Court Opinion

ID: 9637545
Source: CourtListenerOpinion
Date Created: 2023-08-22 15:09:58.227551+00
Date Added: 2024-06-11T18:09:57.671311
License: Public Domain

ERNEST P. COCHRAN, District Judge
(dissenting).
I am unable to concur in the conclusion of the majority of the court in this case. The *178application for an interlocutory injunction was made upon the bill of complaint alone. Consequently, if the facts stated in the bill do not make out a case warranting injunctive relief, the interlocutory injunction should be denied. The defendants contend that the taxes in question were justified upon two grounds: First, that the plaintiff is a domestic corporation, and even if the taxes in question are imposed upon ineome arising outside of South Carolina (which the defendants deny), nevertheless the state would have the right to impose taxes on income of its citizens, no matter where the ineome arose; and, secondly, that the act of the Legislature did not impose any taxes upon income of the plaintiff arising outside of South Carolina, and the commission has not imposed taxes upon any such ineome, but that the commission, pursuant to the act, has simply taken the gross interstate revenues of the system as a whole and applied the mileage proportion rule prescribed by the statute, so as to arrive at that portion of the interstate revenues which should be allocated to South Carolina, as arising within the jurisdiction of the state and therefore taxable in the state.
Upon the first proposition, I am in accord with the majority opinion. An examination of the act discloses clearly that there was no intention on the part of the Legislature to impose any taxes upon ineome of the plaintiff arising beyond the jurisdiction of the state. I am not myself prepared at present to hold that the state has no right to tax one of its citizens, especially an artificial citizen deriving its whole existence from the state, on ineome derived from sources in other states, or even beyond seas in foreign countries. It would seem that a citizen, whether artificial or natural, residing within the state, protected by the laws of the state, enjoying all the advantages to be derived from the government of the state, should be liable when necessary to pay the state upon ineome, no matter from what source derived. But as stated in the majority opinion, inasmuch as the Legislature has not sought to exercise this power, that question need not be decided.
But upon the second ground by which the defendants seek to justify the tax in question, I am not in accord with the majority opinion. The defendants claim that the law authorizes a tax upon income within the jurisdiction of the state, and that in the ease of a railroad or other publie utility, doing business partly within and partly without the state, its interstate business which should be allocated to the state shall.be ascertained by taking the gross interstate operating revenues of the entire system and applying the mileage proportion rule; and that this is the course that the tax commission has pursued.
The act of 1926 qnd amending acts provide for an income tax both upon individuals and corporations. Section 4 (a) provides for a tax on all corporations. Section 4 (b), however, provides in the ease of railroads and other publie utilities which are required to keep records according to the standard classification of accounting of the Interstate Commerce Commission, when the business is part within and part without the state, the net income within the jurisdiction of the state shall be ascertained by taking the gross “operating revenues” within the state (i. e., intrastate revenues), including in this gross “operating revenues” within the jurisdiction of the state, the equal mileage proportion within the jurisdiction of the state of the interstate business (i. e., the equal mileage proportion of the entire interstate revenues of the system), and deducting from their gross “operating revenues” the proportionate average of “operating expenses” or “operating ratio” for their whole business, as shown by the Interstate Commerce Commission standard classification of accounts. In making the assessments in question, the tax commission followed this statute literally.
Now, numerous decisions of the Supreme Court of the United States hold that the mileage basis of apportionment (such as adopted here) may be adopted in the taxation of railroads, unless there is a showing that the result arrived at is arbitrary or excessive, and is in effect taxation of property beyond the jurisdiction of the court. A state may look beyond its borders when it taxes property, so that it may get the true value of the things within it, when they axe part of an organic system of wide extent that gives them a value above what they would otherwise possess. In other words, the mileage proportion rule of arriving at what is within the state is ordinarily a proper method in the absence of a showing that it is arbitrary or so excessive as to demonstrate that the state is really attempting to tax property beyond its jurisdiction. Cleveland, etc., R. Co. v. Backus, 154 U. S. 439, 14 S. Ct. 1122, 38 L. Ed. 1041; Fargo v. Hart, 193 U. S. 490, 499, 24 S. Ct. 498, 48 L. Ed. 761; Wallace v. Hines, 253 U. S. 66, 40 S. Ct. 435, 64 L. Ed. 782; So. Ry. Co. v. Kentucky, 274 U. S. 76, 47 S. Ct. 542, 71 L. Ed. 934; Great Northern Ry. Co. v. Minnesota, 278 U. S. 503, 49 S. Ct. 191, 73 L. Ed. 477. Cf. Southern Ry. Co. v. Ken-*179tacky, 52 S. Ct. 160, 76. L. Ed.-, decided Jan. 4, 1932.
