent years. The commissioner and city may agree to amend the agreement at
any time in light of new information or other appropriate factors. The city may enter into arrangements
with the county to pay for or otherwise meet the local matching contribution requirement. Any public
infrastructure project within the area that will be in the destination medical center development district
whose implementation is started or funded by the city after the effective date of this section but before the
development plan is adopted, as provided by section 469.46, subdivision 5 , will be included for the
purposes of determining the amount the city has contributed as required by this section and the
agreement with the commissioner, subject to approval by the corporation. Subd. 5. State transit aid. (a) The city qualifies for state transit aid under this section if the county contributes the required local
matching contribution under subdivision 6 or the city or county has agreed to make an equivalent
contribution out of other funds for the year. (b) If the city qualifies for aid under paragraph (a), the commissioner must pay the city the state transit
aid in the amount calculated under this paragraph. The amount of the state transit aid for a fiscal year
equals the sum of qualified expenditures, as certified by the commissioner for the prior year, multiplied by
0.75 percent, reduced by the amount of the local contribution under subdivision 6. The maximum amount
of state transit aid payable in any year is limited to no more than $7,500,000. If the aid entitlement for the
year exceeds the maximum annual limit, the excess is an aid carryover to later years. The carryover aid
must be paid in the first year in which the aid entitlement for the current year is less than the maximum
annual limit, but only to the extent the carryover, when added to the current year aid, is less than the
maximum annual limit. (c) The commissioner, in consultation with the commissioner of management and budget, and
representatives of the city and the corporation, must establish a total limit on the amount of state aid
payable under this subdivision that will be adequate to finance, in combination with the local contribution,
$116,000,000 of transit costs. (d) The city must use state transit aid it receives under this subdivision for transit costs. The city must
maintain appropriate records to document the use of the funds under this requirement. Subd. 6. Transit aid; local matching contribution. (a) The required local matching contribution for state transit aid equals the lesser of: (1) 40 percent of the state transit aid under subdivision 5; or (2) the amount that would be raised by a 0.15 percent sales tax imposed by the county in the
preceding year. The county may impose the sales tax or the wheelage tax under section 469.46 to meet
this obligation. (b) If the county elects not to impose any of the taxes authorized under section 469.46 , the county, or
city, or both, may agree to make the local contribution out of other available funds, other than state aid
payable under this section. The commissioner of revenue must estimate the required amount and certify it
to the commissioner, city, and county. Subd. 7. Prevailing wage requirement. During the construction, installation, remodelling, and repairs of
any public infrastructure project funded by state aid or a local matching contribution under this section,
laborers and mechanics at the site must be paid the prevailing wage rate as defined in section 177.42,
subdivision 6 , and the project is subject to the requirements of sections 177.30 and 177.41 to 177.44 .
Subd. 8. Termination. No aid may be paid under this section after fiscal year 2049. Subd. 9. Appropriation. An amount sufficient to pay the state general infrastructure and state transit
aid authorized under this section is appropriated to the commissioner from the general fund. (a) 297A.48 297A.99 subdivision paragraph (b) Notwithstanding Minnesota Statutes, sections 297A.99 and 477A.016 , or any other contrary
provision of law, ordinance, or charter, the city of Rochester may, by ordinance, impose an additional
sales and use tax of up to one quarter of one percent. The provisions of Minnesota Statutes, section
297A.99 , subdivisions 1 and 4 to 13, govern the imposition, administration, collection, and enforcement
of the tax authorized under this paragraph. ,

paragraph (a), The city shall use $5,000,000 of the money allocated to the purpose

in paragraph (c), clause (9), for grants to the cities of Byron, Chatfield, Dodge Center, Dover, Elgin, Eyota, Kasson,
Mantorville, Oronoco, Pine Island, Plainview, St. Charles, Stewartville, Zumbrota, Spring Valley, West
Concord, and Hayfield for economic development projects that these communities would fund through
their economic development authority or housing and redevelopment authority. Notwithstanding
Minnesota Statutes, section 297A.99 , subdivisions 2 and 3, if the city decides to extend the taxes in
subdivisions 1, paragraph (a), and 2, as allowed under subdivision 5, paragraph (c), the city must use any
amount in excess of the amount necessary to meet obligations under paragraphs (a) to (c) from those
taxes to fund obligations, including financing costs, related to public infrastructure projects in the
development plan adopted underMinnesota Statutes, section 469.43. (f) Revenues from the tax under subdivision 1, paragraph (b), must be used to fund obligations,
including financing costs, related to the public infrastructure projects contained in the development plan
approved by the DMCC and adopted by the city under Minnesota Statutes, section 469.43. , paragraph (a), beyond the date , up to December 31,

2049, provided that all additional revenues above those necessary to fund the projects and associated
financing costs listed in subdivision 3, paragraphs (a) to (e), are committed to fund public infrastructure projects contained in the development plan adopted
under Minnesota Statutes, section 469.43 , including all financing costs; otherwise the taxes terminate
when $111,500,000 of paragraph (a) paragraphs (a) to (e) , paragraph (a), if

approved by the voters of the city at the general election in 2012. If the election to authorize the additional
$139,500,000 of bonds plus an amount equal to the costs of the issuance of the bonds is placed on the
general election ballot in 2012, the city may continue to collect the taxes authorized in subdivisions 1 and
2 until December 31, 2012. The question put to the voters must indicate that an affirmative vote would
allow sales tax revenues be raised for an extended period of time and an additional $139,500,000 of
bonds plus an amount equal to the costs of issuance of the bonds, to be issued above the amount
authorized in the previous elections required under paragraphs (a) and (b) for the projects and amounts specified in subdivision 3. If the taxes authorized in
subdivisions 1 and 2 are extended under this paragraph, the taxes expire when the city council
determines that $139,500,000 has been received from the taxes to finance the projects plus an amount
sufficient to prepay or retire at maturity the principal, interest, and premium due on any bonds issued for
the projects under subdivision 4, including any bonds issued to refund the bonds. Any funds remaining
after completion of the projects and retirement or redemption of the bonds may be placed in the general
fund of the city (d) The tax imposed under subdivision 1, paragraph (b), expires at the earlier of 2049, or when the city
council determines that sufficient funds have been raised from the tax plus all other city funding sources
authorized in this article to meet the city obligation for financing the public infrastructure projects
contained in the development plan adopted under Minnesota Statutes, section 469.43 , including all
financing costs.  ROCHESTER SALES TAX SHARING. The city council may, after holding a public hearing
and passing a resolution, use $5,000,000 of the $10,000,000 allocated to an economic development fund
in Laws 1998, chapter 389, article 8, section 43, subdivision 3, as amended by Laws 2005, First Special
Session chapter 3, article 5, section 28, and Laws 2011, First Special Session chapter 7, article 4, section
5, paragraph (c), clause (9), for grants to any or all of the cities of Byron, Chatfield, Dodge Center, Dover,
Elgin, Eyota, Hayfield, Kasson, Mantorville, Oronoco, Pine Island, Plainview, Spring Valley, St. Charles,
Stewartville, West Concord, and Zumbrota for economic development projects that these communities
would fund through their economic development authority or housing and redevelopment authority. The
public hearing may be part of a regular city council meeting. If the council does not pass the resolution by
September 1, 2013, the $5,000,000 may not be used for grants to the other cities but shall instead be
used to fund public infrastructure projects contained in the development plan under Minnesota Statutes,
section 469.42.  OLMSTED INTERREGIONAL PASSENGER RAIL STUDY. The study by the Olmsted
County Regional Rail authority, in conjunction with the Minnesota Department of Transportation, on
interregional passenger rail, and funded under Laws 2009, chapter 93, article 1, section 11, subdivision 5,
must include analysis of the feasibility of a high-speed rail connection between Rochester and the Mall of
America via Minnesota State Highway 77 with connections to the Minneapolis-St. Paul International
Airport and the Union Depot in St. Paul; and, to the extent feasible, take into account available data,
forecasts, available transportation demand modeling information, and transportation impacts of major
economic initiatives and proposals including, but not limited to, expansion of the Mayo Clinic. EFFECTIVE DATE. This section is effective the day following final enactment. EFFECTIVE DATE. Except as otherwise provided, this article is effective the day after the governing
body of the city of Rochester and its chief clerical officer timely comply with Minnesota Statutes, section
645.021 , subdivisions 2 and 3. the sum of and the amount attributable to the

same production year distributed to the cities and townships within the school district under section
298.28, subdivision 2 , paragraph (c) EFFECTIVE DATE. This section is effective for levies certified in 2013 and later. (a) (b) : (1) there is annually appropriated and credited to the mining environmental and regulatory account in
the special revenue fund an amount equal to that which would have been generated by a two and
one-half cent tax imposed by section 298.24 on each taxable ton produced in the preceding calendar
year. Money in the mining environmental and regulatory account is appropriated annually to the
commissioner of natural resources to fund agency staff to work on environmental issues and provide
regulatory services for ferrous and nonferrous mining operations in this state. Payment to the mining
environmental and regulatory account shall be made by July 1 annually. The commissioner of natural
resources shall execute an interagency agreement with the pollution control agency to assist with the
provision of environmental regulatory services such as monitoring and permitting required for ferrous and
nonferrous mining operations; and (2) this section clause (2) (1) (i) (2) (ii) (c) EFFECTIVE DATE. This section is effective beginning for the 2013 production year. equal to the amount of the distribution of at least 50 percent of the distribution based on 14.7
cents per ton 2002 2014 EFFECTIVE DATE. This section is effective beginning for the 2014 distribution. 2001, 2002, and 2003 2013 $2.103 $2.56 For concentrates produced in
2005, the tax rate is the same rate imposed for concentrates produced in 2004. For concentrates
produced in 2009 and subsequent years, 2006 2014 $2.103 $2.56 EFFECTIVE DATE. This section is effective beginning for the 2013 production year. 23.15 32.15 15.72 24.72 (1) the second previous year

2011 (2) Districts qualifying under paragraph (c) must receive additional taconite aid each year equal to
22.5 percent of the amount obtained by subtracting: (i) 1.8 percent of the district's net tax capacity for 2011, from: (ii) the district's weighted average daily membership for fiscal year 2012 multiplied by the sum of: (A) $415, plus (B) the district's referendum revenue allowance for fiscal year 2013. or for outcome-based

learning programs that enhance the academic quality of the district's curriculum. The outcome-based
learning programs must be approved by the commissioner of education two 11 EFFECTIVE DATE. This section is effective beginning for the 2014 distribution. 2002 2014 33.9 34.8 EFFECTIVE DATE. This section is effective beginning for the 2014 distribution.  Temporary 2007 through 2011

only 2013 and thereafter professional hockey organizations or in an amount at

least equal to the amount of the distribution under this subdivision either any If the amount of the distribution authorized under this subdivision exceeds the
total amount of donations for the support of the Hockey Hall of Fame during the 12-month period ending
30 days before the date of the distribution, the amount by which 0.20 cent per ton exceeds the donations
shall be distributed to the Iron Range Resources and Rehabilitation Board. 2003

2015 EFFECTIVE DATE. This section is effective beginning for the 2014 distribution.  IRON RANGE FISCAL DISPARITIES STUDY. The commissioner of revenue, in coordination
with the commissioner of the Iron Range Resources and Rehabilitation Board, shall conduct a study of
the tax relief area revenue distribution program contained in Minnesota Statutes, chapter 276A,
commonly known as the Iron Range fiscal disparities program. By February 1, 2014, the commissioner of
revenue shall submit a report to the chairs and ranking minority members of the house of representatives
and senate tax committees consisting of the findings of the study and identification of issues for policy
makers to consider. The study must analyze: (1) trends in population, property tax base, property tax rates, and contribution and distribution
capacity across the region; (2) the volatility of the program's distribution and causes of the volatility; (3) the impact of state tax policy changes on the fiscal disparities program; and (4) the interaction between the program and the distribution of property tax aids and credits, taconite
aid, and Iron Range Resources and Rehabilitation Board funding across the region. EFFECTIVE DATE. This section is effective June 1, 2013.  2013 DISTRIBUTION ONLY. For the 2013 distribution, a special fund is established to
receive 38.7 cents per ton of any excess of the balance remaining after distribution of amounts required
under Minnesota Statutes, section 298.28, subdivision 6 . The following amounts are allocated to St.
Louis County acting as the fiscal agent for the recipients for the following specific purposes: (1) 5.1 cents per ton to the city of Hibbing for improvements to the city's water supply system; (2) 4.3 cents per ton to the city of Mountain Iron for the cost of moving utilities required as a result of
actions undertaken by United States Steel Corporation; (3) 2.5 cents per ton to the city of Biwabik for improvements to the city's water supply system, payable
upon agreement with ArcelorMittal to satisfy water permit conditions; (4) 2 cents per ton to the city of Tower for the Tower Marina; (5) 2.4 cents per ton to the city of Grand Rapids for an eco-friendly heat transfer system to replace
aging effluent lines and for parking lot repaving; (6) 2.4 cents per ton to the city of Two Harbors for wastewater treatment plant improvements; (7) 0.9 cents per ton to the city of Ely for the sanitary sewer replacement project; (8) 0.6 cents per ton to the town of Crystal Bay for debt service of the Claire Nelson Intermodal
Transportation Center; (9) 0.5 cents per ton to the Greenway Joint Recreation Board for the Coleraine hockey arena
renovations; (10) 1.2 cents per ton for the West Range Regional Fire Hall and Training Center to merge the
existing fire services of Coleraine, Bovey, Taconite Marble, Calumet, and Greenway Township; (11) 2.5 cents per ton to the city of Hibbing for the Memorial Building; (12) 0.7 cents per ton to the city of Chisholm for public works infrastructure; (13) 1.8 cents per ton to the Crane Lake Water and Sanitary District for sanitary sewer extension; (14) 2.5 cents per ton for the city of Buhl for the roof on the Mesabi Academy; (15) 1.2 cents per ton to the city of Gilbert for the New Jersey/Ohio Avenue project; (16) 1.5 cents per ton to the city of Cook for street improvements, business park infrastructure, and a
maintenance garage; (17) 0.5 cents per ton to the city of Cook for a water line project; (18) 1.8 cents per ton to the city of Eveleth to be used for Jones Street reconstruction and the city
auditorium; (19) 0.5 cents for the city of Keewatin for an electrical substation and water line replacements; (20) 3.3 cents for the city of Virginia for Fourth Street North infrastructure and Franklin Park
improvement; and (21) 0.5 cents per ton to the city of Grand Rapids for an economic development project. EFFECTIVE DATE. This section is effective for the 2013 distribution, and all payments must be made
separately and within ten days of the date of the August 2013 payment. This section supersedes article 5,
section 46, of 2013 H.F. No. 729, if enacted in the 2013 regular session of the legislature.  IRON RANGE RESOURCES AND REHABILITATION COMMISSIONER; BONDS
AUTHORIZED. Subdivision 1. Issuance; purpose. Notwithstanding any provision of Minnesota Statutes, chapter 298,
to the contrary, the commissioner of Iron Range resources and rehabilitation shall issue revenue bonds in
a principal amount of $38,000,000 plus an amount sufficient to pay costs of issuance in one or more
series, and thereafter may issue bonds to refund those bonds. The proceeds of the bonds must be used
to pay costs of issuance and to make grants to school districts located in the taconite tax relief area
defined inMinnesota Statutes, section 273.134 , or the taconite assistance area defined inMinnesota
Statutes, section 273.1341 , to be used by the school districts to pay for building projects, such as energy
efficiency, technology, infrastructure, health, safety, and maintenance improvements. Proceeds granted to
School District No. 2142 must be used to reduce debt service on the building bond passed on December
8, 2009. Subd. 2. Appropriation. (a) There is annually appropriated from the distribution of taconite production tax revenues under
Minnesota Statues, section 298.28 , prior to the calculation of the amount of the remainder under
Minnesota Statutes, section 298.28, subdivision 11 , an amount sufficient to pay when due the principal
and interest on the bonds issued pursuant to subdivision 1. The appropriation under this section must not
exceed an amount equal to ten cents per taxable ton. (b) If in any year the amount available under paragraph (a) is insufficient to pay principal and interest
due on the bonds in that year, an additional amount is appropriated from the Douglas J. Johnson fund to
make up the deficiency. (c) The appropriation under this subdivision terminates upon payment or maturity of the last of the
bonds issued under this section. Subd. 3. Credit enhancement. The bonds issued under this section are "debt obligations" and the
commissioner of Iron Range resources and rehabilitation is a "district" for purposes of Minnesota
Statutes, section 126C.55 , provided that advances made underMinnesota Statutes, section 126C.55,
subdivision 2 , are not subject toMinnesota Statutes, section 126C.55 , subdivisions 4 to 7. EFFECTIVE DATE. This section is effective the day following final enactment and applies beginning
with the 2014 distribution under Minnesota Statutes, section 298.28. with taxing powers and .

; and (4) any security which is an obligation of a school district with an original maturity not exceeding 13
months and (i) rated in the highest category by a national bond rating service or (ii) enrolled in the credit
enhancement program pursuant to section 126C.55 . Agreements or contracts for guaranteed investment contracts with a term of 18 months or
less may be entered into regardless of the credit quality of the issuer's or guarantor's long-term unsecured
debt, provided that the credit quality of the issuer's short-term unsecured debt is rated in the highest
category by a nationally recognized rating agency. benefited , provided that special assessments may be made

payable in up to 20 equal annual installments EFFECTIVE DATE. This section is effective the day following final enactment. , together with application development services and

training related to the use of the computer hardware or software public works

facilities, fairground buildings, and records and data storage facilities, For purposes of this section, "capital
improvement" includes expenditures for purposes described in this paragraph that have been incurred by
a county before approval of a capital improvement plan, if such expenditures are included in a capital
improvement plan approved on or before the date of the public hearing under subdivision 2 regarding
issuance of bonds for such expenditures. county The commissioner of revenue
shall prepare a suggested form of the question to be presented at the election. If the county elects
not to submit the question to the voters, the county shall not propose the issuance of bonds under this
section for the same purpose and in the same amount for a period of 365 days from the date of receipt of
the petition. If the question of issuing the bonds is submitted and not approved by the voters, the
provisions of section 475.58, subdivision 1 a, shall apply. Subd. 10. Housing improvement areas. (a) In addition to its other powers, the Dakota County Community Development Agency shall have all
powers of a city under sections 428A.11 to 428A.21 in connection with housing improvement areas in
Dakota County. (b) For purposes of the Dakota County Community Development Agency's exercise of the powers
granted in this subdivision, references in sections428A.11 to 428A.21 to: (1) a "mayor" shall be references to the chair of the board of commissioners of the Dakota County
Community Development Agency; (2) a "council" shall be references to the board of commissioners of the Dakota County Community
Development Agency; and (3) a "city clerk" shall be references to an official of the Dakota County Community Development
Agency designated by the executive director of the Dakota County Community Development Agency. (c) Notwithstanding sections 428A.11, subdivision 3 , and 428A.13 , subdivision 1, the governing body
of the Dakota County Community Development Agency may adopt a resolution, rather than an ordinance,
establishing one or more housing improvement areas, and "enabling ordinance" for purposes of sections
428A.11 to 428A.21 means a resolution under this clause. (d) The community development agency (1) shall send a copy of each petition for the establishment of
a housing improvement area to the city in which the proposed housing improvement area is located, and
(2) may not hold the public hearing required in section 428A.13, subdivision 2 , fewer than 30 days after
the date on which the related application was sent pursuant to clause (1).

The community development agency may not establish a housing improvement area if the applicable city
council opposes the establishment by resolution adopted within 30 days after the petition required to be
sent pursuant to clause (1). , together with application development services and

training related to the use of the computer hardware and software , together with application development services and

training related to the use of the computer hardware or software Subd. 1s. Obligations. After July 1, 2013, in addition to other authority in this section, the council may
issue certificates of indebtedness, bonds, or other obligations under this section in an amount not
exceeding $35,800,000 for capital expenditures as prescribed in the council's transit capital improvement
program and for related costs, including the costs of issuance and sale of the obligations. EFFECTIVE DATE. This section is effective the day following final enactment and applies in the
counties of Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington. This section is not
effective if the legislature authorizes and enacts issuance authority of at least $35,800,000 in 2013 H.F.
No. 1444. If the legislature authorizes and enacts issuance authority of less than $35,800,000 in 2013
H.F. No. 1444, this section prevails, regardless of order of enactment. : (a) Treasury bonds, certificates of indebtedness, bonds or notes of the United States of America, or
bonds, notes or certificates of indebtedness of the state of Minnesota, all of which must mature not later
than three years from the date of purchase. (b) Bonds, notes, debentures or other obligations issued by any agency or instrumentality of the
United States or any securities guaranteed by the United States government, or for which the credit of the
United States is pledged for the payment of the principal and interest thereof, all of which must mature not
later than three years from date of purchase. (c) Commercial paper of prime quality, or rated among the top third of the quality categories, not
applicable to defaulted paper, as defined by a nationally recognized organization which rates such
securities as eligible for investment in the state employees retirement fund except that any nonbanking
issuing corporation, or parent company in the case of paper issued by operating utility or finance
subsidiaries, must have total assets exceeding $500,000,000.

Such commercial paper may constitute no more than 30 percent of the book value of the fund at the time
of purchase, and the commercial paper of any one corporation shall not constitute more than four percent
of the book value of the fund at the time of such investment. (d) Any securities eligible under the preceding provisions, purchased with simultaneous repurchase
agreement under which the securities will be sold to the particular dealer on a specified date at a
predetermined price. In such instances, all maturities of United States government securities, or securities
issued or guaranteed by the United States government or an agency thereof, may be purchased so long
as any such securities which mature later than three years from the date of purchase have a current
market value exceeding the purchase price by at least five percent on the date of purchase, and so long
as such repurchase agreement involving securities extending beyond three years in maturity be limited to
a period not exceeding 45 days. (e) Certificates of deposit issued by any official depository of the commission. The commission may
purchase certificates of deposit from a depository bank in an amount exceeding that insured by federal
depository insurance to the extent that those certificates are secured by collateral maintained by the bank
in a manner as prescribed for investments of the State Board of Investment. (f)  ; carryforward; deduction                Any amount of bonding authority that an entitlement issuer carries forward under federal tax
law that is not permanently issued or for which the governing body of the entitlement issuer has not
enacted a resolution electing to use the authority for mortgage credit certificates and has not provided a
notice of issue to the commissioner before 4:30 p.m. on the last business day in December of the
succeeding calendar year shall be deducted from the entitlement allocation for that entitlement issuer in
the next succeeding calendar year. Any amount deducted from an entitlement issuer's allocation under
this subdivision shall be reallocated to other entitlement issuers, the housing pool, the small issue pool,
and the public facilities pool on a proportional basis consistent with section 474A.03 . EFFECTIVE DATE. This section is effective the day following final enactment and applies to any
bonding authority allocated in 2012 and subsequent years. into one successive calendar year EFFECTIVE DATE. This section is effective
the day following final enactment and applies to any bonding authority allocated in 2012 and subsequent
years. into the next succeeding calendaryear and is

available until the last business day in December of that succeeding calendar year EFFECTIVE DATE. This section is effective the day following final enactment and applies to any
bonding authority allocated in 2012 and subsequent years. For purposes of
this section, "capital improvement" includes expenditures for purposes described in this paragraph that
have been incurred by a municipality before approval of a capital improvement plan, if such expenditures
are included in a capital improvement plan approved on or before the date of the public hearing under
subdivision 2 regarding issuance of bonds for such expenditures. municipal The commissioner of
revenue shall prepare a suggested form of the question to be presented at the election. If the
municipality elects not to submit the question to the voters, the municipality shall not propose the
issuance of bonds under this section for the same purpose and in the same amount for a period of 365
days from the date of receipt of the petition. If the question of issuing the bonds is submitted and not
approved by the voters, the provisions of section 475.58, subdivision 1 a, shall apply.  and bituminous overlays                or

bituminous overlays or overlaid or overlay or overlay or overlay If the municipality elects not to submit the
question to the voters, the municipality shall not propose the issuance of bonds under this section for the
same purpose and in the same amount for a period of 365 days from the date of receipt of the petition. If
the question of issuing the bonds is submitted and not approved by the voters, the provisions of section
475.58, subdivision 1 a, shall apply. and

bituminous overlays For purposes of this subdivision, "street reconstruction" includes
expenditures for street reconstruction that have been incurred by a municipality before approval of a
street reconstruction plan, if such expenditures are included in a street reconstruction plan approved on or
before the date of the public hearing under paragraph (a), clause (1), regarding issuance of bonds for
such expenditures. and bituminous overlays 2003 to to 2024 EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city
of St. Paul with Minnesota Statutes, section 645.021 , subdivisions 2 and 3.  CARRYFORWARD OF BONDING AUTHORITY FOR 2011; NO DEDUCTION FROM
ENTITLEMENT ALLOCATION. Notwithstanding Minnesota Statutes, section 474A.04, subdivision 1 a,
bonding authority that was allocated to an entitlement issuer in 2011 and that was carried forward under
federal tax law, but for which the entitlement issuer did not provide a notice of issue to the commissioner
of management and budget before 4:30 p.m. on the last business day of December 2012 must not be
deducted from the entitlement allocation for that entitlement issuer in 2013. EFFECTIVE DATE. This section is effective the day following final enactment and applies retroactively
to rescind any reallocation by the commissioner of management and budget under Minnesota Statues,
section 474A.04, subdivision 1 a, of any amounts so deducted.  LOCAL MATCH; INDEPENDENT SCHOOL DISTRICT NO. 435; WAUBUN-OGEMA-WHITE
EARTH.

(a) Independent School District No. 435, Waubun-Ogema-White Earth, may expand classroom space
at its Ogema Elementary site using a grant of $551,532 that was awarded to the district by the
Department of Human Services on August 12, 2012, pursuant to a grant agreement as provided by
Minnesota Statutes, section 16A.695, subdivision 9 . Notwithstanding Minnesota Statutes, section
16A.695, subdivision 6 , to satisfy the match requirements of the grant agreement, the district may use a
lease-purchase agreement. Notwithstanding Minnesota Statutes, section 465.71 , the lease-purchase
agreement must provide that the title to the lease-purchased property must be held by the district. (b) Notwithstanding Minnesota Statutes, section 126C.13, subdivision 4 , if the school district enters a
lease-purchase agreement to satisfy the local match under paragraph (a), but fails to make a
lease-purchase payment, the commissioner of education shall reduce its general education aid under
Minnesota Statutes, section 126C.13, subdivision 4 , by the amount of the lease-purchase payment. EFFECTIVE DATE. This section is effective the day following final enactment.  LEGISLATIVE OFFICE FACILITIES. (a) The commissioner of administration may enter into a long-term lease-purchase agreement for a
term of up to 25 years, to predesign, design, construct, and equip offices, hearing rooms, and parking
facilities for legislative and other functions. The facility must be located on the block bounded by
Sherburne Avenue on the north, Park Street on the west, University Avenue on the south, and North
Capitol Boulevard on the east. The legislative office facility must provide office accommodations for all
senators and senate staff who do not have offices in the Capitol building and on-site parking facilities for
all members and staff and disabled visitors to senate offices. A parking structure may also be built on the
state-owned land located in the block bounded by Sherburne Avenue on the north, Park Street on the
east, University Avenue on the south, and Rice Street on the west. The commissioner of management
and budget may issue lease revenue bonds or certificates of participation associated with the
lease-purchase agreement. The lease-purchase agreements must not be terminated, except for
nonappropriation of money. The lease-purchase agreements must provide the state with a unilateral right
to purchase the leased premises at specified times for specified amounts. The lease-purchase
agreements are exempt from Minnesota Statutes, section 16B.24 , subdivisions 6 and 6a. (b) The facilities under the lease-purchase agreement are exempt from the design competition
requirement under Minnesota Statutes, section 15B.10. Notwithstanding anything to the contrary under
Minnesota Statutes, sections 16C.32 and 16C.33, if the commissioner of administration elects to use a
design-build delivery method to design and construct one or more facilities under this appropriation, the
Capitol Area Architectural and Planning Board, in cooperation with the commissioner, shall create a
selection committee to act as the board under Minnesota Statutes, sections 16C.32 and 16C.33, for the
design and construction of the facilities. Notwithstanding Minnesota Statutes, section 16B.33 , if the
commissioner elects to contract with a primary designer to design one or more facilities under this
appropriation, the Capitol Area Architectural and Planning Board, in cooperation with the commissioner,
shall create a selection committee to conduct the selection process in accordance with standards under
Minnesota Statutes, chapters 15B, 16B, and 16C. A selection committee created under this section must
contain no more than seven members, including at least three representatives designated by the senate
Committee on Rules and Administration and three representatives designated by the speaker of the
house. (c) Notwithstanding any provision to the contrary in Minnesota Statutes, sections 16C.32 and 16C.33,
if the commissioner of administration elects to use a design-build delivery method to design, construct,
and equip one or more facilities and associated infrastructure to provide audio and video broadcast
services for the Capitol building, State Office Building, and a new legislative office building, if applicable,
the commissioner shall create a selection committee to act as the board under Minnesota Statutes,
sections 16C.32 and 16C.33, to design, build, and equip the facilities. The selected design-builder may
self-perform trade work or name an audio and video subcontractor as a member of the design-builder's
team. If an audio and video subcontractor is named as a member of the design-builder's team, the
design-builder is not required to competitively bid the trade work. Notwithstanding Minnesota Statutes,
section 16C.33, subdivision 5 , paragraph (b), after obtaining and evaluating qualifications from each
design-builder, in accordance with the weighted criteria and subcriteria and procedures provided in the
request for qualifications, the selection committee shall select a short list of up to five proposals. If the
commissioner does not receive any proposals, the commissioner may either: (1) solicit new proposals; (2) revise the request for qualifications and thereafter solicit new proposals using the revised request
for qualifications; or (3) request selection of a primary designer under Minnesota Statutes, section 16B.33 , 16C.08, or
16C.095, and proceed with competitive bidding pursuant to Minnesota Statutes, sections 16C.25 to
16C.29. (d) The commissioner of administration may enter into a ground lease for state-owned property in the
capitol area in conjunction with the execution of a lease-purchase agreement entered into under this
section for any improvements constructed on that site. Notwithstanding the requirements of Minnesota
Statutes, section 16A.695, subdivision 2 , paragraph (b), the ground lease must be for a term equal to the
term of the lease-purchase agreement, and must include an option to purchase the land at its then fair
market value, if the improvements are not purchased by the state at the end of the term of the
lease-purchase agreement, or at any earlier time that the lease-purchase agreement is terminated. (e) The commissioner of administration must not prepare final plans and specifications for any
construction authorized under this section until the program plan and cost estimates for all elements
necessary to complete the project have been approved by the senate Committee on Rules and
Administration. (f) $3,000,000 is appropriated in fiscal year 2014 from the general fund to the commissioner of
administration for predesign and design of facilities authorized under paragraph (a).
This appropriation is available for expenditure the day following final enactment and until June 30, 2015.
(g) The commissioner of administration may reserve a portion of money from appropriations for office
space costs of the legislature to fund future repairs for facilities constructed under the authority provided
in this section. Money reserved under this paragraph must be credited to a segregated account for each
building in the special revenue fund and is appropriated to the commissioner to make the repairs. When
the state acquires title to a building with an account established under this paragraph, the account for that
building must be abolished and the balance remaining in the account must be transferred to the
appropriate asset preservation and replacement account. EFFECTIVE DATE. This section is effective the day following final enactment.  APPROPRIATION; RELOCATION EXPENSES. $1,860,000 is appropriated from the general
fund to the commissioner of administration for rent loss and relocation expenses related to the Capitol
renovation project for fiscal year 2014. Notwithstanding Minnesota Statutes, section 16A.642 , this
appropriation is available until June 30, 2015. The base for this appropriation is $1,380,000 in fiscal year
2016, $960,000 in fiscal year 2017, and $0 after that. , plus $20,000,000, paragraph (a), EFFECTIVE DATE. This section is effective the day following final enactment.  [116V.03 ] APPROPRIATION. $1,000,000 in fiscal year 2014 and each year thereafter is
appropriated from the general fund to the commissioner of revenue for transfer to the agricultural project
utilization account in the special revenue fund for the Agricultural Utilization Research Institute
established under section 116V.01 . , except as provided in subdivision 3a, EFFECTIVE DATE. This section is effective January 1, 2014. Subd. 3a. Fee for prepaid wireless telecommunications service. The fee established in subdivision 2
does not apply to prepaid wireless telecommunications services as defined in section 403.02, subdivision
17 b, which are instead subject to the prepaid wireless telecommunications access Minnesota fee
established in section 403.161, subdivision 1 , paragraph (b).

Collection, remittance, and deposit of prepaid wireless telecommunications access Minnesota fees are
governed by sections 403.161 and 403.162 . EFFECTIVE DATE. This section is effective January 1, 2014. and and

403, EFFECTIVE DATE. This section is effective January 1, 2014. section sections and 403.16 to 403.162 EFFECTIVE DATE. This section is effective January 1, 2014. authorize the participation in audits performed by the Multistate Tax

Commission. For the purposes of chapter 270B, the Multistate Tax Commission will be considered to be a
state for the purposes of auditing corporate sales, excise, and income tax returns. (10) (10) (11) EFFECTIVE DATE. This section is effective the day following final enactment. mail in the mail , within the time prescribed by

subdivision 2, mail in mail EFFECTIVE DATE. This section is effective for filings delivered by the United States Postal Service
with a postmark date after August 1, 2013. , plus up to $20,000,000 each fiscal year from the

taxes imposed under section 290.06, subdivision 1 EFFECTIVE DATE. This section is effective the day following final enactment. Subd. 17b. Prepaid wireless telecommunications service. " Prepaid wireless telecommunications
service" means a wireless telecommunications service that allows the caller to dial 911 to access the 911
system, which service must be paid for in advance and is: (1) sold in predetermined units or dollars of which the number declines with use in a known amount; or
(2) provides unlimited use for a predetermined time period. The inclusion of nontelecommunications
services, including the download of digital products delivered electronically, content, and ancillary
services, with a prepaid wireless telecommunications service does not preclude that service from being
considered a prepaid wireless telecommunications service under this chapter. EFFECTIVE DATE. This section is effective January 1, 2014. Subd. 20a. Wireless telecommunications service. Wireless telecommunications service means a
commercial mobile radio service, as that term is defined in United States Code, title 47, section 332,
subsection (d), including all broadband personal communication services, wireless radio telephone
services, and geographic area specialized mobile radio licensees, that offer real-time, two-way voice
service interconnected with the public switched telephone network. EFFECTIVE DATE. This section is effective January 1, 2014. commercial mobile radio services, as that term is defined in United States Code, title 47, section 332,
subsection (d), including all broadband personal communications services, wireless radio telephone services,
geographic area specialized and enhanced specialized mobile radio services, and incumbent wide area
specialized mobile radio licensees, that offers real-time, two-way voice service interconnected with the
public switched telephone network and that is doing business in the state of Minnesota wireless
telecommunications service EFFECTIVE DATE. This section is effective January 1, 2014. and , and the most recent

forecast of revenues and expenditures for the 911 emergency telecommunications service account,
including a separate projection of E911 fees from prepaid wireless customers and projections of year-end
fund balances EFFECTIVE DATE. This section is effective the day following final enactment. , except that the fee imposed

under this subdivision does not apply to prepaid wireless telecommunications service, which is instead
subject to the fee imposed under section 403.161, subdivision 1 , paragraph (a) EFFECTIVE DATE. This section is effective January 1, 2014. Subd. 3d. Eligible telecommunications carrier; requirement. No wireless communications provider may
provide telecommunications services under a designation of eligible telecommunications carrier, as
provided underMinnesota Rule 7811.1400 , until and unless the commissioner of public safety certifies to
the chair of the public utilities commission that the wireless telecommunications provider is not in arrears
in amounts owed to the 911 emergency telecommunications service account in the special revenue fund.
EFFECTIVE DATE. This section is effective the day following final enactment. Subd. 6. Report. (a) Beginning September 1, 2013, and continuing semiannually thereafter, each wireless
telecommunications service provider shall report to the commissioner, based on the mobile telephone
number, both the total number of prepaid wireless telecommunications subscribers sourced to Minnesota
and the total number of wireless telecommunications subscribers sourced to Minnesota. The report must
be filed on the same schedule as Federal Communications Commission Form 477. (b) The commissioner shall make a standard form available to all wireless telecommunications service
providers for submitting information required to compile the report required under this subdivision. (c) The information provided to the commissioner under this subdivision is considered trade secret
information under section 13.37 and may only be used for purposes of administering this chapter. EFFECTIVE DATE. This section is effective January 1, 2014.  [403.16 ] DEFINITIONS. Subdivision 1. Scope. For the purposes of sections 403.16 to 403.164 , the terms defined in this
section have the meanings given them. Subd. 2. Consumer. " Consumer" means a person who purchases prepaid wireless
telecommunications service in a retail transaction. Subd. 3. Department. " Department" means the Department of Revenue. Subd. 4. Prepaid wireless E911 fee. " Prepaid wireless E911 fee" means the fee that is required to be
collected by a seller from a consumer as established in section 403.161, subdivision 1 , paragraph (a).
Subd. 5. Prepaid wireless telecommunications access Minnesota fee. " Prepaid wireless
telecommunications access Minnesota fee" means the fee that is required to be collected by a seller from
a consumer as established in section 403.161, subdivision 1 , paragraph (b). Subd. 6. Provider. " Provider" means a person that provides prepaid wireless telecommunications
service under a license issued by the Federal Communications Commission. Subd. 7. Retail transaction. " Retail transaction" means the purchase of prepaid wireless
telecommunications service from a seller for any purpose other than resale. Subd. 8. Seller. " Seller" means a person who sells prepaid wireless telecommunications service to
another person. EFFECTIVE DATE. This section is effective January 1, 2014.  [403.161 ] PREPAID WIRELESS FEES IMPOSED; COLLECTION; REMITTANCE. Subdivision 1. Fees imposed. (a) A prepaid wireless E911 fee of 80 cents per retail transaction is imposed on prepaid wireless
telecommunications service until the fee is adjusted as an amount per retail transaction under subdivision
7. (b) A prepaid wireless telecommunications access Minnesota fee, in the amount of the monthly charge
provided for in section 237.52, subdivision 2 , is imposed on each retail transaction for prepaid wireless
telecommunications service until the fee is adjusted as an amount per retail transaction under subdivision
7. Subd. 2. Exemption. The fees established under subdivision 1 are not imposed on a minimal amount
of prepaid wireless telecommunications service that is sold with a prepaid wireless device and is charged
a single nonitemized price, and a seller may not apply the fees to such a transaction. For purposes of this
subdivision, a minimal amount of service means an amount of service denominated as either ten minutes
or less or $5 or less. Subd. 3. Fee collected. The prepaid wireless E911 and telecommunications access Minnesota fees
must be collected by the seller from the consumer for each retail transaction occurring in this state. The
amount of each fee must be combined into one amount, which must be separately stated on an invoice,
receipt, or other similar document that is provided to the consumer by the seller. Subd. 4. Sales and use tax treatment. For purposes of this section, a retail transaction conducted in
person by a consumer at a business location of the seller must be treated as occurring in this state if that
business location is in this state, and any other retail transaction must be treated as occurring in this state
if the retail transaction is treated as occurring in this state for purposes of the sales and use tax as
specified in section 297A.669, subdivision 3 , paragraph (c). Subd. 5. Remittance. The prepaid wireless E911 and telecommunications access Minnesota fees are
the liability of the consumer and not of the seller or of any provider, except that the seller is liable to remit
all fees as provided in section 403.162 . Subd. 6. Exclusion for calculating other charges. The combined amount of the prepaid wireless E911
and telecommunications access Minnesota fees collected by a seller from a consumer must not be
included in the base for measuring any tax, fee, surcharge, or other charge that is imposed by this state,
any political subdivision of this state, or any intergovernmental agency. Subd. 7. Fee changes. (a) The prepaid wireless E911 and telecommunications access Minnesota fee must be proportionately
increased or reduced upon any change to the fee imposed under section 403.11, subdivision 1 ,
paragraph (c), after July 1, 2013, or the fee imposed under section 237.52, subdivision 2 , as applicable.
(b) The department shall post notice of any fee changes on its Web site at least 30 days in advance of
the effective date of the fee changes. It is the responsibility of sellers to monitor the department's Web
site for notice of fee changes. (c) Fee changes are effective 60 days after the first day of the first calendar month after the
commissioner of public safety or the Public Utilities Commission, as applicable, changes the fee. EFFECTIVE DATE. This section is effective January 1, 2014.  [403.162 ] ADMINISTRATION OF PREPAID WIRELESS E911 FEES. Subdivision 1. Remittance. Prepaid wireless E911 and telecommunications access Minnesota fees
collected by sellers must be remitted to the commissioner of revenue at the times and in the manner
provided by chapter 297A with respect to the general sales and use tax. The commissioner of revenue
shall establish registration and payment procedures that substantially coincide with the registration and
payment procedures that apply in chapter 297A. Subd. 2. Seller's fee retention. A seller may deduct and retain three percent of prepaid wireless E911
and telecommunications access Minnesota fees collected by the seller from consumers. Subd. 3. Department of Revenue provisions. The audit, assessment, appeal, collection, refund,
penalty, interest, enforcement, and administrative provisions of chapters 270C and 289A that are
applicable to the taxes imposed by chapter 297A apply to any fee imposed under section 403.161 . Subd. 4. Procedures for resale transactions. The commissioner of revenue shall establish procedures
by which a seller of prepaid wireless telecommunications service may document that a sale is not a retail
transaction. These procedures must substantially coincide with the procedures for documenting sale for
resale transactions as provided in chapter 297A. Subd. 5. Fees deposited. (a) The commissioner of revenue shall, based on the relative proportion of the prepaid wireless E911
fee and the prepaid wireless telecommunications access Minnesota fee imposed per retail transaction,
divide the fees collected in corresponding proportions. Within 30 days of receipt of the collected fees, the
commissioner shall: (1) deposit the proportion of the collected fees attributable to the prepaid wireless E911 fee in the 911
emergency telecommunications service account in the special revenue fund; and (2) deposit the proportion of collected fees attributable to the prepaid wireless telecommunications
access Minnesota fee in the telecommunications access fund established in section 237.52, subdivision 1
. (b) The department may deduct and retain an amount, not to exceed two percent of collected fees, to
reimburse its direct costs of administering the collection and remittance of prepaid wireless E911 fees and
prepaid wireless telecommunications access Minnesota fees. EFFECTIVE DATE. This section is effective January 1, 2014.  [403.163 ] LIABILITY PROTECTION FOR SELLERS AND PROVIDERS. (a) A provider or seller of prepaid wireless telecommunications service is not liable for damages to any
person resulting from or incurred in connection with providing any lawful assistance in good faith to any
investigative or law enforcement officer of the United States, this or any other state, or any political
subdivision of this or any other state. (b) In addition to the protection from liability provided by paragraph (a),section 403.08, subdivision 11 ,
applies to sellers and providers. EFFECTIVE DATE. This section is effective the day following final enactment.  [403.164 ] EXCLUSIVITY OF PREPAID WIRELESS E911 FEE. The prepaid wireless E911
fee imposed by section 403.161 is the only E911 funding obligation imposed with respect to prepaid
wireless telecommunications service in this state, and no tax, fee, surcharge, or other charge may be
imposed by this state, any political subdivision of this state, or any intergovernmental agency, for E911
funding purposes, upon any provider, seller, or consumer with respect to the sale, purchase, use, or
provision of prepaid wireless telecommunications service. EFFECTIVE DATE. This section is effective January 1, 2014.  PURPOSE STATEMENTS; TAX EXPENDITURES. Subdivision 1. Authority. This section is intended to fulfill the requirement under Minnesota Statutes,
section 3.192 , that a bill creating, renewing, or continuing a tax expenditure provide a purpose for the tax
expenditure and a standard or goal against which its effectiveness may be measured. Subd. 2. Federal conformity. The provisions of article 6 conforming Minnesota individual income tax to
changes in federal law related to bonus depreciation and section 179 expensing are intended to simplify
compliance with and administration of the individual income tax. Subd. 3. Sales tax exemption for certain aircraft parts and labor. The provisions of article 5 exempting
parts and labor for certain aircraft, is intended to encourage the growth of the aviation services industry in
the state. Subd. 4. Railroad track maintenance subtraction. The provisions of article 6 allowing an individual
income and corporate franchise tax subtraction for the amount allowed under the federal credit for railroad
maintenance expenses, are intended to increase the combined federal and state tax incentives available
to Class II and Class III railroads for maintaining and upgrading track in Minnesota. The standard against
which effectiveness is to be measured is the additional miles of track maintained or upgraded following
allowance of the state tax subtraction in addition to the existing federal tax credit. Subd. 5. Historic structure rehabilitation credit. The provisions of article 6 extending the sunset date of
the historic structure rehabilitation credit and modifying the effective date of the credit, are intended to
encourage the preservation of historic structures in Minnesota and to create and retain jobs related to
rehabilitation of historic structures in the state. The standard against which the effectiveness of the
extension of the credit and modification of the effective date is to be measured is the number of jobs
created through the rehabilitation of historic structures and the number of historic structures rehabilitated
and placed in service. Subd. 6. Greater Minnesota internship credit. The provisions of article 6 providing a tax credit to
employers of qualified interns, are intended to encourage Minnesota businesses to employ and provide
valuable education and work experience to Minnesota students and foster long-term relationships
between students and greater Minnesota employers. The standard against which the effectiveness of the
extension of the credit is the number of students who participated in the program who were subsequently
employed full time by the employer. Subd. 7. Sales tax exemption for greater Minnesota business expansion. The provisions of article 8
are intended to induce existing businesses in greater Minnesota to increase investment and expand
employment in greater Minnesota. Subd. 8. Expansion of sales tax exemption on durable medical products and prosthetics. The
provisions of article 8 expanding the definition of items included in repair and replacement parts of
durable medical equipment and prosthetics and exempting Medicare and medicaid purchases is intended
to simplify sales tax administration in this area and provide relief for sellers who cannot collect the tax
under these programs. Subd. 9. Sales tax exemption for established religious orders. The provisions of article 8 exempting
certain sales between a religious order and an affiliated institute of higher education, is intended to retain
an existing sales tax exemption that exists between St. John's Abbey and St. John's University after a
governing restructure between the two entities. Subd. 10. Sales tax exemption for certain dental providers. The provisions of article 8 exempting
certain purchases by qualifying critical access dental providers, is intended to assist critical access dental
providers in defraying the overall cost of the services they provide to underserved communities. Subd. 11. Sales tax exemption for nursing homes and boarding care homes. The provisions of article
8 exempting certain nursing homes and boarding care homes is intended to clarify that an existing
exemption for these facilities is not affected by a recent property tax case related to defining nonprofit
organizations engaged in charitable activities. Subd. 12. Construction sales tax exemptions. The provisions of article 8 exempting from sales tax
construction materials for various entities, are intended to increase jobs and reduce tax pyramiding by
reducing the tax on inputs used to provide taxable goods and services. Subd. 13. Sales tax exemption on certain public infrastructure. The provisions of article 10 exempting
construction materials used in public infrastructure projects related to the destination medical center plan
is intended to reduce city costs for those projects. EFFECTIVE DATE. This section is effective the day following final enactment.  APPROPRIATIONS. (a) $950,000 is appropriated from the general fund to the commissioner of revenue in fiscal year 2014
for administering this act. This appropriation does not cancel but is available until June 30, 2015.
$300,000 of this amount is added to the annual base budget. (b) $25,000 in fiscal year 2014 and $25,000 in fiscal year 2015 are appropriated from the general fund
to the commissioner of employment and economic development for administering the provisions of article
10. EFFECTIVE DATE. This section is effective the day following final enactment.  REPEALER.           REPEAL Minnesota Statutes 2012, sections 290.171
;REPEAL 290.173 ; andREPEAL 290.174 , are repealed.Any Each now or hereafter at any time a an estimated, exclusive of money and

