Court Opinion

ID: 3419200
Source: CourtListenerOpinion
Date Created: 2016-07-05 19:46:31.32057+00
Date Added: 2024-06-11T13:52:52.576657
License: Public Domain

I do not concur in the view of the majority that section 107 and the applicable portion of section 105 of the Corporation act are invalid as constituting an unreasonable burden on interstate commerce. *Page 286 
Appellee's position is that a State has the right to impose a reasonable minimum annual franchise fee or tax in advance for the use of the privilege granted by it to a corporation to carry on a local business in the State, even though such corporation may not have actually exercised that privilege to a substantial extent during the preceding year, and that as such the tax does not discriminate against any foreign or domestic corporation but is applied uniformly to all corporations under the same circumstances; that it is a tax upon a privilege granted, and does not directly or necessarily affect property outside the State nor impose an illegal burden upon interstate commerce. Since appellant concedes the power of the State to levy a franchise tax under the general provisions of section 105 when limited to such issued capital stock as is represented by business transacted and property owned within the State, it is not necessary to consider that phase of the act. That feature of the section has been frequently sustained by this court and the Supreme Court of the United States against the charge that it lacks due process of law, burdens interstate commerce or is discriminatory. (American Can Co. v.Emmerson, 288 Ill. 289; Hump Hairpin Manf. Co. v. Emmerson, 293 id. 387, 258 U.S. 290, 66 L. ed. 622; Roberts  Schaefer Co.
v. Emmerson, 313 Ill. 137, 271 U.S. 50, 70 L. ed. 827;Western Cartridge Co. v. Emmerson, 335 Ill. 150, 281 U.S. 511,74 L. ed. 1004.) The validity of a minimum franchise tax to be applied when the business transacted and property owned in the State does not produce a tax equivalent to such minimum has not heretofore been passed upon by this court.
In support of appellant's argument that section 105 unlawfully burdens interstate commerce and violates the due process clause of the Federal constitution, numerous decisions of this court and of the Supreme Court of the United States involving statutes imposing a franchise tax based on the entire authorized capital stock of foreign or *Page 287 
domestic corporations, rather than on the stock actually issued and outstanding, are cited. These cases uniformly hold that a franchise fee so measured contravenes the due process clause of the Federal constitution and constitutes a burden on interstate commerce for the reason that unissued stock bears no reasonable relation to the business transacted by or the property of the corporation. O'Gara Coal Co. v. Emmerson, 326 Ill. 18; AirwayElectric Appliance Corp. v. Day, 266 U.S. 71, 69 L. ed. 169;International Paper Co. v. Massachusetts, 246 id. 135,62 L.ed. 624; Looney v. Crane Co. 245 id. 178, 62 L. ed. 230; CudahyPacking Co. v. Hinkle, 278 id. 460, 73 L. ed. 454.
Pursuant to the holding of this court in the case ofO'Gara Coal Co. v. Emmerson, supra, the legislature of this State in 1927 amended sections 105, 106 and 107 to base the franchise tax on issued rather than authorized capital stock. The majority opinion holds that the theory and basis of a franchise tax statute requires, and must require, that the annual franchise tax be limited to the rate specified on that part of the corporation's capital stock represented by property owned and business done in the taxing State; that there is no legal sanction for a franchise tax that is not so measured and limited, and that to require a minimum amount which, in any event, results in a larger tax is invalid. Cudahy Packing Co.