The only fact stated in the bill to show that the mileage proportion rule really is not applicable to this ease is that the plaintiff’s railroad properties in the two states “constitute separate and distinct physical entities, and are necessarily so separately operated, except insofar as certain expenses for general management, etc., are incurred for both in common.” There is no allegation or showing whatever that the two component parts are not operated as a system or unit. The claim is based simply upon the lack of physical connection. In other words, because 26 miles lie in North Carolina, and 101 miles in South Carolina, and there is no physical connection, therefore the plaintiff argues that the tax commission had no right, in ascertaining what part of the interstate business should be allocated to South Carolina, to take into consideration that part of the interstate business which arose outside of South Carolina. I do not think the mere fact that there is no physical connection between the two component parts of the system is sufficient to warrant the court in saying that the mileage proportion method is not applicable or fair, or is excessive or arbitrary or unjust, or places a tax upon income arising outside of the state. It is true that the Supreme Court, in a number of cases upon the subject, refers to the connection of the different parts of the properties said to form a system; but I do not apprehend that the court meant to lay any stress upon the mere fact of physical connection. It is the unitary operation that is the controlling fact, that it is a part of a system that operates as a whole, and necessarily each part derives benefit from the operation as a whole. Here, this railroad was operated as a unit; had a common management; the expenses for both its physical parts for that management were paid from the system as a whole; and it must necessarily have derived great advantage in every way from its operation as an entity, although composed of distinct and separate physical parts. There is no reason whatever why all of its interstate revenues should not be considered and taken into account on the mileage proportion basis, in ascertaining the part of its interstate revenues which should be allocated to South Carolina. It is not and cannot be disputed that if there had been a physical connection between its lines, the method used by the tax commission would have been entirely proper. There can be no doubt that in the case of the Atlantic Coast Line Railroad, the Seaboard Air Line Railway, the Southern Railway, and other railroads that might be mentioned, it is perfectly proper in ascertaining the amount of interstate business allocable to South Carolina to inelude the interstate business of the whole system and apply the mileage proportion rule. I can perceive no reason why one rule should be applied to the Atlantic Coast Line Railroad, the Southern Railway, the Seaboard Air Line Railway, and other railroads, and a different rule applied to the Piedmont & Northern Railway, simply because its component parts are physically disconnected; and that is all that there is in this ease to distinguish it.
The court should take judicial notice that the two component parts of this railroad system are located in territory that is climatically and geographically similar; that the industries and commercial life in both regions are similar, and almost identical; and that the populations of the two regions are practically homogeneous, with largely similar habits and manner of life. There is nothing in the situation of these two parts of the system which would indicate, and no facts stated in the bill showing, that either part has any advantage over the other as a revenue producer.
The plaintiff has contended that in ascertaining the net income, .it is authorized to deduct all income arising outside of South Carolina, under the authority of paragraph 9 of section 13 of the act; and the majority opinion holds that paragraph (b) of section 4 does not forbid its claiming a deduction under section 13, par. 9. I do not think this is a proper construction of the act. The act provides (section 4, paragraph (b), in the case of railroads and other public utilities, for a complete scheme or plan to ascertain the net income and all deductions, expenses, etc., in the ease of such corporations are provided for in that section. As to other corporations and individuals, however, in ascertaining their net income, section 13 provides for a number of deductions (expenses, wages, rentals, payments, interest, taxes, etc.), and by paragraph 9 the income from property invested in another state. None of the deductions in section 13 are available for railroads and public utilities; for all expenses, deductions, etc., allowed to public utilities and railroads are provided for in paragraph (b) of section 4.
But little need be said in reference to the plaintiff’s contention that under the act of 1926 and amendments the equal mileage pro- ' portion within the jurisdiction of the state of the plaintiff’s interstate business which may *180be allocated to tbe state for purposes of income taxation is the equal mileage proportion of the plaintiff’s interstate business actually transacted within the state. As I understand this contention, the plaintiff means to say that the commission should take the interstate revenues actually arising from transactions within the state, and then allocate to South Carolina a mileage proportion thereof. An examination of the aet shows plainly that this is untenable. There is not a syllable in the aet which would warrant the inference that the Legislature intended to allow a large portion of the plaintiff’s interstate business arising in South Carolina to escape taxation. But this would be the necessary result, if the plaintiff’s contention be accepted as correct. Such a construction of the statute would make a palpable and gross discrimination in favor of the plaintiff; not only as between the plaintiff and other railroads, but as between the plaintiff and other corporations and individuals.
Bor these reasons, I think the interlocutory injunction should be denied; but without prejudice to the plaintiff to renew the application, if the plaintiff can amend its complaint so as to allege facts (and not merely conclusions of law), supported by affidavits showing that the interstate business allocated to South Carolina by the commission is so arbitrary and excessive as to -amount in effect to the imposition of taxes on property beyond the jurisdiction of the state.