credits, is hereby authorized to aid in defraying maypay any such the , by appropriating and paying over such sum of money for each of the political subdivisions, the
its of the town, statutory city, or school
district may determine determines , . sums so appropriated to amounts paid to the county must for the purpose of aiding in the improvement of to improvesuch the as of the county shall determine determines taxable estimated Estimated estimated

estimated estimated estimated estimated estimated estimated estimated  estimated estimated estimated  estimated estimated estimated taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated assessor's

taxable estimated county, city, town, and aggregate taxing the aggregate of tax capacity shall be is The adjusted net tax capacity must be reduced by the
captured tax capacity of tax increment districts under section 469.177, subdivision 2 , fiscal disparities
contribution tax capacities under sections 276A.06 and 473F.08 , and the tax capacity of transmission
lines required to be subtracted from the local tax base under section 273.425 ; and increased by fiscal
disparities distribution tax capacities under sections 276A.06 and 473F.08 . for school districts for school districts school school

school EFFECTIVE DATE. This section is effective the day following final enactment. taxable estimated taxable

estimated taxable estimated taxable estimated estimated a an estimated exclusive of money and

credits, or unorganized township town or

unorganized territory estimated exclusive of money and credits Subd. 14. Estimated market value. " Estimated market value" means the assessor's determination of
market value, including the effects of any orders made under section 270.12 or chapter 274, for the
parcel. The provisions of section 273.032 apply for certain uses in determining the total estimated market
value for the taxing jurisdiction. Subd. 15. Taxable market value. " Taxable market value" means estimated market value for the parcel
as reduced by market value exclusions, deferments of value, or other adjustments required by law, that
reduce market value before the application of class rates. (a) Unless otherwise provided, or any limit on net

debt, the issuance of bonds, certificates of indebtedness, or capital notes based on market value taxable estimated total taxable
estimated taxable of the following or similar : (1) the market value exclusions under: (i) section 273.11 , subdivisions 14a and 14c (vacant platted land); (ii) section 273.11, subdivision 16 (certain improvements to homestead property); (iii) section 273.11 , subdivisions 19 and 20 (certain improvements to business properties); (iv) section 273.11, subdivision 21 (homestead property damaged by mold); (v) section 273.11, subdivision 22 (qualifying lead hazardous reduction projects); (vi) section 273.13, subdivision 34 (homestead of a disabled veteran or family caregiver); (vii) section 273.13, subdivision 35 (homestead market value exclusion); or (2) the deferment of value under: (i) the Minnesota Agricultural Property Tax Law, section 273.111 ; (ii) the Aggregate Resource Preservation Law, section 273.1115 ; (iii) the Minnesota Open Space Property Tax Law, section 273.112 ; (iv) the rural preserves property tax program, section 273.114 ; or (v) the Metropolitan Agricultural Preserves Act, section 473H.10 ; or (3) the adjustments to tax capacity for: (i) , financing under sections 469.174 to

469.1794; (ii) disparity, disparities under chapter 276A or

473F; or (iii) , or wind energy values, but after the

limited market adjustments under section 273.11, subdivision 1 a , and after the market value exclusions
of certain improvements to homestead property undersection 273.11, subdivision 16 under
section 273.425 (b) Estimated market value under paragraph (a) also includes the market value of tax-exempt property
if the applicable law specifically provides that the limitation, qualification, or aid calculation includes
tax-exempt property. (c) taxable
estimated this paragraph property tax levy limitations and calculation of state

aid taxable estimated and for purposes of limits on net debt, the

issuance of bonds, certificates of indebtedness, or capital notes refer to the estimated market value as
last finally equalized For the purpose of determining any net debt limit based on market value, or
any limit on the issuance of bonds, certificates of indebtedness, or capital notes based on market value,
the terms "market value," "taxable market value," and "market valuation," whether equalized or
unequalized, mean the total taxable market value of property within the local unit of government before
any adjustments for tax increment, fiscal disparity, powerline credit, or wind energy values, but after the
limited market value adjustments under section273.11 , subdivision 1a, and after the market value
exclusions of certain improvements to homestead property under section 273.11 , subdivision 16. Unless
otherwise provided, "market value," "taxable market value," and "market valuation" for purposes of this
paragraph, mean the taxable market value as last finally equalized. (d) For purposes of a provision of a home rule charter or of any special law that is not codified in the
statutes and that imposes a levy limitation based on market value or any limit on debt, the issuance of
bonds, certificates of indebtedness, or capital notes based on market value, the terms "market value,"
"taxable market value," and "market valuation," whether equalized or unequalized, mean "estimated
market value" as defined in paragraph (a). subdivision 14 subdivisions 14a and 14c credit exclusion 273.1384 273.13 , subdivision 35, EFFECTIVE DATE. This section is effective for taxes payable in 2013 and thereafter. and the homestead market

value exclusion residential homestead and credits credit EFFECTIVE DATE. This section is effective for taxes payable in 2013 and thereafter.  Net (a) Gross tax capacity means the product of the appropriate gross class rates in this section and
market values. (b) taxable EFFECTIVE DATE. This section is effective the day following final enactment. taxable taxable taxable taxable 1988 2014 total estimated valuation value without valuation adjustments for fiscal disparities (chapters 276A

and 473F), tax increment financing (sections 469.174 to 469.179 ), or powerline credit (section 273.425 )
as provided under section 273.032 taxable estimated taxable estimated taxable estimated after reductions sections 273.11 , subdivisions 1a and 16, and 273.13 , subdivision 35 section 272.03,
subdivision 15  Adjusted        Adjusted assessor's estimated taxable , as defined in section 272.03, . For purposes of sections 276A.01 to 276A.09 , the commissioner of revenue shall annually make
determinations and reports with respect to each municipality which are comparable to those it makes for
school districts , adjusted for sales ratios in a manner similar to the adjustments made to city and
town

net tax capacities , in

the same manner and at the same times prescribed by the subdivision. The commissioner of revenue
shall annually determine, for each municipality, information comparable to that required by section
475.53, subdivision 4 , for school districts, as soon as practicable after it becomes available. The
commissioner of revenue shall then compute the equalized market value of property within each
municipality EFFECTIVE DATE. This section is effective the day following final enactment. valuation adjusted

market value valuations adjusted market values taxable  for other computations the amount or rate of any salary, aid, tax,

or debt authorized, required, or limited by any provision of any law or charter, where the authorization,
requirement, or limitation is related to any value or valuation of taxable property within any governmental
unit, the value or net tax capacity fiscal capacity under section 276A.01, subdivision 12 , a
municipality's taxable market value adjustments reductions clause (a), : (1) taxable governmental unit for any purpose

other than section 276A.05 municipality (a) governmental

unit's municipality's taxable governmental unit

municipality governmental unit,

and (b) the increase required by this subdivision is that amount which bears the same proportion to the
amount added to the governmental unit's net tax capacity pursuant to subdivision 2, clause (b), as the
market value of commercial-industrial property, or such class thereof, located within the governmental unit
bears to the net tax capacity of commercial-industrial property, or such class thereof, located within the
governmental unit; and (2) in determining the market value of real property within a municipality for
purposes of section 276A.05 , the adjustment prescribed by clause (1)(a) must be made and that
prescribed by clause (1)(b) must not be made municipality. No adjustment shall be made to
taxable market value for the increase in net tax capacity under subdivision 2, clause (b) estimated estimated estimated estimated valuation value estimated estimated estimated estimated valuation

value estimated estimated estimated taxable estimated estimated excluding money and credits, estimated taxable estimated taxable

estimated taxable estimated taxable estimated taxable estimated (f) "Tax capacity" means total taxable market value, but does not include captured market value. taxable the estimated taxable estimated

taxable estimated taxable estimated taxable estimated taxable estimated estimated estimated taxable estimated taxable estimated a an estimated, exclusive of money and

credits, estimated estimated estimated estimated estimated estimated estimated taxable estimated taxable estimated taxable estimated estimated estimated taxable estimated aan estimated exclusive of money and credits, taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated

taxable estimated

taxable estimated taxable
estimated estimated a an estimated taxable estimated taxable estimated 2500

2,500 taxable estimated more than 2500 2,500 or more

taxable estimated section a an estimated , as defined in

section 471.72 , a an estimated , as defined in section 471.72 , a

an estimated a an estimated , as defined in section 471.72 , estimated to be the provisions hereof section 473.625 such
prospective the estimated market such the detached the net tax capacity of now therein or thereon shall be and
on the lands on the date of the detachment from and
after the date of the enactment hereof estimated market
upon the basis of which such used to
calculate the net debt limit of the may issue its

bonds, . such the for such purpose to be

and other taxable properties for purposes of the school district's net

debt limit are estimated said the said the it shall be the duty of such
the from and after the passage hereof, to so of each year, shall that value such the such estimated market constituting and making up the basis aforesaid
used to calculate the net debt limit of the school district estimated estimated taxable estimated estimated valuation value estimated valuation value (c) For the purpose of determining the commission's property tax levy limitation under this subdivision,
"total market valuation" means the total market valuation of all taxable property within the district without
valuation adjustments for fiscal disparities (chapter 473F), tax increment financing (sections 469.174 to
469.179 ), and high voltage transmission lines (section273.425 ).  Adjusted        Adjusted assessor's estimated taxable , as defined in section 272.03, , adjusted for sales ratios in a manner similar to the adjustments made to city and town net tax
capacities . For purposes of sections 473F.01 to 473F.13 , the commissioner of revenue shall
annually make determinations and reports with respect to each municipality which are comparable to
those it makes for school districts , in the same manner and at the same times

as are prescribed by the subdivisions. The commissioner of revenue shall annually determine, for each
municipality, information comparable to that required by section 475.53, subdivision 4 , for school districts,
as soon as practicable after it becomes available. The commissioner of revenue shall then compute the
equalized market value of property within each municipality using the aggregate sales ratios from the
Department of Revenue's sales ratio study valuation adjusted

market value valuations adjusted market values taxable  or net tax capacity the amount or rate of any salary, aid, tax,

or debt authorized, required, or limited by any provision of any law or charter, where such authorization,
requirement, or limitation is related in any manner to any value or valuation of taxable property within any
governmental unit, such value or net tax capacity fiscal capacity under section 473F.02,
subdivision 14 , a municipality's taxable market value adjustments reductions clause (a), :
(1) taxable governmental

unit for any purpose other than section 473F.07 municipality (a) governmental unit's municipality's taxable governmental unit municipality governmental unit, and (b) the increase required by this subdivision shall be that amount which bears
the same proportion to the amount added to the governmental unit's net tax capacity pursuant to
subdivision 2, clause (b), as the market value of commercial-industrial property, or such class thereof,
located within the governmental unit bears to the net tax capacity of commercial-industrial property, or
such class thereof, located within the governmental unit; and (2) in determining the market value of real
property within a municipality for purposes of section 473F.07 , the adjustment prescribed by clause (1)(a)
hereof shall be made and that prescribed by clause (1)(b) hereof shall not be made municipality
No adjustment shall be made to taxable market value for the increase in net tax capacity under
subdivision 2, clause (b). taxable estimated taxable estimated

estimated estimated estimated estimated actual estimated estimated net tax capacity of any

district furnished by county auditors is not based upon the adjusted exceeds the estimated

market value of property within the district such the estimated market actual adjusted .

, and actual market value of property within a district, onwhich its is will be , is (a) the value certified by the county auditors, or (b) this
on the estimated market , whichever results in a higher value estimated estimated (1) the net tax capacity computed using the net tax capacity rates in section 273.13 for taxes payable
in the year of the aid distribution, and the market values, after the exclusion in section 273.13, subdivision
35 , for taxes payable in the year prior to the aid distribution plus (2) a city's fiscal disparities distribution
tax capacity under section 276A.06, subdivision 2 , paragraph (b), or 473F.08 , subdivision 2 , paragraph
(b), for taxes payable in the year prior to that for which aids are being calculated. The market value
utilized in computing city net tax capacity shall be reduced by the sum of (1) a city's market value of
commercial industrial property as defined in section 276A.01, subdivision 3 , or 473F.02 , subdivision 3 ,
multiplied by the ratio determined pursuant to section 276A.06, subdivision 2 , paragraph (a), or 473F.08 , subdivision 2 , paragraph (a), (2) the market value of the captured value of tax
increment financing districts as defined in section 469.177, subdivision 2 , and (3) the market value of
transmission lines deducted from a city's total net tax capacity under section 273.425 . The city net tax
capacity will be computed using equalized market values the city's adjusted net tax capacity under
section 273.1325 EFFECTIVE DATE. This section is effective the day following final enactment. net tax capacity of the county,

computed analogously to city net tax capacity under section 477A.011, subdivision 20 county's
adjusted net tax capacity under section 273.1325 EFFECTIVE DATE. This section is effective the day following final enactment. estimated estimated Subd. 20. Estimated market value. When used in determining or calculating a limit on taxation,
spending, state aid amounts, or debt, bond, certificate of indebtedness, or capital note issuance by or for
a local government unit, "estimated market value" has the meaning given in section 273.032 .  REVISOR'S INSTRUCTION.

The revisor of statutes shall recodify                     RECOD Minnesota Statutes, section

127A.48, subdivisions 1 to 6 , as section 273.1325 , subdivisions 1 to 6, and change all cross-references
to the affected subdivisions accordingly.EFFECTIVE DATE. This section is effective the day
following final enactment.  REPEALER.          AMEND Minnesota Statutes 2012, sections 276A.01, subdivision

11 ;AMEND 473F.02 , subdivision 13 ; andAMEND 477A.011 , subdivision 21 , are repealed.EFFECTIVE DATE. Unless otherwise specifically provided, this article is effective the day following
final enactment for purposes of limits on net debt, the issuance of bonds, certificates of indebtedness, and
capital notes and is effective beginning for taxes payable in 2014 for all other purposes. Subd. 1a. Recapture tax return required. If a disposition or cessation as provided by section
291.03, subdivision 11 , paragraph (a), has occurred, the qualified heir, as defined under section 291.03,
subdivision 8 , paragraph (c), or personal representative of the decedent's estate must submit a recapture
tax return to the commissioner. EFFECTIVE DATE. This section is effective for estates of decedents dying after June 30, 2011. (b) This subdivision applies to regulated investment companies required to register under chapter
80A. (c) (b) EFFECTIVE DATE. This section is effective the day following final enactment. Subd. 18. Returns by qualified heirs. A qualified heir, as defined in section 291.03, subdivision 8 ,
paragraph (c), must file two returns with the commissioner attesting that no disposition or cessation as
provided by section 291.03, subdivision 11 , paragraph (a), occurred. The first return must be filed no earlier than 24 months and no later than 26 months
after the decedent's death. The second return must be filed no earlier than 36 months and no later than
39 months after the decedent's death. EFFECTIVE DATE. This section is effective for returns required to be filed after December 31, 2013.
Subd. 3a. Recapture tax return. A recapture tax return must be filed with the commissioner within six
months after the date of the disposition or cessation as provided by section 291.03, subdivision 11 ,
paragraph (a). EFFECTIVE DATE. This section is effective for estates of decedents dying after June 30, 2011. chapter 291 section 291.03, subdivision 1, EFFECTIVE DATE. This section is effective for estates of decedents dying after June 30, 2011. Subd. 3a. Recapture tax. The additional estate tax imposed by section 291.03, subdivision 11 ,
paragraph (b), is due and payable on or before the expiration of the date provided bysection 291.03,
subdivision 11 , paragraph (c). EFFECTIVE DATE. This section is effective for estates of decedents dying after June 30, 2011. A corporation or A corporation or EFFECTIVE DATE. This section is effective the day following final enactment. or an

entity or

an entity is subject to the tax imposed under section 290.05, subdivision 3 EFFECTIVE DATE. This section is effective the day following final enactment. corporation or corporation or

or entity

or

entities corporation or EFFECTIVE DATE. This section is effective the day following final enactment. a corporation or EFFECTIVE DATE. This section is effective the day following final enactment. , as

defined in Minnesota Statutes 1986, section 290.01, subdivision 5 , cumulative calendar year made which exceed if the value of the contract exceeds EFFECTIVE DATE. This section is effective for payments made to contractors after December 31,
2013. Subd. 11. Partition. "Partition" means the division by conveyance of real property that is held
jointly or in common by two or more persons into individually owned interests. If one of the co-owners
gives consideration for all or a part of the individually owned interest conveyed to them, that portion of the
conveyance is not a part of the partition. EFFECTIVE DATE. This section is effective the day following final enactment. : (1) ; and . (2) except as provided in paragraph (f), for a vendor having a liability of $120,000 or more during a
fiscal year ending June 30, 2009, and fiscal years thereafter, the taxes imposed by chapter 297A, except
as provided in paragraph (b), are due and payable to the commissioner monthly in the following manner:
(i) On or before the 14th day of the month following the month in which the taxable event occurred, the
vendor must remit to the commissioner 90 percent of the estimated liability for the month in which the
taxable event occurred. (ii) On or before the 20th day of the month in which the taxable event occurs, the vendor must remit to
the commissioner a prepayment for the month in which the taxable event occurs equal to 67 percent of
the liability for the previous month. (iii) On or before the 20th day of the month following the month in which the taxable event occurred,
the vendor must pay any additional amount of tax not previously remitted under either item (i) or (ii ) or, if
the payment made under item (i) or (ii) was greater than the vendor's liability for the month in which the
taxable event occurred, the vendor may take a credit against the next month's liability in a manner
prescribed by the commissioner. (iv) Once the vendor first pays under either item (i) or (ii), the vendor is required to continue to make
payments in the same manner, as long as the vendor continues having a liability of $120,000 or more
during the most recent fiscal year ending June 30. (v) Notwithstanding items (i), (ii), and (iv), if a vendor fails to make the required payment in the first
month that the vendor is required to make a payment under either item (i) or (ii), then the vendor is deemed to have elected to pay under item (ii) and must make subsequent
monthly payments in the manner provided in item (ii). (vi) For vendors making an accelerated payment under item (ii), for the first month that the vendor is
required to make the accelerated payment, on the 20th of that month, the vendor will pay 100 percent of
the liability for the previous month and a prepayment for the first month equal to 67 percent of the liability
for the previous month. Notwithstanding paragraph (a), , clause (2), (e) Whenever the liability is $120,000 or more separately for: (1) the tax imposed under chapter 297A;
(2) a fee that is to be reported on the same return as and paid with the chapter 297A taxes; or (3) any
other tax that is to be reported on the same return as and paid with the chapter 297A taxes, then the
payment of all the liabilities on the return must be accelerated as provided in this subdivision. (f) At the start of the first calendar quarter at least 90 days after the cash flow account established in
section 16A.152, subdivision 1 , and the budget reserve account established in section 16A.152,
subdivision 1 a , reach the amounts listed in section 16A.152, subdivision 2 , paragraph (a), the
remittance of the accelerated payments required under paragraph (a), clause (2), must be suspended.
The commissioner of management and budget shall notify the commissioner of revenue when the
accounts have reached the required amounts. Beginning with the suspension of paragraph (a), clause
(2), for a vendor with a liability of $120,000 or more during a fiscal year ending June 30, 2009, and fiscal
years thereafter, the taxes imposed by chapter 297A are due and payable to the commissioner on the
20th day of the month following the month in which the taxable event occurred. Payments of tax liabilities
for taxable events occurring in June under paragraph (b) are not changed. EFFECTIVE DATE. This section is effective the day following final enactment. in good faith from the purchaser from the purchaser taken in good faith

which means that the exemption certificate claims an exemption that (A) was statutorily available on the
date of the transaction, (B) could be applicable to the item for which the exemption is claimed, and (C) is
reasonable for the purchaser's type of business (d) Notwithstanding paragraph (b), relief from liability does not apply to a seller who has obtained
information under paragraph (b), clause (2), if through the audit process the commissioner finds the
following: (1) that at the time the information was provided the seller had knowledge or had reason to know that
the information relating to the exemption was materially false; or (2) that the seller knowingly participated in activity intended to purposefully evade the sales tax due on
the transaction. (d) (e) (e) (f) (f) (g) EFFECTIVE DATE. This section is effective retroactively from January 1, 2013. stated on the price list in effect
at the time of sale for which a manufacturer or person sells a tobacco product to a distributor, exclusive of
any discount, promotional offer, or other reduction. For purposes of this subdivision, "price list" means the
manufacturer's price at which tobacco products are made available for sale to all distributors on an
ongoing basis at which a distributor purchases a tobacco product. Wholesale sales price includes
the applicable federal excise tax, freight charges, or packaging costs, regardless of whether they were
included in the purchase price EFFECTIVE DATE. This section is effective for purchases made after December 31, 2013. calendar fiscal EFFECTIVE DATE. This section is effective the day following final enactment. persons, firms, or corporations a person,

firm, corporation, or purchasing group as defined in section 60E.02, or any
member of a purchasing group, procure procures EFFECTIVE DATE. This section is effective for premiums received after December 31, 2013. ,
; , ; , 6, and ; ; and 14 EFFECTIVE DATE. This section is effective the day following final enactment. and ; and . (5) gross premiums less return premiums paid to an insurer other than a licensed insurance company
or a surplus lines broker for coverage of risks resident or located in Minnesota by a purchasing group or
any members of the purchasing group to a broker or agent for the purchasing group. EFFECTIVE DATE. This section is effective for premiums received after December 31, 2013. , ; , ; , paragraphs (a), clauses (1) to (4), (b), (c), and (d), ; EFFECTIVE DATE. This section is effective for premiums received after December 31, 2013.  and purchasing groups and every purchasing group or member of a purchasing group subject to tax under section 297I.05,
subdivision 12 , paragraph (a), clause (5), EFFECTIVE DATE. This section is effective for premiums received after December 31, 2013.  REPEALER.           AMEND Minnesota Statutes 2012, section 289A.60, subdivision
31

, is repealed.EFFECTIVE DATE. This section is effective the day following final enactment. , clause (1) EFFECTIVE DATE. This section is effective for taxes payable in 2014 and thereafter. collected by

the commissioner and EFFECTIVE
DATE. This section is effective the day following final enactment. land exchanges, EFFECTIVE DATE. This section is effective the day following final enactment. or 270.075, subdivision 2, EFFECTIVE DATE. This section is effective the day following final enactment. federal government, the by , loaned, or

otherwise made available to EFFECTIVE DATE. This section is effective the day following final enactment. or direct reduced ore EFFECTIVE DATE. This section is effective the day following final enactment. includes means an individual, association, estate, trust,

partnership, EFFECTIVE DATE. This section is effective the day following final enactment. (a) is sold, transferred, or sold, transferred, or taxes

payable in provided (b) In the case of a sale or transfer, the additional taxes under paragraph (a) shall not be extended
against the property if the new owner submits a successful application under this section by the later of
May 1 of the current year or 30 days after the sale or transfer. (c) For the purposes of this section, the following events do not constitute a sale or transfer for
property that qualified under subdivision 2 prior to the event: (1) death of a property owner when the surviving owners retain ownership of the property; (2) divorce of a married couple when one of the spouses retains ownership of the property; (3) marriage of a single property owner when that owner retains ownership of the property in whole or
in part; (4) the organization or reorganization of a farm ownership entity that is not prohibited from owning
agricultural land in this state under section500.24 , if all owners maintain the same beneficial interest both
before and after the organization or reorganization; and (5) transfer of the property to a trust or trustee, provided that the individual owners of the property are
the grantors of the trust and they maintain the same beneficial interest both before and after placement of
the property in trust. EFFECTIVE DATE. This section is effective the day following final enactment. : (1) .

; or (2) contiguous acreage used during the preceding year for an intensive livestock or poultry
confinement operation, provided that land used only for pasturing or grazing does not qualify under this
clause. the assessment year 2002 taxes payable in 2003

because of its enrollment in a qualifying program and the land remains enrolled "Contiguous acreage," for
purposes of this paragraph, means all of, or a contiguous portion of, a tax parcel as described in section
272.193 , or all of, or a contiguous portion of, a set of contiguous tax parcels under that section that are
owned by the same person. Real estate of Agricultural land under this section also

includes: (1) contiguous acreage that is , which is
in size and or intensively in the
preceding year ,

shall be considered as agricultural land. To qualify under this paragraph, property that includes a
residential structure must be used intensively for one of the following purposes: ; or (2) contiguous acreage that contains a residence and is less than 11 acres in size, if the contiguous
acreage exclusive of the house, garage, and surrounding one acre of land was used in the preceding
year for one or more of the following three uses: an intensive grain of grain
operation, for intensive machinery or equipment of machinery or equipment activities intensively or (iii) for livestock or poultry confinement, provided that land that is used only for pasturing and grazing
does not qualify; or (iv) (iii) intensive "Contiguous acreage," for purposes of this paragraph, means all of a tax parcel
as described in section 272.193 , or all of a set of contiguous tax parcels under that section that are
owned by the same person. EFFECTIVE DATE. This section is effective for taxes payable in 2014 and thereafter. or any of its political subdivisions EFFECTIVE DATE. This section is effective the day following final enactment. by submitting . (b) Companies that must submit reports under section 270.82 must submit with to May June (c) Companies that submit reports under section 273.371 must submit a written request to the
commissioner for a conference within ten days after the date of the commissioner's valuation certification
or notice to the company, or by July 1, whichever is earlier. (d) (b) (e) EFFECTIVE DATE. This section is effective beginning with assessment year 2014. incorporatedstatutory city or
home rule charterEFFECTIVE DATE. This section is effective the day following final enactment. The period of
redemption for all lands sold to the state at a tax judgment sale shall be three years from the date of sale
to the state of Minnesota if the land is within an incorporated area unless it is: (a) nonagricultural homesteaded land as defined in section 273.13, subdivision 22 ; (b) homesteaded agricultural land as defined in section 273.13, subdivision 23 , paragraph (a); (c) seasonal residential recreational land as defined in section 273.13 , subdivisions 22, paragraph (c)
, and 25, paragraph (d), clause (1), in which event the period of redemption is five years from the date of
sale to the state of Minnesota; (d) abandoned property and pursuant to section 281.173 a court order has been entered shortening
the redemption period to five weeks; or (e) vacant property as described under section 281.174, subdivision 2 , and for which a court order is
entered shortening the redemption period under section 281.174 . The period of redemption for all other
lands sold to the state at a tax judgment sale shall be five years from the date of sale. The notice must contain a narrative description of the various periods to redeem specified in sections
281.17 , 281.173 , and 281.174 , in the manner prescribed by the commissioner of revenue under
subdivision 2. EFFECTIVE DATE. This section is effective for lists and notices required after December 31, 2013.
The commissioner shall prescribe the form of the
notice. Execution of the notice by the original or facsimile signature of the commissioner or a delegate
entitles them to be recorded, and no other attestation, certification, or acknowledgment is necessary. EFFECTIVE DATE. This section is effective for notices that are both executed and recorded after
June 30, 2013. Hydrometallurgical processes are processes that
extract the ores, metals, or minerals, by use of aqueous solutions that leach, concentrate, and recover the
ore, metal, or mineral. EFFECTIVE DATE. This section is effective the day following final enactment. ores,metals, or and energy resources ores,metals, or and energy resources EFFECTIVE DATE. This section is effective the day following final enactment. For the purpose of determining for the county the estimated values of parcels proposed to
be exchanged, the county assessor need not be licensed under chapter 82B. EFFECTIVE DATE. This section is effective the day following final enactment.  REPEALER.           AMEND Minnesota Statutes 2012, sections 272.69 ;

andAMEND 273.11 , subdivisions 1a and 22, are repealed.EFFECTIVE DATE. This section is
effective the day following final enactment. Subdivision 1. Duplicate warrant.

The commissioner may refuse to issue a duplicate of an unpaid state warrant.

If the commissioner acts in good faith, the commissioner is not liable, whether the application is granted
or denied. Subd. 2. Original warrant is void.
may refuse to issue a duplicate of an unpaid state

warrant. If the commissioner acts in good faith the commissioner is not liable, whether the application is
granted or denied is not liable to any holder who took the void original warrant for value, whether
or not the commissioner required an indemnity bond from the applicant Subd. 3. Unpaid refund or rebate.

EFFECTIVE DATE. This section is effective the day following final enactment. (a) (b) If a taxpayer or other person agrees to accept notification by electronic means, notice of a
determination or action of the commissioner sent by electronic mail to the taxpayer's or person's last
known electronic mailing address as provided for in section 325L.08 is sufficient. EFFECTIVE DATE. This section is effective the day following final enactment. due of the payment of the tax provided in section

270C.40, subdivision 3, EFFECTIVE DATE. This section is effective the day following final enactment. payment

was required to be paid, including any extensions, provided in section 270C.40, subdivision 3 ,
EFFECTIVE DATE. This section is effective the day following final enactment. the return or payment was required to be

filed or paid, including any extensions provided in section 270C.40, subdivision 3 EFFECTIVE DATE. This section is effective the day following final enactment. at the rate asfrom the time the tax should have been

paid EFFECTIVE DATE. This section is effective the day following final enactment. D910-07a

D910-11 EFFECTIVE DATE. This section is effective the day following final enactment. D1655-08a D1655-12 EFFECTIVE DATE. This section is effective the day following final enactment. Subd. 8b. Biobutanol. "Biobutanol" means isobutyl alcohol produced by fermenting agriculturally
generated organic material that is to be blended with gasoline and meets either: (1) the initial ASTM Standard Specification for Butanol for Blending with Gasoline for use as an
Automotive Spark-Ignition Engine Fuel once it has been released by ASTM for general distribution; or (2) in the absence of an ASTM Standard Specification, the following list of requirements: (i) visually free of sediment and suspended matter; (ii) clear and bright at the ambient temperature of 21 degrees Celsius or the ambient temperature
whichever is higher; (iii) free of any adulterant or contaminant that can render it unacceptable for its commonly used
applications; (iv) contains not less than 96 volume percent isobutyl alcohol; (v) contains not more than 0.4 volume percent methanol; (vi) contains not more than 1.0 volume percent water as determined by ASTM standard test method
E203 or E1064; (vii) acidity (as acetic acid) of not more than 0.007 mass percent as determined by ASTM standard
test method D1613; (viii) solvent washed gum content of not more than 5.0 milligrams per 100 milliliters as determined by
ASTM standard test method D381; (ix) sulfur content of not more than 30 parts per million as determined by ASTM standard test method
D2622 or D5453; and (x) contains not more than 4 parts per million total inorganic sulfate. D975-07b

D975-11b EFFECTIVE DATE. This section is effective the day following final enactment. typically not more than 60 greater than 50 D5798-07 D5798-11

EFFECTIVE DATE. This section is effective the day following final enactment. D4806-08

D4806-11a EFFECTIVE DATE. This section is effective the day following final enactment. D4814-08b D4814-11b

D4814-08b D4814-11b EFFECTIVE DATE. This section is effective the day following final enactment. D4814-08b D4814-11b EFFECTIVE DATE. This section is effective the day following final enactment. D396-08b D396-12 EFFECTIVE DATE. This section is effective the day following final enactment. until paid EFFECTIVE DATE. This section is effective the day following final enactment. , and , and penalty The penalty imposed in this subdivision shall bear interest
from the date provided in section 270C.40, subdivision 3 , to the date of payment of the penalty. EFFECTIVE DATE. This section is effective the day following final enactment. from the date provided in section 270C.40,

subdivision 3, until paid EFFECTIVE DATE. This section is effective the day following final
enactment. the return or payment was required to be

filed or paid, including any extensions provided in section 270C.40, subdivision 3 EFFECTIVE DATE. This section is effective the day following final enactment. , together with any penalty imposed in

this section, The penalty imposed in this section bears interest at the rate specified in
section 270C.40 from the date provided in section 270C.40, subdivision 3 , to the date of payment of the
penalty. EFFECTIVE DATE. This section is effective the day following final enactment. the return or payment was required to be filed or

paid, including any extensions provided in section 270C.40, subdivision 3 EFFECTIVE DATE. This section is effective the day following final enactment. , together with any penalty imposed by

this chapter, Any penalty imposed by this chapter bears interest from the date provided in
section 270C.40, subdivision 3 , to the date of payment of the penalty. EFFECTIVE DATE. This section is effective the day following final enactment. the return or payment was required to be filed or

paid, including any extensions provided in section 270C.40, subdivision 3 EFFECTIVE DATE. This section is effective the day following final enactment. the return or payment was

required to be filed or paid provided in section 270C.40, subdivision 3 , EFFECTIVE DATE. This section is effective the day following final enactment. , . The additional tax shall bear interest Any
penalty imposed pursuant to this section shall bear interest from the date provided in section 270C.40,
subdivision 3 , to the date of payment of the penalty. EFFECTIVE DATE. This section is effective the day following final enactment. , . The additional tax shall bear interest Any penalty imposed pursuant to this section shall bear interest from the date
provided in section 270C.40, subdivision 3 , to the date of payment of the penalty. EFFECTIVE DATE. This section is effective the day following final enactment. 2007 PA 36, entitled "An act to meet deficiencies in state funds by providing for the
imposition, levy, computation, collection, assessment, reporting, payment, and enforcement of taxes on
certain commercial, business, and financial activities; to prescribe the powers and duties of public officers
and state departments; to provide for the inspection of certain taxpayer records; to provide for interest
and penalties; to provide exemptions, credits, and refunds; to provide for the disposition of funds; to
provide for the interrelation of this act with other acts; and to make appropriations," by amending sections
111, 305, 403, and 433 ( AMEND MCL 208.1111 ,AMEND208.1305 ,AMEND208.1403 ,
andAMEND208.1433 ), sections 111 and 305 as amended by 2012 PA 605, section 403 as amended by
2008 PA 434, and section 433 as amended by 2007 PA 215, and by adding section 508; and to repeal
acts and parts of acts. The People of the State of Michigan enact:

Sec. 111. (1) "Gross receipts" means the entire amount received by the taxpayer as determined by using
the taxpayer's method of accounting used for federal income tax purposes, less any amount deducted as
bad debt for federal income tax purposes that corresponds to items of gross receipts included in the
modified gross receipts tax base for the current tax year or a past tax year phased in over a 5-year period
starting with 50% of that amount in the 2008 tax year, 60% in the 2009 tax year, 60% in the 2010 tax
year, 75% in the 2011 tax year, and 100% in the 2012 tax year and each tax year thereafter, from any
activity whether in intrastate, interstate, or foreign commerce carried on for direct or indirect gain, benefit,
or advantage to the taxpayer or to others except for the following:

(a) Proceeds from sales by a principal that the taxpayer collects in an agency capacity solely on behalf of
the principal and delivers to the principal.

(b) Amounts received by the taxpayer as an agent solely on behalf of the principal that are expended by
the taxpayer for any of the following:

( i ) The performance of a service by a third party for the benefit of the principal that is required by law to
be performed by a licensed person.

( ii ) The performance of a service by a third party for the benefit of the principal that the taxpayer has not
undertaken a contractual duty to perform.

( iii ) Principal and interest under a mortgage loan or land contract, lease or rental payments, or taxes,
utilities, or insurance premiums relating to real or personal property owned or leased by the principal.

( iv ) A capital asset of a type that is, or under the internal revenue code will become, eligible for
depreciation, amortization, or accelerated cost recovery by the principal for federal income tax purposes,
or for real property owned or leased by the principal.

( v ) Property not described under subparagraph ( iv ) that is purchased by the taxpayer on behalf of the
principal and that the taxpayer does not take title to or use in the course of performing its contractual
business activities.
( vi ) Fees, taxes, assessments, levies, fines, penalties, or other payments established by law that are
paid to a governmental entity and that are the legal obligation of the principal.

(c) Amounts that are excluded from gross income of a foreign corporation engaged in the international
operation of aircraft under section 883(a) of the internal revenue code.

(d) Amounts received by an advertising agency used to acquire advertising media time, space,
production, or talent on behalf of another person.

(e) Amounts received by a newspaper to acquire advertising space not owned by that newspaper in
another newspaper on behalf of another person. This subdivision does not apply to any consideration
received by the taxpayer for acquiring that advertising space.

(f) Notwithstanding any other provision of this section, amounts received by a taxpayer that manages real
property owned by a third party that are deposited into a separate account kept in the name of that third
party and that are not reimbursements to the taxpayer and are not indirect payments for management
services that the taxpayer provides to that third party.

(g) Proceeds from the taxpayer's transfer of an account receivable if the sale that generated the account
receivable was included in gross receipts for federal income tax purposes. This subdivision does not
apply to a taxpayer that during the tax year both buys and sells any receivables.

(h) Proceeds from any of the following:

( i ) The original issue of stock or equity instruments or equity issued by a regulated investment company
as that term is defined under section 851 of the internal revenue code.

( ii ) The original issue of debt instruments.

(i) Refunds from returned merchandise.

(j) Cash and in-kind discounts.

(k) Trade discounts.

( l ) Federal, state, or local tax refunds.

(m) Security deposits.

(n) Payment of the principal portion of loans.

(o) Value of property received in a like-kind exchange.

(p) Proceeds from a sale, transaction, exchange, involuntary conversion, maturity, redemption,
repurchase, recapitalization, or other disposition or reorganization of tangible, intangible, or real property,
less any gain from the disposition or reorganization to the extent that the gain is included in the taxpayer's
federal taxable income, if the property satisfies 1 or more of the following:

( i ) The property is a capital asset as defined in section 1221(a) of the internal revenue code.

( ii ) The property is land that qualifies as property used in the trade or business as defined in section
1231(b) of the internal revenue code.

( iii ) The property is used in a hedging transaction entered into by the taxpayer in the normal course of
the taxpayer's trade or business primarily to manage the risk of exposure to foreign currency fluctuations
that affect assets, liabilities, profits, losses, equity, or investments in foreign operations; interest rate
fluctuations; or commodity price fluctuations. For purposes of this subparagraph, the actual transfer of title
of real or tangible personal property to another person is not a hedging transaction. Only the overall net
gain from the hedging transactions entered into during the tax year is included in gross receipts. As used
in this subparagraph, "hedging transaction" means that term as defined under section 1221 of the internal
revenue code regardless of whether the transaction was identified by the taxpayer as a hedge for federal
income tax purposes, provided, however, that transactions excluded under this subparagraph and not
identified as a hedge for federal income tax purposes shall be identifiable to the department by the
taxpayer as a hedge in its books and records.

( iv ) The property is investment and trading assets managed as part of the person's treasury function. For
purposes of this subparagraph, a person principally engaged in the trade or business of purchasing and
selling investment and trading assets is not performing a treasury function. Only the overall net gain from
the treasury function incurred during the tax year is included in gross receipts. As used in this
subparagraph, "treasury function" means the pooling and management of investment and trading assets
for the purpose of satisfying the cash flow or liquidity needs of the taxpayer's trade or business.

(q) The proceeds from a policy of insurance, a settlement of a claim, or a judgment in a civil action less
any proceeds under this subdivision that are included in federal taxable income.

