Court Opinion

ID: 9756805
Source: CourtListenerOpinion
Date Created: 2023-08-28 22:00:56.962463+00
Date Added: 2024-06-11T07:28:31.118381
License: Public Domain

Hammond, J.,
delivered the following dissenting opinion, in which Henderson, J., concurred.
The majority of the Court finds that since the State Tax Commission saw fit “to arrive at the total value of a unitary enterprise on a consolidated basis” it cannot, in apportioning to Maryland a share of that total value, reject “an element used in building up that value”. It is said that the rejected element is “the earnings of the subsidiaries” and that these earnings “have been discarded” because gross earnings of only the parent corporation, and not consolidated gross earnings, were used in making the apportionment. The majority says the result is to allocate to Maryland a greater value than if local gross receipts had been compared with consolidated gross receipts, and, so, to attribute unlawfully extra territorial values to Maryland.
*100To me the premises of the Court are unsound and, if they be assumed to be true, the conclusions drawn from them are erroneous. The Court’s decision requires the Commission, whenever it assesses a multi-state unitary business operating in part through subsidiaries, to disregard the corporate entities of the parent and subsidiary companies. This puts» the Commission in a strait jacket that the terms of the''’statute not only do not prescribe but indeed reject — a stjrait jacket unjustified by economics or constitutional requirements.
In making the assessment here challenged, the Commislion faithfully followed the literal language of the statute. The taxpayer is a corporation doing directly in many states, as? it does in Maryland, a small loan business. In other stafCy, usually if not always, because local law makes it necessafy, it does the same business through separate corporations, all or substantially all of the stock of which it owns. These corporations are regulated locally, keep separate records and make individual local returns. They have a legitimate purpose and serve a need as distinct legal entities. Indeed it i| not even claimed that Household files a consolidated federal income tax return. The parent’s gross receipts consist of interest on loans it makes directly and receipts from the subsidiaries — dividends, interest on funds lent and service charges. The parent is the Maryland taxpayer. It furnished the Commission its Maryland gross receipts and its own total gross receipts. The Maryland gross is some 4% of the parent’s gross and the Commission applied this percentage to the value of all of the parent’s capital stock to find the value of the capital stock of the taxpayer attributable to Maryland.
In determining the value of all of the stock the Commission used market value, as the statute permits. The Court says the appraisal of the market is of “the consolidated assets, liabilities and earnings of the parent and its subsidiaries”. The record is barren of evidence of how the market makes its appraisal generally or of the factors it actually, or in probability, took into account in appraising the value of Household’s stock. If the Court took judicial notice of these matters, it is suggested that it overlooked to a significant extent a variety of factors that influence the market price of a stock. *101They include the nature of the industry and of the particular company, its record, its capital structure, its prospects, its consolidated earnings, and the dividend it pays currently, as well as that it is likely to pay in the not too distant future, that is to say the yield. The market measures the worth of finance company shares particularly by the yield. In any kind of enterprise dividends come only from cash, or its equivalent, actual dollars of the dividend payer — in this case, Household, the parent corporation. Household’s dollars available for dividends is its own net income; that is, its own gross receipts less expenses and taxes, plus dividends from subsidiaries, interest on loans to subsidiaries, and charges for advice and services to subsidiaries. Household’s assets, appraised in the market, included stock of subsidiaries and the value of the subsidiaries, that is the assets they own and the earnings they make, were reflected in their stock owned by Household, and the debts they owed Household. Household’s dividend-available income included receipts from the subsidiaries. It is difficult to see, therefore, how the Court can say accurately that the Commission arrived at the total value of Household on a consolidated basis, if by that is meant, as seemingly was meant, that all operations were conducted, and all measurements of worth made, as if the parent corporation conducted all of its operations without subsidiaries. True, the market took into account to some extent consolidated assets and consolidated earnings, but undoubtedly it reduced its appraisal of so much of them as were represented by stock ownership as opposed to direct ownership. Cf. National Leather Co. v. Massachusetts, 277 U. S. 413, 72 L. Ed. 935.
The owner of stock gets only as much of the earnings, less expenses, as the management of the company feels it can and should spare. Earnings of subsidiaries customarily retained, as we are told is the case here, even fully owned subsidiaries, are not given recognition in the market’s appraisal of the worth of the parent that they would get if they were paid out as dividends.