v. Hinkle, supra, is cited as determining the question here. There a statute of Washington required that all domestic and foreign corporations filing articles of incorporation with the Secretary of State pay to that officer a filing fee in proportion to their authorized capital stock according to a schedule in the act provided, graduated from a fee of $25 on authorized capital stock not exceeding $50,000 to $750 on authorized capital stock of over $2,000,000, with $10 additional for each million of such capital stock, or major fraction thereof, in excess of $2,000,000. The maximum of such fee was fixed at $3000. The act also required an annual *Page 288 
franchise fee on all corporations, domestic and foreign, graduated from $15 on authorized capital stock of $50,000 or less to $150 on authorized capital stock of $2,000,000, with a like charge of $10 for each million, or major fraction thereof, over $2,000,000, the annual franchise fee in no case to exceed $3000. The complainant in that case had an authorized capital of $45,000,000, of which it had issued less than $30,000,000. The total value of its property did not exceed the latter sum. It had in Washington property of the value of $40,000. Its gross sales amounted to over $230,000,000, of which something over $1,300,000 were made in Washington, less than one-half of those being intrastate. The court referred to Looney v. CraneCo. supra, in which a franchise tax graduated according to authorized capital stock without prescribing a maximum limit was held invalid, and pointed out that unless saved by the maximum limitation in it the Washington statute was subject to the objections pointed out in the Crane Co. case. It was held that if there be no legitimate basis for the tax the amount demanded is unimportant, and that the act was invalid under theCrane Co. case and other cases there cited. It will be observed that the validity of a reasonable minimum franchise tax based on issued capital stock was not before the court. As the act involved in the Cudahy Packing Co. case and the facts of that case are not in effect or in reality the same as the instant case, that decision is not controlling in determining whether the minimum franchise tax in this case is valid. Under the statute of this State only issued stock is considered, and that to the limited extent required by the act.
In Airway Electric Appliance Corp. v. Day, supra, cited in the Cudahy Packing Co. case, a Delaware corporation had authorized stock of 400,000 shares no par value, of which but 50,485 shares had been issued at the time of the levy of the franchise tax in suit. Its property was all located in Ohio, the taxing State. Twenty-eight per cent of *Page 289 
its business for the year was local and the rest interstate. The franchise tax was based on the portion of its authorized capital stock represented by property owned and business done in Ohio. The taxing officer treated all the business of the corporation as intrastate and assessed a tax of five cents per share on all the authorized capital stock. The court, after laying down the general principles governing the power of a State to assess a franchise tax, held that as some of the corporation's outstanding shares were represented by interstate business, the application of the there specified rate of tax to all the shares, or to any greater number than the total outstanding shares, constituted a direct burden on interstate commerce. It was also held that the fee charged must bear some reasonable relation to the privilege granted, which in that case the fee did not have.
In General Railway Signal Co. v. Virginia, 246 U.S. 500,62 L. ed. 854, the statute required every foreign corporation with a capital of over $1,000,000 and not exceeding $10,000,000 to pay a license fee of $1000 when it obtained its certificate to do local business. It was attacked on the ground that it unlawfully burdened interstate commerce. The court held that such fee was not wholly arbitrary or unreasonable and that it was not open to the objection urged and sustained its validity, citing Baltic Mining Co. v. Massachusetts, 231 U.S. 68, K. C.,Ft. S.  M. R. R. Co. v. Bodkin, 242 id. 226, and K. C.,M.  B. R. R. Co. v. Stiles, 242 id. 111. It was observed that what was said in those cases was sufficient to show that the characteristics of the Virginia statute were such as to save its validity.
It is said in the majority opinion that the Virginia case is not applicable because in that case the tax was an admission fee to be paid but once, while here the fee is an annual tax. The court, however, does not draw such a distinction, and cases cited and relied upon by it involved annual franchise taxes.Hanover Fire Ins. Co. v. Harding, *Page 290 272 U.S. 494 is cited. The question in that case was whether the charge imposed violated the equal protection clause of the fourteenth amendment of the Federal constitution. It was there held that inequality as between foreign and domestic corporations with respect to the admission fee does not come within the inhibition of the fourteenth amendment, though after admission foreign and domestic corporations must receive like treatment. It was also in the Hanover Fire Ins. Co. case said, that under the decisions of recent years "the State may not exact as a condition of the corporation's engaging in business within its limits, that its rights secured to it by the constitution of the United States may be infringed," citingSioux Remedy Co. v. Cope, 235 U.S. 197, and Looney v. CraneCo. supra. The question in the case before us is whether our statute unlawfully burdens interstate commerce. Since the minimum franchise tax under section 105 applies alike to domestic and foreign corporations, of course no discrimination exists.
In International Shoe Co. v. Shartel, 279 U.S. 429,73 L.ed. 781, a statute of Missouri providing for the assessment of an annual franchise tax was attacked. It was held that a franchise tax imposed on a corporation, foreign or domestic, for the privilege of doing local business, as apportioned to the business done or the property owned within the State, is not invalid under the commerce clause merely because part of the property or capital included in computing the tax is used by it in interstate commerce — citing numerous cases. The opinion distinguishes the tax in that case from others, such as the Airway case, the Looney v. Crane Co. case and the CudahyPacking Co. case, which either were measured by authorized instead of issued capital stock, or were not limited to part of the capital stock justly apportioned to the taxing State. It was there said that the fact that a corporation is engaged in interstate commerce does not relieve it of local tax burdens in respect to its property in the State or its intrastate business *Page 291 
In that case it was also objected that the taxing authorities placed an excessive valuation on the non par stock, but it is pointed out that the value of the stock did not appear, and therefore no ground was laid for assailing the tax as so excessive as to be a denial of due process.