(r) For a sales finance company, as defined in section 2 of the motor vehicle sales finance act, 1950 (Ex
Sess) PA 27, MCL 492.102, and directly or indirectly owned in whole or in part by a motor vehicle
manufacturer as of January 1, 2008, and for a person that is a broker or dealer as defined under section
78c(a)(4) or (5) of the securities exchange act of 1934, 15 USC 78c, or a person included in the unitary
business group of that broker or dealer that buys and sells for its own account, contracts that are subject
to the commodity exchange act, 7 USC 1 to 27f, amounts realized from the repayment, maturity, sale, or
redemption of the principal of a loan, bond, or mutual fund, certificate of deposit, or similar marketable
instrument provided such instruments are not held as inventory.

(s) For a sales finance company, as defined in section 2 of the motor vehicle sales finance act, 1950 (Ex
Sess) PA 27, MCL 492.102, and directly or indirectly owned in whole or in part by a motor vehicle
manufacturer as of January 1, 2008, and for a person that is a broker or dealer as defined under section
78c(a)(4) or (5) of the securities exchange act of 1934, 15 USC 78c, or a person included in the unitary
business group of that broker or dealer that buys and sells for its own account, contracts that are subject
to the commodity exchange act, 7 USC 1 to 27f, the principal amount received under a repurchase
agreement or other transaction properly characterized as a loan.

(t) For a mortgage company, proceeds representing the principal balance of loans transferred or sold in
the tax year. For purposes of this subdivision, "mortgage company" means a person that is licensed
under the mortgage brokers, lenders, and servicers licensing act, 1987 PA 173, MCL 445.1651 to
445.1684, or the secondary mortgage loan act, 1981 PA 125, MCL 493.51 to 493.81, and has greater
than 90% of its revenues, in the ordinary course of business, from the origination, sale, or servicing of
residential mortgage loans.

(u) For a professional employer organization, any amount charged by a professional employer
organization that represents the actual cost of wages and salaries, benefits, worker's compensation,
payroll taxes, withholding, or other assessments paid to or on behalf of a covered employee by the
professional employer organization under a professional employer arrangement.

(v) Any invoiced items used to provide more favorable floor plan assistance to a person subject to the tax
imposed under this act than to a person not subject to this tax and paid by a manufacturer, distributor, or
supplier.

(w) For an individual, estate, or person organized for estate or gift planning purposes, amounts received
other than those from transactions, activities, and sources in the regular course of the person's trade or
business. For purposes of this subdivision, all of the following apply:

( i ) Amounts received from transactions, activities, and sources in the regular course of the person's
business include, but are not limited to, the following:

(A) Receipts from tangible and intangible property if the acquisition, rental, lease, management, or
disposition of the property constitutes integral parts of the person's regular trade or business operations.

(B) Receipts received in the course of the person's trade or business from stock and securities of any
foreign or domestic corporation and dividend and interest income.

(C) Receipts derived from isolated sales, leases, assignments, licenses, divisions, or other infrequently
occurring dispositions, transfers, or transactions involving tangible, intangible, or real property if the
property is or was used in the person's trade or business operation.

(D) Receipts derived from the sale of an interest in a business that constitutes an integral part of the
person's regular trade or business.

(E) Receipts derived from the lease or rental of real property.

( ii ) Receipts excluded from gross receipts include, but are not limited to, the following:

(A) Receipts derived from investment activity, including interest, dividends, royalties, and gains from an
investment portfolio or retirement account, if the investment activity is not part of the person's trade or
business.

(B) Receipts derived from the disposition of tangible, intangible, or real property held for personal use and
enjoyment, such as a personal residence or personal assets.

(x) Receipts derived from investment activity other than receipts from transactions, activities, and sources
in the regular course of the person's trade or business by a person that is organized exclusively to
conduct investment activity and that does not conduct investment activity for any person other than an
individual or a person related to that individual or by a common trust fund established under the collective
investment funds act, 1941 PA 174, MCL 555.101 to 555.113. For purposes of this subdivision, a person
is related to an individual if that person is a spouse, brother or sister, whether of the whole or half blood or
by adoption, ancestor, lineal descendent of that individual or related person, or a trust benefiting that
individual or 1 or more persons related to that individual.

(y) Interest income and dividends derived from obligations or securities of the United States government,
this state, or any governmental unit of this state. As used in this subdivision, "governmental unit" means
that term as defined in section 3 of the shared credit rating act, 1985 PA 227, MCL 141.1053.

(z) Dividends and royalties received or deemed received from a foreign operating entity or a person other
than a United States person, including, but not limited to, the amounts determined under section 78 of the
internal revenue code and sections 951 to 964 of the internal revenue code, phased in over a 5-year
period starting with 50% of that amount in the 2008 tax year, 60% in the 2009 tax year, 60% in the 2010
tax year, 75% in the 2011 tax year, and 100% in the 2012 tax year and each tax year thereafter.

(aa) To the extent not deducted as purchases from other firms under section 203, each of the following:

( i ) Sales or use taxes collected from or reimbursed by a consumer or other taxes the taxpayer collected
directly from or was reimbursed by a purchaser and remitted to a local, state, or federal tax authority,
phased in over a 5-year period starting with 50% of that amount in the 2008 tax year, 60% in the 2009 tax
year, 60% in the 2010 tax year, 75% in the 2011 tax year, and 100% in the 2012 tax year and each tax
year thereafter.

( ii ) In the case of receipts from the sale of cigarettes or tobacco products by a wholesale dealer, retail
dealer, distributor, manufacturer, or seller, an amount equal to the federal and state excise taxes paid by
any person on or for such cigarettes or tobacco products under subtitle E of the internal revenue code or
other applicable state law, phased in over a 3-year period starting with 60% of that amount in the 2008
tax year, 75% in the 2009 tax year, and 100% in the 2010 tax year and each tax year thereafter.

( iii ) In the case of receipts from the sale of motor fuel by a person with a motor fuel tax license or a retail
dealer, an amount equal to federal and state excise taxes paid by any person on such motor fuel under
section 4081 of the internal revenue code or under other applicable state law, phased in over a 5-year
period starting with 50% of that amount in the 2008 tax year, 60% in the 2009 tax year, 60% in the 2010
tax year, 75% in the 2011 tax year, and 100% in the 2012 tax year and each tax year thereafter.
( iv ) In the case of receipts from the sale of beer, wine, or intoxicating liquor by a person holding a license
to sell, distribute, or produce those products, an amount equal to federal and state excise taxes paid by
any person on or for such beer, wine, or intoxicating liquor under subtitle E of the internal revenue code or
other applicable state law, phased in over a 5-year period starting with 50% of that amount in the 2008
tax year, 60% in the 2009 tax year, 60% in the 2010 tax year, 75% in the 2011 tax year, and 100% in the
2012 tax year and each tax year thereafter.

( v ) In the case of receipts from the sale of communication, video, internet access and related services
and equipment, any government imposed tax, fee, or other imposition in the nature of a tax or fee
required by law, ordinance, regulation, ruling, or other legal authority and authorized to be charged on a
customer's bill or invoice, phased in over a 5-year period starting with 50% of that amount in the 2008 tax
year, 60% in the 2009 tax year, 60% in the 2010 tax year, 75% in the 2011 tax year, and 100% in the
2012 tax year and each tax year thereafter. This subparagraph does not include the recovery of net
income taxes, net worth taxes, property taxes, or the tax imposed under this act.

( vi ) In the case of receipts from the sale of electricity, natural gas, or other energy source, any
government imposed tax, fee, or other imposition in the nature of a tax or fee required by law, ordinance,
regulation, ruling, or other legal authority and authorized to be charged on a customer's bill or invoice,
phased in over a 5-year period starting with 50% of that amount in the 2008 tax year, 60% in the 2009 tax
year, 60% in the 2010 tax year, 75% in the 2011 tax year, and 100% in the 2012 tax year and each tax
year thereafter. This subparagraph does not include the recovery of net income taxes, net worth taxes,
property taxes, or the tax imposed under this act.

( vii ) Any deposit required under any of the following, phased in over a 5-year period starting with 50% of
that amount in the 2008 tax year, 60% in the 2009 tax year, 60% in the 2010 tax year, 75% in the 2011
tax year, and 100% in the 2012 tax year and each tax year thereafter:

(A) 1976 IL 1, MCL 445.571 to 445.576.

(B) of the Michigan administrative code.

(C) a of the Michigan administrative code.

(D) Any substantially similar beverage container deposit law of another state.

( viii ) An excise tax collected pursuant to the airport parking tax act, 1987 PA 248, MCL 207.371 to
207.383, collected from or reimbursed by a consumer and remitted as provided in the airport parking tax
act, 1987 PA 248, MCL 207.371 to 207.383, phased in over a 5-year period starting with 50% of that
amount in the 2008 tax year, 60% in the 2009 tax year, 60% in the 2010 tax year, 75% in the 2011 tax
year, and 100% in the 2012 tax year and each tax year thereafter.

(bb) Amounts attributable to an ownership interest in a pass-through entity, regulated investment
company, real estate investment trust, or cooperative corporation whose business activities are taxable
under section 203 or would be subject to the tax under section 203 if the business activities were in this
state. For purposes of this subdivision:

( i ) "Cooperative corporation" means those organizations described under subchapter T of the internal
revenue code.

( ii ) "Pass-through" entity means a partnership, subchapter S corporation, or other person, other than an
individual, that is not classified for federal income tax purposes as an association taxed as a corporation.

( iii ) "Real estate investment trust" means that term as defined under section 856 of the internal revenue
code.

( iv ) "Regulated investment company" means that term as defined under section 851 of the internal
revenue code.

(cc) For a regulated investment company as that term is defined under section 851 of the internal revenue
code, receipts derived from investment activity by that regulated investment company.

(dd) For fiscal years that begin after September 30, 2009, unless the state budget director certifies to the
state treasurer by January 1 of that fiscal year that the federally certified rates for actuarial soundness
required under 42 CF and that are specifically developed for Michigan's health maintenance organizations
that hold a contract with this state for medicaid services provide explicit adjustment for their obligations
required for payment of the tax under this act, amounts received by the taxpayer during that fiscal year for
medicaid premium or reimbursement of costs associated with service provided to a medicaid recipient or
beneficiary.

(ee) For a taxpayer that provides health care management consulting services, amounts received by the
taxpayer as fees from its clients that are expended by the taxpayer to reimburse those clients for labor
and nonlabor services that are paid by the client and reimbursed to the client pursuant to a services
agreement.

(ff) Amounts attributed to the taxpayer pursuant to a discharge of indebtedness as described under
section 61(a)(12) of the internal revenue code, including forgiveness of a nonrecourse debt.

(2) "Insurance company" means an authorized insurer as defined in sections 106 and 108 of the
insurance code of 1956, 1956 PA 218, MCL 500.106 and 500.108.

(3) "Internal revenue code" means the United States internal revenue code of 1986 in effect on January 1,
2008 or, at the option of the taxpayer, in effect for the tax year.

(4) "Inventory" means, except as provided in subdivision (e), all of the following:

(a) The stock of goods held for resale in the regular course of trade of a retail or wholesale business,
including electricity or natural gas purchased for resale.

(b) Finished goods, goods in process, and raw materials of a manufacturing business purchased from
another person.

(c) For a person that is a new motor vehicle dealer licensed under the Michigan vehicle code, 1949 PA
300, MCL 257.1 to 257.923, floor plan interest expenses for new motor vehicles. For purposes of this
subdivision, "floor plan interest" means interest paid that finances any part of the person's purchase of
new motor vehicle inventory from a manufacturer, distributor, or supplier. However, amounts attributable
to any invoiced items used to provide more favorable floor plan assistance to a person subject to the tax
imposed under this act than to a person not subject to this tax is considered interest paid by a
manufacturer, distributor, or supplier.

(d) For a person that is a securities trader, broker, or dealer or a person included in the unitary business
group of that securities trader, broker, or dealer that buys and sells for its own account, contracts that are
subject to the commodity exchange act, 7 USC 1 to 27f, the cost of securities as defined under section
475(c)(2) of the internal revenue code and for a securities trader the cost of commodities as defined
under section 475(e)(2) and for a broker or dealer the cost of commodities as defined under section
475(e)(2)(B), (C), and (D) of the internal revenue code, excluding interest expense other than interest
expense related to repurchase agreements. As used in this subdivision:

( i ) "Broker" means that term as defined under section 78c(a)(4) of the securities exchange act of 1934,
15 USC 78c.

( ii ) "Dealer" means that term as defined under section 78c(a)(5) of the securities exchange act of 1934,
15 USC 78c.

( iii ) "Securities trader" means a person that engages in the trade or business of purchasing and selling
investments and trading assets.

(e) Inventory does not include either of the following:

( i ) Personal property under lease or principally intended for lease rather than sale.

( ii ) Property allowed a deduction or allowance for depreciation or depletion under the internal revenue
code.

(5) "Officer" means an officer of a corporation other than a subchapter S corporation, including all of the
following:

(a) The chairperson of the board.

(b) The president, vice president, secretary, or treasurer of the corporation or board.

(c) Persons performing similar duties and responsibilities to persons described in subdivisions (a) and (b)
that include, at a minimum, major decision making.

Sec. 305. (1) Sales of the taxpayer in this state are determined as follows:
(a) Sales of tangible personal property are in this state if the property is shipped or delivered, or, in the
case of electricity and gas, the contract requires the property to be shipped or delivered, to any purchaser
within this state based on the ultimate destination at the point that the property comes to rest regardless
of the free on board point or other conditions of the sales. Property stored in transit for 60 days or more
prior to receipt by the purchaser or the purchaser's designee, or in the case of a dock sale not picked up
for 60 days or more, is deemed to have come to rest at this ultimate destination. Property stored in transit
for fewer than 60 days prior to receipt by the purchaser or the purchaser's designee, or in the case of a
dock sale picked up before 60 days, is not deemed to have come to rest at this ultimate destination. For
purposes of this subdivision:

( i ) "Dock sale" means a sale in which the purchaser uses its own or rented vehicles, or makes
arrangements with a carrier, to pick up the property at the seller's location.

( ii ) "Stored in transit" means storing, staging, forwarding, or consolidating activities undertaken for further
shipment or transfer of the property to the purchaser or purchaser's designee.

(b) Receipts from the sale, lease, rental, or licensing of real property are in this state if that property is
located in this state.

(c) Receipts from the lease or rental of tangible personal property are sales in this state to the extent that
the property is utilized in this state. The extent of utilization of tangible personal property in this state is
determined by multiplying the receipts by a fraction, the numerator of which is the number of days of
physical location of the property in this state during the lease or rental period in the tax year and the
denominator of which is the number of days of physical location of the property everywhere during all
lease or rental periods in the tax year. If the physical location of the property during the lease or rental
period is unknown or cannot be determined, the tangible personal property is utilized in the state in which
the property was located at the time the lease or rental payer obtained possession.

(d) Receipts from the lease or rental of mobile transportation property owned by the taxpayer are in this
state to the extent that the property is used in this state. The extent an aircraft will be deemed to be used
in this state and the amount of receipts that is to be included in the numerator of this state's sales factor is
determined by multiplying all the receipts from the lease or rental of the aircraft by a fraction, the
numerator of the fraction is the number of landings of the aircraft in this state and the denominator of the
fraction is the total number of landings of the aircraft. If the extent of the use of any transportation
property within this state cannot be determined, then the receipts are in this state if the property has its
principal base of operations in this state.

(e) Royalties and other income received for the use of or for the privilege of using intangible property,
including patents, know-how, formulas, designs, processes, patterns, copyrights, trade names, service
names, franchises, licenses, contracts, customer lists, computer software, or similar items, are attributed
to the state in which the property is used by the purchaser. If the property is used in more than 1 state,
the royalties or other income shall be apportioned to this state pro rata according to the portion of use in
this state. If the portion of use in this state cannot be determined, the royalties or other income shall be
excluded from both the numerator and the denominator. Intangible property is used in this state if the
purchaser uses the intangible property or the rights to the intangible property in the regular course of its
business operations in this state, regardless of the location of the purchaser's customers.

(2) Sales from the performance of services are in this state and attributable to this state as follows:

(a) Except as otherwise provided in this section, all receipts from the performance of services are
included in the numerator of the apportionment factor if the recipient of the services receives all of the
benefit of the services in this state. If the recipient of the services receives some of the benefit of the
services in this state, the receipts are included in the numerator of the apportionment factor in proportion
to the extent that the recipient receives benefit of the services in this state.

(b) Sales derived from securities brokerage services attributable to this state are determined by
multiplying the total dollar amount of receipts from securities brokerage services by a fraction, the
numerator of which is the sales of securities brokerage services to customers within this state, and the
denominator of which is the sales of securities brokerage services to all customers. Receipts from
securities brokerage services include commissions on transactions, the spread earned on principal
transactions in which the broker buys or sells from its account, total margin interest paid on behalf of
brokerage accounts owned by the broker's customers, and fees and receipts of all kinds from the
underwriting of securities. If receipts from brokerage services can be associated with a particular
customer, but it is impractical to associate the receipts with the address of the customer, then the address
of the customer shall be presumed to be the address of the branch office that generates the transactions
for the customer.

(c) Sales of services that are derived directly or indirectly from the sale of management, distribution,
administration, or securities brokerage services to, or on behalf of, a regulated investment company or its
beneficial owners, including receipts derived directly or indirectly from trustees, sponsors, or participants
of employee benefit plans that have accounts in a regulated investment company, shall be attributable to
this state to the extent that the shareholders of the regulated investment company are domiciled within
this state. For purposes of this subdivision, "domicile" means the shareholder's mailing address on the
records of the regulated investment company. If the regulated investment company or the person
providing management services to the regulated investment company has actual knowledge that the
shareholder's primary residence or principal place of business is different than the shareholder's mailing
address, then the shareholder's primary residence or principal place of business is the shareholder's
domicile. A separate computation shall be made with respect to the receipts derived from each regulated
investment company. The total amount of sales attributable to this state shall be equal to the total receipts
received by each regulated investment company multiplied by a fraction determined as follows:

( i ) The numerator of the fraction is the average of the sum of the beginning-of-year and end-of-year
number of shares owned by the regulated investment company shareholders who have their domicile in
this state.
( ii ) The denominator of the fraction is the average of the sum of the beginning-of-year and end-of-year
number of shares owned by all shareholders.

( iii ) For purposes of the fraction, the year shall be the tax year of the regulated investment company that
ends with or within the tax year of the taxpayer.

(3) Receipts from the origination of a loan or gains from the sale of a loan secured by residential real
property is deemed a sale in this state only if 1 or more of the following apply:

(a) The real property is located in this state.

(b) The real property is located both within this state and 1 or more other states and more than 50% of the
fair market value of the real property is located within this state.

(c) More than 50% of the real property is not located in any 1 state and the borrower is located in this
state.

(4) Interest from loans secured by real property is in this state if the property is located within this state or
if the property is located both within this state and 1 or more other states, if more than 50% of the fair
market value of the real property is located within this state, or if more than 50% of the fair market value
of the real property is not located within any 1 state, if the borrower is located in this state. The
determination of whether the real property securing a loan is located within this state shall be made as of
the time the original agreement was made and any and all subsequent substitutions of collateral shall be
disregarded.

(5) Interest from a loan not secured by real property is in this state if the borrower is located in this state.

(6) Gains from the sale of a loan not secured by real property, including income recorded under the
coupon stripping rules of section 1286 of the internal revenue code, are in this state if the borrower is in
this state.

(7) Receipts from credit card receivables, including interest, fees, and penalties from credit card
receivables and receipts from fees charged to cardholders, such as annual fees, are in this state if the
billing address of the cardholder is in this state.

(8) Receipts from the sale of credit card or other receivables is in this state if the billing address of the
customer is in this state. Credit card issuer's reimbursements fees are in this state if the billing address of
the cardholder is in this state. Receipts from merchant discounts, computed net of any cardholder
chargebacks, but not reduced by any interchange transaction fees or by any issuer's reimbursement fees
paid to another for charges made by its cardholders, are in this state if the commercial domicile of the
merchant is in this state.

(9) Loan servicing fees derived from loans of another secured by real property are in this state if the real
property is located in this state, or the real property is located both within and outside of this state and 1
or more states if more than 50% of the fair market value of the real property is located in this state, or
more than 50% of the fair market value of the real property is not located in any 1 state, and the borrower
is located in this state. Loan servicing fees derived from loans of another not secured by real property are
in this state if the borrower is located in this state. If the location of the security cannot be determined,
then loan servicing fees for servicing either the secured or the unsecured loans of another are in this state
if the lender to whom the loan servicing service is provided is located in this state.

(10) Receipts from the sale of securities and other assets from investment and trading activities,
including, but not limited to, interest, dividends, and gains are in this state in either of the following
circumstances:

(a) The person's customer is in this state.

(b) If the location of the person's customer cannot be determined, both of the following:

( i ) Interest, dividends, and other income from investment assets and activities and from trading assets
and activities, including, but not limited to, investment securities; trading account assets; federal funds;
securities purchased and sold under agreements to resell or repurchase; options; futures contracts;
forward contracts; notional principal contracts such as swaps; equities; and foreign currency transactions
are in this state if the average value of the assets is assigned to a regular place of business of the
taxpayer within this state. Interest from federal funds sold and purchased and from securities purchased
under resale agreements and securities sold under repurchase agreements are in this state if the average
value of the assets is assigned to a regular place of business of the taxpayer within this state. The
amount of receipts and other income from investment assets and activities is in this state if assets are
assigned to a regular place of business of the taxpayer within this state.

( ii ) The amount of receipts from trading assets and activities, including, but not limited to, assets and
activities in the matched book, in the arbitrage book, and foreign currency transactions, but excluding
amounts otherwise sourced in this section, are in this state if the assets are assigned to a regular place of
business of the taxpayer within this state.

(11) Receipts from transportation services rendered by a person subject to tax in another state are in this
state and shall be attributable to this state as follows:

(a) Except as otherwise provided in subdivisions (b) through (e), receipts shall be proportioned based on
the ratio that revenue miles of the person in this state bear to the revenue miles of the person
everywhere.

(b) Receipts from maritime transportation services shall be attributable to this state as follows:

( i ) 50% of those receipts that either originate or terminate in this state.

( ii ) 100% of those receipts that both originate and terminate in this state.
(c) Receipts attributable to this state of a person whose business activity consists of the transportation
both of property and of individuals shall be proportioned based on the total gross receipts for passenger
miles and ton mile fractions, separately computed and individually weighted by the ratio of gross receipts
from passenger transportation to total gross receipts from all transportation, and by the ratio of gross
receipts from freight transportation to total gross receipts from all transportation, respectively.

(d) Receipts attributable to this state of a person whose business activity consists of the transportation of
oil by pipeline shall be proportioned based on the ratio that the gross receipts for the barrel miles
transported in this state bear to the gross receipts for the barrel miles transported by the person
everywhere.

(e) Receipts attributable to this state of a person whose business activities consist of the transportation of
gas by pipeline shall be proportioned based on the ratio that the gross receipts for the 1,000 cubic feet
miles transported in this state bear to the gross receipts for the 1,000 cubic feet miles transported by the
person everywhere.

(12) For purposes of subsection (11), if a taxpayer can show that revenue mile information is not available
or cannot be obtained without unreasonable expense to the taxpayer, receipts attributable to this state
shall be that portion of the revenue derived from transportation services everywhere performed that the
miles of transportation services performed in this state bears to the miles of transportation services
performed everywhere. If the department determines that the information required for the calculations
under subsection (11) are not available or cannot be obtained without unreasonable expense to the
taxpayer, the department may use other available information that in the opinion of the department will
result in an equitable allocation of the taxpayer's receipts to this state.

(13) Except as provided in subsections (14) through (19), receipts from the sale of telecommunications
service or mobile telecommunications service are in this state if the customer's place of primary use of the
service is in this state. As used in this subsection, "place of primary use" means the customer's residential
street address or primary business street address where the customer's use of the telecommunications
service primarily occurs. For mobile telecommunications service, the customer's residential street address
or primary business street address is the place of primary use only if it is within the licensed service area
of the customer's home service provider.

(14) Receipts from the sale of telecommunications service sold on an individual call-by-call basis are in
this state if either of the following applies:

(a) The call both originates and terminates in this state.

(b) The call either originates or terminates in this state and the service address is located in this state.

(15) Receipts from the sale of postpaid telecommunications service are in this state if the origination point
of the telecommunication signal, as first identified by the service provider's telecommunication system or
as identified by information received by the seller from its service provider if the system used to transport
telecommunication signals is not the seller's, is located in this state.

(16) Receipts from the sale of prepaid telecommunications service or prepaid mobile telecommunications
service are in this state if the purchaser obtains the prepaid card or similar means of conveyance at a
location in this state. Receipts from recharging a prepaid telecommunications service or mobile
telecommunications service is in this state if the purchaser's billing information indicates a location in this
state.

(17) Receipts from the sale of private communication services are in this state as follows:

(a) 100% of the receipts from the sale of each channel termination point within this state.

(b) 100% of the receipts from the sale of the total channel mileage between each termination point within
this state.

(c) 50% of the receipts from the sale of service segments for a channel between 2 customer channel
termination points, 1 of which is located in this state and the other is located outside of this state, which
segments are separately charged.

(d) The receipts from the sale of service for segments with a channel termination point located in this
state and in 2 or more other states or equivalent jurisdictions, and which segments are not separately
billed, are in this state based on a percentage determined by dividing the number of customer channel
termination points in this state by the total number of customer channel termination points.

(18) Receipts from the sale of billing services and ancillary services for telecommunications service are in
this state based on the location of the purchaser's customers. If the location of the purchaser's customers
is not known or cannot be determined, the sale of billing services and ancillary services for
telecommunications service are in this state based on the location of the purchaser.

(19) Receipts to access a carrier's network or from the sale of telecommunications services for resale are
in this state as follows:

(a) 100% of the receipts from access fees attributable to intrastate telecommunications service that both
originates and terminates in this state.

(b) 50% of the receipts from access fees attributable to interstate telecommunications service if the
interstate call either originates or terminates in this state.

(c) 100% of the receipts from interstate end user access line charges, if the customer's service address is
in this state. As used in this subdivision, "interstate end user access line charges" includes, but is not
limited to, the surcharge approved by the federal communications commission and levied pursuant to 47
CFR 69.

(d) Gross receipts from sales of telecommunications services to other telecommunication service
providers for resale shall be sourced to this state using the apportionment concepts used for non-resale
receipts of telecommunications services if the information is readily available to make that determination.
If the information is not readily available, then the taxpayer may use any other reasonable and consistent
method.

(20) Except as otherwise provided under this subsection, for a taxpayer whose business activities include
live radio or television programming as described in subsector code 7922 of industry group 792 under the
standard industrial classification code as compiled by the United States department of labor or are
included in industry group 483, 484, 781, or 782 under the standard industrial classification code as
compiled by the United States department of labor, or any combination of the business activities included
in those groups, media receipts are in this state and attributable to this state only if the commercial
domicile of the customer is in this state and the customer has a direct connection or relationship with the
taxpayer pursuant to a contract under which the media receipts are derived. For media receipts from the
sale of advertising, if the customer of that advertising is commercially domiciled in this state and receives
some of the benefit of the sale of that advertising in this state, the media receipts from the advertising to
that customer are included in the numerator of the apportionment factor in proportion to the extent that
the customer receives the benefit of the advertising in this state. For purposes of this subsection, if the
taxpayer is a broadcaster and if the customer receives some of the benefit of the advertising in this state,
the media receipts for that sale of advertising from that customer shall be proportioned based on the ratio
that the broadcaster's viewing or listening audience in this state bears to its total viewing or listening
audience everywhere. As used in this subsection:

(a) "Media property" means motion pictures, television programs, internet programs and websites, other
audiovisual works, and any other similar property embodying words, ideas, concepts, images, or sound
without regard to the means or methods of distribution or the medium in which the property is embodied.

(b) "Media receipts" means receipts from the sale, license, broadcast, transmission, distribution,
exhibition, or other use of media property and receipts from the sale of media services. Media receipts do
not include receipts from the sale of media property that is a consumer product that is ultimately sold at
retail.

(c) "Media services" means services in which the use of the media property is integral to the performance
of those services.

(21) Terms used in subsections (13) through (20) have the same meaning as those terms defined in the
streamlined sales and use tax agreement administered under the streamlined sales and use tax
administration act, 2004 PA 174, MCL 205.801 to 205.833.

(22) For purposes of this section, a borrower is considered located in this state if the borrower's billing
address is in this state.

Sec. 403. (1) Notwithstanding any other provision in this act, the credits provided in this section shall be
taken before any other credit under this act. Except as otherwise provided in subsection (6), for the 2008
tax year, the total combined credit allowed under this section shall not exceed 50% of the tax liability
imposed under this act before the imposition and levy of the surcharge under section 281. For the 2009
tax year and each tax year after 2009, the total combined credit allowed under this section shall not
exceed 52% of the tax liability imposed under this act before the imposition and levy of the surcharge
under section 281.

(2) Subject to the limitation in subsection (1), for the 2008 tax year a taxpayer may claim a credit against
the tax imposed by this act equal to 0.296% of the taxpayer's compensation in this state. For the 2009 tax
year and each tax year after 2009, subject to the limitation in subsection (1), a taxpayer may claim a
credit against the tax imposed by this act equal to 0.370% of the taxpayer's compensation in this state.
For purposes of this subsection, a taxpayer includes a person subject to the tax imposed under chapter
2A and a person subject to the tax imposed under chapter 2B. A professional employer organization shall
not include payments by the professional employer organization to the officers and employees of a client
of the professional employer organization whose employment operations are managed by the
professional employer organization. A client may include payments by the professional employer
organization to the officers and employees of the client whose employment operations are managed by
the professional employer organization.

(3) Subject to the limitation in subsection (1), for the 2008 tax year a taxpayer may claim a credit against
the tax imposed by this act equal to 2.32% multiplied by the result of subtracting the sum of the amounts
calculated under subdivisions (d), (e), and (f) from the sum of the amounts calculated under subdivisions
(a), (b), and (c).

Subject to the limitation in subsection (1), for the 2009 tax year and each tax year after 2009, a taxpayer
may claim a credit against the tax imposed by this act equal to 2.9% multiplied by the result of subtracting
the sum of the amounts calculated under subdivisions (d), (e), and (f) from the sum of the amounts
calculated under subdivisions (a), (b), and (c):

(a) Calculate the cost, including fabrication and installation, paid or accrued in the taxable year of tangible
assets of a type that are, or under the internal revenue code will become, eligible for depreciation,
amortization, or accelerated capital cost recovery for federal income tax purposes, provided that the
assets are physically located in this state for use in a business activity in this state and are not mobile
tangible assets.

(b) Calculate the cost, including fabrication and installation, paid or accrued in the taxable year of mobile
tangible assets of a type that are, or under the internal revenue code will become, eligible for
depreciation, amortization, or accelerated capital cost recovery for federal income tax purposes. This
amount shall be multiplied by the apportionment factor for the tax year as prescribed in chapter 3.

(c) For tangible assets, other than mobile tangible assets, purchased or acquired for use outside of this
state in a tax year beginning after December 31, 2007 and subsequently transferred into this state and
purchased or acquired for use in a business activity, calculate the federal basis used for determining gain
or loss as of the date the tangible assets were physically located in this state for use in a business activity
plus the cost of fabrication and installation of the tangible assets in this state.

(d) If the cost of tangible assets described in subdivision (a) was paid or accrued in a tax year beginning
after December 31, 2007, or before December 31, 2007 to the extent the credit is used and at the rate at
which the credit was used under former 1975 PA 228 or to the extent the credit was used, and at the rate
at which the credit was used under this act, calculate the gross proceeds or benefit derived from the sale
or other disposition of the tangible assets minus the gain, multiplied by the apportionment factor for the
taxable year as prescribed in chapter 3, and plus the loss, multiplied by the apportionment factor for the
taxable year as prescribed in chapter 3 from the sale or other disposition reflected in federal taxable
income.

(e) If the cost of mobile tangible assets described in subdivision (b) was paid or accrued in a tax year
beginning after December 31, 2007, or before December 31, 2007 to the extent the credit is used and at
the rate at which the credit was used under former 1975 PA 228 or to the extent the credit was used, and
at the rate at which the credit was used under this act, calculate the gross proceeds or benefit derived
from the sale or other disposition of the mobile tangible assets minus the gain and plus the loss from the
sale or other disposition reflected in federal taxable income. This amount shall be multiplied by the
apportionment factor for the tax year as prescribed in chapter 3.

(f) For assets purchased or acquired in a tax year beginning after December 31, 2007, or before
December 31, 2007 to the extent the credit is used and at the rate at which the credit was used under
former 1975 PA 228 or to the extent the credit was used, and at the rate at which the credit was used
under this act, that were eligible for a credit under subdivision (a) or (c) and that were transferred out of
this state, calculate the federal basis used for determining gain or loss as of the date of the transfer. For
purposes of this subdivision, "transferred out of this state" means removal from this state of tangible
assets, other than mobile tangible assets, by means other than sale or other disposition.

(4) For a tax year in which the amount of the credit calculated under subsection (3) is negative, the
absolute value of that amount is added to the taxpayer's tax liability for the tax year.

(5) A taxpayer that claims a credit under this section is not prohibited from claiming a credit under section
405. However, the taxpayer shall not claim a credit under this section and section 405 based on the same
costs and expenses.

(6) For a taxpayer primarily engaged in furnishing electric and gas utility service that makes capital
investments in electric and gas distribution assets for which a portion of the credit provided under
subsection (3) would be denied for the 2008 tax year by reason of the 50% limitation of subsection (1),
the 50% limitation on the total combined credit for the 2008 tax year provided in subsection (1) shall be
increased by an amount not to exceed the lesser of the amount of the denied credit or 50% of the tax
increase under this act accrued for financial reporting purposes due to the elimination of the deduction
under section 168(k) of the internal revenue code by 2008 PA 434. Provided, however, that the total
combined credit allowed under this section for the 2008 tax year shall not exceed 80% of the tax liability
imposed under this act after the imposition and levy of the surcharge under section 281.

Sec. 433. (1) A taxpayer that is a business located and conducting business activity within a renaissance
zone may claim a credit against the tax imposed by this act for the tax year to the extent and for the
duration provided pursuant to the Michigan renaissance zone act, 1996 PA 376, MCL 125.2681 to
125.2696, as follows:

(a) Except as otherwise provided under subdivision (b), for a taxpayer located and conducting business
activity in a renaissance zone after November 30, 2002, a credit equal to the lesser of the following:

( i ) The tax liability attributable to business activity conducted within a renaissance zone in the tax year.

( ii ) Ten percent of adjusted services performed in a designated renaissance zone.

(b) For a taxpayer located and conducting business activity in a renaissance zone before December 1,
2002, a credit equal to the greater of the following:

( i ) The amount calculated under subdivision (a)( i ) or ( ii ), whichever is less.

( ii ) The product of the following:

(A) The credit claimed under section 39b of former 1975 PA 228 for the tax year ending in 2007.

(B) The ratio of the taxpayer's payroll in this state in the tax year divided by the taxpayer's payroll in this
state in its tax year ending in 2007 under former 1975 PA 228.

(C) The ratio of the taxpayer's renaissance zone business activity factor for the tax year divided by the
taxpayer's renaissance zone business activity factor for its tax year ending in 2007 under section 39b of
former 1975 PA 228.

(2) Any portion of the taxpayer's tax liability that is attributable to illegal activity conducted in the
renaissance zone shall not be used to calculate a credit under this section.

(3) The credit allowed under this section continues through the tax year in which the renaissance zone
designation expires.

(4) If the amount of the credit allowed under this section exceeds the tax liability of the taxpayer for the
tax year, that portion of the credit that exceeds the tax liability shall not be refunded.

(5) A taxpayer that claims a credit under this section shall not employ, pay a speaker fee to, or provide
any remuneration, compensation, or consideration to any person employed by the state, the state
administrative board created in 1921 PA 2, MCL 17.1 to 17.3, or the renaissance zone review board
created in section 5 of the renaissance zone act, 1996 PA 376, MCL 125.2685, whose employment
relates or related in any way to the authorization or enforcement of the credit allowed under this section
for any year in which the taxpayer claims a credit under this section and for the 3 years after the last year
that a credit is claimed.

(6) To be eligible for the credit allowed under this section, an otherwise qualified taxpayer shall file an
annual return under this act in a format determined by the department.

(7) Any portion of the taxpayer's tax liability that is attributable to business activity related to the operation
of a casino, and business activity that is associated or affiliated with the operation of a casino, including,
but not limited to, the operation of a parking lot, hotel, motel, or retail store, shall not be used to calculate
a credit under this section.

(8) For purposes of this section, taxpayer includes a person subject to the tax imposed under chapter 2A
and a person subject to the tax imposed under chapter 2B.

(9) As used in this section:

(a) "Adjusted services performed in a designated renaissance zone" means either of the following:

( i ) Except as provided in subparagraph ( ii ), the sum of the taxpayer's payroll for services performed in a
designated renaissance zone plus an amount equal to the amount deducted in arriving at federal taxable
income for the tax year for depreciation, amortization, or immediate or accelerated write-off for tangible
property exempt under section 7ff of the general property tax act, 1893 PA 206, MCL 211.7ff, in the tax
year or, for new property, in the immediately following tax year.

( ii ) For a partnership, limited liability company, S corporation, or individual, the amount determined under
subparagraph ( i ) plus the product of the following as related to the taxpayer if greater than zero:

(A) Business income.

(B) The ratio of the taxpayer's total sales in this state during the tax year divided by the taxpayer's total
sales everywhere during the tax year.

(C) The renaissance zone business activity factor.

(b) "Casino" means a casino regulated by this state pursuant to the Michigan gaming control and revenue
act, 1996 IL 1, MCL 432.201 to 432.226.

(c) "New property" means property that has not been subject to, or exempt from, the collection of taxes
under the general property tax act, 1893 PA 206, MCL 211.1 to 211.155, and has not been subject to, or
exempt from, ad valorem property taxes levied in another state, except that receiving an exemption as
inventory property does not disqualify property.

(d) "Payroll" means total salaries and wages before deducting any personal or dependency exemptions.

(e) "Renaissance zone" means that term as defined in the Michigan renaissance zone act, 1996 PA 376,
MCL 125.2681 to 125.2696.
(f) "Renaissance zone business activity factor" means a fraction, the numerator of which is the ratio of the
average value of the taxpayer's property located in a designated renaissance zone to the average value
of the taxpayer's property in this state plus the ratio of the taxpayer's payroll for services performed in a
designated renaissance zone to all of the taxpayer's payroll in this state and the denominator of which is
2.

(g) "Tax liability attributable to business activity conducted within a renaissance zone" means the
taxpayer's tax liability multiplied by the renaissance zone business activity factor.

Sec. 508. (1) If, as a result of the changes enacted by the amendatory act that added this section, a
taxpayer has an overpayment of tax for any tax year beginning after December 31, 2009 through the tax
year beginning after December 31, 2013, the taxpayer shall, in accordance with sections 27a and 30 of
1941 PA 122, MCL 205.27a and 205.30, file a claim for a refund, on or after January 1, 2015 but no later
than December 31, 2015, using a form, process, or format as prescribed by the department. A claim filed
pursuant to this section is limited to the determination of any tax liability and any overpayment resulting
from the changes enacted by the amendatory act that added this section. Interest shall be calculated in
accordance with section 23 of 1941 PA 122, MCL 205.23. Any refund paid under this section shall be
paid in equal annual payments over 6 years beginning in 2016.

(2) Notwithstanding section 21(6) and (7) of 1941 PA 122, MCL 205.21, and the statute of limitations
period prescribed under section 27a(2) of 1941 PA 122,MCL 205.27a , the department may assess a
taxpayer that claimed a refund pursuant to this section for any amount determined after audit or
investigation to have exceeded the proper and correct amount of overpayment resulting from the changes
enacted by the amendatory act that added this section. The assessment issued under this subsection
shall not be issued more than 4 years after the date the taxpayer filed its claim under this section and
shall be limited to the changes enacted by the amendatory act that added this section.

(3) There is appropriated to the department for the 2014-2015 state fiscal year the sum of $1,000,000.00
to begin implementing the requirements of the amendatory act that added this section. Any portion of this
amount under this section that is not expended in the 2014-2015 state fiscal year shall not lapse to the
general fund but shall be carried forward in a work project account that is in compliance with section 451a
of the management and budget act, 1984 PA 431, MCL 18.1451a, for the following state fiscal year.

Enacting section 1. 1969 PA 343, MCL 205.581 to 205.589 [FN1] , is repealed retroactively and effective
beginning January 1, 2008. It is the intent of the legislature that the repeal of 1969 PA 343, MCL 205.581
to 205.589 [FN1] , is to express the original intent of the legislature regarding the application of section
301 of the Michigan business tax act, 2007 PA 36, AMEND MCL 208.1301 , and the intended effect of
that section to eliminate the election provision included within section 1 of 1969 PA 343,AMENDMCL
205.581 , and that the 2011 amendatory act that amended section 1 of 1969 PA 343,AMENDMCL
205.581 , was to further express the original intent of the legislature regarding the application of section
301 of the Michigan business tax act, 2007 PA 36,AMENDMCL 208.1301 , and to clarify that the election
provision included within section 1 of 1969 PA 343,AMENDMCL 205.581 , is not available under the
income tax act of 1967, 1967 PA 281, MCL 206.1 to206.713 [FN2]. Enacting section 2. This amendatory
act is retroactive and is effective for tax years beginning on and after January 1, 2010.

This act is ordered to take immediate effect.

Secretary of the Senate Clerk of the House of Representatives Approved Governor

© 2015 Thomson Reuters/Tax & Accounting. All Rights Reserved.
                                                                                                                     Page 1

                                        Deering's California Codes Annotated
                                Copyright © 2015 by Matthew Bender & Company, Inc.
                                         a member of the LexisNexis Group.
                                                 All rights reserved.

                             *** This document is current through the 2015 Supplement ***
                                                 (All 2014 legislation)

                                              FISH AND GAME CODE
                                    Division 11. Pacific Marine Fisheries Compact
                                               Chapter 1. The Compact

                             GO TO CALIFORNIA CODES ARCHIVE DIRECTORY

                                           Cal Fish & G Code § 14001 (2015)

§ 14001. Form and contents; Interpretation; Administration

    The form and contents of the Pacific Marine Fisheries Compact shall be substantially as provided in this section
and the effect of its provisions shall be interpreted and administered in conformity with the provisions of this division:

    PACIFIC MARINE FISHERIES COMPACT

    The contracting states do hereby agree as follows:

    Article I

    The purposes of this compact are and shall be to promote the better utilization of fisheries, marine, shell and
anadromous, which are of mutual concern, and to develop a joint program of protection and prevention of physical
waste of such fisheries in all of those areas of the Pacific Ocean over which the compacting states jointly or separately
now have or may hereafter acquire jurisdiction.

    Nothing herein contained shall be construed so as to authorize the compacting states or any of them to limit the
production of fish or fish products for the purpose of establishing or fixing the prices thereof or creating and
perpetuating a monopoly.

    Article II

    This agreement shall become operative immediately as to those states executing it in the form that is in accordance
with the laws of the executing state and when the Congress has given its consent.

    Article III
                                                                                                                    Page 2
                                              Cal Fish & G Code § 14001

    Each state joining herein shall appoint, as determined by state statutes, one or more representatives to a commission
hereby constituted and designated as the Pacific States Marine Fisheries Commission, of whom one shall be the
administrative or other officer of the agency of such state charged with the conservation of the fisheries resources to
which this compact pertains. This commission shall be invested with the powers and duties set forth herein.