The cases show that the state need not pierce the corporate veil and, absent compelling reasons to disregard it in *102cases like this, should respect corporate entities. In Kraft Foods Company v. Commissioner of Internal Rev., 2 Cir., 232 F. 2d 118, 124, the Court held that interest paid by a wholly-owned subsidiary on debentures held by the parent was deductible for Federal income tax purposes. The Court said: “But the law generally and the applicable tax law deliberately, through its insistence on taxing affiliates separately, affords significance to and honors the type of investment chosen. In consequence, all legitimate and genuine corporation-stockholder arrangements have legal — and hence economic —significance, and must be respected in so far as the rights of third parties, including the tax collector, are concerned.” In People ex rel. Studebaker Corp. of America v. Gilchrist (Ct. App. N. Y.), 155 N. E. 68, the Court, speaking through Judge Cardozo, held that New York could not tax a parent corporation by reason of the presence in the state of its wholly owned subsidiaries in the state. These principles were recognized — although held inapplicable on the facts — in Fox Film Corp. v. Loughman, 259 N. Y. 30, 180 N. E. 885. In A. C. Lawrence Leather Co. v. Commonwealth (Mass.), 150 N. E. 851, Chief Judge Rugg spoke for the court. The Massachusetts statute said that if two or more foreign corporations doing business in this commonwealth participated in the filing of a consolidated return of income to the Federal government, they had the option of being assessed for state income tax upon their combined net income. The parent corporation did business in Massachusetts and owned the stock of some eight subsidiaries, four of which did business in the state. The nine corporations filed a consolidated return with the Federal government. Two of the corporations doing business in the state had net income for the taxable period. The other two had suffered losses, so that the combined net income of the four corporations was zero, or less, as was the combined net income of the parent and the eight subsidiaries. The taxing authorities assessed each of the four corporations on their separate net income, so that two of the four doing business in the state were taxed substantially. The court held that only when the entire group filing a consolidated return did business in the state could they elect to be taxed on their joint *103return, and since four of the nine did no business in Massachusetts, it was proper to tax separately the four that did do business in the state. In Commonwealth v. Ford Motor Co., 350 Pa. 236, 38 A. 2d 329, it was held that it was proper in making an allocation to the state to include in the multiplicand book value of stock of wholly-owned subsidiaries, without including in the denominators of the allocative fraction the tangible property, wages and gross receipts of such subsidiaries. In Louisville & N. R. Co. v. Greene, 244 U. S. 522, 61 L. Ed. 1291, the court was dealing with valuation of the proportion of the capital stock of a railroad attributable to Kentucky. The statute made it necessary to deduct nontaxable assets before arriving at the total value of assets. The taxing authorities had recognized that this must be done, and in applying the capitalization-of-income method of arriving at value, deducted from the total net income the net income from nontaxable securities, and capitalized only the balance. The railroad’s criticism was that there had been deducted only the capitalized value of such stock in other corporations as paid dividends, although much of the stock held, while paying no dividends or dividends at a low rate, had large intrinsic value. It produced evidence that such securities were worth some $30,000,000, whereas a capitalization of the income actually paid by the exempt securities, produced a value of only $14,000,000. The court refused to say that the method followed was wrong.
If it be assumed that the Commission’s appraisal of Household’s stock and the Commission’s adoption of that appraisal represents a weighing of its value as if it had no subsidiaries and operated in each state as it did in Maryland, it does not follow that the apportionment that the Commission made, which is made prima facie correct by the statute, actually attributed to Maryland more than Maryland’s fair share of total value. Gross receipts have meaning as indicators of worth or value only to the extent that they finally emerge as net earnings. Railway Express Agency, Inc. v. Virginia, 347 U. S. 359, 366, 98 L. Ed. 757, 764. A subsidiary company may have very large gross receipts and make no money and, in such cases, gross receipts bear little relation to the value of *104the stock held by the parent company. The record shows (using round figures) that consolidated gross receipts of $75,000,-000 produced $32,500,000 of consolidated net income before taxes, so that consolidated net was 43.3% of consolidated gross. Maryland gross of $2,400,000 produced $1,200,000 of net income before taxes, so that Maryland net was 50% of gross. In the case of a finance company, assets mean debts due by individuals, banks or governmental subdivisions, largely by individuals. Consolidated assets were $355,000,000 and each dollar of assets produced but 9 cents of net income before taxes; Maryland assets were $10,000,000 and each dollar of Maryland assets produced 12 cents of net income before taxes. Net income after taxes on a consolidated basis was $13,600,000, or 3.85% of consolidated assets. Maryland net income was $518,000, or 5.18% of Maryland assets. Many other comparable figures, revealed by the record show that the value of Maryland assets and Maryland business to the corporation was substantially greater than the average on a consolidated basis. For example, Maryland net income of $518,000 is 3.81% of consolidated net income of $13,600,000. Maryland assets comprise only 2.8% of consolidated assets but they produced 3.81% of the net income of the enterprise. The 3.81% that Maryland assets contributed to consolidated net income almost equals the 4% ratio of Maryland gross income compared to parent gross income which the Commission used. 3.81% of $163,000,000, the total value of all of the parent company’s stock as determined by the Commission, is some $6,200,000, which is only $300,000 less than the Commission assessment of some $6,500,000. The Maryland statute clearly intends to tax local values as the State’s share of total value as a going concern, a money maker.