In Western Cartridge Co. v. Emmerson, 281 U.S. 511,74 L.ed. 1004, the sections of the Corporation act involved here were attacked. It was held that a State has a right to impose a license tax for the exercise of the right of a corporation to do business in the State and that the tax was not laid directly upon interstate commerce, although in determining the amount of the tax the corporation's business and property located in the State are divided by all its business and property, since various elements employed in the calculation of the tax did not directly depend upon the amount of the tax-payer's interstate transactions. Reference is made to the Airway case, supra, and the distinction between the cases is pointed out, in that the tax there was applied to authorized capital stock, and so to a number of shares greatly in excess of the total issued. The court observes that the main case cannot be distinguished fromHump Hairpin Manf. Co. v. Emmerson, supra.
In Hump Hairpin Manf. Co. v. Emmerson, supra, section 105 of the Corporation act of this State was attacked. The corporation was organized under the laws of West Virginia and had all of its tangible property in Illinois. Approximately ninety per cent of its business was done outside the State, and it was argued that the tax imposed was a burden on interstate commerce. The court states that the question presented was whether the use made of the amount of interstate business in determining the amount of the tax rendered the act invalid. Attention was called to the ruling that a State excise tax, which affects interstate commerce not directly but only incidentally and remotely, may be entirely valid where it is clear that it was not imposed with a covert purpose or with the effect of defeating constitutional *Page 292 
rights. The test is declared to be "whether in its incidence the tax affects interstate commerce so directly and immediately as to amount to a genuine and substantial regulation of or restraint upon it or whether it affects it only incidentally or remotely, so that the tax is not in reality a burden, although in form it may touch and in fact distantly affect it." It was there pointed out that the interstate business of the corporation is but one of the factors used in estimating or measuring the amount of the capital stock represented by property and business transacted in Illinois. A franchise tax need not be based solely on the amount of business done or property owned in the State, so long as it bears some real and reasonable relation to the privilege granted or to the protection of the interests of the State. New York v. Latrobe,279 U.S. 421, 73 L. ed. 776.
Ozark Pipe Line Corp. v. Monier, 266 U.S. 561,69 L. ed. 439, is also cited in the majority opinion. A Missouri statute required foreign corporations to pay an annual franchise tax of one-tenth of one per cent of the par value of capital stock and surplus employed in business in the State, to be determined by computing that proportion of its entire capital and surplus which its property and assets in Missouri bore to all its property and assets wherever located. In that case the complaining corporation owned a pipe line extending through the State but did no business and received and delivered no oil in the State. It had its principal office, with pumping stations, telegraph and telephone lines, in the State. It was there held that as the corporation did no intrastate business the tax necessarily was entirely based on interstate business. That case is readily distinguishable from the case before us.
It will be observed that in none of these cases has a minimum tax of the exact character of that here involved, under the same or analogous facts and statutory provisions, been before the courts, and I have found no such case. The cases cited, however, lay down the principles *Page 293 
governing such a minimum tax. Applying these principles and considering permissible bases of such tax, I am of the opinion that the tax here involved does not violate the commerce or due process clause of the constitution of the United States. We come, then, to the question whether it denies appellant equal protection of the laws.