     The term of each commissioner of the Pacific States Marine Fisheries Commission shall be four years. A
commissioner shall hold office until his successor shall be appointed and qualified but such successor's term shall expire
four years from legal date of expiration of the term of his predecessor. Vacancies occurring in the office of such
commissioner from any reason or cause shall be filled for the unexpired term, or a commissioner may be removed from
office, as provided by the statutes of the state concerned. Each commissioner may delegate in writing from time to time,
to a deputy, the power to be present and participate, including voting as his representative or substitute, at any meeting
of or hearing by or other proceeding of the commission.

    Voting powers under this compact shall be limited to one vote for each state regardless of the number of
representatives.

    Article IV

     The duty of the said commission shall be to make inquiry and ascertain from time to time such methods, practices,
circumstances and conditions as may be disclosed for bringing about the conservation and the prevention of the
depletion and physical waste of the fisheries, marine, shell, and anadromous in all of those areas of the Pacific Ocean
over which the states signatory to this compact jointly or separately now have or may hereafter acquire jurisdiction. The
commission shall have power to recommend the coordination of the exercise of the police powers of the several states
within their respective jurisdictions and said conservation zones to promote the preservation of those fisheries and their
protection against overfishing, waste, depletion or any abuse whatsoever and to assure a continuing yield from the
fisheries resources of the signatory parties hereto.

     To that end the commission shall draft and, after consultation with the advisory committee hereinafter authorized,
recommend to the governors and legislative branches of the various signatory states hereto legislation dealing with the
conservation of the marine, shell, and anadromous fisheries in all of those areas of the Pacific Ocean over which the
states signatory to this compact jointly or separately now have or may hereafter acquire jurisdiction. The commission
shall, more than one month prior to any regular meeting of the legislative branch in any state signatory hereto, present to
the governor of such state its recommendations relating to enactments by the legislative branch of that state in furthering
the intents and purposes of this compact.

    The commission shall consult with and advise the pertinent administrative agencies in the signatory states with
regard to problems connected with the fisheries and recommend the adoption of such regulations as it deems advisable
and which lie within the jurisdiction of such agencies.

     The commission shall have power to recommend to the states signatory hereto the stocking of the waters of such
states with marine, shell or anadromous fish and fish eggs or joint stocking by some or all of such states and when two
or more of the said states shall jointly stock waters the commission shall act as the coordinating agency for such
stocking.

    Article V

    The commission shall elect from its number a chairman and a vice chairman and shall appoint and at its pleasure
remove or discharge such officers and employees as may be required to carry the provisions of this compact into effect
and shall fix and determine their duties, qualifications and compensation. Said commission shall adopt rules and
regulations for the conduct of its business. It may establish and maintain one or more offices for the transaction of its
business and may meet at any time or place within the territorial limits of the signatory states but must meet at least
once a year.
                                                                                                                      Page 3
                                               Cal Fish & G Code § 14001

    Article VI

    No action shall be taken by the commission except by the affirmative vote of a majority of the whole number of
compacting states represented at any meeting. No recommendation shall be made by the commission in regard to any
species of fish except by the vote of a majority of the compacting states which have an interest in such species.

    Article VII

     The fisheries research agencies of the signatory states shall act in collaboration as the official research agency of
the Pacific States Marine Fisheries Commission.

    An advisory committee to be representative of the commercial fishermen, commercial fishing industry and such
other interests of each state as the commission deems advisable shall be established by the commission as soon as
practicable for the purpose of advising the commission upon such recommendations as it may desire to make.

    Article VIII

    Nothing in this compact shall be construed to limit the powers of any state or to repeal or prevent the enactment of
any legislation or the enforcement of any requirement by any state imposing additional conditions and restrictions to
conserve its fisheries.

    Article IX

    Continued absence of representation or of any representative on the commission from any state party hereto, shall
be brought to the attention of the governor thereof.

    Article X

    The states agree to make available annual funds for the support of the commission on the following basis:

     Eighty percent of the annual budget shall be shared equally by those member states having as a boundary the
Pacific Ocean. Not less than 5 percent of the annual budget shall be contributed by any other member state. The balance
of the annual budget shall be shared by those member states having as a boundary the Pacific Ocean, in proportion to
the primary market value of the products of their commercial fisheries on the basis of the latest five-year catch records.

    The annual contribution of each member state shall be figured to the nearest one hundred dollars ($100).

    Article XI

    This compact shall continue in force and remain binding upon each state until renounced by it. Renunciation of this
compact must be preceded by sending six months' notice in writing of intention to withdraw from the compact to the
other parties hereto.

    Article XII

     Hawaii or any other state having rivers or streams tributary to the Pacific Ocean may become a contracting state by
enactment of the Pacific Marine Fisheries Compact. Upon admission of any new state to the compact, the purposes of
the compact and the duties of the commission shall extend to the development of joint programs for the conservation,
protection and prevention of physical waste of fisheries in which the contracting states are mutually concerned and to all
waters of the newly admitted state necessary to develop such programs.

     This compact shall become effective upon its enactment by the states signatory to this compact and upon
ratification by Congress by virtue of the authority vested in it under Article 1, Section 10, of the Constitution of the
                                                                                                                        Page 4
                                                Cal Fish & G Code § 14001

United States.

HISTORY:

    Enacted 1957. Amended Stats 1959 ch 1316 § 2; Stats 1961 ch 1052 § 2; Stats 1969 ch 361 § 2; Stats 1996 ch 870
§ 54.

NOTES:

Amendments:

1959 Amendment:

     (1) Substituted "compacting states" for "States of California, Oregon, and Washington" in the first paragraph of
Article I, in Article II, and wherever it appears in Article IV; (2) added ", other than Idaho or Montana," in the first
paragraph of Article X; (3) substituted the first sentence of the second paragraph of Article X for the former first
sentence which read: "The compacting states agree to make available initially the annual amounts scheduled below,
which amounts are calculated in the manner set forth herein, on the basis of the latest five-year catch records."; (4)
deleted "Subsequent" before "Budgets shall" in the second sentence of the second paragraph of Article X; (5) deleted
the table at the end of Article X which read:

     Click here to view image.

    and (6) added Article XII.

1961 Amendment:

     (1) Substituted "States of California, Oregon, and Washington" for "compacting states" in the first paragraph of
Article I, in Article II, and wherever it appears in Article IV; (2) deleted ", other than Idaho or Montana," after
"provided, no state" in the first paragraph of Article X; (3) substituted the first sentence of the second paragraph of
Article X for the former first sentence which read: "Idaho or Montana, on agreeing to this compact, shall contribute one
thousand dollars ($1,000) per annum."; (4) added "Subsequent" before "budgets shall" in the second sentence of the
second paragraph of Article X; (5) added the table at the end of Article X; (6) substituted "States of Alaska or Hawaii"
for "State of Alaska, the State of Hawaii," in the first sentence of the first paragraph of Article XII; (7) substituted "joint
programs" for "a joint program" after "development of" in the second sentence of the first paragraph of Article XII; (8)
substituted "programs" for "a program" after "develop such" in the second sentence of the first paragraph of Article XII;
(9) substituted "States the second sentence of the first paragraph of Article XII; (9) substituted "States of California,
Oregon and Washington" for "other compacting states" in the second paragraph of Article XII; and (10) substituted
"ratification by" for "consent and approval of" before "Congress" in the second paragraph of Article XII.

1969 Amendment:

      (1) Substituted "compacting states" for "States of California, Oregon, and Washington" in the first paragraph of
Article I; (2) substituted "compacting" for "aforesaid" after "authorize the" in the second paragraph of Article I; (3)
deleted "whenever two or more of the States of California, Oregon and Washington have executed it" after "executing
it" in Article II; (4) added "when" before "the Congress" in Article II; (5) substituted "states signatory to this compact"
for "States of California, Oregon and Washington" in the first and second paragraphs of Article IV and in the second
                                                                                                                     Page 5
                                               Cal Fish & G Code § 14001

paragraph of Article XII; (6) substituted Article X for former Article X which read:

     "The states agree to make available annual funds for the support of the commission in proportion to the primary
market value of the products of their fisheries as recorded in the latest published reports (five-year average); provided,
no state shall contribute less than two thousand dollars ($2,000) per annum and the annual contribution of each state
above the minimum shall be figured to the nearest one hundred dollars ($100).

    "The compacting states agree to make available initially the annual amounts scheduled below, which amounts are
calculated in the manner set forth herein, on the basis of the latest five year catch records. Subsequent budgets shall be
recommended by a majority of the commission and the total amount thereof allocated equitably among the states in
accordance with the above formula.

     Click here to view image.

      (7) deleted "The States of Alaska or" at the beginning of Article XII; (8) added "other" after "Hawaii or any" in the
first paragraph of Article XII; and (9) substituted "compact" for "article" before "shall become" in the second paragraph
of Article XII.

1996 Amendment:

    Substituted (1) "the Pacific Marine Fisheries Compact" for "such compact" in the introductory clause; and (2)
"Pacific States Marine Fisheries Commission" for "Pacific Marine Fisheries Commission" wherever it appears.

Historical Derivation:

    Stats 1947 ch 1447 § 1, as amended Stats 1949 ch 76 § 1.

Collateral References:

    Consent of Congress July 24, 1947, c 419, 61 Stats 419, as amended July 10, 1970: 84 Statutes at Large 415.

    Hierarchy Notes:

     Div. 11 Note

     Div. 11, Ch. 1 Note

LexisNexis 50 State Surveys, Legislation & Regulations

      Fish & Game
                                                                                                                      Page 1

                                         Deering's California Codes Annotated
                                 Copyright © 2015 by Matthew Bender & Company, Inc.
                                          a member of the LexisNexis Group.
                                                  All rights reserved.

                             *** This document is current through the 2015 Supplement ***
                                                 (All 2014 legislation)

                                                 GOVERNMENT CODE
                                       Title 7.4. Tahoe Regional Planning Compact

                              GO TO CALIFORNIA CODES ARCHIVE DIRECTORY

                                              Cal Gov Code § 66800 (2015)

§ 66800. Ratification and approval by Legislature

    The Legislature of California hereby ratifies and approves the "Tahoe Regional Planning Compact" as set forth
below.

HISTORY:

    Added Stats 1967 ch 1589 § 1.

NOTES:

Note

    Stats 1967 ch 1589 provides:

    SEC. 2. Proclamation by Governor.

     The Secretary of State of the State of California shall transmit a duly certified copy of Section 1 of this act to the
Governor of the State of Nevada. The Governor of this state, whenever officially advised that the State of Nevada has
ratified and approved the compact set forth in Section 1 and whenever the Congress of the United States has approved
the compact, shall make proclamation of that fact. A copy of such proclamation shall be published one time in one
newspaper of general circulation in the county seats of Placer, El Dorado and Nevada Counties.

    SEC 4. Section 1 of this act shall become operative only if the compact creating the Tahoe Regional Planning
Agency as provided for in Section 1 of this act is adopted by the State of Nevada and approved by the Congress of the
United States. [As amended by Stats 1968 ch 988 § 6.]
                                                                                                                    Page 2
                                                 Cal Gov Code § 66800

Editor's Notes

   The compact was enacted by the State of Nevada as Nevada Revised Stats § 277.200, and approved by the
Congress of the United States on December 18, 1969 (Public Law 91-148, 83 Stat 360).

Collateral References:

    Cal. Legal Forms, (Matthew Bender) §§ 30B.30, 30B.126.

Law Review Articles:

    Water quality control at Lake Tahoe-regional planning. 58 Conn. L. Rptr. 1320.

    State land use control: Why pending federal legislation will help. 25 Hast LJ 1165.

    Hierarchy Notes:

     Tit. 7.4 Note

NOTES OF DECISIONS 1. Immunity

1. Immunity

     The Tahoe Regional Planning Agency, created by compact between the States of California and Nevada, is not
entitled to the immunity that the Eleventh Amendment provides to the compacting states, and is thus subject to the
"Judicial power of the United States" within the meaning of that Amendment, where both states disclaim any intent to
confer immunity on the agency, the terms of the compact indicate that the agency is to be regarded as a political
subdivision rather than as an arm of the state, and the actual operations of the agency involve the regulation of land use.
Lake Country Estates, Inc. v. Tahoe Regional Planning Agency (1979) 440 U.S. 391, 59 L. Ed. 2d 401, 99 S. Ct. 1171,
1979 US LEXIS 68.

   The individual members of the Tahoe Regional Planning Agency are entitled to absolute immunity from federal
damage liability to the extent that they act in a capacity comparable to that of members of a state legislature. Lake
Country Estates, Inc. v. Tahoe Regional Planning Agency (1979) 440 U.S. 391, 59 L. Ed. 2d 401, 99 S. Ct. 1171, 1979 US
LEXIS 68.

    The Tahoe Regional Planning Agency is not immune from monetary liability for inverse condemnation, even
though it has only the power to regulate, not the power to condemn. Even a temporary regulation of land may result in a
substantial burden to landowners, and where the burden results from governmental action amounting to a taking, the
government must pay the landowner for the value of the use of the land during the period. Tahoe-Sierra Preservation
Council, Inc. v. Tahoe Regional Planning Agency (1990, 9th Cir Nev) 911 F2d 1331, 1990 US App LEXIS 13540, cert.
denied, Tahoe-Sierra v. Tahoe Regional Planning Agency (1991) 499 U.S. 943, 113 L. Ed. 2d 459, 111 S. Ct. 1404, 1991
US LEXIS 1788.
                                                                                                                     Page 1

                                        Deering's California Codes Annotated
                                Copyright © 2015 by Matthew Bender & Company, Inc.
                                         a member of the LexisNexis Group.
                                                 All rights reserved.

                             *** This document is current through the 2015 Supplement ***
                                                 (All 2014 legislation)

                                                  VEHICLE CODE
                                            Division 6. Drivers' Licenses
                                          Chapter 6. Driver License Compact
                                              Article 2. Compact Terms

                             GO TO CALIFORNIA CODES ARCHIVE DIRECTORY

                                              Cal Veh Code § 15027 (2015)

§ 15027. Compact as law; Withdrawal procedure

     (a) This compact shall become effective as to any state in which this compact becomes effective as the law of that
state.

     (b) Any party state may withdraw from this compact by enacting a statute repealing this compact as the law of that
state, but no such withdrawal shall take effect until six months after the executive head of the withdrawing state has
given notice of the withdrawal to the executive heads of all other party states. No withdrawal shall affect the validity or
applicability by the licensing authorities of states remaining party to the compact of any report of conviction occurring
prior to the withdrawal.

HISTORY:

    Added Stats 1963 ch 237 § 10.

NOTES:

    Hierarchy Notes:

     Div. 6 Note

     Div. 6, Ch. 6 Note
                                                                   Page 2
                                            Cal Veh Code § 15027

LexisNexis 50 State Surveys, Legislation & Regulations

     Non-commercial Drivers Licenses
                                    2011 MCLS § 205.581
                                   2011 Michigan Code Archive

MICHIGAN COMPILED LAWS SERVICE > CHAPTER 205 TAXATION > MULTISTATE TAX
COMPACT

§ 205.581. Multistate tax compact; enactment.
 Sec. 1. The multistate tax compact is enacted into law and entered into with all jurisdictions legally
     joining therein, in the form substantially as follows:

                        MULTISTATE TAX COMPACT
 Article I. Purposes.

   The purposes of this compact are to:
     (1) Facilitate proper determination of state and local tax liability of multistate taxpayers,
         including the equitable apportionment of tax bases and settlement of apportionment
         disputes.
     (2) Promote uniformity or compatibility in significant components of tax systems.
     (3) Facilitate taxpayer convenience and compliance in the filing of tax returns and in other
         phases of tax administration.
     (4) Avoid duplicative taxation.
 Article II. Definitions.
       As used in this compact:
         (1) ″State″ means a state of the United States, the district of Columbia, the commonwealth
             of Puerto Rico, or any territory or possession of the United States.
         (2) ″Subdivision″ means any governmental unit or special district of a state.
         (3) ″Taxpayer″ means any corporation, partnership, firm, association, governmental unit or
             agency or person acting as a business entity in more than 1 state.
         (4) ″Income tax″ means a tax imposed on or measured by net income including any tax
             imposed on or measured by an amount arrived at by deducting expenses from gross
             income, 1 or more forms of which expenses are not specifically and directly related to
             particular transactions.
         (5) ″Capital stock tax″ means a tax measured in any way by the capital of a corporation
             considered in its entirety.
         (6) ″Gross receipts tax″ means a tax, other than a sales tax, which is imposed on or
             measured by the gross volume of business, in terms of gross receipts or in other terms,
             and in the determination of which no deduction is allowed which would constitute the
             tax an income tax.
         (7) ″Sales tax″ means a tax imposed with respect to the transfer for a consideration of
                                          EDWARD BEEBY
                                                                                          Page 2 of 14
                                      2011 MCLS § 205.581

           ownership, possession or custody of tangible personal property or the rendering of
           services measured by the price of the tangible personal property transferred or services
           rendered and which is required by state or local law to be separately stated from the
           sales price by the seller, or which is customarily separately stated from the sales price,
           but does not include a tax imposed exclusively on the sale of a specifically identified
           commodity or article or class of commodities or articles.
       (8) ″Use tax″ means a nonrecurring tax, other than a sales tax, which (a) is imposed on or
           with respect to the exercise or enjoyment of any right or power over tangible personal
           property incident to the ownership, possession or custody of that property or the leasing
           of that property from another including any consumption, keeping, retention, or other
           use of tangible personal property and (b) is complementary to a sales tax.
       (9) ″Tax″ means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and
           any other tax which has a multistate impact, except that the provisions of articles III, IV
           and V of this compact shall apply only to the taxes specifically designated therein and
           the provisions of article IX of this compact shall apply only in respect to determinations
           pursuant to article IV.
Article III. Elements of Income Tax Laws.

              Taxpayer Option, State and Local Taxes.
   (1) Any taxpayer subject to an income tax whose income is subject to apportionment and
       allocation for tax purposes pursuant to the laws of a party state or pursuant to the laws of
       subdivisions in 2 or more party states may elect to apportion and allocate his income in the
       manner provided by the laws of such state or by the laws of such states and subdivisions
       without reference to this compact, or may elect to apportion and allocate in accordance with
       article IV except that beginning January 1, 2011 any taxpayer subject to the Michigan
       business tax act, 2007 PA 36, MCL 208.1101 to 208.1601, or the income tax act of 1967,
       1967 PA 281, MCL 206.1 to 206.697, shall, for purposes of that act, apportion and allocate
       in accordance with the provisions of that act and shall not apportion or allocate in
       accordance with article IV . This election for any tax year may be made in all party states
       or subdivisions thereof or in any one or more of the party states or subdivisions thereof
       without reference to the election made in the others. For the purposes of this paragraph,
       taxes imposed by subdivisions shall be considered separately from state taxes and the
       apportionment and allocation also may be applied to the entire tax base. In no instance
       wherein article IV is employed for all subdivisions of a state may the sum of all
       apportionments and allocations to subdivisions within a state be greater than the
       apportionment and allocation that would be assignable to that state if the apportionment or
       allocation were being made with respect to a state income tax.

                        Taxpayer Option, Short Form.
   (2) Each party state or any subdivision thereof which imposes an income tax shall provide by
       law that any taxpayer required to file a return, whose only activities within the taxing
       jurisdiction consist of sales and do not include owning or renting real estate or tangible
       personal property, and whose dollar volume of gross sales made during the tax year within
                                        EDWARD BEEBY
                                                                                           Page 3 of 14
                                       2011 MCLS § 205.581

       the state or subdivision, is not in excess of $100,000.00 may elect to report and pay any tax
       due on the basis of a percentage of such volume, and shall adopt rates which shall produce
       a tax which reasonably approximates the tax otherwise due. The multistate tax commission,
       not more than once in 5 years, may adjust the $100,000.00 figure in order to reflect such
       changes as may occur in the real value of the dollar, and such adjusted figure, upon adoption
       by the commission, shall replace the $100,000.00 figure specifically provided herein. Each
       party state and subdivision thereof may make the same election available to taxpayers
       additional to those specified in this paragraph.

                                Coverage.
   (3) Nothing in this article relates to the reporting or payment of any tax other than an income
       tax.
Article IV. Division of Income.
   (1) As used in this article, unless the context otherwise requires:
       (a) ″Business income″ means income arising from transactions and activity in the regular
           course of the taxpayer’s trade or business and includes income from tangible and
           intangible property if the acquisition, management and disposition of the property
           constitute integral parts of the taxpayer’s regular trade or business operations.
       (b) ″Commercial domicile″ means the principal place from which the trade or business of
           the taxpayer is directed or managed.
       (c) ″Compensation″ means wages, salaries, commissions and any other form of remuneration
           paid to employees for personal services.
       (d) ″Financial organization″ means any bank, trust company, savings bank, industrial bank,
           land bank, safe deposit company, private banker, savings and loan association, credit
           union, cooperative bank, small loan company, sales finance company, investment
           company, or any type of insurance company.
       (e) ″Nonbusiness income″ means all income other than business income.
       (f) ″Public utility″ means any business entity (1) which owns or operates any plant,
           equipment, property, franchise, or license for the transmission of communications,
           transportation of goods or persons, except by pipe line, or the production, transmission,
           sale, delivery, or furnishing of electricity, water or steam; and (2) whose rates of charges
           for goods or services have been established or approved by a federal, state or local
           government or governmental agency.
       (g) ″Sales″ means all gross receipts of the taxpayer not allocated under paragraphs of this
           article.
       (h) ″State″ means any state of the United States, the district of Columbia, the commonwealth
           of Puerto Rico, any territory or possession of the United States, and any foreign country
           or political subdivision thereof.
       (i) ″This state″ means the state in which the relevant tax return is filed or, in the case of
           application of this article to the apportionment and allocation of income for local tax
                                        EDWARD BEEBY
                                                                                            Page 4 of 14
                                      2011 MCLS § 205.581

          purposes, the subdivision or local taxing district in which the relevant tax return is filed.
(2) Any taxpayer having income from business activity which is taxable both within and
    without this state, other than activity as a financial organization or public utility or the
    rendering of purely personal services by an individual, shall allocate and apportion his net
    income as provided in this article. If a taxpayer has income from business activity as a
    public utility but derives the greater percentage of his income from activities subject to this
    article, the taxpayer may elect to allocate and apportion his entire net income as provided
    in this article.
(3) For purposes of allocation and apportionment of income under this article, a taxpayer is
    taxable in another state if (1) in that state he is subject to a net income tax, a franchise tax
    measured by net income, a franchise tax for the privilege of doing business, or a corporate
    stock tax, or (2) that state has jurisdiction to subject the taxpayer to a net income tax
    regardless of whether, in fact, the state does or does not.
(4) Rents and royalties from real or tangible personal property, capital gains, interest, dividends
    or patent or copyright royalties, to the extent that they constitute nonbusiness income, shall
    be allocated as provided in paragraphs 5 through 8 of this article.
(5)
      (a) Net rents and royalties from real property located in this state are allocable to this state.
      (b) Net rents and royalties from tangible personal property are allocable to this state: (1) If
          and to the extent that the property is utilized in this state, or (2) in their entirety if the
          taxpayer’s commercial domicile is in this state and the taxpayer is not organized under
          the laws of or taxable in the state in which the property is utilized.
      (c) The extent of utilization of tangible personal property in a state is determined by
          multiplying the rents and royalties by a fraction, the numerator of which is the number
          of days of physical location of the property in the state during the rental or royalty
          period in the taxable year and the denominator of which is the number of days of
          physical location of the property everywhere during all rental or royalty periods in the
          taxable year. If the physical location of the property during the rental or royalty period
          is unknown or unascertainable by the taxpayer, tangible personal property is utilized in
          the state in which the property was located at the time the rental or royalty payer
          obtained possession.
(6)
      (a) Capital gains and losses from sales of real property located in this state are allocable to
          this state.
      (b) Capital gains and losses from sales of tangible personal property are allocable to this
          state if (1) the property had a situs in this state at the time of the sale, or (2) the
          taxpayer’s commercial domicile is in this state and the taxpayer is not taxable in the
          state in which the property had a situs.
      (c) Capital gains and losses from sales of intangible personal property are allocable to this
          state if the taxpayer’s commercial domicile is in this state.
(7) Interest and dividends are allocable to this state if the taxpayer’s commercial domicile is in
                                        EDWARD BEEBY
                                                                                            Page 5 of 14
                                      2011 MCLS § 205.581

      this state.
(8)
      (a) Patent and copyright royalties are allocable to this state: (1) if and to the extent that the
          patent or copyright is utilized by the payer in this state, or (2) if and to the extent that
          the patent copyright is utilized by the payer in a state in which the taxpayer is not
          taxable and the taxpayer’s commercial domicile is in this state.
      (b) A patent is utilized in a state to the extent that it is employed in production, fabrication,
          manufacturing, or other processing in the state or to the extent that a patented product
          is produced in the state. If the basis of receipts from patent royalties does not permit
          allocation to states or if the accounting procedures do not reflect states of utilization, the
          patent is utilized in the state in which the taxpayer’s commercial domicile is located.
      (c) A copyright is utilized in a state to the extent that printing or other publication originates
          in the state. If the basis of receipts from copyright royalties does not permit allocation
          to states or if the accounting procedures do not reflect states of utilization, the copyright
          is utilized in the state in which the taxpayer’s commercial domicile is located.
(9) All business income shall be apportioned to this state by multiplying the income by a
    fraction, the numerator of which is the property factor plus the payroll factor plus the sales
    factor, and the denominator of which is 3.
(10) The property factor is a fraction, the numerator of which is the average value of the
    taxpayer’s real and tangible personal property owned or rented and used in this state during
    the tax period and the denominator of which is the average value of all the taxpayer’s real
    and tangible personal property owned or rented and used during the tax period.
(11) Property owned by the taxpayer is valued at its original cost. Property rented by the
    taxpayer is valued at 8 times the net annual rental rate. Net annual rental rate is the annual
    rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from
    subrentals.
(12) The average value of property shall be determined by averaging the values at the beginning
    and ending of the tax period but the tax administrator may require the averaging of monthly
    values during the tax period if reasonably required to reflect properly the average value of
    the taxpayer’s property.
(13) The payroll factor is a fraction, the numerator of which is the total amount paid in this state
    during the tax period by the taxpayer for compensation and the denominator of which is the
    total compensation paid everywhere during the tax period.
(14) Compensation is paid in this state if:
      (a) The individual’s service is performed entirely within the state;
      (b) The individual’s service is performed both within and without the state, but the service
          performed without the state is incidental to the individual’s service within the state; or
      (c) Some of the service is performed in the state and (1) the base of operations or, if there
          is no base of operations, the place from which the service is directed or controlled is in
          the state, or (2) the base of operations or the place from which the service is directed
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                                         2011 MCLS § 205.581

           or controlled is not in any state in which some part of the service is performed, but the
           individual’s residence is in this state.
   (15) The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in
       this state during the tax period, and the denominator of which is the total sales of the
       taxpayer everywhere during the tax period.
   (16) Sales of tangible personal property are in this state if:
       (a) The property is delivered or shipped to a purchaser, other than the United States
           government, within this state regardless of the f.o.b. point or other conditions of the
           sale; or
       (b) The property is shipped from an office, store, warehouse, factory, or other place of
           storage in this state and (1) the purchaser is the United States government or (2) the
           taxpayer is not taxable in the state of the purchaser.
   (17) Sales, other than sales of tangible personal property, are in this state if:
       (a) The income-producing activity is performed in this state; or
       (b) The income-producing activity is performed both in and outside this state and a greater
           proportion of the income-producing activity is performed in this state than in any other
           state, based on costs of performance.
   (18) If the allocation and apportionment provisions of this article do not fairly represent the
       extent of the taxpayer’s business activity in this state, the taxpayer may petition for or the
       tax administrator may require, in respect to all or any part of the taxpayer’s business activity,
       if reasonable:
       (a) Separate accounting;
       (b) The exclusion of any one or more of the factors;
       (c) The inclusion of 1 or more additional factors which will fairly represent the taxpayer’s
           business activity in this state; or
       (d) The employment of any other method to effectuate an equitable allocation and
           apportionment of the taxpayer’s income.
Article V. Elements of Sales and Use Tax Laws.
                           Tax Credit.
   (1) Each purchaser liable for a use tax on tangible personal property shall be entitled to full
       credit for the combined amount or amounts of legally imposed sales or use taxes paid by
       him with respect to the same property to another state and any subdivision thereof. The
       credit shall be applied first against the amount of any use tax due the state, and any unused
       portion of the credit shall then be applied against the amount of any use tax due a
       subdivision.

                                Tax Credit

                  Exemption Certificates, Vendors May Rely.
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                                        2011 MCLS § 205.581

   (2) Whenever a vendor receives and accepts in good faith from a purchaser a resale or other
       exemption certificate or other written evidence of exemption authorized by the appropriate
       state or subdivision taxing authority, the vendor shall be relieved of liability for a sales or
       use tax with respect to the transaction.
Article VI. The Commission.

                     Organization and Management.
   (1)
         (a) The multistate tax commission is hereby established. It shall be composed of 1
             ″member″ from each party state who shall be the head of the state agency charged with
             the administration of the types of taxes to which this compact applies. If there is more
             than 1 such agency, the state shall provide by law for the selection of the commission
             member from the heads of the relevant agencies. State law may provide that a member
             of the commission be represented by an alternate but only if there is on file with the
             commission written notification of the designation and identity of the alternate. The
             attorney general of each party state or his designee, or other counsel if the laws of the
             party state specifically provide, shall be entitled to attend the meetings of the
             commission, but shall not vote. Such attorneys general, designees, or other counsel shall
             receive all notices of meetings required under paragraph 1 (e) of this article.
         (b) Each party state shall provide by law for the selection of representatives from its
             subdivisions affected by this compact to consult with the commission member from that
             state.
         (c) Each member shall be entitled to 1 vote. The commission shall not act unless a majority
             of the members are present, and no action shall be binding unless approved by a
             majority of the total number of members.
         (d) The commission shall adopt an official seal to be used as it may provide.
         (e) The commission shall hold an annual meeting and such other regular meetings as its
             bylaws may provide and such special meetings as its executive committee may
             determine. The commission bylaws shall specify the dates of the annual and any other
             regular meetings, and shall provide for the giving of notice of annual, regular and
             special meetings. Notices of special meetings shall include the reasons therefor and an
             agenda of the items to be considered.
         (f) The commission shall elect annually, from among its members, a chairman, a vice
             chairman and a treasurer. The commission shall appoint an executive director who shall
             serve at its pleasure, and it shall fix his duties and compensation. The executive director
             shall be secretary of the commission. The commission shall make provision for the
             bonding of such of its officers and employees as it may deem appropriate.
         (g) Irrespective of the civil service, personnel or other merit system laws of any party state,
             the executive director shall appoint or discharge such personnel as may be necessary for
             the performance of the functions of the commission and shall fix their duties and
             compensation. The commission bylaws shall provide for personnel policies and
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                                    2011 MCLS § 205.581

          programs.
      (h) The commission may borrow, accept or contract for the services of personnel from any
          state, the United States, or any other governmental entity.
      (i) The commission may accept for any of its purposes and functions any and all donations
          and grants of money, equipment, supplies, materials and services, conditional or
          otherwise, from any governmental entity, and may utilize and dispose of the same.
      (j) The commission may establish 1 or more offices for the transacting of its business.
      (k) The commission shall adopt bylaws for the conduct of its business. The commission
          shall publish its bylaws in convenient form, and shall file a copy of the bylaws and any
          amendments thereto with the appropriate agency or officer in each of the party states.
      (l) The commission annually shall make to the governor and legislature of each party state
          a report covering its activities for the preceding year. Any donation or grant accepted
          by the commission or services borrowed shall be reported in the annual report of the
          commission, and shall include the nature, amount and conditions, if any, of the
          donation, gift, grant or services borrowed and the identity of the donor or lender. The
          commission may make additional reports as it may deem desirable.

                                 Committees.
(2)
      (a) To assist in the conduct of its business when the full commission is not meeting, the
          commission shall have an executive committee of 7 members, including the chairman,
          vice chairman, treasurer and 4 other members elected annually by the commission. The
          executive committee, subject to the provisions of this compact and consistent with the
          policies of the commission, shall function as provided in the bylaws of the commission.
      (b) The commission may establish advisory and technical committees, membership on
          which may include private persons and public officials, in furthering any of its
          activities. Such committees may consider any matter of concern to the commission,
          including problems of special interest to any party state and problems dealing with
          particular types of taxes.
      (c) The commission may establish such additional committees as its bylaws may provide.

                                   Powers.
(3) In addition to powers conferred elsewhere in this compact, the commission shall have power
    to:
      (a) Study state and local tax systems and particular types of state and local taxes.
      (b) Develop and recommend proposals for an increase in uniformity or compatibility of
          state and local tax laws with a view toward encouraging the simplification and
          improvement of state and local tax law and administration.
      (c) Compile and publish information as in its judgment would assist the party states in
          implementation of the compact and taxpayers in complying with state and local tax
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                                        2011 MCLS § 205.581

             laws.
         (d) Do all things necessary and incidental to the administration of its functions pursuant to
             this compact.
                                      Finance.
   (4)
         (a) The commission shall submit to the governor or designated officer or officers of each
             party state a budget of its estimated expenditures for such period as may be required by
             the laws of that state for presentation to the legislature thereof.
         (b) Each of the commission’s budgets of estimated expenditures shall contain specific
             recommendations of the amounts to be appropriated by each of the party states. The
             total amount of appropriations requested under any such budget shall be apportioned
             among the party states as follows: one-tenth in equal shares; and the remainder in
             proportion to the amount of revenue collected by each party state and its subdivisions
             from income taxes, capital stock taxes, gross receipts taxes, sales and use taxes. In
             determining such amounts, the commission shall employ such available public sources
             of information as, in its judgment, present the most equitable and accurate comparisons
             among the party states. Each of the commission’s budgets of estimated expenditures
             and requests for appropriations shall indicate the sources used in obtaining information
             employed in applying the formula contained in this paragraph.
         (c) The commission shall not pledge the credit of any party state. The commission may
             meet any of its obligations in whole or in part with funds available to it under paragraph
             (1) (i) of this article: provided that the commission takes specific action setting aside
             such funds prior to incurring any obligation to be met in whole or in part in such
             manner. Except where the commission makes use of funds available to it under
             paragraph (1) (i), the commission shall not incur any obligation prior to the allotment
             of funds by the party states adequate to meet the same.
         (d) The commission shall keep accurate accounts of all receipts and disbursements. The
             receipts and disbursements of the commission shall be subject to the audit and
             accounting procedures established under its bylaws. All receipts and disbursements of
             funds handled by the commission shall be audited yearly by a certified or licensed
             public accountant and the report of the audit shall be included in and become part of the
             annual report of the commission.
         (e) The accounts of the commission shall be open at any reasonable time for inspection by
             duly constituted officers of the party states and by any persons authorized by the
             commission.
         (f) Nothing contained in this article shall be construed to prevent commission compliance
             with laws relating to audit or inspection of accounts by or on behalf of any government
             contributing to the support of the commission.
Article VII. Uniform Regulations and Forms.
   (1) Whenever any 2 or more party states, or subdivisions of party states, have uniform or
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                                        2011 MCLS § 205.581

        similar provisions of law relating to an income tax, capital stock tax, gross receipts tax, sales
        or use tax, the commission may adopt uniform regulations for any phase of the
        administration of such law, including assertion of jurisdiction to tax, or prescribing uniform
        tax forms. The commission may also act with respect to the provisions of article IV of this
        compact.
    (2) Prior to the adoption of any regulation, the commission shall:
        (a) As provided in its bylaws, hold at least 1 public hearing on due notice to all affected
            party states and subdivisions thereof and to all taxpayers and other persons who have
            made timely request of the commission for advance notice of its regulation-making
            proceedings.
        (b) Afford all affected party states and subdivisions and interested persons an opportunity
            to submit relevant written data and views, which shall be considered fully by the
            commission.
    (3) The commission shall submit any regulations adopted by it to the appropriate officials of all
        party states and subdivisions to which they might apply. Each such state and subdivision
        shall consider any such regulation for adoption in accordance with its own laws and
        procedures.
Article VIII. Interstate Audits.
    (1) This article shall be in force only in those party states that specifically provide therefor by
        statute.
    (2) Any party state or subdivision thereof desiring to make or participate in an audit of any
        accounts, books, papers, records or other documents may request the commission to
        perform the audit on its behalf. In responding to the request, the commission shall have
        access to and may examine, at any reasonable time, such accounts, books, papers, records,
        and other documents and any relevant property or stock of merchandise. The commission
        may enter into agreements with party states or their subdivisions for assistance in
        performance of the audit. The commission shall make charges, to be paid by the state or
        local government or governments for which it performs the service, for any audits
        performed by it in order to reimburse itself for the actual costs incurred in making the audit.
    (3) The commission may require the attendance of any person within the state where it is
        conducting an audit or part thereof at a time and place fixed by it within such state for the
        purpose of giving testimony with respect to any account, book, paper, document, other
        record, property or stock of merchandise being examined in connection with the audit. If the
        person is not within the jurisdiction, he may be required to attend for such purpose at any
        time and place fixed by the commission within the state of which he is a resident: provided
        that such state has adopted this article.
    (4) The commission may apply to any court having power to issue compulsory process for
        orders in aid of its powers and responsibilities pursuant to this article and any and all such
        courts shall have jurisdiction to issue such orders. Failure of any person to obey any such
        order shall be punishable as contempt of the issuing court. If the party or subject matter on
        account of which the commission seeks an order is within the jurisdiction of the court to
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                                       2011 MCLS § 205.581

       which application is made, such application may be to a court in the state or subdivision on
       behalf of which the audit is being made or a court in the state in which the object of the order
       being sought is situated. The provisions of this paragraph apply only to courts in a state that
       has adopted this article.
   (5) The commission may decline to perform any audit requested if it finds that its available
       personnel or other resources are insufficient for the purpose or that, in the terms requested,
       the audit is impracticable of satisfactory performance. If the commission, on the basis of its
       experience, has reason to believe that an audit of a particular taxpayer, either at a particular
       time or on a particular schedule, would be of interest to a number of party states or their
       subdivisions, it may offer to make the audit or audits, the offer to be contingent on sufficient
       participation therein as determined by the commission.
   (6) Information obtained by any audit pursuant to this article shall be confidential and available
       only for tax purposes to party states, their subdivisions or the United States. Availability of
       information shall be in accordance with the laws of the states or subdivisions on whose
       account the commission performs the audit, and only through the appropriate agencies or
       officers of such states or subdivisions. Nothing in this article shall be construed to require
       any taxpayer to keep records for any period not otherwise required by law.
   (7) Other arrangements made or authorized pursuant to law for cooperative audit by or on
       behalf of the party states or any of their subdivisions are not superseded or invalidated by
       this article.
   (8) In no event shall the commission make any charge against a taxpayer for an audit.
   (9) As used in this article, ″tax,″ in addition to the meaning ascribed to it in article II, means
       any tax or license fee imposed in whole or in part for revenue purposes.
Article IX. Arbitration.
   (1) Whenever the commission finds a need for settling disputes concerning apportionments and
       allocations by arbitration, it may adopt a regulation placing this article in effect,
       notwithstanding the provisions of article VII.
   (2) The commission shall select and maintain an arbitration panel composed of officers and
       employees of state and local governments and private persons who shall be knowledgeable
       and experienced in matters of tax law and administration.
   (3) Whenever a taxpayer who has elected to employ article IV, or whenever the laws of the
       party state or subdivision thereof are substantially identical with the relevant provisions of
       article IV, the taxpayer, by written notice to the commission and to each party state or
       subdivision thereof that would be affected, may secure arbitration of an apportionment or
       allocation, if he is dissatisfied with the final administrative determination of the tax agency
       of the state or subdivision with respect thereto on the ground that it would subject him to
       double or multiple taxation by 2 or more party states or subdivisions thereof. Each party
       state and subdivision thereof hereby consents to the arbitration as provided herein, and
       agrees to be bound thereby.
   (4) The arbitration board shall be composed of 1 person selected by the taxpayer, 1 by the
       agency or agencies involved, and 1 member of the commission’s arbitration panel. If the
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                                    2011 MCLS § 205.581

    agencies involved are unable to agree on the person to be selected by them, such person
    shall be selected by lot from the total membership of the arbitration panel. The 2 persons
    selected for the board in the manner provided by the foregoing provisions of this paragraph
    shall jointly select the third member of the board. If they are unable to agree on the
    selection, the third member shall be selected by lot from among the total membership of the
    arbitration panel. No member of a board selected by lot shall be qualified to serve if he is
    an officer or employee or is otherwise affiliated with any party to the arbitration proceeding.
    Residence within the jurisdiction of a party to the arbitration proceeding shall not constitute
    affiliation within the meaning of this paragraph.
(5) The board may sit in any state or subdivision party to the proceeding, in the state of the
    taxpayer’s incorporation, residence or domicile, in any state where the taxpayer does
    business, or in any place that it finds most appropriate for gaining access to evidence
    relevant to the matter before it.
(6) The board shall give due notice of the times and places of its hearings. The parties shall be
    entitled to be heard, to present evidence, and to examine and cross-examine witnesses. The
    board shall act by majority vote.
(7) The board shall have power to administer oaths, take testimony, subpoena and require the
    attendance of witnesses and the production of accounts, books, papers, records, and other
    documents, and issue commissions to take testimony. Subpoenas may be signed by any
    member of the board. In case of failure to obey a subpoena, and upon application by the
    board, any judge of a court of competent jurisdiction of the state in which the board is sitting
    or in which the person to whom the subpoena is directed may be found may make an order
    requiring compliance with the subpoena, and the court may punish failure to obey the order
    as a contempt. The provisions of this paragraph apply only in states that have adopted this
    article.
(8) Unless the parties otherwise agree the expenses and other costs of the arbitration shall be
    assessed and allocated among the parties by the board in such manner as it may determine.
    The commission shall fix a schedule of compensation for members of arbitration boards and
    of other allowable expenses and costs. No officer or employee of a state or local government
    who serves as a member of a board shall be entitled to compensation therefor unless he is
    required on account of his service to forego the regular compensation attaching to his public
    employment, but any such board member shall be entitled to expenses.
(9) The board shall determine the disputed apportionment or allocation and any matters
    necessary thereto. The determinations of the board shall be final for purposes of making the
    apportionment or allocation, but for no other purpose.
(10) The board shall file with the commission and with each tax agency represented in the
    proceeding: the determination of the board; the board’s written statement of its reasons
    therefor; the record of the board’s proceedings; and any other documents required by the
    arbitration rules of the commission to be filed.
(11) The commission shall publish the determinations of boards together with the statements of
    the reasons therefor.
(12) The commission shall adopt and publish rules of procedure and practice and shall file a
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                                        2011 MCLS § 205.581

        copy of such rules and of any amendment thereto with the appropriate agency or officer in
        each of the party states.
    (13) Nothing contained herein shall prevent at any time a written compromise of any matter or
        matters in dispute, if otherwise lawful, by the parties to the arbitration proceeding.
Article X. Entry Into Force and Withdrawal.
    (1) This compact shall enter into force when enacted into law by any 7 states. Thereafter, this
        compact shall become effective as to any other state upon its enactment thereof. The
        commission shall arrange for notification of all party states whenever there is a new
        enactment of the compact.
    (2) Any party state may withdraw from this compact by enacting a statute repealing the same.
        No withdrawal shall affect any liability already incurred by or chargeable to a party state
        prior to the time of such withdrawal.
    (3) No proceeding commenced before an arbitration board prior to the withdrawal of a state and
        to which the withdrawing state or any subdivision thereof is a party shall be discontinued
        or terminated by the withdrawal, nor shall the board thereby lose jurisdiction over any of
        the parties to the proceeding necessary to make a binding determination therein.
Article XI. Effect on Other Laws and Jurisdiction.