As the Court recognizes, a state in assessing a multistate unitary enterprise may take into account the value that all of the assets and business activities wherever located and conducted contribute to local value. The assets and activities may be valued in their organic relations and not merely as a congeries of unrelated items. Where there is a unity of use as well as a unity of ownership there may exist a value that exceeds the aggregate of the values of the separate items of *105property. Capital used in any of its branches tends to make every other part of the business more profitable and the advantages flowing from large scale capital resources should and can be distributed equitably among the states in which business is done. Since a state may value the business as a whole and for what it is worth for the purposes of income and sale, inevitably, an allocation need not be limited only to what may be pinpointed in fact or by logic or mathematical exactness actually as being in or attributable by demonstration to the State. Clearly an allocation may reflect a fair share of the total value — and often, if not always this must include extra-state values — and if the apportionment formula is not inherently unreasonable and in the particular case does not produce “a palpably disproportionate” result it will be upheld. Apportionment by a gross receipts ratio has often been approved as inherently reasonable. Under the Maryland Statute the burden is on the taxpayer to show by clear evidence to the contrary that the ratio it sets up results in a manifest disproportion and so that it is not a “rough approximation”' of local value. If he cannot show this or that the State had an intention that was equivalent to a fraudulent purpose to discriminate or overtax he cannot upset the assessment either under the statute or on constitutional grounds. Rowley v. Chicago & N. W. R. Co., 293 U. S. 102, 79 L. Ed. 222.
The cases show the extent to which the courts go to give validity to efforts honest in the sense discussed, even in the face of apparently disproportionate results. An example is Ford Motor Co. v. Beauchamp, 308 U. S. 331, 84 L. Ed. 304. There Texas levied an annual franchise tax on foreign corporations doing business in the state, measured by a charge upon such proportion of (a) outstanding capital stock; (b) surplus and undivided profits; (c) long-term indebtedness, as the gross receipts from its Texas business bore to its total receipts. Ford’s capital, as defined, was over $600,000,000. The book value of all Texas assets was some $3,000,000. Total gross receipts were $888,000,000. Texas gross receipts were $34,000,000. The capital allocable to Texas by the statutory franchise was over $23,000,000. The taxpayer sued to recover all over $3,000,000 it had been required to pay. *106The Supreme Court approved the statutory formula, and refused the refund.
In International Harvester Co. v. Evatt, 329 U. S. 416, 91 L. Ed. 390, the taxpayer owned factories, sales agencies, warehouses and retail stores in Ohio and other states. Under Ohio’s allocation formula, one-half of the value of the stock was multiplied by a fraction whose numerator was the value of all of taxpayer’s property in Ohio and whose denominator was the value of all of taxpayer’s property. The other half of the value of the capital stock was multiplied by a fraction whose numerator was the total value of “business done” in Ohio and whose denominator was the total value of business done everywhere. The taxpayer objected because the total value of business used as the numerator in the second fraction included the proceeds of goods manufactured within, but sold outside of, Ohio, as well as the proceeds of goods manufactured out of the state but sold in Ohio. A unanimous court sustained the tax, rejecting the contention that it was a levy on sales made outside of the state.
In Great Atl. & Pac. Tea Co. v. Grosjean, 301 U. S. 412, 81 L. Ed. 1193, an occupation or license tax on chain stores was graduated on the number of stores of the taxpayer, whether operated in Louisiana or not. The court sustained the Louisiana tax. See also Butler Bros. v. McColgan, 315 U. S. 501, 86 L. Ed. 991; and S. S. Kresge Co. v. Bennett, 51 F. 2d 353, aff’d by the Supreme Court per curiam, 287 U. S. 565, 77 L. Ed. 498.
In Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113, 65 L. Ed. 165, Connecticut taxed 47% of Underwood’s net profits as attributable to Connecticut, in the face of the showing that only 3% was actually received in Connecticut. The 47% figure represented the proportion of Connecticut real and tangible personal property to total real and tangible personal property. The court found this to be a fair apportionment, saying that Connecticut had “* * * adopted a method of apportionment which, for all that appears in this record, reached, and was meant to reach, only the profits earned within the state. * * * There is, consequently, nothing in this record to show that the method of apportionment adopted *107by the state was inherently arbitrary, or that its application to this corporation produced an unreasonable result.” The Underwood case was approved and followed in Bass, Ratcliff & Gretton, Ltd. v. State Tax Commission, 266 U. S. 271, 69 L. Ed. 282, where the right of the state to allocate value was perhaps even more obscure and less demonstrable.
It seems plain to me that there is nothing in this record to show that the statutory method is inherently arbitrary or that its application produced an unreasonable result. There is substantial evidence in the record to show that the result was not inequitable or unreasonable and that it was better than a “rough approximation”. This being so, I find no justification for the reversal of the Commission’s action and, as I have indicated, think that great harm will be done - by a precedent that requires without need a disregard of the corporate entities. I would reverse the court below on this aspect of the matter.
Judge Henderson authorizes me to say he concurs in this dissent.