Court Opinion

ID: 3530171
Source: CourtListenerOpinion
Date Created: 2016-07-05 22:42:37.092889+00
Date Added: 2024-06-11T14:05:59.006801
License: Public Domain

This is a proceeding by writ of certiorari issuing out of this court, upon the petition of *Page 218 
the Marquette Hotel Investment Company against the State Tax Commission, to determine the amount of tax due from relator under the act commonly known as the Franchise Tax Act. [Laws of Missouri 1917, p. 237.] The relator, as required by the act above mentioned, filed its report with the State Tax Commission, showing assets of the amount of $708,770.90, and liabilities in the amount of $700,000, consisting of its capital stock, amounting to $350,000, and indebtedness amounting to $350,000, thus showing an excess of assets above capital stock and indebtedness in the sum of $8,770.90. Respondent construed the Act of 1917, supra, to mean that the tax of three-fortieths of one per cent, by that act assessed, should be caculated upon the basis of $708,770.90, and determined the amount of the tax due from relator to be $531.58. Relator contends that its indebtedness of $350,000 should be deducted from its total assets, leaving a balance of $358,770.90, and that amount of the tax due from it is, when computed on this balance, $269.08. This sum it has tendered to the State Treasurer. The foregoing facts are substantially the facts set out in relator's application for the writ of certiorari, and upon these facts the writ was issued.
The respondent demurred to the writ, on the ground that it did not state facts sufficient to constitute a cause of action against respondent, and because upon its face it showed that relator is not entitled to the relief prayed. The cause is submitted upon the issues thus made up.
The statute in question is denominated a franchise tax in the title, and in the first section of the act. In relator's brief, the first point made is that this is a "franchise tax and not a tax upon property." Respondent in its brief statesFranchise  that it "readily agrees with relator that theTax.       franchise tax is not a property tax." Since the lawmaking body and the contending parties are agreed upon this point, we think we may safely assume that this is a franchise tax, and so dispose of relator's contention number one. *Page 219 
The real difference between the parties here is embraced within a very narrow scope. Section 1 of the act supra, in so far as it relates to the matter here in issue, is as follows:
"Every corporation organized under the laws of this State shall . . . pay an annual franchise tax to the State ofSurplus.  Missouri equal to three-fortieths of one per cent of the par value of its outstanding capital stock and surplus . . ."
There is no controversy between the parties to this action concerning the liability of the relator to pay the tax upon the amount of its outstanding capital stock, which is $350,000. The whole controversy hinges upon the interpretation to be placed upon the word "surplus" as used in the statute. Surplus ex vitermini implies an excess. Relator's contention is that, as used in this act, surplus means the excess of assets over liabilities other than stock liability. Respondent, on the other hand, contends that the surplus is the excess of the gross assets over the total outstanding capital stock, and that the amount of relator's indebtedness is an irrelevant circumstance. By respondent's reasoning, the tax should be based upon the total sum of $708,770.90. By relator's reasoning, the amount upon which the tax should be calculated is $358,770.90.
We are indebted to the diligence of counsel for relator for a large number of citations of cases in which "surplus" is defined. We have read all of these cases with interest, but, it must be confessed, with little profit. In each instance, the word as used in the case cited is obviously, and usually expressly, confined to the particular context in which it is used, and to the subject matter under discussion. No case cited is sufficiently analogous to be of much assistance. The result is that we are forced to turn to a study of this particular act, and to endeavor, as best we may, from its somewhat confused and cloudy phraseology, to ascertain what the real intention of the Legislature was. It goes without saying that the cardinal rule of statutory construction is to ascertain *Page 220 
the intention of the law-making body, and as far as possible to give effect to the intention expressed.