  Nothing in this compact shall be construed to:
    (a) Affect the power of any state or subdivision thereof to fix rates of taxation, except that a
        party state shall be obligated to implement article III (2) of this compact.
    (b) Apply to any tax or fixed fee imposed for the registration of a motor vehicle or any tax on
        motor fuel, other than a sales tax: provided that the definition of ″tax″ in article VIII (9) may
        apply for the purposes of that article and the commission’s powers of study and
        recommendation pursuant to article VI (3) may apply.
    (c) Withdraw or limit the jurisdiction of any state or local court or administrative officer or
        body with respect to any person, corporation or other entity or subject matter, except to the
        extent that such jurisdiction is expressly conferred by or pursuant to this compact upon
        another agency or body.
    (d) Supersede or limit the jurisdiction of any court of the United States.
Article XII. Construction and Serverability.

   This compact shall be liberally construed so as to effectuate the purposes thereof. The provisions
of this compact shall be severable and if any phrase, clause, sentence or provision of this compact
is declared to be contrary to the constitution of any state or of the United States or the applicability
thereof to any government, agency, person or circumstance is held invalid, the validity of the
remainder of this compact and the applicability thereof to any government, agency, person or
circumstance shall not be affected thereby. If this compact shall be held contrary to the constitution
of any state participating therein, the compact shall remain in full force and effect as to the
remaining party states and in full force and effect as to the state affected as to all severable matters.
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                                            2011 MCLS § 205.581

History

Act 343, 1969, p 770; eff July 1, 1970.
Pub Acts 1969, No. 343, § 1, by § 9 eff July 1, 1970.
Amended by Pub Acts 2011, No. 40, imd eff May 25, 2011.
MICHIGAN COMPILED LAWS SERVICE
Copyright © 2015 Matthew Bender & Company, Inc. a member of the LexisNexis Group. All rights reserved.

                                              EDWARD BEEBY
                                                                                                                      Page 1

                              LEXISNEXIS (TM) MISSOURI ANNOTATED STATUTES
                                Copyright © 2014 by Matthew Bender & Company, Inc.,
                                          a member of the LexisNexis Group.
                                                 All rights reserved.

            *** CURRENT THROUGH THE 97TH GENERAL ASSEMBLY, 2ND REGULAR SESSION ***

                                  TITLE 4. EXECUTIVE BRANCH (Chs. 26-37)
                                CHAPTER 32. STATE DEPARTMENT OF REVENUE
                                         MULTISTATE TAX COMPACT

                       GO TO CODE ARCHIVE DIRECTORY FOR THIS JURISDICTION

                                                 § 32.200 R.S.Mo. (2014)

§ 32.200. Multistate tax compact

  The "Multistate Tax Compact" is hereby enacted into law and entered into with all jurisdictions legally joining
therein, in the form substantially as follows:

MULTISTATE TAX COMPACT

Article I

  The purposes of this compact are to:

      1. Facilitate proper determination of state and local tax liability of multistate taxpayers, including the equitable
apportionment of tax bases and settlement of apportionment disputes.

      2. Promote uniformity or compatibility in significant components of tax systems.

     3. Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax
administration.

      4. Avoid duplicative taxation.
                                                                                                                    Page 2
                                                    § 32.200 R.S.Mo.

Article II

    As used in this compact:

       1. "State" means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any
territory or possession of the United States.

      2. "Subdivision" means any governmental unit or special district of a state.

      3. "Taxpayer" means any corporation, partnership, firm, association, governmental unit or agency or person
acting as a business entity in more than one state.

       4. "Income tax" means a tax imposed on or measured by net income including any tax imposed on or measured
by an amount arrived at by deducting expenses from gross income, one or more forms of which expenses are not
specifically and directly related to particular transactions.

      5. "Capital stock tax" means a tax measured in any way by the capital of a corporation considered in its entirety.

      6. "Gross receipts tax" means a tax, other than a sales tax, which is imposed on or measured by the gross volume
of business, in terms of gross receipts or in other terms, and in the determination of which no deduction is allowed
which would constitute the tax an income tax.

       7. "Sales tax" means a tax imposed with respect to the transfer for a consideration of ownership, possession or
custody of tangible personal property or the rendering of services measured by the price of the tangible personal
property transferred or services rendered and which is required by state or local law to be separately stated from the
sales price by the seller, or which is customarily separately stated from the sales price, but does not include a tax
imposed exclusively on the sale of a specifically identified commodity or article or class of commodities or articles.

      8. "Use tax" means a nonrecurring tax, other than a sales tax, which

        (a) is imposed on or with respect to the exercise or enjoyment of any right or power over tangible personal
property incident to the ownership, possession or custody of that property or the leasing of that property from another
including any consumption, keeping, retention, or other use of tangible personal property; and

         (b) is complementary to a sales tax.

       9. "Tax" means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and any other tax which has
a multistate impact, except that the provisions of articles III, IV and V of this compact shall apply only to the taxes
specifically designated therein and the provisions of article IX of this compact shall apply only in respect to
determinations pursuant to article IV.

Article III

       1. Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax
purposes pursuant to the laws of a party state or pursuant to the laws of subdivisions in two or more party states may
elect to apportion and allocate his income in the manner provided by the laws of such state or by the laws of such states
and subdivisions without reference to this compact, or may elect to apportion and allocate in accordance with article IV.
                                                                                                                     Page 3
                                                    § 32.200 R.S.Mo.

This election for any tax year may be made in all party states or subdivisions thereof or in any one or more of the party
states or subdivisions thereof without reference to the election made in the others. For the purposes of this paragraph,
taxes imposed by subdivisions shall be considered separately from state taxes and the apportionment and allocation also
may be applied to the entire tax base. In no instance wherein article IV is employed for all subdivisions of a state may
the sum of all apportionments and allocations to subdivisions within a state be greater than the apportionment and
allocation that would be assignable to that state if the apportionment or allocation were being made with respect to a
state income tax.

      2. Each party state or any subdivision thereof which imposes an income tax shall provide by law that any
taxpayer required to file a return, whose only activities within the taxing jurisdiction consist of sales and do not include
owning or renting real estate or tangible personal property, and whose dollar volume of gross sales made during the tax
year within the state or subdivision, as the case may be, is not in excess of $ 100,000 may elect to report and pay any tax
due on the basis of a percentage of such volume, and shall adopt rates which shall produce a tax which reasonably
approximates the tax otherwise due. The multistate tax commission, not more than once in five years, may adjust the $
100,000 figure in order to reflect such changes as may occur in the real value of the dollar, and such adjusted figure,
upon adoption by the commission, shall replace the $ 100,000 figure specifically provided herein. Each party state and
subdivision thereof may make the same election available to taxpayers additional to those specified in this paragraph.

      3. Nothing in this article relates to the reporting or payment of any tax other than an income tax.

Article IV

      1. As used in this article, unless the context otherwise requires:

        (1) "Business income" means income arising from transactions and activity in the regular course of the
taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management,
and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations.

        (2) "Commercial domicile" means the principal place from which the trade or business of the taxpayer is
directed or managed.

        (3) "Compensation" means wages, salaries, commissions and any other form of remuneration paid to employees
for personal services.

         (4) "Financial organization" means any bank, trust company, savings bank, industrial bank, land bank, safe
deposit company, private banker, savings and loan association, credit union, cooperative bank, small loan company,
sales finance company, investment company, or any type of insurance company.

        (5) "Nonbusiness income" means all income other than business income.

        (6) "Public utility" means any business entity

          (a) which owns or operates any plant, equipment, property, franchise, or license for the transmission of
communications, transportation of goods or persons, except by pipeline, or the production, transmission, sale, delivery,
or furnishing of electricity, water or steam; and

        (b) whose rates of charges for goods or services have been established or approved by a federal, state or local
government or governmental agency.
                                                                                                                       Page 4
                                                       § 32.200 R.S.Mo.

        (7) "Sales" means all gross receipts of the taxpayer not allocated under paragraphs of this article.

         (8) "State" means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico,
any territory or possession of the United States, and any foreign country or political subdivision thereof.

          (9) "This state" means the state in which the relevant tax return is filed or, in the case of application of this
article, to the apportionment and allocation of income for local tax purposes, the subdivision or local taxing district in
which the relevant tax return is filed.

       2. Any taxpayer having income from business activity which is taxable both within and without this state, other
than activity as a financial organization or public utility or the rendering of purely personal services by an individual,
shall allocate and apportion his net income as provided in this article. If a taxpayer has income from business activity as
a public utility but derives the greater percentage of his income from activities subject to this article, the taxpayer may
elect to allocate and apportion his entire net income as provided in this article.

      3. For purposes of allocation and apportionment of income under this article, a taxpayer is taxable in another state
if

        (1) in that state he is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the
privilege of doing business, or a corporate stock tax; or

        (2) that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state
does or does not.

      4. Rents and royalties from real or tangible personal property, capital gains, interest, dividends or patent or
copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in paragraphs 5
through 8 of this article.

      5. (1) Net rents and royalties from real property located in this state are allocable to this state.

        (2) Net rents and royalties from tangible personal property are allocable to this state:

          (a) if and to the extent that the property is utilized in this state; or

          (b) in their entirety if the taxpayer's commercial domicile is in this state and the taxpayer is not organized
under the laws of or taxable in the state in which the property is utilized.

         (3) The extent of utilization of tangible personal property in a state is determined by multiplying the rents and
royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state
during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical
location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the
property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is
utilized in the state in which the property was located at the time the rental or royalty payer obtained possession.

      6. (1) Capital gains and losses from sales of real property located in this state are allocable to this state.

        (2) Capital gains and losses from sales of tangible personal property are allocable to this state if

          (a) the property had a situs in this state at the time of the sale; or

          (b) the taxpayer's commercial domicile is in this state and the taxpayer is not taxable in the state in which the
property had a situs.
                                                                                                                          Page 5
                                                       § 32.200 R.S.Mo.

      (3) Capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer's
commercial domicile is in this state.

      7. Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state.

      8. (1) Patent and copyright royalties are allocable to this state:

          (a) if and to the extent that the patent or copyright is utilized by the payer in this state; or

          (b) if and to the extent that the patent copyright is utilized by the payer in a state in which the taxpayer is not
taxable and the taxpayer's commercial domicile is in this state.

         (2) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or
other processing in the state or to the extent that a patented product is produced in the state. If the basis of receipts from
patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the
patent is utilized in the state in which the taxpayer's commercial domicile is located.

         (3) A copyright is utilized in a state to the extent that printing or other publication originates in the state. If the
basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do not
reflect states of utilization, the copyright is utilized in the state in which the taxpayer's commercial domicile is located.

     9. All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of
which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three.

      10. The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and
tangible personal property owned or rented and used in this state during the tax period and the denominator of which is
the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax
period.

       11. Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight
times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual
rental rate received by the taxpayer from subrentals.

      12. The average value of property shall be determined by averaging the values at the beginning and ending of the
tax period but the tax administrator may require the averaging of monthly values during the tax period if reasonably
required to reflect properly the average value of the taxpayer's property.

      13. The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the tax
period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere
during the tax period.

      14. Compensation is paid in this state if:

        (1) the individual's service is performed entirely within the state;

          (2) the individual's service is performed both within and without the state, but the service performed without the
state is incidental to the individual's service within the state; or

        (3) some of the service is performed in the state; and

          (a) the base of operations or, if there is no base of operations, the place from which the service is directed or
controlled is in the state; or
                                                                                                                       Page 6
                                                       § 32.200 R.S.Mo.

         (b) the base of operations or the place from which the service is directed or controlled is not in any state in
which some part of the service is performed, but the individual's residence is in this state.

      15. The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the
tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period.

      16. Sales of tangible personal property are in this state if:

        (1) the property is delivered or shipped to a purchaser, other than the United States government, within this state
regardless of the f.o.b. point or other conditions of the sale; or

        (2) the property is shipped from an office, store, warehouse, factory, or other place of storage in this state; and

            (a) the purchaser is the United States government; or

            (b) the taxpayer is not taxable in the state of the purchaser.

      17. Sales, other than sales of tangible personal property, are in this state if:

        (1) the income-producing activity is performed in this state; or

       (2) the income-producing activity is performed both in and outside this state and a greater proportion of the
income-producing activity is performed in this state than in any other state, based on costs of performance.

       18. If the allocation and apportionment provisions of this article do not fairly represent the extent of the taxpayer's
business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to all or any
part of the taxpayer's business activity, if reasonable:

        (1) separate accounting;

        (2) the exclusion of any one or more of the factors;

         (3) the inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in
this state; or

        (4) the employment of any other method to effectuate an equitable allocation and apportionment of the
taxpayer's income.

Article V

      1. Each purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the combined
amount or amounts of legally imposed sales or use taxes paid by him with respect to the same property to another state
and any subdivision thereof. The credit shall be applied first against the amount of any use tax due the state, and any
unused portion of the credit shall then be applied against the amount of any use tax due a subdivision.

       2. Whenever a vendor receives and accepts in good faith from a purchaser a resale or other exemption certificate
or other written evidence of exemption authorized by the appropriate state or subdivision taxing authority, the vendor
shall be relieved of liability for a sales or use tax with respect to the transaction.
                                                                                                                       Page 7
                                                     § 32.200 R.S.Mo.

Article VI

       1. (a) The multistate tax commission is hereby established. It shall be composed of one "member" from each
party state who shall be the head of the state agency charged with the administration of the types of taxes to which this
compact applies. If there is more than one such agency the state shall provide by law for the selection of the commission
member from the heads of the relevant agencies. State law may provide that a member of the commission be
represented by an alternate but only if there is on file with the commission written notification of the designation and
identity of the alternate. The attorney general of each party state or his designee, or other counsel if the laws of the party
state specifically provide, shall be entitled to attend the meetings of the commission, but shall not vote. Such attorneys
general, designees, or other counsel shall receive all notices of meetings required under paragraph 1 (e) of this article.

        (b) Each party state shall provide by law for the selection of representatives from its subdivisions affected by
this compact to consult with the commission member from that state.

        (c) Each member shall be entitled to one vote. The commission shall not act unless a majority of the members
are present, and no action shall be binding unless approved by a majority of the total number of members.

        (d) The commission shall adopt an official seal to be used as it may provide.

        (e) The commission shall hold an annual meeting and such other regular meetings as its bylaws may provide
and such special meetings as its executive committee may determine. The commission bylaws shall specify the dates of
the annual and any other regular meetings, and shall provide for the giving of notice of annual, regular and special
meetings. Notices of special meetings shall include the reasons therefor and an agenda of the items to be considered.

        (f) The commission shall elect annually, from among its members, a chairman, a vice chairman and a treasurer.
The commission shall appoint an executive director who shall serve at its pleasure, and it shall fix his duties and
compensation. The executive director shall be secretary of the commission. The commission shall make provision for
the bonding of such of its officers and employees as it may deem appropriate.

         (g) Irrespective of the civil service, personnel or other merit system laws of any party state, the executive
director shall appoint or discharge such personnel as may be necessary for the performance of the functions of the
commission and shall fix their duties and compensation. The commission bylaws shall provide for personnel policies
and programs.

         (h) The commission may borrow, accept or contract for the services of personnel from any state, the United
States, or any other governmental entity.

        (i) The commission may accept for any of its purposes and functions any and all donations and grants of money,
equipment, supplies, materials and services, conditional or otherwise, from any governmental entity, and may utilize
and dispose of the same.

        (j) The commission may establish one or more offices for the transacting of its business.

         (k) The commission shall adopt bylaws for the conduct of its business. The commission shall publish its bylaws
in convenient form, and shall file a copy of the bylaws and any amendments thereto with the appropriate agency or
officer in each of the party states.

         (l) The commission annually shall make to the governor and legislature of each party state a report covering its
activities for the preceding year. Any donation or grant accepted by the commission or services borrowed shall be
reported in the annual report of the commission, and shall include the nature, amount and conditions, if any, of the
                                                                                                                      Page 8
                                                    § 32.200 R.S.Mo.

donation, gift, grant or services borrowed and the identity of the donor or lender. The commission may make additional
reports as it may deem desirable.

      2. (a) To assist in the conduct of its business when the full commission is not meeting, the commission shall have
an executive committee of seven members, including the chairman, vice chairman, treasurer and four other members
elected annually by the commission. The executive committee, subject to the provisions of this compact and consistent
with the policies of the commission, shall function as provided in the bylaws of the commission.

         (b) The commission may establish advisory and technical committees, membership on which may include
private persons and public officials, in furthering any of its activities. Such committees may consider any matter of
concern to the commission, including problems of special interest to any party state and problems dealing with
particular types of taxes.

        (c) The commission may establish such additional committees as its bylaws may provide.

      3. In addition to powers conferred elsewhere in this compact, the commission shall have power to:

        (a) Study state and local tax systems and particular types of state and local taxes.

        (b) Develop and recommend proposals for an increase in uniformity or compatibility of state and local tax laws
with a view toward encouraging the simplification and improvement of state and local tax law and administration.

       (c) Compile and publish information as in its judgment would assist the party states in implementation of the
compact and taxpayers in complying with state and local tax laws.

        (d) Do all things necessary and incidental to the administration of its functions pursuant to this compact.

        4. (a) The commission shall submit to the governor or designated officer or officers of each party state a budget of
its estimated expenditures for such period as may be required by the laws of that state for presentation to the legislature
thereof.

         (b) Each of the commission's budgets of estimated expenditures shall contain specific recommendations of the
amounts to be appropriated by each of the party states. The total amount of appropriations requested under any such
budget shall be apportioned among the party states as follows: one-tenth in equal shares; and the remainder in
proportion to the amount of revenue collected by each party state and its subdivisions from income taxes, capital stock
taxes, gross receipts taxes, sales and use taxes. In determining such amounts, the commission shall employ such
available public sources of information as, in its judgment, present the most equitable and accurate comparisons among
the party states. Each of the commission's budgets of estimated expenditures and requests for appropriations shall
indicate the sources used in obtaining information employed in applying the formula contained in this paragraph.

         (c) The commission shall not pledge the credit of any party state. The commission may meet any of its
obligations in whole or in part with funds available to it under paragraph 1 (i) of this article; provided that the
commission takes specific action setting aside such funds prior to incurring any obligation to be met in whole or in part
in such manner. Except where the commission makes use of funds available to it under paragraph 1 (i), the commission
shall not incur any obligation prior to the allotment of funds by the party states adequate to meet the same.

        (d) The commission shall keep accurate accounts of all receipts and disbursements. The receipts and
disbursements of the commission shall be subject to the audit and accounting procedures established under its bylaws.
All receipts and disbursements of funds handled by the commission shall be audited yearly by a certified or licensed
public accountant and the report of the audit shall be included in and become part of the annual report of the
commission.
                                                                                                                     Page 9
                                                     § 32.200 R.S.Mo.

         (e) The accounts of the commission shall be open at any reasonable time for inspection by duly constituted
officers of the party states and by any persons authorized by the commission.

         (f) Nothing contained in this article shall be construed to prevent commission compliance with laws relating to
audit or inspection of accounts by or on behalf of any government contributing to the support of the commission.

Article VII

      1. Whenever any two or more party states, or subdivisions of party states, have uniform or similar provisions of
law relating to an income tax, capital stock tax, gross receipts tax, sales or use tax, the commission may adopt uniform
regulations for any phase of the administration of such law, including assertion of jurisdiction to tax, or prescribing
uniform tax forms. The commission may also act with respect to the provisions of article IV of this compact.

      2. Prior to the adoption of any regulation, the commission shall:

        (a) As provided in its bylaws, hold at least one public hearing on due notice to all affected party states and
subdivisions thereof and to all taxpayers and other persons who have made timely request of the commission for
advance notice of its regulation-making proceedings.

        (b) Afford all affected party states and subdivisions and interested persons an opportunity to submit relevant
written data and views, which shall be considered fully by the commission.

      3. The commission shall submit any regulations adopted by it to the appropriate officials of all party states and
subdivisions to which they might apply. Each such state and subdivision shall consider any such regulation for adoption
in accordance with its own laws and procedures.

Article VIII*

      1. This article shall be in force only in those party states that specifically provide therefor by statute.

       2. Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books,
papers, records or other documents may request the commission to perform the audit on its behalf. In responding to the
request, the commission shall have access to and may examine, at any reasonable time, such accounts, books, papers,
records, and other documents and any relevant property or stock of merchandise. The commission may enter into
agreements with party states or their subdivisions for assistance in performance of the audit. The commission shall
make charges, to be paid by the state or local government or governments for which it performs the service, for any
audits performed by it in order to reimburse itself for the actual costs incurred in making the audit.

       3. The commission may require the attendance of any person within the state where it is conducting an audit or
part thereof at a time and place fixed by it within such state for the purpose of giving testimony with respect to any
account, book, paper, document, other record, property or stock of merchandise being examined in connection with the
audit. If the person is not within the jurisdiction, he may be required to attend for such purpose at any time and place
fixed by the commission within the state of which he is a resident; provided that such state has adopted this article.

     4. The commission may apply to any court having power to issue compulsory process for orders in aid of its
powers and responsibilities pursuant to this article and any and all such courts shall have jurisdiction to issue such
                                                                                                                     Page 10
                                                     § 32.200 R.S.Mo.

orders. Failure of any person to obey any such order shall be punishable as contempt of the issuing court. If the party or
subject matter on account of which the commission seeks an order is within the jurisdiction of the court to which
application is made, such application may be to a court in the state or subdivision on behalf of which the audit is being
made or a court in the state in which the object of the order being sought is situated. The provisions of this paragraph
apply only to courts in a state that has adopted this article.

      5. The commission may decline to perform any audit requested if it finds that its available personnel or other
resources are insufficient for the purpose or that, in the terms requested, the audit is impracticable of satisfactory
performance. If the commission, on the basis of its experience, has reason to believe that an audit of a particular
taxpayer, either at a particular time or on a particular schedule, would be of interest to a number of party states or their
subdivisions, it may offer to make the audit or audits, the offer to be contingent on sufficient participation therein as
determined by the commission.

      6. Information obtained by any audit pursuant to this article shall be confidential and available only for tax
purposes to party states, their subdivisions or the United States. Availability of information shall be in accordance with
the laws of the states or subdivisions on whose account the commission performs the audit, and only through the
appropriate agencies or officers of such states or subdivisions. Nothing in this article shall be construed to require any
taxpayer to keep records for any period not otherwise required by law.

      7. Other arrangements made or authorized pursuant to law for cooperative audit by or on behalf of the party states
or any of their subdivisions are not superseded or invalidated by this article.

      8. In no event shall the commission make any charge against a taxpayer for an audit.

     9. As used in this article, "tax" in addition to the meaning ascribed to it in article II, means any tax or license fee
imposed in whole or in part for revenue purposes.

Article IX

       1. Whenever the commission finds a need for settling disputes concerning apportionments and allocations by
arbitration, it may adopt a regulation placing this article in effect, notwithstanding the provisions of article VII.

       2. The commission shall select and maintain an arbitration panel composed of officers and employees of state and
local governments and private persons who shall be knowledgeable and experienced in matters of tax law and
administration.

       3. Whenever a taxpayer who has elected to employ article IV, or whenever the laws of the party state or
subdivision thereof are substantially identical with the relevant provisions of article IV, the taxpayer, by written notice
to the commission and to each party state or subdivision thereof that would be affected, may secure arbitration of an
apportionment or allocation, if he is dissatisfied with the final administrative determination of the tax agency of the state
or subdivision with respect thereto on the ground that it would subject him to double or multiple taxation by two or
more party states or subdivisions thereof. Each party state and subdivision thereof hereby consents to the arbitration as
provided herein, and agrees to be bound thereby.

       4. The arbitration board shall be composed of one person selected by the taxpayer, one by the agency or agencies
involved, and one member of the commission's arbitration panel. If the agencies involved are unable to agree on the
person to be selected by them, such person shall be selected by lot from the total membership of the arbitration panel.
The two persons selected for the board in the manner provided by the foregoing provisions of this paragraph shall
jointly select the third member of the board. If they are unable to agree on the selection, the third member shall be
                                                                                                                     Page 11
                                                     § 32.200 R.S.Mo.

selected by lot from among the total membership of the arbitration panel. No member of a board selected by lot shall be
qualified to serve if he is an officer or employee or is otherwise affiliated with any party to the arbitration proceeding.
Residence within the jurisdiction of a party to the arbitration proceeding shall not constitute affiliation within the
meaning of this paragraph.

      5. The board may sit in any state or subdivision party to the proceeding, in the state of the taxpayer's
incorporation, residence or domicile, in any state where the taxpayer does business, or in any place that it finds most
appropriate for gaining access to evidence relevant to the matter before it.

       6. The board shall give due notice of the times and places of its hearings. The parties shall be entitled to be heard,
to present evidence, and to examine and cross-examine witnesses. The board shall act by majority vote.

       7. The board shall have power to administer oaths, take testimony, subpoena and require the attendance of
witnesses and the production of accounts, books, papers, records, and other documents, and issue commissions to take
testimony. Subpoenas may be signed by any member of the board. In case of failure to obey a subpoena, and upon
application by the board, any judge of a court of competent jurisdiction of the state in which the board is sitting or in
which the person to whom the subpoena is directed may be found may make an order requiring compliance with the
subpoena, and the court may punish failure to obey the order as a contempt. The provisions of this paragraph apply only
in states that have adopted this article.

       8. Unless the parties otherwise agree the expenses and other costs of the arbitration shall be assessed and
allocated among the parties by the board in such manner as it may determine. The commission shall fix a schedule of
compensation for members of arbitration boards and of other allowable expenses and costs. No officer or employee of a
state or local government who serves as a member of a board shall be entitled to compensation therefor unless he is
required on account of his service to forego the regular compensation attaching to his public employment, but any such
board member shall be entitled to expenses.

      9. The board shall determine the disputed apportionment or allocation and any matters necessary thereto. The
determinations of the board shall be final for purposes of making the apportionment or allocation, but for no other
purpose.

      10. The board shall file with the commission and with each tax agency represented in the proceeding: the
determination of the board; the board's written statement of its reasons therefor; the record of the board's proceedings;
and any other documents required by the arbitration rules of the commission to be filed.

      11. The commission shall publish the determinations of boards together with the statements of the reasons
therefor.

      12. The commission shall adopt and publish rules of procedure and practice and shall file a copy of such rules and
of any amendment thereto with the appropriate agency or officer in each of the party states.

       13. Nothing contained herein shall prevent at any time a written compromise of any matter or matters in dispute,
if otherwise lawful, by the parties to the arbitration proceeding.

Article X

       1. This compact shall enter into force when enacted into law by any seven states. Thereafter, this compact shall
become effective as to any other state upon its enactment thereof. The commission shall arrange for notification of all
party states whenever there is a new enactment of the compact.
                                                                                                                      Page 12
                                                     § 32.200 R.S.Mo.

       2. Any party state may withdraw from this compact by enacting a statute repealing the same. No withdrawal shall
affect any liability already incurred by or chargeable to a party state prior to the time of such withdrawal.

       3. No proceeding commenced before an arbitration board prior to the withdrawal of a state and to which the
withdrawing state or any subdivision thereof is a party shall be discontinued or terminated by the withdrawal, nor shall
the board thereby lose jurisdiction over any of the parties to the proceeding necessary to make a binding determination
therein.

Article XI

    Nothing in this compact shall be construed to:

        (a) Affect the power of any state or subdivision thereof to fix rates of taxation, except that a party state shall be
obligated to implement article III 2 of this compact.

         (b) Apply to any tax or fixed fee imposed for the registration of a motor vehicle or any tax on motor fuel, other
than a sales tax; provided that the definition of "tax" in article VIII 9 may apply for the purposes of that article and the
commission's powers of study and recommendation pursuant to article VI 3 may apply.

        (c) Withdraw or limit the jurisdiction of any state or local court or administrative officer or body with respect to
any person, corporation or other entity or subject matter, except to the extent that such jurisdiction is expressly
conferred by or pursuant to this compact upon another agency or body.

        (d) Supersede or limit the jurisdiction of any court of the United States.

Article XII

     This compact shall be liberally construed so as to effectuate the purposes thereof. The provisions of this compact
shall be severable and if any phrase, clause, sentence or provision of this compact is declared to be contrary to the
constitution of any state or of the United States or the applicability thereof to any government, agency, person or
circumstance is held invalid, the validity of the remainder of this compact and the applicability thereof to any
government, agency, person or circumstance shall not be affected thereby. If this compact shall be held contrary to the
constitution of any state participating therein, the compact shall remain in full force and effect as to the remaining party
states and in full force and effect as to the state affected as to all severable matters.

HISTORY: L. 1967 p. 102 § 1

NOTES:

 *Article VIII adopted in this state, RSMo 32.205

MISSOURI NOTES TO DECISIONS. (1980) The Multistate Tax Compact has altered the focus of an inquiry from the
search for the source of income to a simple showing of the tax liability in another state. M. V. Marine Co. v. State Tax
Commission (Mo.), 606 S.W.2d 644.

LexisNexis (R) Notes:
                                                                                                                 Page 13
                                                   § 32.200 R.S.Mo.

CASE NOTES

1. Court had to transfer the appeal to the Missouri Supreme Court, where the case required construction of the term
"business income" in the Multistate Tax Compact, Mo. Rev. Stat. § 32.200, art. IV.1, because the Missouri Supreme
Court has exclusive appellate jurisdiction in all cases involving the construction of the state revenue laws. ABB C-E
Nuclear Power, Inc. v. Dir. of Revenue, 2006 Mo. App. LEXIS 997 (Mo. Ct. App. June 30 2006).

2. Supreme Court of Missouri had exclusive jurisdiction pursuant to Mo. Const. art. V, § 3 over a Connecticut
Administrative Hearing Commission finding that two corporations were subject to the Missouri income tax because the
case necessarily involved the construction of the revenue laws of this state, including Mo. Rev. Stat. § 143.431.1, Mo.
Rev. Stat. § 143.451, and Mo. Rev. Stat. § 32.200. Acme Royalty Co. v. Dir. of Revenue, 96 S.W.3d 72, 2002 Mo.
LEXIS 107 (Mo. 2002).

3. Even if the U.S. Internal Revenue Code and accompanying rules and regulations and rulings were in some way
binding upon the State Director of Revenue in his construction and interpretation of Mo. Rev. Stat. ch. 143, they cannot
be relied on as indicative of a policy which other state statutes, such as Mo. Rev. Stat. § 32.200, did not adopt. M. V.
Marine Co. v. State Tax Com., 606 S.W.2d 644, 1980 Mo. LEXIS 325 (Mo. 1980).

4. The Missouri Tax Commission failed to apply the plain language of the Multistate Tax Compact, Mo. Rev. Stat. §
32.200 et seq., when it affirmed an order of the Director of Revenue which assessed additional income tax against a
taxpayer. Goldberg v. State Tax Com., 618 S.W.2d 635, 1981 Mo. LEXIS 322 (Mo. 1981), not followed by State ex rel.
Nesslage v. Flint Hill, 718 S.W.2d 210, 1986 Mo. App. LEXIS 4858 (Mo. Ct. App. 1986).

5. The Administrative Hearing Commission properly held that top officials of a subsidiary corporation located in
Missouri were employees of a corporate taxpayer, a Virginia corporation, and that investment interest earned by a
financial subsidiary of the taxpayer on funds in overseas stock was not just a bookkeeping transaction; an income tax
deficiency as to both items was properly assessed against the taxpayer. Philip Morris, Inc. v. Director of Revenue, 1988
Mo. LEXIS 112 (Mo. Dec. 13 1988).

6. Where corporate taxpayer had elected to pay subsidiary's employees and elected the formula for determining its tax,
employees were the taxpayer's employees for income tax purposes, and the salaries were not paid simply as an
accounting transaction. Philip Morris, Inc. v. Director of Revenue, 760 S.W.2d 888, 1988 Mo. LEXIS 100 (Mo. 1988).

7. Taxpayers' royalty income from licensing agreement was outside the scope of Missouri taxation under Mo. Rev. Stat.
                                                                                                                    Page 14
                                                     § 32.200 R.S.Mo.

§ 143.431.1, Mo. Rev. Stat. § 143.451, and Mo. Rev. Stat. § 32.200 because the taxpayers had no contact, and
specifically no sales, within the state of Missouri. Acme Royalty Co. v. Dir. of Revenue, 96 S.W.3d 72, 2002 Mo.
LEXIS 107 (Mo. 2002).

8. Supreme Court of Missouri had exclusive jurisdiction pursuant to Mo. Const. art. V, § 3 over a Connecticut
Administrative Hearing Commission finding that two corporations were subject to the Missouri income tax because the
case necessarily involved the construction of the revenue laws of this state, including Mo. Rev. Stat. § 143.431.1, Mo.
Rev. Stat. § 143.451, and Mo. Rev. Stat. § 32.200. Acme Royalty Co. v. Dir. of Revenue, 96 S.W.3d 72, 2002 Mo.
LEXIS 107 (Mo. 2002).

9. The Administrative Hearing Commission properly held that top officials of a subsidiary corporation located in
Missouri were employees of a corporate taxpayer, a Virginia corporation, and that investment interest earned by a
financial subsidiary of the taxpayer on funds in overseas stock was not just a bookkeeping transaction; an income tax
deficiency as to both items was properly assessed against the taxpayer. Philip Morris, Inc. v. Director of Revenue, 1988
Mo. LEXIS 112 (Mo. Dec. 13 1988).

10. Where a Delaware corporation that did business in Missouri divested itself of certain subsidiaries, the long-term
capital gains created were "extraordinary" and treated as "nonbusiness income"; thus, the gains were not taxable in
Missouri pursuant to Mo. Rev. Stat. § 32.200. James v. International Tel. & Tel. Corp., 654 S.W.2d 865, 1983 Mo.
LEXIS 391 (Mo. 1983).

11. Where the Missouri Multistate Tax Compact, Mo. Rev. Stat. § 32.200 et seq., superseded former Mo. Rev. Stat. §
143.040.2 (now Mo. Rev. Stat. § 143.071) and Mo. Rev. Stat. § 143.451.2(2)(a) and changed the evaluation issue from
the source of the income to the jurisdiction of foreign states to tax the taxpayer's income, the State Tax Commission of
Missouri's assessment of a taxpayer's income tax liability for foreign royalty payments was remanded for further review
because the effect of the Missouri Multistate Tax Compact was not considered in the original claim. A. P. Green
Refractories Co. v. State Tax Com., 621 S.W.2d 340, 1981 Mo. App. LEXIS 3024, 217 U.S.P.Q. (BNA) 1357 (Mo. Ct.
App. 1981).

12. Even if the U.S. Internal Revenue Code and accompanying rules and regulations and rulings were in some way
binding upon the State Director of Revenue in his construction and interpretation of Mo. Rev. Stat. ch. 143, they cannot
be relied on as indicative of a policy which other state statutes, such as Mo. Rev. Stat. § 32.200, did not adopt. M. V.
Marine Co. v. State Tax Com., 606 S.W.2d 644, 1980 Mo. LEXIS 325 (Mo. 1980).

13. Although taxpayers still are given an option on the method of allocation they may use, all other questions that
reference apportionment of income were to be resolved by reference to the Multistate Tax Compact under Mo. Const.
art. III, § 1, Mo. Rev. Stat. §§ 32.200, 32.210, and 143.451, and former Mo. Rev. Stat. § 143.040 (now Mo. Rev. Stat. §
143.071); while duplicative taxation by multiple states was to be avoided, so too was the taxpayer's avoidance of all
taxation by any state. M. V. Marine Co. v. State Tax Com., 606 S.W.2d 644, 1980 Mo. LEXIS 325 (Mo. 1980).

14. Missouri Administrative Hearing Commission properly found that the sale of the taxpayer's assets in a complete
liquidation was not the type of business transaction in which it regularly engaged, nor did it constitute an integral part of
the taxpayer's ordinary business; thus, the taxpayer, a Delaware corporation headquartered in Connecticut with
operational facilities in several states including Missouri, was not liable for Missouri corporate income tax under Mo.
Rev. Stat. § 32.200. ABB C-E Nuclear Power Inc. v. Dir. of Revenue, 215 S.W.3d 85, 2007 Mo. LEXIS 8, 26
A.L.R. 6th 789 (Mo. 2007).
                                                                                                                   Page 15
                                                    § 32.200 R.S.Mo.

15. To be relieved from liability for sales and use taxes by accepting out-of-state exemption certificates in "good faith"
pursuant to Mo. Rev. Stat. § 32.200 and Mo. Const. art. V, § 2, "good faith" requires an honesty of intention and
freedom from knowledge of circumstances which ought to put the holder upon inquiry. Blevins Asphalt Constr. Co. v.
Director of Revenue, 938 S.W.2d 899, 1997 Mo. LEXIS 20 (Mo. 1997).

16. To be relieved from liability for sales and use taxes by accepting out-of-state exemption certificates in "good faith"
pursuant to Mo. Rev. Stat. § 32.200 and Mo. Const. art. V, § 2, "good faith" requires an honesty of intention and
freedom from knowledge of circumstances which ought to put the holder upon inquiry. Blevins Asphalt Constr. Co. v.
Director of Revenue, 938 S.W.2d 899, 1997 Mo. LEXIS 20 (Mo. 1997).

LAW REVIEWS

1. 51 J. Mo. B. 217, ARTICLE: SALES AND USE TAX ISSUES AT THE ADMINISTRATIVE HEARING
COMMISSION (PART II), Dan Jordan and Kevin Thompson, July/August, 1995, Copyright (c) 1995 Journal of the
Missouri Bar Journal of the Missouri Bar.

LexisNexis Practice Insights

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                                                                                                                      Page 1

                                         LexisNexis (R) Montana Code Annotated

                      *** Current through 2013 Regular Session and the 2014 General Election ***

                                                     Title 15 Taxation
                                               Chapter 1 Tax Administration
                                               Part 6 Multistate Tax Compact

                                      Go to the Montana Code Archive Directory

                                                  15-1-601, MCA (2013)

15-1-601 Compact adopted -- text.

    The Multistate Tax Compact is enacted into law and entered into with all jurisdictions legally joining in the compact,
in the form substantially as set forth in this section. Article VIII of the Multistate Tax Compact relating to interstate
audits is specifically adopted.

    Article I. Purposes

          The purposes of this compact are to:

            (1) facilitate proper determination of state and local tax liability of multistate taxpayers, including the
equitable apportionment of tax bases and settlement of apportionment disputes;

             (2) promote uniformity or compatibility in significant components of tax systems;

             (3) facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax
administration;

             (4) avoid duplicative taxation.

    Article II. Definitions

          As used in this compact:

              (1) "state" means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico,
or any territory or possession of the United States;

             (2) "subdivision" means any government unit or special district of a state;

            (3) "taxpayer" means any corporation, partnership, firm, association, governmental unit or agency, or
person acting as a business entity in more than one state;

             (4) "income tax" means a tax imposed on or measured by net income including any tax imposed on or
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                                                      15-1-601, MCA

measured by an amount arrived at by deducting expenses from gross income, one or more forms of which expenses are
not specifically and directly related to particular transactions;

             (5) "capital stock tax" means a tax measured in any way by the capital of a corporation considered in its
entirety;

           (6) "gross receipts tax" means a tax, other than a sales tax, which is imposed on or measured by the gross
volume of business, in terms of gross receipts or in other terms, and in the determination of which no deduction is
allowed which would constitute the tax an income tax;

             (7) "sales tax" means a tax imposed with respect to the transfer for a consideration of ownership,
possession, or custody of tangible personal property or the rendering of services measured by the price of the tangible
personal property transferred or services rendered and which is required by state or local law to be separately stated
from the sales price by the seller or which is customarily separately stated from the sales price but does not include a tax
imposed exclusively on the sale of a specifically identified commodity or article or class of commodities or articles;

             (8) "use tax" means a nonrecurring tax, other than a sales tax, which:

               (a) is imposed on or with respect to the exercise or enjoyment of any right or power over tangible
personal property incident to the ownership, possession, or custody of that property or the leasing of that property from
another including any consumption, keeping, retention, or other use of tangible personal property; and

               (b) is complementary to a sales tax;

             (9) "tax" means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and any other tax
which has a multistate impact, except that the provisions of Articles III, IV, and V of this compact shall apply only to
the taxes specifically designated therein and the provisions of Article IX of this compact shall apply only in respect to
determinations pursuant to Article IV.

    Article III. Elements of Income Tax Laws Taxpayer Option, State and Local Taxes

           (1) Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax
purposes pursuant to the laws of a party state or pursuant to the laws of subdivisions in two or more party states may
elect to apportion and allocate the taxpayer's income in the manner provided by the laws of such state or by the laws of
such states and subdivisions without reference to this compact or may elect to apportion and allocate in accordance with
Article IV. This election for any tax year may be made in all party states or subdivisions thereof or in any one or more
of the party states or subdivisions thereof without reference to the election made in the others. For the purposes of this
subsection, taxes imposed by subdivisions shall be considered separately from state taxes and the apportionment and
allocation also may be applied to the entire tax base. In no instance wherein Article IV is employed for all subdivisions
of a state may the sum of all apportionments and allocations to subdivisions within a state be greater than the
apportionment and allocation that would be assignable to that state if the apportionment or allocation were being made
with respect to a state income tax.

                             Taxpayer Option, Short Form

          (2) Each party state or any subdivision thereof which imposes an income tax shall provide by law that any
taxpayer required to file a return whose only activities within the taxing jurisdiction consist of sales and do not include
owning or renting real estate or tangible personal property and whose dollar volume of gross sales made during the tax
year within the state or subdivision, as the case may be, is not in excess of $ 100,000 may elect to report and pay any tax
due on the basis of a percentage of such volume and shall adopt rates which shall produce a tax which reasonably
approximates the tax otherwise due. The multistate tax commission, not more than once in 5 years, may adjust the $
100,000 figure in order to reflect such changes as may occur in the real value of the dollar, and such adjusted figure,
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                                                        15-1-601, MCA

upon adoption by the commission, shall replace the $ 100,000 figure specifically provided herein. Each party state and
subdivision thereof may make the same election available to taxpayers additional to those specified in this subsection.

                                     Coverage

          (3) Nothing in this article relates to the reporting or payment of any tax other than an income tax.

    Article IV. Division of Income

          (1) As used in this article, unless the context otherwise requires:

             (a) "business income" means income arising from transactions and activity in the regular course of the
taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management,
and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations;

             (b) "commercial domicile" means the principal place from which the trade or business of the taxpayer is
directed or managed;

           (c) "compensation" means wages, salaries, commissions, and any other form of remuneration paid to
employees for personal services;

             (d) "financial organization" means any bank, trust company, savings bank, industrial bank, land bank, safe
deposit company, private banker, savings and loan association, credit union, cooperative bank, small loan company,
sales finance company, investment company, or any type of insurance company;

             (e) "nonbusiness income" means all income other than business income;

             (f) "public utility" means any business entity:

               (i) which owns or operates any plant, equipment, property, franchise, or license for the transmission of
communications, transportation of goods or persons, except by pipeline, or the production, transmission, sale, delivery,
or furnishing of electricity, water, or steam; and

              (ii) whose rates of charges for goods or services have been established or approved by a federal, state, or
local government or governmental agency;

             (g) "sales" means all gross receipts of the taxpayer not allocated under subsections of this article;

             (h) "state" means any state of the United States, the District of Columbia, the Commonwealth of Puerto
Rico, any territory or possession of the United States, and any foreign country or political subdivision thereof;

              (i) "this state" means the state in which the relevant tax return is filed or, in the case of application of this
article to the apportionment and allocation of income for local tax purposes, the subdivision or local taxing district in
which the relevant tax return is filed.