Nor does the application of a minimum tax in this act discriminate against appellant. It is argued in the brief of appellant that this tax requires appellant to pay more per dollar on its shares of stock than may be required of other corporations. The act requires the same minimum license fees of all foreign and domestic corporations based on their issued capital stock, and, of course, no discrimination as between domestic and foreign corporations exists, but it is said that a discrimination exists between it and other foreign corporations differing in issued capital stock and in amount of business done and property held in this State. Cudahy PackingCo. v. Hinkle, supra, is cited as authority for this position. As we have seen, under the Washington statute the franchise tax was computed solely on a graduated amount of authorized capital stock, with a maximum fee of $3000. No minimum fee similar to that imposed in this State is provided. There was thus presented no distinction between corporations using little or no capital in the State and those so using a larger part or all of their capital, and it was held that in failing to consider this difference between the value of the right to use the privilege granted as between foreign corporations so differing, the act violated the equal protection clause of the Federal constitution. The distinction between that act and the Illinois act in this regard is obvious. In no instance, under the act before us, is any corporation with an issued capital stock of over $20,000,000 required to pay less than appellant is required to pay. Up to and beyond the point where their business done and property owned in this State produces a franchise fee equal to the minimum *Page 294 
fixed by section 105 for corporations of the class of appellant, the amount assessed against all is the same. Corporations with less issued capital stock which do not have business and property in the State sufficient to produce a minimum fee in the amount assessed against corporations with such stock and doing no business and having no property in the State will pay a less annual franchise tax than appellant, and it may be that corporations with less capital stock, having a greater proportion of their property and doing a larger per cent of their business in Illinois, will, because of such proportion of their business and property in the State, pay a larger fee than appellant, based on the rate fixed in section 105. That, however, is not a matter of which appellant can complain. The reverse of this situation is not true as applied to appellant, since all corporations with over $20,000,000 of issued stock fall in the same class with appellant, and so no situation can arise where appellant is required to pay a larger franchise tax than a corporation with a larger issued capital stock, and with either the same, a greater or a less proportion of its property and business in the State.
In New York v. Latrobe, supra, a New York statute imposed on foreign corporations a tax computed on the basis of issued capital stock employed by it within the State during the first year it did business there, in the proportion which its gross assets within the State bore to its gross assets wherever situated. The tax was styled a license fee, and was similar to an admission fee under our statute in that it was paid but once, though not due until the end of the year. The corporation was organized in Delaware with 250,000 shares of no par value stock. The question was whether the tax on no par value stock at the rate fixed, without regard to the true value of the amount paid into the corporation upon its issue, infringed the equal protection clause of the fourteenth amendment. It was argued that the tax was not, in fact, an admission fee but a franchise *Page 295 
fee imposed as the corporation was admitted, and so, under theAirway Electric Appliance Corp. case, resulted in lack of equal protection. The court held that it was unnecessary to consider whether the tax was imposed as a condition of entrance or a franchise tax. It was said that it did not consider the decision of the Airway Corp. case controlling, nor the tax so unreasonable or discriminatory as to deprive it of its validity. It was held that the maximum of such tax at a flat rate on corporation stock, either par or non par, used within the State, reasonably related to the privilege granted by the State and to the protection of its own interest in the maintenance of its similar policy of taxation with respect to domestic corporations, and was valid. It was also held that such a tax is not a denial of equal protection because a different measure or method of computation is applied to corporations of no par value stock from those having stock of par value, citing Roberts  Schaefer Co. v. Emmerson, supra. It was there said: "Although permissible, a franchise tax need not be based solely on the amount of business done or property owned within the State. It may be based on the nature of the business or the particular form in which it is carried on, so long as it bears some real and reasonable relation to the privilege granted or to the protection of the interests of the State." (Citing cases.) In International Shoe Co. v. Shartel,supra, the court refers to the Latrobe case for the reasons upon which it bases its judgment that the tax in the main case did not violate the equal protection clause of the constitution.
I am of the opinion that section 105 does not violate the equal protection clause of the Federal constitution and does not unreasonably burden interstate commerce. As was said in theLatrobe case, the constitution does not require that the State shall adopt the best possible system of taxation, and that, although permissible, a franchise tax need not be based solely on the amount of business done or *Page 296 
property owned within the State so long as it bears some real and reasonable relation to the privilege granted or to the protection of the interests of the State. The amount of issued stock is but one of the elements necessarily considered in determining what should be by the act fixed as a reasonable minimum franchise tax. The value of the privilege granted must also be considered. As was said by this court in American CanCo. v. Emmerson, supra: "It is, and has been, an underlying principle in the policy of this State in its treatment of foreign corporations, that they shall be subjected to the same rights and liabilities as domestic corporations of like character." The franchise tax imposed under section 105 is not designed to burden interstate commerce and does not directly do so. It bears a reasonable relation to the value of the privilege granted and is not open to the constitutional objections urged against it.
The decree of the circuit court should therefore be affirmed.