The ordinary meaning of the word "surplus," as found in the standard lexicons, is "that which remains when use or need is satisfied; excess; overplus." As defined in various decisions, surplus mean "the amount of the residue of the assets after the liabilities have been deducted" (Anderson v. Farmers' Loan 
Trust Co., 141 F. 322, l.c. 327), or "the net assets over and above the liabilities" (People ex rel. v. Purdy,146 N.Y.S. 646). A method of ascertaining the amount of the surplus is pointed out in Fidelity Trust Co. v. Board of Equalization, 77 N.J. Law, 128, l.c. 130, as follows: "In order to ascertain the capital and surplus, it is necessary to find the true value of the gross assets. From this must be deducted debts and liabilities. The remainder will be the value of the capital and surplus, if any." All of these authorities tend to support relator's contention.
In each instance above cited, however as well as in all others which have been called to our attention, the definition given or the method pointed out by which the surplus may be ascertained, is confined either in express terms, or by necessary implication, to the particular case and facts under consideration. We think it must be so confined in this instance.
It clearly appears, by reference to Sections 1 and 2, that the fundamental idea in the mind of the Legislature was that a corporation doing business wholly in this State should be taxed under the provisions of this act upon two things, first, upon the amount of its outstanding capital stock, regardless of the value of its assets, whether more or less than the amount of the outstanding capital stock, and, second, upon any surplus property employed in its business in this State. The tax is levied not upon the property itself, but upon the right of the corporation to transact business in this State. The references to the amount of the authorized capital stock and to the amount of the surplus *Page 221 
are made solely for the purpose of pointing out a method of determining the amount of the tax. It is, of course, obvious that a corporation may be authorized to issue a very limited amount of capital stock, and may, in fact, in the case of a domestic corporation, have outstanding only one-half of the capital stock which it is authorized to issue. But the amount of capital stock outstanding is by no means the measure of the amount of capital which the corporation may use in its business. It commonly happens that upon the organization of a corporation, all or so much of its capital stock as is required by law to be paid up, is paid up, and in addition thereto a sum is contributed by the stockholders as a means of establishing and reenforcing the credit of the corporation. There is no limit to the amount which may be so contributed. A corporation organized and authorized to issue capital stock in an amount not exceeding two thousand dollars may borrow and employ in its business any sum whatever. The result is that a corporation with a minimum stock subscription may actually employ huge sums of capital in its business. It might well happen that no part of this total employed in business, in excess of the amount of the outstanding capital stock, would be surplus in the ordinary acceptation of that term. If this excess were borrowed money, the amount so borrowed would constitute a liability, but the corporation would nevertheless be employing the amount of that liability in business. The money so borrowed or the property purchased with that money, would be assets of the corporation. The corporation would have the right to use and actually would be using under its franchise, not only the amount of its outstanding capital stock, but all of the money so borrowed. This it has a right to do, and it is that right which the General Assembly intended to tax by the enactment of the statute here in question. If relator's theory is correct, and all liabilities must first be deducted in order to ascertain what the surplus is, or whether or not there is any surplus, it would be an easy matter for a corporation practically *Page 222 
to escape the tax levied by this law, and nevertheless to enjoy all the benefits of a franchise to do business in this State with assets circumscribed only by the limits of its ability to borrow money or to contract debts. It cannot be supposed that the Legislature intended such a condition to exist. Neither can it be supposed that a possibility so obvious escaped the legislative attention. It necessarily follows that, in view of the language of Sections 1 and 2, and of the whole purpose of this act, as disclosed by the act itself, the Legislature must have intended the word surplus to mean the difference between the amount of the outstanding capital stock of a wholly domestic corporation, such as relator is, and the amount of the assets of that corporation, excluding, liabilities of all sorts. Were the rule otherwise, this peculiar condition might exist: A corporation might accumulate a surplus of $100,000, which it could either use in its business or distribute in dividends to its stockholders. If it used this sum in its business, its franchise tax would then be based upon the amount of its outstanding capital stock plus $100,000. But if it distributed this same $100,000 as dividends to its stockholders and immediately borrowed it back from them and employed it in its business, the franchise tax, upon relator's theory, would be based upon the outstanding capital stock alone. In other words, the amount of the franchise tax would depend on the method of book-keeping employed. A statute is not to be so construed as to produce an absurdity.