            (2) Any taxpayer having income from business activity which is taxable both within and without this state,
other than activity as a financial organization or public utility or the rendering of purely personal services by an
individual, shall allocate and apportion the taxpayer's net income as provided in this article. If a taxpayer has income
from business activity as a public utility but derives the greater percentage of the taxpayer's income from activities
subject to this article, the taxpayer may elect to allocate and apportion the taxpayer's entire net income as provided in
this article.

          (3) For purposes of allocation and apportionment of income under this article, a taxpayer is taxable in another
                                                                                                                          Page 4
                                                         15-1-601, MCA

state if:

             (a) in that state the taxpayer is subject to a net income tax, a franchise tax measured by net income, a
franchise tax for the privilege of doing business, or a corporate stock tax; or

             (b) that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the
state does or does not.

          (4) Rents and royalties from real or tangible personal property, capital gains, interest, dividends, or patent or
copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in subsections
(5) through (8) of this article.

            (5) (a) Net rents and royalties from real property located in this state are allocable to this state.

              (b) Net rents and royalties from tangible personal property are allocable to this state:

                 (i) if and to the extent that the property is utilized in this state; or

               (ii) in their entirety if the taxpayer's commercial domicile is in this state and the taxpayer is not organized
under the laws of or taxable in the state in which the property is utilized.

              (c) The extent of utilization of tangible personal property in a state is determined by multiplying the rents
and royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state
during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical
location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the
property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is
utilized in the state in which the property was located at the time the rental or royalty payer obtained possession.

            (6) (a) Capital gains and losses from sales of real property located in this state are allocable to this state.

              (b) Capital gains and losses from sales of tangible personal property are allocable to this state if:

                 (i) the property had a situs in this state at the time of the sale; or

               (ii) the taxpayer's commercial domicile is in this state and the taxpayer is not taxable in the state in which
the property had a situs.

             (c) Capital gains and losses from sales of intangible personal property are allocable to this state if the
taxpayer's commercial domicile is in this state.

            (7) Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state.

            (8) (a) Patent and copyright royalties are allocable to this state:

              (i) if and to the extent that the patent or copyright is utilized by the payer in this state; or

             (ii) if and to the extent that the patent or copyright is utilized by the payer in a state in which the taxpayer is
not taxable and the taxpayer's commercial domicile is in this state.

                 (b) A patent is utilized in a state to the extent that it is employed in production, fabrication,
manufacturing, or other processing in the state or to the extent that a patented product is produced in the state. If the
basis of receipts from patent royalties does not permit allocation to states or if the accounting procedures do not reflect
states of utilization, the patent is utilized in the state in which the taxpayer's commercial domicile is located.
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                                                        15-1-601, MCA

                 (c) A copyright is utilized in a state to the extent that printing or other publication originates in the state.
If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do
not reflect states of utilization, the copyright is utilized in the state in which the taxpayer's commercial domicile is
located.

         (9) All business income shall be apportioned to this state by multiplying the income by a fraction, the
numerator of which is the property factor plus the payroll factor plus the sales factor and the denominator of which is 3.

          (10) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and
tangible personal property owned or rented and used in this state during the tax period and the denominator of which is
the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax
period.

           (11) Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at
eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual
rental rate received by the taxpayer from subrentals.

           (12) The average value of property shall be determined by averaging the values at the beginning and ending
of the tax period, but the tax administrator may require the averaging of monthly values during the tax period if
reasonably required to reflect properly the average value of the taxpayer's property.

          (13) The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the
tax period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere
during the tax period.

          (14) Compensation is paid in this state if:

             (a) the individual's service is performed entirely within the state;

             (b) the individual's service is performed both within and without the state, but the service performed
without the state is incidental to the individual's service within the state; or

             (c) some of the service is performed in the state and:

                (i) the base of operations or, if there is no base of operations, the place from which the service is directed
or controlled is in the state; or

              (ii) the base of operations or the place from which the service is directed or controlled is not in any state
in which some part of the service is performed, but the individual's residence is in this state.

          (15) The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during
the tax period and the denominator of which is the total sales of the taxpayer everywhere during the tax period.

          (16) Sales of tangible personal property are in this state if:

             (a) the property is delivered or shipped to a purchaser, other than the United States government, within this
state regardless of the f.o.b. point or other conditions of the sale; or

             (b) the property is shipped from an office, store, warehouse, factory, or other place of storage in this state
and:

                (i) the purchaser is the United States government; or
                                                                                                                        Page 6
                                                      15-1-601, MCA

               (ii) the taxpayer is not taxable in the state of the purchaser.

          (17) Sales, other than sales of tangible personal property, are in this state if:

             (a) the income-producing activity is performed in this state; or

           (b) the income-producing activity is performed both in and outside this state and a greater proportion of the
income-producing activity is performed in this state than in any other state, based on costs of performance.

           (18) If the allocation and apportionment provisions of this article do not fairly represent the extent of the
taxpayer's business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to
all or any part of the taxpayer's business activity, if reasonable:

             (a) separate accounting;

             (b) the exclusion of any one or more of the factors;

              (c) the inclusion of one or more additional factors which will fairly represent the taxpayer's business
activity in this state; or

             (d) the employment of any other method to effectuate an equitable allocation and apportionment of the
taxpayer's income.

    Article V. Elements of Sales and Use Tax Laws Tax Credit

          (1) Each purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the
combined amount or amounts of legally imposed sales or use taxes paid by the purchaser with respect to the same
property to another state and any subdivision thereof. The credit shall be applied first against the amount of any use tax
due the state, and any unused portion of the credit shall then be applied against the amount of any use tax due a
subdivision.

                        Exemption Certificates -- Vendors May Rely

           (2) Whenever a vendor receives and accepts in good faith from a purchaser a resale or other exemption
certificate or other written evidence of exemption authorized by the appropriate state or subdivision taxing authority, the
vendor shall be relieved of liability for a sales or use tax with respect to the transaction.

    Article VI. The Commission Organization and Management

           (1) (a) The Multistate Tax Commission is hereby established. It shall be composed of one member from each
party state who shall be the head of the state agency charged with the administration of the types of taxes to which this
compact applies. If there is more than one such agency, the state shall provide by law for the selection of the
commission member from the heads of the relevant agencies. State law may provide that a member of the commission
be represented by an alternate, but only if there is on file with the commission written notification of the designation
and identity of the alternate. The attorney general of each party state or the attorney general's designee or other counsel
if the laws of the party state specifically provide, shall be entitled to attend the meetings of the commission but shall not
vote. Such attorneys general, designees, or other counsel shall receive all notices of meetings required under subsection
(1)(e) of this article.

            (b) Each party state shall provide by law for the selection of representatives from its subdivisions affected
by this compact to consult with the commission member from that state.

             (c) Each member shall be entitled to one vote. The commission shall not act unless a majority of the
                                                                                                                      Page 7
                                                     15-1-601, MCA

members are present, and no action shall be binding unless approved by a majority of the total number of members.

             (d) The commission shall adopt an official seal to be used as it may provide.

             (e) The commission shall hold an annual meeting and such other regular meetings as its bylaws may
provide and such special meetings as its executive committee may determine. The commission bylaws shall specify the
dates of the annual and any other regular meetings and shall provide for the giving of notice of annual, regular, and
special meetings. Notice of special meetings shall include the reasons therefor and an agenda of the items to be
considered.

             (f) The commission shall elect annually, from among its members, a presiding officer, a vice presiding
officer, and a treasurer. The commission shall appoint an executive director who shall serve at its pleasure, and it shall
fix the executive director's duties and compensation. The executive director shall be secretary of the commission. The
commission shall make provision for the bonding of such of its officers and employees as it may deem appropriate.

             (g) Irrespective of the civil service, personnel, or other merit system laws of any party state, the executive
director shall appoint or discharge such personnel as may be necessary for the performance of the functions of the
commission and shall fix their duties and compensation. The commission bylaws shall provide for personnel policies
and programs.

            (h) The commission may borrow, accept, or contract for the services of personnel from any state, the
United States, or any other governmental entity.

             (i) The commission may accept for any of its purposes and functions any and all donations and grants of
money, equipment, supplies, materials, and services, conditional or otherwise, from any governmental entity and may
utilize and dispose of the same.

             (j) The commission may establish one or more offices for the transacting of its business.

              (k) The commission shall adopt bylaws for the conduct of its business. The commission shall publish its
bylaws in convenient form and shall file a copy of the bylaws and any amendments thereto with the appropriate agency
or officer in each of the party states.

             (l) The commission annually shall make to the governor and legislature of each party state a report
covering its activities for the preceding year. Any donation or grant accepted by the commission or services borrowed
shall be reported in the annual report of the commission and shall include the nature, amount, and conditions, if any, of
the donation, gift, grant, or services borrowed and the identity of the donor or lender. The commission may make
additional reports as it may deem desirable.

                                     Committees

          (2) (a) To assist in the conduct of its business when the full commission is not meeting, the commission shall
have an executive committee of seven members, including the presiding officer, vice presiding officer, treasurer, and
four other members elected annually by the commission. The executive committee, subject to the provisions of this
compact and consistent with the policies of the commission, shall function as provided in the bylaws of the commission.

             (b) The commission may establish advisory and technical committees, membership on which may include
private persons and public officials, in furthering any of its activities. Such committees may consider any matter of
concern to the commission, including problems of special interest to any party state and problems dealing with
particular types of taxes.

             (c) The commission may establish such additional committees as its bylaws may provide.
                                                                                                                    Page 8
                                                     15-1-601, MCA

                                      Powers

          (3) In addition to powers conferred elsewhere in this compact, the commission shall have power to:

            (a) study state and local tax systems and particular types of state and local taxes;

            (b) develop and recommend proposals for an increase in uniformity or compatibility of state and local tax
laws with a view toward encouraging the simplification and improvement of state and local tax law and administration;

            (c) compile and publish information as in its judgment would assist the party states in implementation of
the compact and taxpayers in complying with state and local tax laws;

            (d) do all things necessary and incidental to the administration of its functions pursuant to this compact.

                                      Finance

           (4) (a) The commission shall submit to the governor or designated officer or officers of each party state a
budget of its estimated expenditures for such period as may be required by the laws of that state for presentation to the
legislature thereof.

             (b) Each of the commission's budgets of estimated expenditures shall contain specific recommendations of
the amounts to be appropriated by each of the party states. The total amount of appropriations requested under any such
budget shall be apportioned among the party states as follows: one-tenth in equal shares and the remainder in proportion
to the amount of revenue collected by each party state and its subdivisions from income taxes, capital stock taxes, gross
receipts taxes, sales and use taxes. In determining such amounts, the commission shall employ such available public
sources of information as, in its judgment, present the most equitable and accurate comparisons among the party states.
Each of the commission's budgets of estimated expenditures and requests for appropriations shall indicate the sources
used in obtaining information employed in applying the formula contained in this subsection.

             (c) The commission shall not pledge the credit of any party state. The commission may meet any of its
obligations in whole or in part with funds available to it under subsection (1)(i) of this article, provided that the
commission takes specific action setting aside such funds prior to incurring any obligation to be met in whole or in part
in such manner. Except where the commission makes use of funds available to it under subsection (1)(i), the
commission shall not incur any obligation prior to the allotment of funds by the party states adequate to meet the same.

             (d) The commission shall keep accurate accounts of all receipts and disbursements. The receipts and
disbursements of the commission shall be subject to the audit and accounting procedures established under its bylaws.
All receipts and disbursements of funds handled by the commission shall be audited yearly by a certified or licensed
public accountant, and the report of the audit shall be included in and become part of the annual report of the
commission.

              (e) The accounts of the commission shall be open at any reasonable time for inspection by duly constituted
officers of the party states and by any person authorized by the commission.

              (f) Nothing contained in this article shall be construed to prevent commission compliance with laws
relating to audit or inspection of accounts by or on behalf of any government contributing to the support of the
commission.

    Article VII. Uniform Regulations and Forms

          (1) Whenever any two or more party states or subdivisions of party states have uniform or similar provisions
of law relating to an income tax, capital stock tax, gross receipts tax, sales or use tax, the commission may adopt
uniform regulations for any phase of the administration of such law, including assertion of jurisdiction to tax or
                                                                                                                         Page 9
                                                      15-1-601, MCA

prescribing uniform tax forms. The commission may also act with respect to the provisions of Article IV of this
compact.

          (2) Prior to the adoption of any regulation, the commission shall:

            (a) as provided in its bylaws, hold at least one public hearing on due notice to all affected party states and
subdivisions thereof and to all taxpayers and other persons who have made timely request of the commission for
advance notice of its regulation-making proceedings;

             (b) afford all affected party states and subdivisions and interested persons an opportunity to submit relevant
written data and views, which shall be considered fully by the commission.

          (3) The commission shall submit any regulations adopted by it to the appropriate officials of all party states
and subdivisions to which they might apply. Each such state and subdivision shall consider any such regulation for
adoption in accordance with its own laws and procedures.

    Article VIII. Interstate Audits

          (1) This article shall be in force only in those party states that specifically provide therefor by statute.

           (2) Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books,
papers, records, or other documents may request the commission to perform the audit on its behalf. In responding to the
request, the commission shall have access to and may examine, at any reasonable time, such accounts, books, papers,
records, and other documents and any relevant property or stock of merchandise. The commission may enter into
agreements with party states or their subdivisions for assistance in performance of the audit. The commission shall
make charges, to be paid by the state or local government or governments for which it performs the service, for any
audits performed by it in order to reimburse itself for the actual costs incurred in making the audit.

            (3) The commission may require the attendance of any person within the state where it is conducting an audit
or part thereof at a time and place fixed by it within such state for the purpose of giving testimony with respect to any
account, book, paper, document, other record, property, or stock of merchandise being examined in connection with the
audit. If the person is not within the jurisdiction, the person may be required to attend for such purpose at any time and
place fixed by the commission within the state of which the person is a resident, provided that such state has adopted
this article.

          (4) The commission may apply to any court having power to issue compulsory process for orders in aid of its
powers and responsibilities pursuant to this article, and any and all such courts shall have jurisdiction to issue such
orders. Failure of any person to obey any such order shall be punishable as contempt of the issuing court. If the party or
subject matter on account of which the commission seeks an order is within the jurisdiction of the court to which
application is made, such application may be to a court in the state or subdivision on behalf of which the audit is being
made or a court in the state in which the object of the order being sought is situated. The provisions of this subsection
apply only to courts in a state that has adopted this article.

          (5) The commission may decline to perform any audit requested if it finds that its available personnel or other
resources are insufficient for the purpose or that, in the terms requested, the audit is impracticable of satisfactory
performance. If the commission, on the basis of its experience, has reason to believe that an audit of a particular
taxpayer, either at a particular time or on a particular schedule, would be of interest to a number of party states or their
subdivisions, it may offer to make the audit or audits, the offer to be contingent on sufficient participation therein as
determined by the commission.

          (6) Information obtained by any audit pursuant to this article shall be confidential and available only for tax
purposes to party states, their subdivisions, or the United States. Availability of information shall be in accordance with
                                                                                                                       Page 10
                                                      15-1-601, MCA

the laws of the states or subdivisions on whose account the commission performs the audit and only through the
appropriate agencies or officers of such states or subdivisions. Nothing in this article shall be construed to require any
taxpayer to keep records for any period not otherwise required by law.

           (7) Other arrangements made or authorized pursuant to law for cooperative audit by or on behalf of the party
states or any of their subdivisions are not superseded or invalidated by this article.

          (8) In no event shall the commission make any charge against a taxpayer for an audit.

           (9) As used in this article, "tax", in addition to the meaning ascribed to it in Article II, means any tax or
license fee imposed in whole or in part for revenue purposes.

    Article IX. Arbitration

           (1) Whenever the commission finds a need for settling disputes concerning apportionments and allocations by
arbitration, it may adopt a regulation placing this article in effect, notwithstanding the provisions of Article VII.

           (2) The commission shall select and maintain an arbitration panel composed of officers and employees of
state and local governments and private persons who shall be knowledgeable and experienced in matters of tax law and
administration.

           (3) Whenever a taxpayer who has elected to employ Article IV or whenever the laws of the party state or
subdivision thereof are substantially identical with the relevant provisions of Article IV, the taxpayer, by written notice
to the commission and to each party state or subdivision thereof that would be affected, may secure arbitration of an
apportionment or allocation if the taxpayer is dissatisfied with the final administrative determination of the tax agency
of the state or subdivision with respect thereto on the ground that it would subject the taxpayer to double or multiple
taxation by two or more party states or subdivisions thereof. Each party state and subdivision thereof hereby consents to
the arbitration as provided herein and agrees to be bound thereby.

           (4) The arbitration board shall be composed of one person selected by the taxpayer, one by the agency or
agencies involved, and one member of the commission's arbitration panel. If the agencies involved are unable to agree
on the person to be selected by them, such person shall be selected by lot from the total membership of the arbitration
panel. The two persons selected for the board in the manner provided by the foregoing provisions of this subsection
shall jointly select the third member of the board. If they are unable to agree on the selection, the third member shall be
selected by lot from among the total membership of the arbitration panel. No member of a board selected by lot shall be
qualified to serve if he is an officer or employee or is otherwise affiliated with any party to the arbitration proceeding.
Residents within the jurisdiction of a party to the arbitration proceeding shall not constitute affiliation within the
meaning of this subsection.

          (5) The board may sit in any state or subdivision party to the proceeding, in the state of the taxpayer's
incorporation, residence, or domicile, in any state where the taxpayer does business, or in any place that it finds most
appropriate for gaining access to evidence relevant to the matter before it.

           (6) The board shall give due notice of the times and places of its hearings. The parties shall be entitled to be
heard, to present evidence, and to examine and cross-examine witnesses. The board shall act by majority vote.

          (7) The board shall have power to administer oaths, take testimony, subpoena and require the attendance of
witnesses and the production of accounts, books, papers, records, and other documents, and issue commissions to take
testimony. Subpoenas may be signed by any member of the board. In case of failure to obey a subpoena and upon
application by the board, any judge of a court of competent jurisdiction of the state in which the board is sitting or in
which the person to whom the subpoena is directed may be found may make an order requiring compliance with the
subpoenas, and the court may punish failure to obey the order as a contempt. The provisions of this subsection apply
                                                                                                                       Page 11
                                                      15-1-601, MCA

only in states that have adopted this article.

           (8) Unless the parties otherwise agree, the expenses and other costs of the arbitration shall be assessed and
allocated among the parties by the board in such manner as it may determine. The commission shall fix a schedule of
compensation for members of arbitration boards and of other allowable expenses and costs. No officer or employee of a
state or local government who serves as a member of a board shall be entitled to compensation therefor unless the
member is required on account of the service to forego the regular compensation attaching to the member's public
employment, but any such board member shall be entitled to expenses.

         (9) The board shall determine the disputed apportionment or allocation and any matters necessary thereto. The
determinations of the board shall be final for purposes of making the apportionment or allocation, but for no other
purpose.

          (10) The board shall file with the commission and with each tax agency represented in the proceeding: the
determination of the board, the board's written statement of its reasons therefor, the record of the board's proceedings,
and any other documents required by the arbitration rules of the commission to be filed.

            (11) The commission shall publish the determinations of boards, together with the statements of the reasons
therefor.

          (12) The commission shall adopt and publish rules of procedure and practice and shall file a copy of such
rules and of any amendment thereto with the appropriate agency or officer in each of the party states.

           (13) Nothing contained herein shall prevent at any time a written compromise of any matter or matters in
dispute, if otherwise lawful, by the parties to the arbitration proceedings.

    Article X. Entry Into Force and Withdrawal

           (1) This compact shall enter into force when enacted into law by any seven states. Thereafter, this compact
shall become effective as to any other state upon its enactment thereof. The commission shall arrange for notification of
all party states whenever there is a new enactment of the compact.

           (2) Any party state may withdraw from this compact by enacting a statute repealing the same. No withdrawal
shall affect any liability already incurred by or chargeable to a party state prior to the time of such withdrawal.

          (3) No proceeding commenced before an arbitration board prior to the withdrawal of a state and to which the
withdrawing state or any subdivision thereof is a party shall be discontinued or terminated by the withdrawal, nor shall
the board thereby lose jurisdiction over any of the parties to the proceeding necessary to make a binding determination
therein.

    Article XI. Effect on Other Laws and Jurisdiction

            Nothing in this compact shall be construed to:

             (1) affect the power of any state or subdivision thereof to fix rates of taxation, except that a party state shall
be obligated to implement Article III, subsection (2), of this compact;

              (2) apply to any tax or fixed fee imposed for the registration of a motor vehicle or any tax on motor fuel,
other than a sales tax; provided that the definition of "tax" in Article VIII, subsection (9), may apply for the purposes of
that article and the commission's powers of study and recommendation pursuant to Article VI, subsection (3), may
apply;

              (3) withdraw or limit the jurisdiction of any state or local court or administrative officer or body with
                                                                                                                        Page 12
                                                      15-1-601, MCA

respect to any person, corporation, or other entity or subject matter, except to the extent that such jurisdiction is
expressly conferred by or pursuant to this compact upon another agency or body;

             (4) supersede or limit the jurisdiction of any court of the United States.

    Article XII. Construction and Severability

           This compact shall be liberally construed so as to effectuate the purposes thereof. The provisions of this
compact shall be severable, and if any phrase, clause, sentence, or provision of this compact is declared to be contrary to
the constitution of any state or of the United States or if the applicability thereof to any government, agency, person, or
circumstance is held invalid, the validity of the remainder of this compact and the applicability thereof to any
government, agency, person, or circumstance shall not be affected thereby. If this compact shall be held contrary to the
constitution of any state participating therein, the compact shall remain in full force and effect as to the remaining party
states and in full force and effect as to the state affected as to all severable matters.

HISTORY: En. Sec. 1, Ch. 17, L. 1969; amd. Sec. 1, Ch. 249, L. 1973; amd. Sec. 1, Ch. 163, L. 1975; R.C.M. 1947,
84-6701; amd. Sec. 142, Ch. 56, L. 2009.

NOTES: Compiler's Comments

     2009 Amendment: Chapter 56 made section gender neutral; and made minor changes in style. Amendment
effective October 1, 2009.

    Uniform Act: Article IV of this Compact consists of the Uniform Division of Income for Tax Purposes Act.

    Official Comments

    Commission Notes for Article IV.

    The Uniform Division of Income for Tax Purposes Act is designed for enactment in those states which levy taxes
on or measured by net income.

    The need for a uniform method of division of income for tax purposes among the several taxing jurisdictions has
been recognized for many years and has long been recommended by the Council of State Governments. There is no
other practical means of assuring that a taxpayer is not taxed on more than its net income. At present, the several states
have various formulae for determining the amount of income to be taxed, and the differences in the formulae produce
inequitable results. The problem has been well analyzed and its historical background outlined in an article appearing in
18 Ohio State Law Journal, page 84.

   The Uniform Division of Income for Tax Purposes Act is the result of conferences with the representatives of the
Controller's Institute of America, the Council of State Governments and various interested individuals.

    Subsection 1

    This definition is derived from the Model Unemployment Compensation Act which has been adopted in all states.

     It is expected that "public utility" will be defined to include all taxpayers subject to the control of the state's
regulatory bodies on the theory that separate legislation will provide for the apportionment and allocation of the income
of such taxpayers.

    Each state may wish to enact separate legislation to apportion and allocate the income of taxpayers subject to the
control of its regulatory bodies.
                                                                                                                     Page 13
                                                      15-1-601, MCA

    Subsection 11

     This section is admittedly arbitrary in using original cost rather than depreciated cost, and in valuing rented
property as eight times the annual rental. This approach is justified because the act does not impose a tax, nor prescribe
the depreciation allowable in computing the tax, but merely provides a basis for division of the taxable income among
the several states. The use of original cost obviates any differences due to varying methods of depreciation, and has the
advantage that the basic figure is readily ascertainable from the taxpayer's books. No method of valuing the property
would probably be universally acceptable.

    Subsection 14

    This section is derived from the Model Unemployment Compensation Act. This is the same figure which will be
used by taxpayers for unemployment compensation purposes.

    Subsection 16

   Sales to the United States Government are treated separately because they are not necessarily attributable to a
market existing in the state to which the goods are originally shipped.

    Subsection 18

     It is anticipated that this act will be made a part of the income tax acts of the several states. For that reason, this
section does not spell out the procedure to be followed in the event of a disagreement between the taxpayer and the tax
administrator. The income tax acts of each state presumably outline the procedure to be followed.

Case Notes

     Audit Information Subject to Discovery by Taxpayer: Pacificorp appealed taxes imposed by the Department of
Revenue that were in part based on audits by other states belonging to the Multistate Tax Commission. The lower court
affirmed the State Tax Appeal Board's refusal to turn over copies of the audits pursuant to discovery requests by
Pacificorp. The Supreme Court held that the audits were subject to discovery under this section because the action was
brought in Montana and its confidentiality rules were controlling and not those of the state performing the audit.
Pacificorp v. Dept. of Revenue, 254 M 387, 838 P2d 914, 49 St. Rep. 774 (1992).

Administrative Rules

    ARM 42.9.107 Multitiered pass-through entity structures with Montana source income -- reporting requirements.

    ARM 42.15.120 Income tax -- intent.

    Title 42, chapter 26, subchapter 2, ARM Corporate multistate activities -- income allocation and apportionment.

    Title 42, chapter 26, subchapter 12, ARM Telecommunication services for corporation license taxes.
                                                                                                                      Page 1

                                        North Dakota Century Code Annotated
                                  Copyright © 2015 Matthew Bender & Company, Inc.
                                          a member of the LexisNexis Group.
                                                 All rights reserved.

                     *** This document is current through the 2013 Regular Legislative Session ***

                                               TITLE 57 Taxation
                                        CHAPTER 57-59 Multistate Tax Compact

                                   Go to the North Dakota Code Archive Directory

                                           N.D. Cent. Code, § 57-59-01 (2014)

57-59-01. Multistate tax compact.

The multistate tax compact is hereby entered into law and entered into with all jurisdictions legally joining therein, in
the form substantially as follows:

    MULTISTATE TAX COMPACT

    Article I Purposes

    The purposes of this compact are to:

       1. Facilitate proper determination of state and local tax liability of multistate taxpayers, including the equitable
apportionment of tax bases and settlement of apportionment disputes.

       2. Promote uniformity or compatibility in significant components of tax systems.

       3. Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax
administration.

       4. Avoid duplicative taxation.

    Article II Definitions

    As used in this compact:

       1. "Capital stock tax" means a tax measured in any way by the capital of a corporation considered in its entirety.

        2. "Gross receipts tax" means a tax, other than a sales tax, which is imposed on or measured by the gross volume
of business, in terms of gross receipts or in other terms, and in the determination of which no deduction is allowed
which would constitute the tax an income tax.
                                                                                                                      Page 2
                                               N.D. Cent. Code, § 57-59-01

        3. "Income tax" means a tax imposed on or measured by net income including any tax imposed on or measured
by an amount arrived at by deducting expenses from gross income, one or more forms of which expenses are not
specifically and directly related to particular transactions.

        4. "Sales tax" means a tax imposed with respect to the transfer for a consideration of ownership, possession, or
custody of tangible personal property or the rendering of services measured by the price of the tangible personal
property transferred or services rendered and which is required by state or local law to be separately stated from the
sales price by the seller, or which is customarily separately stated from the sales price, but does not include a tax
imposed exclusively on the sale of a specifically identified commodity or article or class of commodities or articles.

         5. "State" means a state of the United States, the District of Columbia, the commonwealth of Puerto Rico, or any
territory or possession of the United States.

       6. "Subdivision" means any governmental unit or special district of a state.

        7. "Tax" means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and any other tax which
has a multistate impact, except that the provisions of articles III, IV, and V of this compact shall apply only to the taxes
specifically designated therein and the provisions of article IX of this compact shall apply only in respect to
determinations pursuant to article IV.

        8. "Taxpayer" means any corporation, partnership, firm, association, governmental unit, or agency or person
acting as a business entity in more than one state.

        9. "Use tax" means a nonrecurring tax, other than a sales tax, which (a) is imposed on or with respect to the
exercise or enjoyment of any right or power over tangible personal property incident to the ownership, possession, or
custody of that property or the leasing of that property from another including any consumption, keeping, retention, or
other use of tangible personal property, and (b) is complementary to a sales tax.

    Article III Elements of Income Tax LawsTaxpayer Option, State and Local Taxes

     1. Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax purposes
pursuant to the laws of a party state or pursuant to the laws of subdivisions in two or more party states may elect to
apportion and allocate the taxpayer's income in the manner provided by the laws of such state or by the laws of such
states and subdivisions without reference to this compact, or may elect to apportion and allocate in accordance with
article IV. This election for any tax year may be made in all party states or subdivisions thereof or in any one or more of
the party states or subdivisions thereof without reference to the election made in the others. For the purposes of this
subsection, taxes imposed by subdivisions shall be considered separately from state taxes and the apportionment and
allocation also may be applied to the entire tax base. In no instance wherein article IV is employed for all subdivisions
of a state may the sum of all apportionments and allocations to subdivisions within a state be greater than the
apportionment and allocation that would be assignable to that state if the apportionment or allocation were being made
with respect to a state income tax.

       Taxpayer Option, Short Form

        2. Each party state or any subdivision thereof which imposes an income tax shall provide by law that any
taxpayer required to file a return, whose only activities within the taxing jurisdiction consist of sales and do not include
owning or renting real estate or tangible personal property, and whose dollar volume of gross sales made during the tax
year within the state or subdivision, as the case may be, is not in excess of one hundred thousand dollars may elect to
report and pay any tax due on the basis of a percentage of such volume, and shall adopt rates which shall produce a tax
which reasonably approximates the tax otherwise due. The multistate tax commission, not more than once in five years,
may adjust the one hundred thousand dollar figure in order to reflect such changes as may occur in the real value of the
dollar, and such adjusted figure, upon adoption by the commission, shall replace the one hundred thousand dollar figure
                                                                                                                         Page 3
                                                N.D. Cent. Code, § 57-59-01

specifically provided herein. Each party state and subdivision thereof may make the same election available to taxpayers
additional to those specified in this subsection.

        Coverage

        3. Nothing in this article relates to the reporting or payment of any tax other than an income tax.

    Article IV Division of Income

    1. As used in this article, unless the context otherwise requires:

       (a) "Business income" means income arising from transactions and activity in the regular course of the
taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management,
and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations.

        (b) "Commercial domicile" means the principal place from which the trade or business of the taxpayer is
directed or managed.

        (c) "Compensation" means wages, salaries, commissions, and any other form of remuneration paid to employees
for personal services.

        (d) "Financial organization" means any bank, trust company, savings bank, industrial bank, land bank, safe
deposit company, private banker, savings and loan association, credit union, cooperative bank, small loan company,
sales finance company, investment company, or any type of insurance company.

        (e) "Nonbusiness income" means all income other than business income.

        (f) "Public utility" means any business entity (1) which owns or operates any plant, equipment, property,
franchise, or license for the transmission of communications, transportation of goods or persons, except by pipeline, or
the production, transmission, sale, delivery, or furnishing of electricity, water, or steam; and (2) whose rates of charges
for goods or services have been established or approved by a federal, state, or local government or governmental
agency.

        (g) "Sales" means all gross receipts of the taxpayer not allocated under subsections of this article.

        (h) "State" means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico,
any territory or possession of the United States, and any foreign country or political subdivision thereof.

        (i) "This state" means the state in which the relevant tax return is filed or, in the case of application of this article
to the apportionment and allocation of income for local tax purposes, the subdivision or local taxing district in which the
relevant tax return is filed.

     2. Any taxpayer having income from business activity which is taxable both within and without this state, other
than activity as a financial organization or public utility or the rendering of purely personal services by an individual,
shall allocate and apportion that taxpayer's net income as provided in this article. If a taxpayer has income from business
activity as a public utility but derives the greater percentage of the taxpayer's income from activities subject to this
article, the taxpayer may elect to allocate and apportion the taxpayer's entire net income as provided in this article.

     3. For purposes of allocation and apportionment of income under this article, a taxpayer is taxable in another state if
(a) in that state the taxpayer is subject to a net income tax, a franchise tax measured by net income, a franchise tax for
the privilege of doing business, or a corporate stock tax, or (b) that state has jurisdiction to subject the taxpayer to a net
income tax regardless of whether, in fact, the state does or does not.
                                                                                                                          Page 4
                                                 N.D. Cent. Code, § 57-59-01

    4. Rents and royalties from real or tangible personal property, capital gains, interest, dividends, or patent or
copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in subsections 5
through 8 of this article.

    5. (a) Net rents and royalties from real property located in this state are allocable to this state.

       (b) Net rents and royalties from tangible personal property are allocable to this state: (1) if and to the extent that
the property is utilized in this state, or (2) in their entirety if the taxpayer's commercial domicile is in this state and the
taxpayer is not organized under the laws of or taxable in the state in which the property is utilized.

        (c) The extent of utilization of tangible personal property in a state is determined by multiplying the rents and
royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state
during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical
location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the
property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is
utilized in the state in which the property was located at the time the rental or royalty payer obtained possession.

    6. (a) Capital gains and losses from sales of real property located in this state are allocable to this state.

         (b) Capital gains and losses from sales of tangible personal property are allocable to this state if (1) the property
had a situs in this state at the time of the sale, or (2) the taxpayer's commercial domicile is in this state and the taxpayer
is not taxable in the state in which the property had a situs.

     (c) Capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer's
commercial domicile is in this state.

    7. Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state.

     8. (a) Patent and copyright royalties are allocable to this state: (1) if and to the extent that the patent or copyright is
utilized by the payer in this state, or (2) if and to the extent that the patent or copyright is utilized by the payer in a state
in which the taxpayer is not taxable and the taxpayer's commercial domicile is in this state.

        (b) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or
other processing in the state or to the extent that a patented product is produced in the state. If the basis of receipts from
patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the
patent is utilized in the state in which the taxpayer's commercial domicile is located.

         (c) A copyright is utilized in a state to the extent that printing or other publication originates in the state. If the
basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do not
reflect states of utilization, the copyright is utilized in the state in which the taxpayer's commercial domicile is located.

    9. All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of
which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three.

    10. The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible
personal property owned or rented and used in this state during the tax period and the denominator of which is the
average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period.

     11. Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight
times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual
rental rate received by the taxpayer from subrentals.

    12. The average value of property shall be determined by averaging the values at the beginning and ending of the
                                                                                                                       Page 5
                                                 N.D. Cent. Code, § 57-59-01

tax period but the tax administrator may require the averaging of monthly values during the tax period if reasonably
required to reflect properly the average value of the taxpayer's property.

    13. The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the tax
period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere
during the tax period.

    14. Compensation is paid in this state if:

        (a) The individual's service is performed entirely within the state;

        (b) The individual's service is performed both within and without the state, but the service performed without
the state is incidental to the individual's service within the state; or

        (c) Some of the service is performed in the state and (1) the base of operations or, if there is no base of
operations, the place from which the service is directed or controlled is in the state, or (2) the base of operations or the
place from which the service is directed or controlled is not in any state in which some part of the service is performed,
but the individual's residence is in this state.

    15. The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the tax
period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period.

    16. Sales of tangible personal property are in this state if:

        (a) The property is delivered or shipped to a purchaser, other than the United States government, within this
state regardless of the f.o.b. point or other conditions of the sale; or

        (b) The property is shipped from an office, store, warehouse, factory, or other place of storage in this state and
(1) the purchaser is the United States government, or (2) the taxpayer is not taxable in the state of the purchaser.

    17. Sales, other than sales of tangible personal property, are in this state if:

        (a) The income-producing activity is performed in this state; or

      (b) The income-producing activity is performed both in and outside this state and a greater proportion of the
income-producing activity is performed in this state than in any other state, based on costs of performance.

     18. If the allocation and apportionment provisions of this article do not fairly represent the extent of the taxpayer's
business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to all or any
part of the taxpayer's business activity, if reasonable:

        (a) Separate accounting;

        (b) The exclusion of any one or more of the factors;

         (c) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in
this state; or

       (d) The employment of any other method to effectuate an equitable allocation and apportionment of the
taxpayer's income.

    Article V Elements of Sales and Use Tax LawsTax Credit

    1. Each purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the combined
                                                                                                                     Page 6
                                              N.D. Cent. Code, § 57-59-01

amount or amounts of legally imposed sales or use taxes paid by the purchaser with respect to the same property to
another state and any subdivision thereof. The credit shall be applied first against the amount of any use tax due the
state, and any unused portion of the credit shall then be applied against the amount of any use tax due a subdivision.

       Exemption Certificates, Vendors May Rely

     2. Whenever a vendor receives and accepts in good faith from a purchaser a resale or other exemption certificate or
other written evidence of exemption authorized by the appropriate state or subdivision taxing authority, the vendor shall
be relieved of liability for a sales or use tax with respect to the transaction.

    Article VI The CommissionOrganization and Management

     1. (a) The multistate tax commission is hereby established. It shall be composed of one "member" from each party
state who shall be the head of the state agency charged with the administration of the types of taxes to which this
compact applies. If there is more than one such agency the state shall provide by law for the selection of the commission
member from the heads of the relevant agencies. State law may provide that a member of the commission be
represented by an alternate but only if there is on file with the commission written notification of the designation and
identity of the alternate. The attorney general of each party state or the attorney general's designee, or other counsel if
the laws of the party state specifically provide, shall be entitled to attend the meetings of the commission, but shall not
vote. Such attorneys general, designees, or other counsel shall receive all notices of meetings required under subdivision
e of subsection 1 of this article.

        (b) Each party state shall provide by law for the selection of representatives from its subdivisions affected by
this compact to consult with the commission member from that state.

        (c) Each member shall be entitled to one vote. The commission shall not act unless a majority of the members
are present, and no action shall be binding unless approved by a majority of the total number of members.

       (d) The commission shall adopt an official seal to be used as it may provide.

       (e) The commission shall hold an annual meeting and such other regular meetings as its bylaws may provide and
such special meetings as its executive committee may determine. The commission bylaws shall specify the dates of the
annual and any other regular meetings, and shall provide for the giving of notice of annual, regular, and special
meetings. Notices of special meetings shall include the reasons therefor and an agenda of the items to be considered.

        (f) The commission shall elect annually, from among its members, a chairman, a vice chairman, and a treasurer.
The commission shall appoint an executive director who shall serve at its pleasure, and it shall fix the executive
director's duties and compensation. The executive director shall be secretary of the commission. The commission shall
make provision for the bonding of such of its officers and employees as it may deem appropriate.

        (g) Irrespective of the civil service, personnel, or other merit system laws of any party state, the executive
director shall appoint or discharge such personnel as may be necessary for the performance of the functions of the
commission and shall fix their duties and compensation. The commission bylaws shall provide for personnel policies
and programs.

        (h) The commission may borrow, accept, or contract for the services of personnel from any state, the United
States, or any other governmental entity.

       (i) The commission may accept for any of its purposes and functions any and all donations and grants of money,
equipment, supplies, materials, and services, conditional or otherwise, from any governmental entity, and may utilize
and dispose of the same.
                                                                                                                    Page 7
                                              N.D. Cent. Code, § 57-59-01

       (j) The commission may establish one or more offices for the transacting of its business.

        (k) The commission shall adopt bylaws for the conduct of its business. The commission shall publish its bylaws
in convenient form, and shall file a copy of the bylaws and any amendments thereto with the appropriate agency or
officer in each of the party states.

         (l) The commission annually shall make to the governor and legislature of each party state a report covering its
activities for the preceding year. Any donation or grant accepted by the commission or services borrowed shall be
reported in the annual report of the commission, and shall include the nature, amount, and conditions, if any, of the
donation, gift, grant, or services borrowed and the identity of the donor or lender. The commission may make additional
reports as it may deem desirable.

       Committees

        2. (a) To assist in the conduct of its business when the full commission is not meeting, the commission shall
have an executive committee of seven members, including the chairman, vice chairman, treasurer, and four other
members elected annually by the commission. The executive committee subject to the provisions of this compact and
consistent with the policies of the commission, shall function as provided in the bylaws of the commission.

           (b) The commission may establish advisory and technical committees, membership on which may include
private persons and public officials, in furthering any of its activities. Such committees may consider any matter of
concern to the commission, including problems of special interest to any party state and problems dealing with
particular types of taxes.

          (c) The commission may establish such additional committees as its bylaws may provide.

       Powers

       3. In addition to powers conferred elsewhere in this compact, the commission shall have power to:

          (a) Study state and local tax systems and particular types of state and local taxes.

          (b) Develop and recommend proposals for an increase in uniformity or compatibility of state and local tax
laws with a view toward encouraging the simplification and improvement of state and local tax law and administration.

         (c) Compile and publish information as in its judgment would assist the party states in implementation of the
compact and taxpayers in complying with state and local tax laws.

          (d) Do all things necessary and incidental to the administration of its functions pursuant to this compact.

       Finance

         4. (a) The commission shall submit to the governor or designated officer or officers of each party state a budget
of its estimated expenditures for such period as may be required by the laws of that state for presentation to the
legislature thereof.

           (b) Each of the commission's budgets of estimated expenditures shall contain specific recommendations of the
amounts to be appropriated by each of the party states. The total amount of appropriations requested under any such
budget shall be apportioned among the party states as follows: one-tenth in equal shares; and the remainder in
proportion to the amount of revenue collected by each party state and its subdivisions from income taxes, capital stock
taxes, gross receipts taxes, and sales and use taxes. In determining such amounts, the commission shall employ such
available public sources of information as, in its judgment, present the most equitable and accurate comparisons among
the party states. Each of the commission's budgets of estimated expenditures and requests for appropriations shall
                                                                                                                       Page 8
                                               N.D. Cent. Code, § 57-59-01

indicate the sources used in obtaining information employed in applying the formula contained in this subsection.

           (c) The commission shall not pledge the credit of any party state. The commission may meet any of its
obligations in whole or in part with funds available to it under subdivision i of subsection 1 of this article; provided, that
the commission takes specific action setting aside such funds prior to incurring any obligation to be met in whole or in
part in such manner. Except where the commission makes use of funds available to it under subdivision i of subsection
1, the commission shall not incur any obligation prior to the allotment of funds by the party states adequate to meet the
same.

          (d) The commission shall keep accurate accounts of all receipts and disbursements. The receipts and
disbursements of the commission shall be subject to the audit and accounting procedures established under its bylaws.
All receipts and disbursements of funds handled by the commission shall be audited yearly by a certified or licensed
public accountant and the report of the audit shall be included in and become part of the annual report of the
commission.

           (e) The accounts of the commission shall be open at any reasonable time for inspection by duly constituted
officers of the party states and by any persons authorized by the commission.