Other considerations tend strongly to support the conclusions we have announced. It may not be amiss to discuss some of them. It will be presumed, in the absence of a declaration to the contrary, that the General Assembly did not mean to depart from the fixed public policy of the State with reference to the levying of taxes. It hence becomes pertinent to inquireTaxation  what that policy is, as tending to shed some light uponPolicy.   the meaning of this act. Turning to our Constitution as the highest evidence of the policy of the State, we find two pertinent provisions, to-wit: *Page 223 
"Taxes may be levied and collected for public purposes only. They shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax, and all taxes shall be levied and collected by general laws." [Sec. 3, Article X, Constitution of Missouri.]
"All property subject to taxation shall be taxed in proportion to its value." [Sec. 4, Article X, Constitution of Missouri.]
The Constitution thus declares that taxes shall be uniform and in proportion to the value of the property taxed. (Note that it is the value of the property, not the value of the owner's interest therein, that is to be taxed.) These provisions are intended to secure uniformity and equality in taxation, so far as possible, and they apply to all taxpayers both natural and corporate, and to franchise as well as to property taxes.
Relator contends that its indebtedness should be deducted from its surplus assets, for assessment purposes. But is any natural person allowed to deduct his indebtedness from his assets, before giving his property in for assessment for taxation? Not at all. It is well known that this has never been the policy of this State. Now a franchise may be granted to naturalCorporations  persons as well as to corporations, and may be taxed when owned by the one as well as when owned by the other. Why should the Legislature be supposed to have intended to depart from the constitutional rule of equality and uniformity merely because this a franchise tax? It cannot be presumed that the law intends, in matters of taxation, to extend to corporations a favor which it denies to natural persons.
"There is a seeming injustice in taxing corporations which are largely indebted, and whose earnings are insufficient to pay the accruing interest, as is alleged to be the fact in the present case, to the full extent of the value of all their property and privileges, without regard to their indebtedness, yet it has never been the policy of the Legislature to make any discrimination in *Page 224 
favor of individuals on this account, and corporations can not claim an exemption from taxation when, under like circumstances, an individual would not also be exempt to the same extent." [Porter v. Rockford Railroad Co., 76 Ill. 561, l.c. 588.]
Further, by way of illustration of the idea of uniformity and equality of taxation, even as between corporations, suppose that each of two corporations has $200,000 invested, and each has $100,000 of outstanding capital stock, and $100,000 in surplus assets, but one owes $100,000 for borrowed money, while the other owes nothing. Construing this statute as respondent has construed it, each would pay the same amount of taxes. If relator's contention is correct, the first, after deducting its indebtedness, would be taxed upon a basis of $100,000, while the second, having no indebtedness, would be taxed upon a basis of $200,000. Would that be uniformity and equality in taxation, either as to the value of the property owned, in the case of a property tax, or as to the measure of the use of the franchise, in the case of a franchise tax? Obviously not. Yet if relator's contention should be upheld, that is precisely what would happen in the case supposed. Such a construction would render the statute unconstitutional. "Unequal taxes may not be imposed upon property of the same kind, in the same condition, and used for the same purposes." [Guthrie on Fourteenth Amendment, cited with approval in Russell v. Croy, 164 Mo. 69, l.c. 110.] It might well be argued that such a discrimination would be in violation of the Fourteenth Amendment to the Constitution of the United States, guaranteeing the equal protection of the laws. Now it is horn-book law that a statute must not be so construed as to make it unconstitutional when it is susceptible of a construction which will harmonize it with the Constitution.