           (f) Nothing contained in this article shall be construed to prevent commission compliance with laws relating
to audit or inspection of accounts by or on behalf of any government contributing to the support of the commission.

    Article VII Uniform Regulations and Forms

     1. Whenever any two or more party states, or subdivisions of party states, have uniform or similar provisions of law
relating to an income tax, the commission may adopt uniform regulations for any phase of the administration of such
law, including assertion of jurisdiction to tax, or prescribing uniform tax forms. The commission may also act with
respect to the provisions of article IV of this compact.

    2. Prior to the adoption of any regulation, the commission shall:

       (a) As provided in its bylaws, hold at least one public hearing on due notice to all affected party states and
subdivisions thereof and to all taxpayers and other persons who have made timely request of the commission for
advance notice of its regulation-making proceedings.

        (b) Afford all affected party states and subdivisions and interested persons an opportunity to submit relevant
written data and views, which shall be considered fully by the commission.

     3. The commission shall submit any regulations adopted by it to the appropriate officials of all party states and
subdivisions to which they might apply. Each such state and subdivision shall consider any such regulation for adoption
in accordance with its own laws and procedures.

    Article VIII Interstate Audits

    1. This article shall be in force only in those party states that specifically provide therefor by statute.

      2. Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books, papers,
records, or other documents may request the commission to perform the audit on its behalf. In responding to the request,
the commission shall have access to and may examine, at any reasonable time, such accounts, books, papers, records,
and other documents and any relevant property or stock of merchandise. The commission may enter into agreements
with party states or their subdivisions for assistance in performance of the audit. The commission shall make charges, to
be paid by the state or local government or governments for which it performs the service, for any audits performed by
it in order to reimburse itself for the actual costs incurred in making the audit.
                                                                                                                        Page 9
                                               N.D. Cent. Code, § 57-59-01

     3. The commission may require the attendance of any person within the state where it is conducting an audit or part
thereof at a time and place fixed by it within such state for the purpose of giving testimony with respect to any account,
book, paper, document, other record, property, or stock of merchandise being examined in connection with the audit. If
the person is not within the jurisdiction, the person may be required to attend for such purpose at any time and place
fixed by the commission within the state of which the person is a resident; provided, that such state has adopted this
article.

     4. The commission may apply to any court having power to issue compulsory process for orders in aid of its powers
and responsibilities pursuant to this article and any and all such courts shall have jurisdiction to issue such orders.
Failure of any person to obey any such order shall be punishable as contempt of the issuing court. If the party or subject
matter on account of which the commission seeks an order is within the jurisdiction of the court to which application is
made, such application may be to a court in the state or subdivision on behalf of which the audit is being made or a
court in the state in which the object of the order being sought is situated. The provisions of this subsection apply only
to courts in a state that has adopted this article.

    5. The commission may decline to perform any audit requested if it finds that its available personnel or other
resources are insufficient for the purpose or that, in the terms requested, the audit is impracticable of satisfactory
performance. If the commission, on the basis of its experience, has reason to believe that an audit of a particular
taxpayer, either at a particular time or on a particular schedule, would be of interest to a number of party states or their
subdivisions, it may offer to make the audit or audits, the offer to be contingent on sufficient participation therein as
determined by the commission.

     6. Information obtained by any audit pursuant to this article shall be confidential and available only for tax
purposes to party states, their subdivisions, or the United States. Availability of information shall be in accordance with
the laws of the states or subdivisions on whose account the commission performs the audit, and only through the
appropriate agencies or officers of such states or subdivisions. Nothing in this article shall be construed to require any
taxpayer to keep records for any period not otherwise required by law.

     7. Other arrangements made or authorized pursuant to law for cooperative audit by or on behalf of the party states
or any of their subdivisions are not superseded or invalidated by this article.

    8. In no event shall the commission make any charge against a taxpayer for an audit.

   9. As used in this article, "tax", in addition to the meaning ascribed to it in article II, means any tax or license fee
imposed in whole or in part for revenue purposes.

    Article IX Arbitration

     1. Whenever the commission finds a need for settling disputes concerning apportionments and allocations by
arbitration, it may adopt a regulation placing this article in effect, notwithstanding the provisions of article VII.

    2. The commission shall select and maintain an arbitration panel composed of officers and employees of state and
local governments and private persons who shall be knowledgeable and experienced in matters of tax law and
administration.

     3. Whenever a taxpayer who has elected to employ article IV, or whenever the laws of the party state or subdivision
thereof are substantially identical with the relevant provisions of article IV, the taxpayer, by written notice to the
commission and to each party state or subdivision thereof that would be affected, may secure arbitration of an
apportionment or allocation, if the taxpayer is dissatisfied with the final administrative determination of the tax agency
of the state or subdivision with respect thereto on the ground that it would subject the taxpayer to double or multiple
taxation by two or more party states or subdivisions thereof. Each party state and subdivision thereof hereby consents to
the arbitration as provided herein, and agrees to be bound thereby.
                                                                                                                    Page 10
                                               N.D. Cent. Code, § 57-59-01

     4. The arbitration board shall be composed of one person selected by the taxpayer, one by the agency or agencies
involved, and one member of the commission's arbitration panel. If the agencies involved are unable to agree on the
person to be selected by them, such person shall be selected by lot from the total membership of the arbitration panel.
The two persons selected for the board in the manner provided by the foregoing provisions of this subsection shall
jointly select the third member of the board. If they are unable to agree on the selection, the third member shall be
selected by lot from among the total membership of the arbitration panel. No member of a board selected by lot shall be
qualified to serve if that member is an officer or employee or is otherwise affiliated with any party to the arbitration
proceeding. Residence within the jurisdiction of a party to the arbitration proceeding shall not constitute affiliation
within the meaning of this subsection.

     5. The board may sit in any state or subdivision party to the proceeding, in the state of the taxpayer's incorporation,
residence, or domicile, in any state where the taxpayer does business, or in any place that it finds most appropriate for
gaining access to evidence relevant to the matter before it.

    6. The board shall give due notice of the times and places of its hearings. The parties shall be entitled to be heard, to
present evidence, and to examine and cross-examine witnesses. The board shall act by majority vote.

     7. The board shall have power to administer oaths, take testimony, subpoena, and require the attendance of
witnesses and the production of accounts, books, papers, records, and other documents, and issue commissions to take
testimony. Subpoenas may be signed by any member of the board. In case of failure to obey a subpoena, and upon
application by the board, any judge of a court of competent jurisdiction of the state in which the board is sitting or in
which the person to whom the subpoena is directed may be found may make an order requiring compliance with the
subpoena, and the court may punish failure to obey the order as a contempt. The provisions of this subsection apply
only in states that have adopted this article.

     8. Unless the parties otherwise agree the expenses and other costs of the arbitration shall be assessed and allocated
among the parties by the board in such manner as it may determine. The commission shall fix a schedule of
compensation for members of arbitration boards and of other allowable expenses and costs. No officer or employee of a
state or local government who serves as a member of a board shall be entitled to compensation therefor unless that
person is required on account of that person's service to forego the regular compensation attaching to that person's
public employment, but any such board member shall be entitled to expenses.

    9. The board shall determine the disputed apportionment or allocation and any matters necessary thereto. The
determinations of the board shall be final for purposes of making the apportionment or allocation, but for no other
purpose.

    10. The board shall file with the commission and with each tax agency represented in the proceeding: the
determination of the board; the board's written statement of its reasons therefor; the record of the board's proceedings;
and any other documents required by the arbitration rules of the commission to be filed.

    11. The commission shall publish the determinations of boards together with the statements of the reasons therefor.

     12. The commission shall adopt and publish rules of procedure and practice and shall file a copy of such rules and
of any amendment thereto with the appropriate agency or officer in each of the party states.

    13. Nothing contained herein shall prevent at any time a written compromise of any matter or matters in dispute, if
otherwise lawful, by the parties to the arbitration proceeding.

    Article X Entry Into Force and Withdrawal

    1. This compact shall enter into force when enacted into law by any seven states. Thereafter, this compact shall
become effective as to any other state upon its enactment thereof. The commission shall arrange for notification of all
                                                                                                                      Page 11
                                               N.D. Cent. Code, § 57-59-01

party states whenever there is a new enactment of the compact.

     2. Any party state may withdraw from this compact by enacting a statute repealing the same. No withdrawal shall
affect any liability already incurred by or chargeable to a party state prior to the time of such withdrawal.

     3. No proceeding commenced before an arbitration board prior to the withdrawal of a state and to which the
withdrawing state or any subdivision thereof is a party shall be discontinued or terminated by the withdrawal, nor shall
the board thereby lose jurisdiction over any of the parties to the proceeding necessary to make a binding determination
therein.

    Article XI Effect on Other Laws and Jurisdiction

    Nothing in this compact shall be construed to:

    1. Affect the power of any state or subdivision thereof to fix rates of taxation, except that a party state shall be
obligated to implement subsection 2 of article III of this compact.

     2. Apply to any tax or fixed fee imposed for the registration of a motor vehicle or any tax on motor fuel, other than
a sales tax; provided, that the definition of "tax" in subsection 9 of article VIII may apply for the purposes of that article
and the commission's powers of study and recommendation pursuant to subsection 3 of article VI may apply.

     3. Withdraw or limit the jurisdiction of any state or local court or administrative officer or body with respect to any
person, corporation, limited liability company, or other entity or subject matter, except to the extent that such
jurisdiction is expressly conferred by or pursuant to this compact upon another agency or body.

    4. Supersede or limit the jurisdiction of any court of the United States.

    Article XII Construction and Severability

     This compact shall be liberally construed so as to effectuate the purposes thereof. The provisions of this compact
shall be severable and if any phrase, clause, sentence, or provision of this compact is declared to be contrary to the
constitution of any state or of the United States or the applicability thereof to any government, agency, person, or
circumstance is held invalid, the validity of the remainder of this compact and the applicability thereof to any
government, agency, person, or circumstance shall not be affected thereby. If this compact shall be held contrary to the
constitution of any state participating therein, the compact shall remain in full force and effect as to the remaining party
states and in full force and effect as to the state affected as to all severable matters.

HISTORY: S.L. 1969, ch. 537, § 1; 1993, ch. 54, § 106.

NOTES: Comparative Legislation.

    Multistate Tax Compact:

    Ala. Code § 47-27-1 et seq.

    Alaska Stat. § 43-19-010 et seq.

    Ark. Stat. Ann. § 84.4101.

    Cal. Revenue and Taxation Code § 38001.

    Colo. Rev. Stat. § 24-60-1301.
                                                                     Page 12
                                       N.D. Cent. Code, § 57-59-01

D.C. Law 4-17.

Fla. Stat. § 213.15 et seq.

Hawaii Rev. Stat. § 255-1 et seq.

Idaho Code § 63-3701 et seq.

Kan. Stat. Ann. § 79-4301.

Mich. Comp. Laws §§ 205.581-205.589.

Mo. Rev. Stat. § 32.200 et seq.

Mont. Code Ann. § 15-31-122.

Neb. Rev. Stat. § 77-2901 et seq.

Nev. Rev. Stat. § 376.010 et seq.

N. M. Stat. Ann. § 7-5-1 et seq.

Or. Rev. Stat. § 305.655 et seq.

S. D. Codified Laws § 10-54-1.

Tex. Rev. Civ. Stat., Art. 7359a.

Utah Code Ann. § 59-22-1.

Wash. Rev. Code § 82.56.010.

W. Va. Code c. 11, art. 10A.
                                                                                                                      Page 1

                                    Michie's TM Annotated Statutes of New Mexico
                                 Copyright © 2014 by Matthew Bender & Company, Inc.
                                          a member of the LexisNexis Group.
                                                  All rights reserved.

  *** Statutes current through end of the Second Regular Session of the Fifty-First Legislature (2014 legislation) ***

                                                   Chapter 7 Taxation
                                            Article 5 Multistate Tax Compact

                                     Go to the New Mexico Code Archive Directory

                                              N.M. Stat. Ann. § 7-5-1 (2014)

7-5-1. Compact enacted and entered into.

The "Multistate Tax Compact" is enacted into law and entered into with all jurisdictions legally joining therein, in the
form substantially as follows:

       "MULTISTATE TAX COMPACT Article I. Purposes.

    The purposes of this compact are to:

       1. Facilitate proper determination of state and local tax liability of multistate taxpayers, including the equitable
apportionment of tax bases and settlement of apportionment disputes.

       2. Promote uniformity or compatibility in significant components of tax systems.

       3. Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax
administration.

       4. Avoid duplicative taxation.

          Article II. Definitions.

    As used in this compact:

         1. "State" means a state of the United States, the District of Columbia, the commonwealth of Puerto Rico, or any
territory or possession of the United States.

       2. "Subdivision" means any governmental unit or special district of a state.

        3. "Taxpayer" means any corporation, partnership, firm, association, governmental unit or agency or person
acting as a business entity in more than one state.
                                                                                                                     Page 2
                                                 N.M. Stat. Ann. § 7-5-1

        4. "Income tax" means a tax imposed on or measured by net income including any tax imposed on or measured
by an amount arrived at by deducting expenses from gross income, one or more forms of which expenses are not
specifically and directly related to particular transactions.

       5. "Capital stock tax" means a tax measured in any way by the capital of a corporation considered in its entirety.

        6. "Gross receipts tax" means a tax, other than a sales tax, which is imposed on or measured by the gross volume
of business, in terms of gross receipts or in other terms, and in the determination of which no deduction is allowed
which would constitute the tax an income tax.

        7. "Sales tax" means a tax imposed with respect to the transfer for a consideration of ownership, possession or
custody of tangible personal property or the rendering of services measured by the price of the tangible personal
property transferred or services rendered and which is required by state or local law to be separately stated from the
sales price by the seller, or which is customarily separately stated from the sales price, but does not include a tax
imposed exclusively on the sale of a specifically identified commodity or article or class of commodities or articles.

        8. "Use tax" means a nonrecurring tax, other than a sales tax, which (a) is imposed on or with respect to the
exercise or enjoyment of any right or power over tangible personal property incident to the ownership, possession or
custody of that property or the leasing of that property from another including any consumption, keeping, retention, or
other use of tangible personal property and (b) is complementary to a sales tax.

        9. "Tax" means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and any other tax which
has a multistate impact, except that the provisions of Articles III, IV and V of this compact shall apply only to the taxes
specifically designated therein and the provisions of Article IX of this compact shall apply only in respect to
determinations pursuant to Article IV.

          Article III. Elements of Income Tax Laws. Taxpayer Option, State and Local Taxes.

     1. Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax purposes
pursuant to the laws of a party state or pursuant to the laws of subdivisions in two or more party states may elect to
apportion and allocate his income in the manner provided by the laws of such state or by the laws of such states and
subdivisions without reference to this compact, or may elect to apportion and allocate in accordance with Article IV.
This election for any tax year may be made in all party states or subdivisions thereof or in any one or more of the party
states or subdivisions thereof without reference to the election made in the others. For the purposes of this paragraph,
taxes imposed by subdivisions shall be considered separately from state taxes and the apportionment and allocation also
may be applied to the entire tax base. In no instance wherein Article IV is employed for all subdivisions of a state may
the sum of all apportionments and allocations to subdivisions within a state be greater than the apportionment and
allocation that would be assignable to that state if the apportionment or allocation were being made with respect to a
state income tax.

       Taxpayer Option, Short Form.

     2. Each party state or any subdivision thereof which imposes an income tax shall provide by law that any taxpayer
required to file a return, whose only activities within the taxing jurisdiction consist of sales and do not include owning
or renting real estate or tangible personal property, and whose dollar volume of gross sales made during the tax year
within the state or subdivision, as the case may be, is not in excess of $ 100,000 may elect to report and pay any tax due
on the basis of a percentage of such volume, and shall adopt rates which shall produce a tax which reasonably
approximates the tax otherwise due. The multistate tax commission, not more than once in five years, may adjust the $
100,000 figure in order to reflect such changes as may occur in the real value of the dollar, and such adjusted figure,
upon adoption by the commission, shall replace the $ 100,000 figure specifically provided herein. Each party state and
subdivision thereof may make the same election available to taxpayers additional to those specified in this paragraph.
                                                                                                                     Page 3
                                                 N.M. Stat. Ann. § 7-5-1

       Coverage.

    3. Nothing in this Article relates to the reporting or payment of any tax other than an income tax.

       Article IV. Division of Income.

    1. As used in this Article, unless the context otherwise requires:

       (a) "Business income" means income arising from transactions and activity in the regular course of the
taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management,
and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations.

        (b) "Commercial domicile" means the principal place from which the trade or business of the taxpayer is
directed or managed.

        (c) "Compensation" means wages, salaries, commissions and any other form of remuneration paid to employees
for personal services.

        (d) "Financial organization" means any bank, trust company, savings bank, industrial bank, land bank, safe
deposit company, private banker, savings and loan association, credit union, cooperative bank, small loan company,
sales finance company, investment company, or any type of insurance company.

       (e) "Nonbusiness income" means all income other than business income.

        (f) "Public utility" means any business entity (1) which owns or operates any plant, equipment, property,
franchise, or license for the transmission of communications, transportation of goods or persons, except by pipeline, or
the production, transmission, sale, delivery, or furnishing of electricity, water or steam; and (2) whose rates of charges
for goods or services have been established or approved by a federal, state or local government or governmental agency.

       (g) "Sales" means all gross receipts of the taxpayer not allocated under paragraphs of this Article.

        (h) "State" means any state of the United States, the District of Columbia, the commonwealth of Puerto Rico,
any territory or possession of the United States, and any foreign country or political subdivision thereof.

        (i) "This state" means the state in which the relevant tax return is filed or, in the case of application of this
Article to the apportionment and allocation of income for local tax purposes, the subdivision or local taxing district in
which the relevant tax return is filed.

     2. Any taxpayer having income from business activity which is taxable both within and without this state, other
than activity as a financial organization or public utility or the rendering of purely personal services by an individual,
shall allocate and apportion his net income as provided in this Article. If a taxpayer has income from business activity
as a public utility but derives the greater percentage of his income from activities subject to this Article, the taxpayer
may elect to allocate and apportion his entire net income as provided in this Article.

     3. For purposes of allocation and apportionment of income under this Article, a taxpayer is taxable in another state
if (1) in that state he is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the
privilege of doing business, or a corporate stock tax, or (2) that state has jurisdication [jurisdiction] to subject the
taxpayer to a net income tax regardless of whether, in fact, the state does or does not.

    4. Rents and royalties from real or tangible personal property, capital gains, interest, dividends or patent or
copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in paragraphs 5
through 8 of this Article.
                                                                                                                          Page 4
                                                   N.M. Stat. Ann. § 7-5-1

    5. (a) Net rents and royalties from real property located in this state are allocable to this state.

       (b) Net rents and royalties from tangible personal property are allocable to this state: (1) if and to the extent that
the property is utilized in this state, or (2) in their entirety if the taxpayer's commercial domicile is in this state and the
taxpayer is not organized under the laws of or taxable in the state in which the property is utilized.

        (c) The extent of utilization of tangible personal property in a state is determined by multiplying the rents and
royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state
during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical
location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the
property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is
utilized in the state in which the property was located at the time the rental or royalty payer obtained possession.

    6. (a) Capital gains and losses from sales of real property located in this state are allocable to this state.

         (b) Capital gains and losses from sales of tangible personal property are allocable to this state if (1) the property
had a situs in this state at the time of the sale, or (2) the taxpayer's commercial domicile is in this state and the taxpayer
is not taxable in the state in which the property had a situs.

     (c) Capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer's
commercial domicile is in this state.

    7. Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state.

     8. (a) Patent and copyright royalties are allocable to this state: (1) if and to the extent that the patent or copyright is
utilized by the payer in this state, or (2) if and to the extent that the patent [or] copyright is utilized by the payer in a
state in which the taxpayer is not taxable and the taxpayer's commercial domicile is in this state.

        (b) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or
other processing in the state or to the extent that a patented product is produced in the state. If the basis of receipts from
patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the
patent is utilized in the state in which the taxpayer's commercial domicile is located.

         (c) A copyright is utilized in a state to the extent that printing or other publication originates in the state. If the
basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do not
reflect states of utilization, the copyright is utilized in the state in which the taxpayer's commercial domicile is located.

    9. All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of
which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three.

    10. The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible
personal property owned or rented and used in this state during the tax period and the denominator of which is the
average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period.

     11. Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight
times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual
rental rate received by the taxpayer from subrentals.

     12. The average value of property shall be determined by averaging the values at the beginning and ending of the
tax period but the tax administrator may require the averaging of monthly values during the tax period if reasonably
required to reflect properly the average value of the taxpayer's property.

    13. The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the tax
                                                                                                                       Page 5
                                                  N.M. Stat. Ann. § 7-5-1

period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere
during the tax period.

    14. Compensation is paid in this state if:

        (a) the individual's service is performed entirely within the state;

         (b) the individual's service is performed both within and without the state, but the service performed without the
state is incidental to the individual's service within the state; or

        (c) some of the service is performed in the state and (1) the base of operations or, if there is no base of
operations, the place from which the service is directed or controlled is in the state, or (2) the base of operations or the
place from which the service is directed or controlled is not in any state in which some part of the service is performed,
but the individual's residence is in this state.

    15. The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the tax
period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period.

    16. Sales of tangible personal property are in this state if:

       (a) the property is delivered or shipped to a purchaser, other than the United States government, within this state
regardless of the f.o.b. point or other conditions of the sale; or

        (b) the property is shipped from an office, store, warehouse, factory or other place of storage in this state and (1)
the purchaser is the United States government or (2) the taxpayer is not taxable in the state of the purchaser.

    17. Sales, other than sales of tangible personal property, are in this state if:

        (a) the income-producing activity is performed in this state; or

      (b) the income-producing activity is performed both in and outside this state and a greater proportion of the
income-producing activity is performed in this state than in any other state, based on costs of performance.

     18. If the allocation and apportionment provisions of this Article do not fairly represent the extent of the taxpayer's
business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to all or any
part of the taxpayer's business activity, if reasonable:

        (a) separate accounting;

        (b) the exclusion of any one or more of the factors;

         (c) the inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in
this state; or

       (d) the employment of any other method to effectuate an equitable allocation and apportionment of the
taxpayer's income.

          Article V. Elements of Sales and Use Tax Laws. Tax Credit.

    1. Each purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the combined
amount or amounts of legally imposed sales or use taxes paid by him with respect to the same property to another state
and any subdivision thereof. The credit shall be applied first against the amount of any use tax due the state, and any
unused portion of the credit shall then be applied against the amount of any use tax due a subdivision.
                                                                                                                       Page 6
                                                  N.M. Stat. Ann. § 7-5-1

       Exemption Certificates, Vendors May Rely.

     2. Whenever a vendor receives and accepts in good faith from a purchaser a resale or other exemption certificate or
other written evidence of exemption authorized by the appropriate state or subdivision taxing authority, the vendor shall
be relieved of liability for a sales or use tax with respect to the transaction.

       Article VI. The Commission. Organization and Management.

     1. (a) The multistate tax commission is hereby established. It shall be composed of one "member" from each party
state who shall be the head of the state agency charged with the administration of the types of taxes to which this
compact applies. If there is more than one such agency the state shall provide by law for the selection of the commission
member from the heads of the relevant agencies. State law may provide that a member of the commission be
represented by an alternate but only if there is on file with the commission written notification of the designation and
identity of the alternate. The attorney general of each party state or his designee, or other counsel if the laws of the party
state specifically provide, shall be entitled to attend the meetings of the commission, but shall not vote. Such attorneys
general, designees, or other counsel shall receive all notices of meetings required under paragraph 1(e) of this Article.

        (b) Each party state shall provide by law for the selection of representatives from its subdivisions affected by
this compact to consult with the commission member from that state.

        (c) Each member shall be entitled to one vote. The commission shall not act unless a majority of the members
are present, and no action shall be binding unless approved by a majority of the total number of members.

       (d) The commission shall adopt an official seal to be used as it may provide.

       (e) The commission shall hold an annual meeting and such other regular meetings as its bylaws may provide and
such special meetings as its executive committee may determine. The commission bylaws shall specify the dates of the
annual and any other regular meetings, and shall provide for the giving of notice of annual, regular and special
meetings. Notices of special meetings shall include the reasons therefor and an agenda of the items to be considered.

       (f) The commission shall elect annually, from among its members, a chairman, a vice chairman and a treasurer.
The commission shall appoint an executive director who shall serve at its pleasure, and it shall fix his duties and
compensation. The executive director shall be secretary of the commission. The commission shall make provision for
the bonding of such of its officers and employees as it may deem appropriate.

        (g) Irrespective of the civil service, personnel or other merit system laws of any party state, the executive
director shall appoint or discharge such personnel as may be necessary for the performance of the functions of the
commission and shall fix their duties and compensation. The commission bylaws shall provide for personnel policies
and programs.

        (h) The commission may borrow, accept or contract for the services of personnel from any state, the United
States, or any other governmental entity.

       (i) The commission may accept for any of its purposes and functions any and all donations and grants of money,
equipment, supplies, materials and services, conditional or otherwise, from any governmental entity, and may utilize
and dispose of the same.

       (j) The commission may establish one or more offices for the transacting of its business.

        (k) The commission shall adopt bylaws for the conduct of its business. The commission shall publish its bylaws
in convenient form, and shall file a copy of the bylaws and any amendments thereto with the appropriate agency or
officer in each of the party states.
                                                                                                                     Page 7
                                                 N.M. Stat. Ann. § 7-5-1

         (l) The commission annually shall make to the governor and legislature of each party state a report covering its
activities for the preceding year. Any donation or grant accepted by the commission or services borrowed shall be
reported in the annual report of the commission, and shall include the nature, amount and conditions, if any, of the
donation, gift, grant or services borrowed and the identity of the donor or lender. The commission may make additional
reports as it may deem desirable.

          Committees.

     2. (a) To assist in the conduct of its business when the full commission is not meeting, the commission shall have
an executive committee of seven members, including the chairman, vice chairman, treasurer and four other members
elected annually by the commission. The executive committee, subject to the provisions of this compact and consistent
with the policies of the commission, shall function as provided in the bylaws of the commission.

        (b) The commission may establish advisory and technical committees, membership on which may include
private persons and public officials, in furthering any of its activities. Such committees may consider any matter of
concern to the commission, including problems of special interest to any party state and problems dealing with
particular types of taxes.

       (c) The commission may establish such additional committees as its bylaws may provide.

          Powers.

    3. In addition to powers conferred elsewhere in this compact, the commission shall have power to:

       (a) Study state and local tax systems and particular types of state and local taxes.

        (b) Develop and recommend proposals for an increase in uniformity or compatibility of state and local tax laws
with a view toward encouraging the simplification and improvement of state and local tax law and administration.

      (c) Compile and publish information as in its judgment would assist the party states in implementation of the
compact and taxpayers in complying with state and local tax laws.

       (d) Do all things necessary and incidental to the administration of its functions pursuant to this compact.

          Finance.

     4. (a) The commission shall submit to the governor or designated officer or officers of each party state a budget of
its estimated expenditures for such period as may be required by the laws of that state for presentation to the legislature
thereof.

        (b) Each of the commission's budgets of estimated expenditures shall contain specific recommendations of the
amounts to be appropriated by each of the party states. The total amount of appropriations requested under any such
budget shall be apportioned among the party states as follows: one-tenth in equal shares; and the remainder in
proportion to the amount of revenue collected by each party state and its subdivisions from income taxes, capital stock
taxes, gross receipts taxes, sales and use taxes. In determining such amounts, the commission shall employ such
available public sources of information as, in its judgment, present the most equitable and accurate comparisons among
the party states. Each of the commission's budgets of estimated expenditures and requests for appropriations shall
indicate the sources used in obtaining information employed in applying the formula contained in this paragraph.

        (c) The commission shall not pledge the credit of any party state. The commission may meet any of its
obligations in whole or in part with funds available to it under paragraph (1)(i) of this Article: provided that the
commission takes specific action setting aside such funds prior to incurring any obligation to be met in whole or in part
in such manner. Except where the commission makes use of funds available to it under paragraph 1(i), the commission
                                                                                                                    Page 8
                                                  N.M. Stat. Ann. § 7-5-1

shall not incur any obligation prior to the allotment of funds by the party states adequate to meet the same.

        (d) The commission shall keep accurate accounts of all receipts and disbursements. The receipts and
disbursements of the commission shall be subject to the audit and accounting procedures established under its bylaws.
All receipts and disbursements of funds handled by the commission shall be audited yearly by a certified or licensed
public accountant and the report of the audit shall be included in and become part of the annual report of the
commission.

        (e) The accounts of the commission shall be open at any reasonable time for inspection by duly constituted
officers of the party states and by any persons authorized by the commission.

        (f) Nothing contained in this Article shall be construed to prevent commission compliance with laws relating to
audit or inspection of accounts by or on behalf of any government contributing to the support of the commission.

          Article VII. Uniform Regulations and Forms.

     1. Whenever any two or more party states, or subdivisions of party states, have uniform or similar provisions of law
relating to an income tax, capital stock tax, gross receipts tax, sales or use tax, the commission may adopt uniform
regulations for any phase of the administration of such law, including assertion of jurisdiction to tax, or prescribing
uniform tax forms. The commission may also act with respect to the provisions of Article IV of this compact.

    2. Prior to the adoption of any regulation, the commission shall:

       (a) As provided in its bylaws, hold at least one public hearing on due notice to all affected party states and
subdivisions thereof and to all taxpayers and other persons who have made timely request of the commission for
advance notice of its regulation-making proceedings.

        (b) Afford all affected party states and subdivisions and interested persons an opportunity to submit relevant
written data and views, which shall be considered fully by the commission.

     3. The commission shall submit any regulations adopted by it to the appropriate officials of all party states and
subdivisions to which they might apply. Each such state and subdivision shall consider any such regulation for adoption
in accordance with its own laws and procedures.

       Article VIII. Interstate Audits.

    1. This Article shall be in force only in those party states that specifically provide therefor by statute.

      2. Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books, papers,
records or other documents may request the commission to perform the audit on its behalf. In responding to the request,
the commission shall have access to and may examine, at any reasonable time, such accounts, books, papers, records,
and other documents and any relevant property or stock of merchandise. The commission may enter into agreements
with party states or their subdivisions for assistance in performance of the audit. The commission shall make charges, to
be paid by the state or local government or governments for which it performs the service, for any audits performed by
it in order to reimburse itself for the actual costs incurred in making the audit.

     3. The commission may require the attendance of any person within the state where it is conducting an audit or part
thereof at a time and place fixed by it within such state for the purpose of giving testimony with respect to any account,
book, paper, document, other record, property or stock of merchandise being examined in connection with the audit. If
the person is not within the jurisdiction, he may be required to attend for such purpose at any time and place fixed by
the commission within the state of which he is a resident; provided that such state has adopted this Article.

    4. The commission may apply to any court having power to issue compulsory process for orders in aid of its powers
                                                                                                                        Page 9
                                                  N.M. Stat. Ann. § 7-5-1

and responsibilities pursuant to this Article and any and all such courts shall have jurisdiction to issue such orders.
Failure of any person to obey any such order shall be punishable as contempt of the issuing court. If the party or subject
matter on account of which the commission seeks an order is within the jurisdiction of the court to which application is
made, such application may be to a court in the state or subdivision on behalf of which the audit is being made or a
court in the state in which the object of the order being sought is situated. The provisions of this paragraph apply only to
courts in a state that has adopted this Article.

    5. The commission may decline to perform any audit requested if it finds that its available personnel or other
resources are insufficient for the purpose or that, in the terms requested, the audit is impracticable of satisfactory
performance. If the commission, on the basis of its experience, has reason to believe that an audit of a particular
taxpayer, either at a particular time or on a particular schedule, would be of interest to a number of party states or their
subdivisions, it may offer to make the audit or audits, the offer to be contingent on sufficient participation therein as
determined by the commission.

     6. Information obtained by any audit pursuant to this Article shall be confidential and available only for tax
purposes to party states, their subdivisions or the United States. Availability of information shall be in accordance with
the laws of the states or subdivisions on whose account the commission performs the audit, and only through the
appropriate agencies or officers of such states or subdivisions. Nothing in this Article shall be construed to require any
taxpayer to keep records for any period not otherwise required by law.

     7. Other arrangements made or authorized pursuant to law for cooperative audit by or on behalf of the party states
or any of their subdivisions are not superseded or invalidated by this Article.

    8. In no event shall the commission make any charge against a taxpayer for an audit.

   9. As used in this Article, "tax," in addition to the meaning ascribed to it in Article II, means any tax or license fee
imposed in whole or in part for revenue purposes.

       Article IX. Arbitration.

     1. Whenever the commission finds a need for settling disputes concerning apportionments and allocations by
arbitration, it may adopt a regulation placing this Article in effect, notwithstanding the provisions of Article VII.

    2. The commission shall select and maintain an arbitration panel composed of officers and employees of state and
local governments and private persons who shall be knowledgeable and experienced in matters of tax law and
administration.

     3. Whenever a taxpayer who has elected to employ Article IV, or whenever the laws of the party state or
subdivision thereof are substantially identical with the relevant provisions of Article IV, the taxpayer, by written notice
to the commission and to each party state or subdivision thereof that would be affected, may secure arbitration of an
apportionment or allocation, if he is dissatisfied with the final administrative determination of the tax agency of the state
or subdivision with respect thereto on the ground that it would subject him to double or multiple taxation by two or
more party states or subdivisions thereof. Each party state and subdivision thereof hereby consents to the arbitration as
provided herein, and agrees to be bound thereby.

     4. The arbitration board shall be composed of one person selected by the taxpayer, one by the agency or agencies
involved, and one member of the commission's arbitration panel. If the agencies involved are unable to agree on the
person to be selected by them, such person shall be selected by lot from the total membership of the arbitration panel.
The two persons selected for the board in the manner provided by the foregoing provisions of this paragraph shall
jointly select the third member of the board. If they are unable to agree on the selection, the third member shall be
selected by lot from among the total membership of the arbitration panel. No member of a board selected by lot shall be
qualified to serve if he is an officer or employee or is otherwise affiliated with any party to the arbitration proceeding.
                                                                                                                     Page 10
                                                  N.M. Stat. Ann. § 7-5-1

Residence within the jurisdiction of a party to the arbitration proceeding shall not constitute affiliation within the
meaning of this paragraph.

     5. The board may sit in any state or subdivision party to the proceeding, in the state of the taxpayer's incorporation,
residence or domicile, in any state where the taxpayer does business, or in any place that it finds most appropriate for
gaining access to evidence relevant to the matter before it.

    6. The board shall give due notice of the times and places of its hearings. The parties shall be entitled to be heard, to
present evidence, and to examine and cross-examine witnesses. The board shall act by majority vote.

     7. The board shall have power to administer oaths, take testimony, subpoena and require the attendance of
witnesses and the production of accounts, books, papers, records, and other documents, and issue commissions to take
testimony. Subpoenas may be signed by any member of the board. In case of failure to obey a subpoena, and upon
application by the board, any judge of a court of competent jurisdiction of the state in which the board is sitting or in
which the person to whom the subpoena is directed may be found may make an order requiring compliance with the
subpoena, and the court may punish failure to obey the order as a contempt. The provisions of this paragraph apply only
in states that have adopted this Article.

     8. Unless the parties otherwise agree the expenses and other costs of the arbitration shall be assessed and allocated
among the parties by the board in such manner as it may determine. The commission shall fix a schedule of
compensation for members of arbitration boards and of other allowable expenses and costs. No officer or employee of a
state or local government who serves as a member of a board shall be entitled to compensation therefor unless he is
required on account of his service to forego the regular compensation attaching to his public employment, but any such
board member shall be entitled to expenses.

    9. The board shall determine the disputed apportionment or allocation and any matters necessary thereto. The
determinations of the board shall be final for the purposes of making the apportionment or allocation, but for no other
purpose.

    10. The board shall file with the commission and with each tax agency represented in the proceeding: the
determination of the board; the board's written statement of its reasons therefor; the record of the board's proceedings;
and any other documents required by the arbitration rules of the commission to be filed.

    11. The commission shall publish the determinations of boards together with the statements of the reasons therefor.

     12. The commission shall adopt and publish rules of procedure and practice and shall file a copy of such rules and
of any amendment thereto with the appropriate agency or officer in each of the party states.

    13. Nothing contained herein shall prevent at any time a written compromise of any matter or matters in dispute, if
otherwise lawful, by the parties to the arbitration proceeding.

       Article X. Entry Into Force and Withdrawal.

    1. This compact shall enter into force when enacted into law by any seven states. Thereafter, this compact shall
become effective as to any other state upon its enactment thereof. The commission shall arrange for notification of all
party states whenever there is a new enactment of the compact.

     2. Any party state may withdraw from this compact by enacting a statute repealing the same. No withdrawal shall
affect any liability already incurred by or chargeable to a party state prior to the time of such withdrawal.

    3. No proceeding commenced before an arbitration board prior to the withdrawal of a state and to which the
withdrawing state or any subdivision thereof is a party shall be discontinued or terminated by the withdrawal, nor shall
                                                                                                                      Page 11
                                                  N.M. Stat. Ann. § 7-5-1

the board thereby lose jurisdiction over any of the parties to the proceeding necessary to make a binding determination
therein.

         Article XI. Effect on Other Laws and Jurisdiction.

    Nothing in this compact shall be construed to:

        (a) Affect the power of any state or subdivision thereof to fix rates of taxation, except that a party state shall be
obligated to implement Article III 2 of this compact.

        (b) Apply to any tax or fixed fee imposed for the registration of a motor vehicle or any tax on motor fuel, other
than a sales tax; provided that the definition of "tax" in Article VIII 9 may apply for the purposes of that Article and the
commission's powers of study and recommendation pursuant to Article VI 3 may apply.

       (c) Withdraw or limit the jurisdiction of any state or local court or administrative officer or body with respect to
any person, corporation or other entity or subject matter, except to the extent that such jurisdiction is expressly
conferred by or pursuant to this compact upon another agency or body.

         (d) Supersede or limit the jurisdiction of any court of the United States.

           Article XII. Construction and Severability.

     This compact shall be liberally construed so as to effectuate the purposes thereof. The provisions of this compact
shall be severable and if any phrase, clause, sentence or provision of this compact is declared to be contrary to the
constitution of any state or of the United States or the applicability thereof to any government, agency, person or
circumstance is held invalid, the validity of the remainder of this compact and the applicability thereof to any
government, agency, person or circumstance shall not be affected thereby. If this compact shall be held contrary to the
constitution of any state participating therein, the compact shall remain in full force and effect as to the remaining party
states and in full force and effect as to the state affected as to all severable matters."

HISTORY: 1953 Comp., § 72-15A-37, enacted by Laws 1967, ch. 56, § 1.

NOTES:

LexisNexis Practice Insights

    1.

    2.

    3.

    4.

    5.

    6.

    7.

    8.

    9.
                                                                                                                      Page 12
                                                  N.M. Stat. Ann. § 7-5-1

    10.

    11.

Notes to Decisions

     Constitutionality. Registration. Tax certificate number. Tax challenge.

Constitutionality.

    Allegations that the Multistate Tax Commission, had abused its powers by conducting a campaign of harassment
against members of plaintiff class of taxpayers failed to establish that the compact was in violation of the Commerce
Clause, U.S. Const. art. I, § 8. United States Steel Corp. v. Multistate Tax Comm'n, 434 U.S. 452, 98 S. Ct. 799, 54 L.
Ed. 2d 682, 1978 U.S. LEXIS 58 (U.S. 1978).

    Multistate Tax Compact, did not violate the Compact Clause, U.S. Const. art. I, § 10, because it granted the states
no powers that they did not already have individually, and was entirely voluntary to the states. United States Steel Corp.
v. Multistate Tax Comm'n, 434 U.S. 452, 98 S. Ct. 799, 54 L. Ed. 2d 682, 1978 U.S. LEXIS 58 (U.S. 1978).

Registration.

   Mere possession of a New Mexico registration number does not mean that a taxpayer is registered with New
Mexico for gross receipts tax purposes. Siemens Energy & Automation v. New Mexico Taxation & Revenue Dep t, 119
N.M. 316, 889 P.2d 1238, 1994 N.M. App. LEXIS 171 (Ct. App. 1994).

Tax certificate number.

     The presence of a purchaser's taxpayer identification number on a sales and use tax exemption certificate is not, by
itself, evidence that a seller did not accept the certificate in good faith. Siemens Energy & Automation v. New Mexico
Taxation & Revenue Dep t, 119 N.M. 316, 889 P.2d 1238, 1994 N.M. App. LEXIS 171 (Ct. App. 1994).

Tax challenge.

     In a taxpayer's challenge of an assessment of gross receipts tax against it, a hearing officer's finding that a sales and
use tax exemption certificate delivered by a purchaser to the taxpayer was not in the proper form required to merit a tax
exemption violated 7-1-25C(1), (2) NMSA 1978 where the taxpayer submitted valid multi-state certificates on the three
sales in question, where the New Mexico Taxation and Revenue Department presented no testimony on the subject and
did not even cross-examine the taxpayer's representative on why the certificates were not valid, where a reference in the
testimony to the certificates as "multi-jurisdictional certificates," rather than "multi-state certificates," caused no
confusion, and where thus there was no evidence to support the hearing officer's finding. Siemens Energy &
Automation v. New Mexico Taxation & Revenue Dep t, 119 N.M. 316, 889 P.2d 1238, 1994 N.M. App. LEXIS 171
(Ct. App. 1994).

Research References and Practice Aids

    New Mexico Law Review.

   New Mexico Taxes: Taking Another Look, Robert J. Desiderio, James La Fata and Maria Siemel McCulley, 32
N.M. L. Rev. 351 (2002).
                                                                                                                       Page 1

                                        LexisNexis (R) Texas Annotated Statutes
                                 Copyright © 2014 by Matthew Bender & Company, Inc.
                                           a member of the LexisNexis Group
                                                  All rights reserved.

                          *** This document is current through the 2013 3rd Called Session ***

                                         CODE OF CRIMINAL PROCEDURE
                                TITLE 1. CODE OF CRIMINAL PROCEDURE OF 1965
                                         PROCEEDINGS AFTER VERDICT
                                    CHAPTER 42. JUDGMENT AND SENTENCE

                                  GO TO TEXAS CODE ARCHIVE DIRECTORY

                                        Tex. Code Crim. Proc. art. 42.19 (2014)

Art. 42.19. Interstate Corrections Compact

Article I. Purpose and Policy

     The party states, desiring by common action to fully utilize and improve their institutional facilities and provide
adequate programs for the confinement, treatment, and rehabilitation of various types of offenders, declare that it is the
policy of each of the party states to provide such facilities and programs on a basis of cooperation with one another,
thereby serving the best interests of such offenders and of society and effecting economies in capital expenditures and
operational costs. The purpose of this compact is to provide for the mutual development and execution of such
programs of cooperation for the confinement, treatment, and rehabilitation of offenders with the most economical use of
human and material resources.

Article II. Definitions

    As used in this compact, unless the context clearly requires otherwise:

      (a) "State" means a state of the United States; the United States of America; a territory or possession of the
United States; the District of Columbia; the commonwealth of Puerto Rico.

      (b) "Sending state" means a state party to this compact in which conviction or court commitment was had.
                                                                                                                       Page 2
                                             Tex. Code Crim. Proc. art. 42.19

       (c) "Receiving state" means a state party to this compact to which an inmate is sent for confinement other than a
state in which conviction or court commitment was had.

      (d) "Inmate" means a male or female offender who is committed, under sentence to or confined in a penal or
correctional institution.

     (e) "Institution" means any penal or correctional facility, including but not limited to a facility for the mentally ill
or mentally defective, in which inmates as defined in (d) above may lawfully be confined.

Article III. Contracts

       (a) Each party state may make one or more contracts with any one or more of the other party states for the
confinement of inmates on behalf of a sending state in institutions situated within receiving states. Any such contract
shall provide for:

        1. Its duration.

          2. Payments to be made to the receiving state by the sending state for inmate maintenance, extraordinary
medical and dental expenses, and any participation in or receipt by inmates of rehabilitative or correctional services,
facilities, programs, or treatment not reasonably included as part of normal maintenance.

        3. Participation in programs of inmate employment, if any; the disposition or crediting of any payments
received by inmates on account thereof; and the crediting of proceeds from or disposal of any products resulting
therefrom.

        4. Delivery and retaking of inmates.

        5. Such other matters as may be necessary and appropriate to fix the obligations, responsibilities, and rights of
the sending and receiving states.

      (b) The terms and provisions of this compact shall be a part of any contract entered into by the authority of or
pursuant thereto, and nothing in any such contract shall be inconsistent therewith.

Article IV. Procedures and Rights

       (a) Whenever the duly constituted authorities in a state party to this compact, and which has entered into a
contract pursuant to Article III, shall decide that confinement in, or transfer of an inmate to, an institution within the
territory of another party state is necessary or desirable in order to provide adequate quarters and care or an appropriate
program of rehabilitation or treatment, such official may direct that the confinement be within an institution within the
territory of such other party state, the receiving state to act in that regard solely as agent for the sending state.

       (b) The appropriate officials of any state party to this compact shall have access, at all reasonable times, to any
institution in which it has a contractual right to confine inmates for the purpose of inspecting the facilities thereof and
visiting such of its inmates as may be confined in the institution.

      (c) Inmates confined in an institution pursuant to this compact shall at all times be subject to the jurisdiction of
the sending state and may at any time be removed therefrom for transfer to a prison or other institution within the
                                                                                                                      Page 3
                                             Tex. Code Crim. Proc. art. 42.19

sending state, for transfer to another institution in which the sending state may have a contractual or other right to
confine inmates, for release on probation or parole, for discharge, or for any other purpose permitted by the laws of the
sending state. However, the sending state shall continue to be obligated to such payments as may be required pursuant
to the terms of any contract entered into under the terms of Article III.

       (d) Each receiving state shall provide regular reports to each sending state on the inmates of that sending state
who are in institutions pursuant to this compact including a conduct record of each inmate and shall certify such record
to the official designated by the sending state, in order that each inmate may have official review of his or her record in
determining and altering the disposition of the inmate in accordance with the law which may obtain in the sending state
and in order that the same may be a source of information for the sending state.

       (e) All inmates who may be confined in an institution pursuant to this compact shall be treated in a reasonable
and humane manner and shall be treated equally with such similar inmates of the receiving state as may be confined in
the same institution. The fact of confinement in a receiving state shall not deprive any inmate so confined of any legal
rights which the inmate would have had if confined in an appropriate institution of the sending state.

       (f) Any hearing or hearings to which an inmate confined pursuant to this compact may be entitled by the laws of
the sending state may be had before the appropriate authorities of the sending state, or of the receiving state if
authorized by the sending state. The receiving state shall provide adequate facilities for such hearing as may be
conducted by the appropriate officials of a sending state. In the event such hearing or hearings are had before officials of
the receiving state, the governing law shall be that of the sending state and a record of the hearing or hearings as
prescribed by the sending state shall be made. The record together with any recommendations of the hearing officials
shall be transmitted forthwith to the official or officials before whom the hearing would have been had if it had taken
place in the sending state. In any and all proceedings had pursuant to the provisions of this paragraph (f), the officials of
the receiving state shall act solely as agents of the sending state and no final determination shall be made in any matter
except by the appropriate officials of the sending state.

       (g) Any inmate confined pursuant to this compact shall be released within the territory of the sending state unless
the inmate and the sending and receiving states shall agree upon release in some other place. The sending state shall
bear the cost of such return to its territory.

      (h) Any inmate confined pursuant to this compact shall have any rights and all rights to participate in and derive
any benefits or incur or be relieved of any obligations or have such obligations modified or his status changed on
account of any action or proceeding in which he could have participated if confined in any appropriate institution of the
sending state located within such state.

      (i) The parent, guardian, trustee, or other person or persons entitled under the laws of the sending state to act for,
advise, or otherwise function with respect to any inmate shall not be deprived of or restricted in his exercise of any
power in respect of any inmate confined pursuant to the terms of this compact.

Article V. Act Not Reviewable in Receiving State: Extradition

      (a) Any decision of the sending state in respect of any matter over which it retains jurisdiction pursuant to this
compact shall be conclusive upon and not reviewable within the receiving state, but if at the time the sending state seeks
to remove an inmate from an institution in the receiving state there is pending against the inmate within such state any
criminal charge or if the inmate is formally accused of having committed within such state a criminal offense, the
inmate shall not be returned without the consent of the receiving state until discharged from prosecution or other form
of proceeding, imprisonment, or detention for such offense. The duly accredited officer of the sending state shall be
                                                                                                                      Page 4
                                             Tex. Code Crim. Proc. art. 42.19

permitted to transport inmates pursuant to this compact through any and all states party to this compact without
interference.

       (b) An inmate who escapes from an institution in which he is confined pursuant to this compact shall be deemed a
fugitive from the sending state and from the state in which the institution escaped from is situated. In the case of an
escape to a jurisdiction other than the sending or receiving state, the responsibility for institution of extradition or
rendition proceedings shall be that of the sending state, but nothing contained herein shall be construed to prevent or
affect the activities of officers and agencies of any jurisdiction directed toward the apprehension and return of an
escapee.

Article VI. Federal Aid

    Any state party to this compact may accept federal aid for use in connection with any institution or program, the
use of which is or may be affected by this compact or any contract pursuant thereto. Any inmate in a receiving state
pursuant to this compact may participate in any such federally aided program or activity for which the sending and
receiving states have made contractual provision. However, if such program or activity is not part of the customary
correctional regimen, the express consent of the appropriate official of the sending state shall be required therefor.

Article VII. Entry into Force

     This compact shall enter into force and become effective and binding upon the states so acting when it has been
enacted into law by any two states. Thereafter, this compact shall enter into force and become effective and binding as
to any other of such states upon similar action by such state.

Article VIII. Withdrawal and Termination

     This compact shall continue in force and remain binding upon a party state until it shall have enacted a statute
repealing the compact and providing for the sending of formal written notice of withdrawal from the compact to the
appropriate officials of all other party states. An actual withdrawal shall not take effect until one year after the notices
provided in the statute have been sent. Such withdrawal shall not relieve the withdrawing state from its obligations
assumed hereunder prior to the effective date of withdrawal. Before the effective date of withdrawal, a withdrawal state
shall remove to its territory, at its own expense, such inmates as it may have confined pursuant to the provisions of this
compact.

Article IX. Other Arrangements Unaffected

    Nothing contained in this compact shall be construed to abrogate or impair an agreement or other arrangement
which a party state may have with a nonparty state for the confinement, rehabilitation, or treatment of inmates, nor to
repeal any other laws of a party state authorizing the making of cooperative institutional arrangements.
                                                                                                                      Page 5
                                             Tex. Code Crim. Proc. art. 42.19

Article X. Construction and Severability

     (a) The provisions of this compact shall be liberally construed and shall be severable. If any phrase, clause,
sentence, or provision of this compact is declared to be contrary to the constitution of any participating state or of the
United States or the applicability thereof to any government, agency, person, or circumstance is held invalid, the
validity of the remainder of this compact and the applicability thereof to any government, agency, person, or
circumstance shall not be affected thereby. If this compact shall be held contrary to the constitution of any state
participating therein, the compact shall remain in full force and effect as to the remaining states and in full force and
effect as to the state affected as to all severable matters.

    (b) Powers. The director of the Texas Department of Criminal Justice is authorized and directed to do all things
necessary or incidental to the carrying out of the compact in every particular.

HISTORY: Enacted by Acts 1985, 69th Leg., ch. 24 (S.B. 126), § 1, effective January 1, 1986; am. Acts 1987, 70th
Leg., ch. 167 (S.B. 892), § 5.01(a 9), effective September 1, 1987 (renumbered from art. 42.18); am. Acts 2009, 81st
Leg., ch. 87 (S.B. 1969), § 25.031, effective September 1, 2009.

NOTES:

 2009 amendment,
 substituted "Texas Department of Criminal Justice" for "Texas Department of Corrections" in Art. X(b).

LexisNexis (R) Notes:

CASE NOTES

1. Pursuant to Tex. Code Crim. Proc. Ann. art. 42.19, § 9(c)(1), defendant's pre-sentence investigation report (PSI) was
ordered after defendant entered his plea of guilty. Any inspection by the trial court necessarily took place after such
plea, in conformance with the statutory requirement, and could not have influenced its finding of guilt. Smith v. State,
2004 Tex. App. LEXIS 10566 (Tex. App. Houston 1st Dist. Nov. 24 2004).

2. Revocation of community supervision was proper, because the petitioner pled true to counts one and two of the
State's motion to revoke, the petitioner received notice of and pled true to count one, which, standing alone, was
sufficient evidence for the trial court's revocation of his community supervision, notwithstanding his argument with
regard to count two, and imposition of a nineteen-year sentence was within the applicable punishment range for the
offense of possession of a controlled substance to which the petitioner pled guilty. Dellatorre v. State, 2012 Tex. App.
LEXIS 1823 (Tex. App. Beaumont Mar. 7 2012).
                                                                                                                  Page 6
                                            Tex. Code Crim. Proc. art. 42.19

3. Tex. Code Crim. Proc. Ann. art. 42.08(b) required stacking for any offense an inmate committed during the time he
was an inmate processed into the Texas Department of Criminal Justice -- Institutional Division (TDCJ-ID), and was
actually serving a sentence in TDCJ-ID, regardless of the inmate's temporal physical location at the time he committed
the offense. The court noted that the term "inmate" generally connoted the offender"s permanent institutional status, not
his temporary physical location, and cited Tex. Code Crim. Proc. Ann. art. 42.19 as an example. Rhodes v. State, 175
S.W.3d 348, 2004 Tex. App. LEXIS 9136 (Tex. App. Houston 1st Dist. 2004).

4. Although Tex. Code Crim. Proc. Ann. art. 42.12 itself does not define "state," the Code Construction Act, defines
"state" to include Puerto Rico pursuant to Tex. Gov't Code Ann. § 311.005, and 48 U.S.C.S. § 734. Additionally, the
code of criminal procedure elsewhere adopts definitions of "state" that include Puerto Rico, for example, Tex. Code
Crim. Proc. Ann. arts. 24.29 and 42.19, and Tex. Gov't Code Ann. § 311.011(b). Robles v. State, 141 S.W.3d 250, 2004
Tex. App. LEXIS 5787 (Tex. App. Austin 2004).

5. Pursuant to Tex. Code Crim. Proc. Ann. art. 42.19, § 9(c)(1), defendant's pre-sentence investigation report (PSI) was
ordered after defendant entered his plea of guilty. Any inspection by the trial court necessarily took place after such
plea, in conformance with the statutory requirement, and could not have influenced its finding of guilt. Smith v. State,
2004 Tex. App. LEXIS 10566 (Tex. App. Houston 1st Dist. Nov. 24 2004).

6. Although Tex. Code Crim. Proc. Ann. art. 42.12 itself does not define "state," the Code Construction Act, defines
"state" to include Puerto Rico pursuant to Tex. Gov't Code Ann. § 311.005, and 48 U.S.C.S. § 734. Additionally, the
code of criminal procedure elsewhere adopts definitions of "state" that include Puerto Rico, for example, Tex. Code
Crim. Proc. Ann. arts. 24.29 and 42.19, and Tex. Gov't Code Ann. § 311.011(b). Robles v. State, 141 S.W.3d 250, 2004
Tex. App. LEXIS 5787 (Tex. App. Austin 2004).

TREATISES AND ANALYTICAL MATERIALS

1. 4-92 Texas Criminal Practice Guide § 92.05, POSTCONVICTION REMEDIES, PRISONERS' RIGHTS,
Disciplinary Procedures, Texas Criminal Practice Guide.

2. 4-92 Texas Criminal Practice Guide § 92.201, POSTCONVICTION REMEDIES, PRISONERS' RIGHTS, Statutes
and Rules, Texas Criminal Practice Guide.
                                                                                                                        Page 1

                                        LexisNexis (R) Texas Annotated Statutes
                                 Copyright © 2014 by Matthew Bender & Company, Inc.
                                           a member of the LexisNexis Group
                                                  All rights reserved.

                          *** This document is current through the 2013 3rd Called Session ***

                                          TEXAS FAMILY CODE
                                    TITLE 3. JUVENILE JUSTICE CODE
                        CHAPTER 60. UNIFORM INTERSTATE COMPACT ON JUVENILES

                                   GO TO TEXAS CODE ARCHIVE DIRECTORY

                                              Tex. Fam. Code § 60.010 (2014)

§ 60.010. Interstate Compact for Juveniles

ARTICLE I

PURPOSE

     The compacting states to this Interstate Compact recognize that each state is responsible for the proper supervision
or return of juveniles, delinquents, and status offenders who are on probation or parole and who have absconded,
escaped, or run away from supervision and control and in so doing have endangered their own safety and the safety of
others. The compacting states also recognize that each state is responsible for the safe return of juveniles who have run
away from home and in doing so have left their state of residence. The compacting states also recognize that congress,
by enacting the Crime Control Act, 4 U.S.C. Section 112 (1965), has authorized and encouraged compacts for
cooperative efforts and mutual assistance in the prevention of crime.

     It is the purpose of this compact, through means of joint and cooperative action among the compacting states to:
(A) ensure that the juveniles who are moved under this compact to another state for probation or parole supervision and
services are governed in the receiving state by the same standards that apply to juveniles receiving such supervision and
services in the receiving state; (B) ensure that the public safety interests of the citizens, including the victims of juvenile
offenders, in both the sending and receiving states are adequately protected and balanced with the juvenile's and the
juvenile's family's best interests and welfare when an interstate movement is under consideration; (C) return juveniles
who have run away, absconded, or escaped from supervision or control or have been accused of an offense to the state
requesting their return through a fair and prompt judicial review process that ensures that the requisition is in order and
that the transport is properly supervised; (D) make provisions for contracts between member states for the cooperative
institutionalization in public facilities in member states for delinquent youth needing special services; (E) provide for
                                                                                                                    Page 2
                                                Tex. Fam. Code § 60.010

the effective tracking of juveniles who move interstate under the compact's provisions; (F) equitably allocate the costs,
benefits, and obligations of the compacting states; (G) establish procedures to manage the movement between states of
juvenile offenders released to the community under the jurisdiction of courts, juvenile departments, or any other
criminal or juvenile justice agency which has jurisdiction over juvenile offenders, ensuring that a receiving state accepts
supervision of a juvenile when the juvenile's parent or other person having legal custody resides or is undertaking
residence there; (H) ensure immediate notice to jurisdictions where defined offenders are authorized to travel or to
relocate across state lines; (I) establish a system of uniform data collection on information pertaining to juveniles who
move interstate under this compact that prevents public disclosure of identity and individual treatment information but
allows access by authorized juvenile justice and criminal justice officials and regular reporting of compact activities to
heads of state executive, judicial, and legislative branches and juvenile and criminal justice administrators; (J) monitor
compliance with rules governing interstate movement of juveniles and initiate interventions to address and correct
noncompliance; (K) coordinate training and education regarding the regulation of interstate movement of juveniles for
officials involved in such activity; and (L) coordinate the implementation and operation of the compact with the
Interstate Compact for the Placement of Children, the Interstate Compact for Adult Offender Supervision and other
compacts affecting juveniles particularly in those cases where concurrent or overlapping supervision issues arise. It is
the policy of the compacting states that the activities conducted by the Interstate Commission created herein are the
formation of public policies and therefore are public business. Furthermore, the compacting states shall cooperate and
observe their individual and collective duties and responsibilities for the prompt return and acceptance of juveniles
subject to the provisions of this compact. The provisions of this compact shall be reasonably and liberally construed to
accomplish the purposes and policies of the compact.

ARTICLE II

DEFINITIONS

    As used in this compact, unless the context clearly requires a different construction:

      A. "Bylaws" means those bylaws established by the Interstate Commission for its governance or for directing or
controlling the Interstate Commission's actions or conduct.

       B. "Compact administrator" means the individual in each compacting state appointed pursuant to the terms of this
compact responsible for the administration and management of the state's supervision and transfer of juveniles subject
to the terms of this compact and to the rules adopted by the Interstate Commission under this compact.

      C. "Compacting state" means any state which has enacted the enabling legislation for this compact.

       D. "Commissioner" means the voting representative of each compacting state appointed pursuant to Article III of
this compact.

      E. "Court" means any court having jurisdiction over delinquent, neglected, or dependent children.

      F. "Deputy compact administrator" means the individual, if any, in each compacting state appointed to act on
behalf of a compact administrator pursuant to the terms of this compact, responsible for the administration and
management of the state's supervision and transfer of juveniles subject to the terms of this compact and to the rules
adopted by the Interstate Commission under this compact.

      G. "Interstate Commission" means the Interstate Commission for Juveniles created by Article III of this compact.

    H. "Juvenile" means any person defined as a juvenile in any member state or by the rules of the Interstate
Commission, including:
                                                                                                                    Page 3
                                                 Tex. Fam. Code § 60.010

           (1) Accused Delinquent -- a person charged with an offense that, if committed by an adult, would be a criminal
offense;

       (2) Adjudicated Delinquent -- a person found to have committed an offense that, if committed by an adult,
would be a criminal offense;

       (3) Accused Status Offender -- a person charged with an offense that would not be a criminal offense if
committed by an adult;

        (4) Adjudicated Status Offender -- a person found to have committed an offense that would not be a criminal
offense if committed by an adult; and

        (5) Nonoffender -- a person in need of supervision who has not been accused or adjudicated a status offender or
delinquent.

      I. "Noncompacting state" means any state which has not enacted the enabling legislation for this compact.

      J. "Probation or parole" means any kind of supervision or conditional release of juveniles authorized under the
laws of the compacting states.

       K. "Rule" means a written statement by the Interstate Commission promulgated pursuant to Article VI of this
compact that is of general applicability, implements, interprets, or prescribes a policy or provision of the compact, or an
organizational, procedural, or practice requirement of the Interstate Commission, and has the force and effect of
statutory law in a compacting state, and includes the amendment, repeal, or suspension of an existing rule.

      L. "State" means a state of the United States, the District of Columbia (or its designee), the Commonwealth of
Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, and the Northern Marianas Islands.

ARTICLE III

INTERSTATE COMMISSION FOR JUVENILES

     A. The compacting states hereby create the Interstate Commission for Juveniles. The Interstate Commission shall
be a body corporate and joint agency of the compacting states. The commission shall have all the responsibilities,
powers, and duties set forth herein, and such additional powers as may be conferred upon it by subsequent action of the
respective legislatures of the compacting states in accordance with the terms of this compact.

     B. The Interstate Commission shall consist of commissioners appointed by the appropriate appointing authority in
each state pursuant to the rules and requirements of each compacting state. The commissioner shall be the compact
administrator, deputy compact administrator, or designee from that state who shall serve on the Interstate Commission
in such capacity under or pursuant to the applicable law of the compacting state.

     C. In addition to the commissioners who are the voting representatives of each state, the Interstate Commission
shall include individuals who are not commissioners, but who are members of interested organizations. Such
noncommissioner members must include a member of the national organizations of governors, legislators, state chief
justices, attorneys general, Interstate Compact for Adult Offender Supervision, Interstate Compact for the Placement of
Children, juvenile justice and juvenile corrections officials, and crime victims. All noncommissioner members of the
Interstate Commission shall be ex officio (nonvoting) members. The Interstate Commission may provide in its bylaws
for such additional ex officio (nonvoting) members, including members of other national organizations, in such
numbers as shall be determined by the commission.
                                                                                                                       Page 4
                                                 Tex. Fam. Code § 60.010

    D. Each compacting state represented at any meeting of the Interstate Commission is entitled to one vote. A
majority of the compacting states shall constitute a quorum for the transaction of business, unless a larger quorum is
required by the bylaws of the Interstate Commission.

     E. The Interstate Commission shall meet at least once each calendar year. The chairperson may call additional
meetings and, upon the request of a simple majority of the compacting states, shall call additional meetings. Public
notice shall be given of all meetings and meetings shall be open to the public.

     F. The Interstate Commission shall establish an executive committee, which shall include commission officers,
members, and others as determined by the bylaws. The executive committee shall have the power to act on behalf of the
Interstate Commission during periods when the Interstate Commission is not in session, with the exception of
rulemaking or amendment to the compact. The executive committee shall oversee the day-to-day activities of the
administration of the compact managed by an executive director and Interstate Commission staff; administers
enforcement and compliance with the provisions of the compact, its bylaws and rules, and performs such other duties as
directed by the Interstate Commission or set forth in the bylaws.

     G. Each member of the Interstate Commission shall have the right and power to cast a vote to which that
compacting state is entitled and to participate in the business and affairs of the Interstate Commission. A member shall
vote in person and shall not delegate a vote to another compacting state. However, a commissioner shall appoint another
authorized representative, in the absence of the commissioner from that state, to cast a vote on behalf of the compacting
state at a specified meeting. The bylaws may provide for members' participation in meetings by telephone or other
means of telecommunication or electronic communication.

     H. The Interstate Commission's bylaws shall establish conditions and procedures under which the Interstate
Commission shall make its information and official records available to the public for inspection or copying. The
Interstate Commission may exempt from disclosure any information or official records to the extent they would
adversely affect personal privacy rights or proprietary interests.

     I. Public notice shall be given of all meetings and all meetings shall be open to the public, except as set forth in the
rules or as otherwise provided in the compact. The Interstate Commission and any of its committees may close a
meeting to the public when it determines by two-thirds vote that an open meeting would be likely to:

      1. Relate solely to the Interstate Commission's internal personnel practices and procedures;

      2. Disclose matters specifically exempted from disclosure by statute;

      3. Disclose trade secrets or commercial or financial information which is privileged or confidential;

      4. Involve accusing any person of a crime or formally censuring any person;

      5. Disclose information of a personal nature where disclosure would constitute a clearly unwarranted invasion of
personal privacy;

      6. Disclose investigative records compiled for law enforcement purposes;

      7. Disclose information contained in or related to examination, operating or condition reports prepared by, or on
behalf of or for the use of, the Interstate Commission with respect to a regulated person or entity for the purpose of
regulation or supervision of such person or entity;

      8. Disclose information, the premature disclosure of which would significantly endanger the stability of a
regulated person or entity; or

      9. Specifically relate to the Interstate Commission's issuance of a subpoena, or its participation in a civil action or
                                                                                                                     Page 5
                                                Tex. Fam. Code § 60.010

other legal proceeding.

     J. For every meeting closed pursuant to this provision, the Interstate Commission's legal counsel shall publicly
certify that, in the legal counsel's opinion, the meeting may be closed to the public, and shall reference each relevant
exemptive provision. The Interstate Commission shall keep minutes which shall fully and clearly describe all matters
discussed in any meeting and shall provide a full and accurate summary of any actions taken, and the reasons therefore,
including a description of each of the views expressed on any item and the record of any roll call vote (reflected in the
vote of each member on the question). All documents considered in connection with any action shall be identified in
such minutes.

     K. The Interstate Commission shall collect standardized data concerning the interstate movement of juveniles as
directed through its rules which shall specify the data to be collected, the means of collection and data exchange, and
reporting requirements. Such methods of data collection, exchange, and reporting shall insofar as is reasonably possible
conform to up-to-date technology and coordinate the Interstate Commission's information functions with the appropriate
repository of records.

ARTICLE IV

POWERS AND DUTIES OF THE INTERSTATE COMMISSION

    The commission shall have the following powers and duties:

      1. To provide for dispute resolution among compacting states.

       2. To promulgate rules to effect the purposes and obligations as enumerated in this compact, which shall have the
force and effect of statutory law and shall be binding in the compacting states to the extent and in the manner provided
in this compact.

      3. To oversee, supervise, and coordinate the interstate movement of juveniles subject to the terms of this compact
and any bylaws adopted and rules promulgated by the Interstate Commission.

      4. To enforce compliance with the compact provisions, the rules promulgated by the Interstate Commission, and
the bylaws, using all necessary and proper means, including but not limited to the use of judicial process.

      5. To establish and maintain offices which shall be located within one or more of the compacting states.

      6. To purchase and maintain insurance and bonds.

      7. To borrow, accept, hire, or contract for services of personnel.

      8. To establish and appoint committees and hire staff which it deems necessary for the carrying out of its
functions including, but not limited to, an executive committee as required by Article III of this compact, which shall
have the power to act on behalf of the Interstate Commission in carrying out its powers and duties hereunder.

       9. To elect or appoint officers, attorneys, employees, agents, or consultants, and to fix their compensation, define
their duties, and determine their qualifications, and to establish the Interstate Commission's personnel policies and
programs relating to, inter alia, conflicts of interest, rates of compensation, and qualifications of personnel.

      10. To accept any and all donations and grants of money, equipment, supplies, materials, and services, and to
receive, utilize, and dispose of same.
                                                                                                                     Page 6
                                                Tex. Fam. Code § 60.010

      11. To lease, purchase, accept contributions or donations of, or otherwise to own, hold, improve, or use any
property, whether real, personal, or mixed.

       12. To sell, convey, mortgage, pledge, lease, exchange, abandon, or otherwise dispose of any property, whether
real, personal, or mixed.

      13. To establish a budget and make expenditures and levy dues as provided in Article VIII of this compact.

      14. To sue and be sued.

      15. To adopt a seal and bylaws governing the management and operation of the Interstate Commission.

      16. To perform such functions as may be necessary or appropriate to achieve the purposes of this compact.

       17. To report annually to the legislatures, governors, and judiciary of the compacting states concerning the
activities of the Interstate Commission during the preceding year. Such reports shall also include any recommendations
that may have been adopted by the Interstate Commission.

       18. To coordinate education, training, and public awareness regarding the interstate movement of juveniles for
officials involved in such activity.

      19. To establish uniform standards of the reporting, collecting, and exchanging of data.

      20. The Interstate Commission shall maintain its corporate books and records in accordance with the bylaws.

ARTICLE V

ORGANIZATION AND OPERATION OF THE INTERSTATE COMMISSION

    Sec. A. Bylaws

        1. The Interstate Commission shall, by a majority of the members present and voting, within 12 months of the
first Interstate Commission meeting, adopt bylaws to govern its conduct as may be necessary or appropriate to carry out
the purposes of the compact, including, but not limited to:

        a. Establishing the fiscal year of the Interstate Commission;

        b. Establishing an executive committee and such other committees as may be necessary;

         c. Providing for the establishment of committees governing any general or specific delegation of any authority
or function of the Interstate Commission;

        d. Providing reasonable procedures for calling and conducting meetings of the Interstate Commission and
ensuring reasonable notice of each such meeting;

        e. Establishing the titles and responsibilities of the officers of the Interstate Commission;

        f. Providing a mechanism for concluding the operations of the Interstate Commission and the return of any
surplus funds that may exist upon the termination of the compact after the payment or reserving of all of its debts and
obligations;
                                                                                                                     Page 7
                                                Tex. Fam. Code § 60.010

        g. Providing start-up rules for initial administration of the compact; and

        h. Establishing standards and procedures for compliance and technical assistance in carrying out the compact.

    Sec. B. Officers and Staff

       1. The Interstate Commission shall, by a majority of the members, elect annually from among its members a
chairperson and a vice chairperson, each of whom shall have such authority and duties as may be specified in the
bylaws. The chairperson or, in the chairperson's absence or disability, the vice chairperson shall preside at all meetings
of the Interstate Commission. The officers so elected shall serve without compensation or remuneration from the
Interstate Commission, provided that, subject to the availability of budgeted funds, the officers shall be reimbursed for
any ordinary and necessary costs and expenses incurred by them in the performance of their duties and responsibilities
as officers of the Interstate Commission.

       2. The Interstate Commission shall, through its executive committee, appoint or retain an executive director for
such period, upon such terms and conditions, and for such compensation as the Interstate Commission may deem
appropriate. The executive director shall serve as secretary to the Interstate Commission, but shall not be a member and
shall hire and supervise such other staff as may be authorized by the Interstate Commission.

    Sec. C. Qualified Immunity, Defense, and Indemnification

        1. The Interstate Commission's executive director and employees shall be immune from suit and liability, either
personally or in their official capacity, for any claim for damage to or loss of property or personal injury or other civil
liability caused or arising out of or relating to any actual or alleged act, error, or omission that occurred, or that such
person had a reasonable basis for believing occurred, within the scope of Interstate Commission employment, duties, or
responsibilities, provided that any such person shall not be protected from suit or liability for any damage, loss, injury,
or liability caused by the intentional or wilful and wanton misconduct of any such person.

       2. The liability of any commissioner, or the employee or agent of a commissioner, acting within the scope of such
person's employment or duties for acts, errors, or omissions occurring within such person's state may not exceed the
limits of liability set forth under the constitution and laws of that state for state officials, employees, and agents.
Nothing in this subsection shall be construed to protect any such person from suit or liability for any damage, loss,
injury, or liability caused by the intentional or wilful and wanton misconduct of any such person.

       3. The Interstate Commission shall defend the executive director or the employees or representatives of the
Interstate Commission and, subject to the approval of the attorney general of the state represented by any commissioner
of a compacting state, shall defend such commissioner or the commissioner's representatives or employees in any civil
action seeking to impose liability arising out of any actual or alleged act, error, or omission that occurred within the
scope of Interstate Commission employment, duties, or responsibilities, or that the defendant had a reasonable basis for
believing occurred within the scope of Interstate Commission employment, duties, or responsibilities, provided that the
actual or alleged act, error, or omission did not result from intentional or wilful and wanton misconduct on the part of
such person.

      4. The Interstate Commission shall indemnify and hold the commissioner of a compacting state, or the
commissioner's representatives or employees, or the Interstate Commission's representatives or employees, harmless in
the amount of any settlement or judgment obtained against such persons arising out of any actual or alleged act, error, or
omission that occurred within the scope of Interstate Commission employment, duties, or responsibilities, or that such
persons had a reasonable basis for believing occurred within the scope of Interstate Commission employment, duties, or
responsibilities, provided that the actual or alleged act, error, or omission did not result from intentional or wilful and
wanton misconduct on the part of such persons.

ARTICLE VI
                                                                                                                        Page 8
                                                  Tex. Fam. Code § 60.010

RULEMAKING FUNCTIONS OF THE INTERSTATE COMMISSION

    A. The Interstate Commission shall promulgate and publish rules in order to effectively and efficiently achieve the
purposes of the compact.

     B. Rulemaking shall occur pursuant to the criteria set forth in this article and the bylaws and rules adopted pursuant
thereto. Such rulemaking shall substantially conform to the principles of the "Model State Administrative Procedures
Act," 1981 Act, Uniform Laws Annotated, Vol. 15, p.1 (2000), or such other administrative procedures act, as the
Interstate Commission deems appropriate consistent with due process requirements under the United States Constitution
as now or hereafter interpreted by the United States Supreme Court. All rules and amendments shall become binding as
of the date specified, as published with the final version of the rule as approved by the Interstate Commission.

    C. When promulgating a rule, the Interstate Commission shall, at a minimum:

      1. Publish the proposed rule's entire text stating the reason or reasons for that proposed rule;

      2. Allow and invite persons to submit written data, facts, opinions, and arguments, which information shall be
added to the record and be made publicly available;

      3. Provide an opportunity for an informal hearing, if petitioned by 10 or more persons; and

       4. Promulgate a final rule and its effective date, if appropriate, based on input from state or local officials, or
interested parties.

     D. Allow, not later than 60 days after a rule is promulgated, any interested person to file a petition in the United
States District Court for the District of Columbia or in the federal district court where the Interstate Commission's
principal office is located for judicial review of the rule. If the court finds that the Interstate Commission's action is not
supported by substantial evidence in the rulemaking record, the court shall hold the rule unlawful and set it aside. For
purposes of this subsection, evidence is substantial if it would be considered substantial evidence under the Model State
Administrative Procedures Act.

     E. If a majority of the legislatures of the compacting states rejects a rule, those states may, by enactment of a statute
or resolution in the same manner used to adopt the compact, cause that such rule shall have no further force and effect in
any compacting state.

     F. The existing rules governing the operation of the Interstate Compact on Juveniles superceded by this Act shall be
null and void 12 months after the first meeting of the Interstate Commission created under this compact.

     G. Upon determination by the Interstate Commission that an emergency exists, the Interstate Commission may
promulgate an emergency rule which shall become effective immediately upon adoption, provided that the usual
rulemaking procedures provided hereunder shall be retroactively applied to said rule as soon as reasonably possible, but
no later than 90 days after the effective date of the emergency rule.

ARTICLE VII

OVERSIGHT, ENFORCEMENT, AND DISPUTE RESOLUTION
BY THE INTERSTATE COMMISSION
                                                                                                                     Page 9
                                                Tex. Fam. Code § 60.010

    Sec. A. Oversight

      1. The Interstate Commission shall oversee the administration and operations of the interstate movement of
juveniles subject to this compact in the compacting states and shall monitor such activities being administered in
noncompacting states which may significantly affect compacting states.

       2. The courts and executive agencies in each compacting state shall enforce this compact and shall take all actions
necessary and appropriate to effectuate the compact's purposes and intent. The provisions of this compact and the rules
promulgated hereunder shall be received by all the judges, public officers, commissions, and departments of the state
government as evidence of the authorized statute and administrative rules. All courts shall take judicial notice of the
compact and the rules. In any judicial or administrative proceeding in a compacting state pertaining to the subject matter
of this compact which may affect the powers, responsibilities, or actions of the Interstate Commission, the Interstate
Commission shall be entitled to receive all service of process in any such proceeding, and shall have standing to
intervene in the proceeding for all purposes.

    Sec. B. Dispute Resolution

     1. The compacting states shall report to the Interstate Commission on all issues and activities necessary for the
administration of the compact as well as issues and activities pertaining to compliance with the provisions of the
compact and its bylaws and rules.

       2. The Interstate Commission shall attempt, upon the request of a compacting state, to resolve any disputes or
other issues which are subject to the compact and which may arise among compacting states and between compacting
and noncompacting states. The Interstate Commission shall promulgate a rule providing for both mediation and binding
dispute resolution for disputes among the compacting states.

       3. The Interstate Commission, in the reasonable exercise of its discretion, shall enforce the provisions and rules of
this compact using any or all means set forth in Article X of this compact.

ARTICLE VIII

FINANCE

    A. The Interstate Commission shall pay or provide for the payment of the reasonable expenses of its establishment,
organization, and ongoing activities.

     B. The Interstate Commission shall levy on and collect an annual assessment from each compacting state to cover
the cost of the internal operations and activities of the Interstate Commission and its staff which must be in a total
amount sufficient to cover the Interstate Commission's annual budget as approved each year. The aggregate annual
assessment amount shall be allocated based upon a formula to be determined by the Interstate Commission, taking into
consideration the population of each compacting state and the volume of interstate movement of juveniles in each
compacting state. The Interstate Commission shall promulgate a rule binding upon all compacting states that governs
said assessment.

     C. The Interstate Commission shall not incur any obligations of any kind prior to securing the funds adequate to
meet the same, nor shall the Interstate Commission pledge the credit of any of the compacting states, except by and with
the authority of the compacting state.

    D. The Interstate Commission shall keep accurate accounts of all receipts and disbursements. The receipts and
disbursements of the Interstate Commission shall be subject to the audit and accounting procedures established under its
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                                                 Tex. Fam. Code § 60.010

bylaws. However, all receipts and disbursements of funds handled by the Interstate Commission shall be audited yearly
by a certified or licensed public accountant and the report of the audit shall be included in and become part of the annual
report of the Interstate Commission.

ARTICLE IX

COMPACTING STATES, EFFECTIVE DATE, AND AMENDMENT

    A. Any state, as defined in Article II of this compact, is eligible to become a compacting state.

     B. The compact shall become effective and binding upon legislative enactment of the compact into law by no less
than 35 of the states. The initial effective date shall be the later of July 1, 2004, or upon enactment into law by the 35th
jurisdiction. Thereafter, the compact shall become effective and binding, as to any other compacting state, upon
enactment of the compact into law by that state. The governors of noncompacting states or their designees shall be
invited to participate in Interstate Commission activities on a nonvoting basis prior to adoption of the compact by all
states.

     C. The Interstate Commission may propose amendments to the compact for enactment by the compacting states. No
amendment shall become effective and binding upon the Interstate Commission and the compacting states unless and
until it is enacted into law by unanimous consent of the compacting states.

ARTICLE X

WITHDRAWAL, DEFAULT, TERMINATION, AND JUDICIAL ENFORCEMENT

    Sec. A. Withdrawal

      1. Once effective, the compact shall continue in force and remain binding upon each and every compacting state,
provided that a compacting state may withdraw from the compact by specifically repealing the statute which enacted the
compact into law.

      2. The effective date of withdrawal is the effective date of the repeal.

       3. The withdrawing state shall immediately notify the chairperson of the Interstate Commission in writing upon
the introduction of legislation repealing this compact in the withdrawing state. The Interstate Commission shall notify
the other compacting states of the withdrawing state's intent to withdraw within 60 days of its receipt thereof.

       4. The withdrawing state is responsible for all assessments, obligations, and liabilities incurred through the
effective date of withdrawal, including any obligations, the performance of which extend beyond the effective date of
withdrawal.

      5. Reinstatement following withdrawal of any compacting state shall occur upon the withdrawing state reenacting
the compact or upon such later date as determined by the Interstate Commission.

    Sec. B. Technical Assistance, Fines, Suspension, Termination, and Default

      1. If the Interstate Commission determines that any compacting state has at any time defaulted in the performance
of any of its obligations or responsibilities under this compact, or the bylaws or duly promulgated rules, the Interstate
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                                                 Tex. Fam. Code § 60.010

Commission may impose any or all of the following penalties:

         a. Remedial training and technical assistance as directed by the Interstate Commission;

         b. Alternative dispute resolution;

         c. Fines, fees, and costs in such amounts as are deemed to be reasonable as fixed by the Interstate Commission;
and

         d. Suspension or termination of membership in the compact, which shall be imposed only after all other
reasonable means of securing compliance under the bylaws and rules have been exhausted and the Interstate
Commission has determined that the offending state is in default. Immediate notice of suspension shall be given by the
Interstate Commission to the governor, the chief justice or the chief judicial officer of the state, and the majority and
minority leaders of the defaulting state's legislature. The grounds for default include, but are not limited to, failure of a
compacting state to perform such obligations or responsibilities imposed upon it by this compact, the bylaws or duly
promulgated rules, and any other grounds designated in commission bylaws and rules. The Interstate Commission shall
immediately notify the defaulting state in writing of the penalty imposed by the Interstate Commission and of the
default pending a cure of the default. The Interstate Commission shall stipulate the conditions and the time period
within which the defaulting state must cure its default. If the defaulting state fails to cure the default within the time
period specified by the Interstate Commission, the defaulting state shall be terminated from the compact upon an
affirmative vote of a majority of the compacting states and all rights, privileges, and benefits conferred by this compact
shall be terminated from the effective date of termination.

      2. Within 60 days of the effective date of termination of a defaulting state, the Interstate Commission shall notify
the governor, the chief justice or chief judicial officer of the state, and the majority and minority leaders of the
defaulting state's legislature of such termination.

      3. The defaulting state is responsible for all assessments, obligations, and liabilities incurred through the effective
date of termination including any obligations, the performance of which extends beyond the effective date of
termination.

      4. The Interstate Commission shall not bear any costs relating to the defaulting state unless otherwise mutually
agreed upon in writing between the Interstate Commission and the defaulting state.

      5. Reinstatement following termination of any compacting state requires both a reenactment of the compact by
the defaulting state and the approval of the Interstate Commission pursuant to the rules.

      Sec. C. Judicial Enforcement

     The Interstate Commission may, by majority vote of the members, initiate legal action in the United States District
Court for the District of Columbia or, at the discretion of the Interstate Commission, in the federal district where the
Interstate Commission has its offices, to enforce compliance with the provisions of the compact, its duly promulgated
rules and bylaws, against any compacting state in default. In the event judicial enforcement is necessary the prevailing
party shall be awarded all costs of such litigation including reasonable attorney's fees.

      Sec. D. Dissolution of Compact

      1. The compact dissolves effective upon the date of the withdrawal or default of the compacting state, which
reduces membership in the compact to one compacting state.

       2. Upon the dissolution of this compact, the compact becomes null and void and shall be of no further force or
effect, and the business and affairs of the Interstate Commission shall be concluded and any surplus funds shall be
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                                                Tex. Fam. Code § 60.010

distributed in accordance with the bylaws.

ARTICLE XI

SEVERABILITY AND CONSTRUCTION

    A. The provisions of this compact shall be severable, and if any phrase, clause, sentence, or provision is deemed
unenforceable, the remaining provisions of the compact shall be enforceable.

    B. The provisions of this compact shall be liberally construed to effectuate its purposes.

ARTICLE XII

BINDING EFFECT OF COMPACT AND OTHER LAWS

    Sec. A. Other Laws

       1. Nothing herein prevents the enforcement of any other law of a compacting state that is not inconsistent with
this compact.

     2. All compacting states' laws other than state constitutions and other interstate compacts conflicting with this
compact are superseded to the extent of the conflict.

    Sec. B. Binding Effect of the Compact

    1. All lawful actions of the Interstate Commission, including all rules and bylaws promulgated by the Interstate
Commission, are binding upon the compacting states.

       2. All agreements between the Interstate Commission and the compacting states are binding in accordance with
their terms.

      3. Upon the request of a party to a conflict over meaning or interpretation of Interstate Commission actions, and
upon a majority vote of the compacting states, the Interstate Commission may issue advisory opinions regarding such
meaning or interpretation.

       4. In the event any provision of this compact exceeds the constitutional limits imposed on the legislature of any
compacting state, the obligations, duties, powers, or jurisdiction sought to be conferred by such provision upon the
Interstate Commission shall be ineffective and such obligations, duties, powers, or jurisdiction shall remain in the
compacting state and shall be exercised by the agency thereof to which such obligations, duties, powers, or jurisdiction
are delegated by law in effect at the time this compact becomes effective.

HISTORY: Enacted by Acts 2005, 79th Leg., ch. 1007 (H.B. 706), § 1.01, effective September 1, 2005.

NOTES:

 Editor's Notes. --
 Acts 2005, 79th Leg., ch. 1007 (H.B. 706) implemented a significant revision of the original 1955 Interstate Compact
on Juveniles, effective on the date that the new version of the compact was adopted by 35 states. The new compact was
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                                             Tex. Fam. Code § 60.010

adopted by the 35th state, Illinois, on August 26, 2008, making the compact and conforming amendments effective on
that date.

LexisNexis (R) Notes:

TREATISES AND ANALYTICAL MATERIALS

1. 5-111 Texas Criminal Practice Guide § 111.04, JUVENILE PROCEEDINGS, ARREST AND PRELIMINARY
PROCEEDINGS, Extradition of Juveniles, Texas Criminal Practice Guide.