Moreover, as we have said, we see no reason why the provisions of Section 4 of Article X of our Constitution, providing that all property "shall be taxed in proportion to its value," should not apply as well to *Page 225 
franchises as to any other species of property. It certainly is not beyond the power of the Legislature to take theExtent   extent of the use of a franchise as a basis for theof Use.  computation of the franchise tax. That, we think, is the standard adopted by the Legislature in this instance. Generally speaking, a franchise which is not used is non-productive. Its value depends, usually at least, upon the extent to which it is used. If, therefore, each of two corporations uses in its business the same amount of outstanding capital stock, and the same amount of other assets, each is using its franchise to the same extent, and it is, therefore, reasonable to assume that these franchises are of equal value. Each should therefore pay an equal amount of taxes. The fact that one corporation may have borrowed fifty per cent of its total capital, diminishes the actual value of its outstanding capital stock to that extent, but does not in the least diminish the extent to which it is using its franchise. On the contrary, the borrowing corporation, by the act of borrowing, is making a greater use of its franchise than is the non-borrowing corporation. It is upon the franchise, we reiterate, that the statute here in question levies a tax. The extent of the use of the franchise is the basis for the computation of the tax.
Furthermore, it is frequently the case that a corporation's total gross assets do not equal the par value of its outstanding capital stock. In such a case, its outstanding capital stock is actually below par. It may also be indebted to such an extent that after paying its debts, the outstanding capital stock would not be worth more than fifty cents on the dollar. Having no surplus, it would have nothing from which it could deduct its indebtedness, even if such deduction were allowed. Yet by the express language of this act, such a corporation would be assessed upon "the par value of its outstanding capital stock." Why should it be supposed that the General Assembly meant, as relator contends it did mean, that a corporation whose outstanding capital *Page 226 
stock is worth less than par should not be allowed to deduct itsliabilities, while one whose outstanding capital stock is worthmore than par should be allowed that privilege? Such a distinction would be unreasonable, discriminatory and in defiance of the uniformity and equality clauses of our Constitution. Yet this conclusion is the inevitable result of relator's argument.
"It is not denied that the State may classify property for taxation . . . But we do mean to say the classification must rest on some reason other than mere ownership and that different pieces of property of the same kind, held and used for the same or similar purposes, within the same jurisdiction, cannot lawfully be so classified as that one is subject to the tax and the other exempt, merely because one belongs to a . . . large concern and the other to a small one." [Russell v. Croy,164 Mo. 69, l.c. 107.]
Under a constitutional provision substantially similar to ours, a Nebraska statute allowing a deduction of indebtedness in assessing a franchise was held void. "This provision of the Constitution does not allow the indebtedness of individuals or corporations to be deducted from the true value of property or franchises in determining the value of such property and franchises for taxation, and if the `manner' of assessment prescribed by the Legislature, when strictly pursued, would result in so doing, and would not result in levying a tax `by valuation, so that every person and corporation shall pay a tax in proportion to the value of his, her or its property and franchises,' it violates the constitution, and is so far invalid." [State v. Karr, 64 Neb. 514, l.c. 521.]
That the Franchise Tax Act may cause hardships may be conceded. What taxing act ever failed to cause hardships? But the wisdom or unwisdom of particular acts of legislation is for the decision of the General Assembly. So, also, is the correction of legislative mistakes, if any. So long as it keeps within its constitutional bounds, the Legislature is supreme. The constitutionality of this act is not questioned in this proceeding. *Page 227 
Clearly, in this case the General Assembly meant by surplus, the excess of assets employed in the business over the par value of outstanding capital stock, without regard to liabilities.
It is in harmony with the principles which we have discussed that respondent has levied upon relator the tax which is here called in question. We think respondent correctly construed the law, and that the writ of certiorari heretofore issued by us should be quashed. It is so ordered.
All concur except Woodson and Goode, JJ., who dissent;Goode, J., in separate opinion. Graves, J., concurs in separate opinion. Motion for rehearing overruled in Per Curiam
opinion.