Petition — District of Columbia v. Bishop
Supreme Court brief1980
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a Suprema Court, Ue ~%
~ Las gg FILED
+1 68 APR 7 1980
HHCHAFL ROD AK, JR, CLERK
IN THE wr Siraiann onic
Supreme Court of the United States
Ocroser TERM 1979
No.
District or CoLUMBIA,
Petitioner,
Vv.
Ricuarp A. BisHop, et al.,
Respondents.
PETITION FOR WRIT OF CERTIORARI TO
THE DISTRICT OF COLUMBIA COURT OF APPEALS
Jup1ItH W. RoceErs,
Corporation Conusel, D. C.
Ricuarp W. Barton :
Deputy Corporation Counsel, D. C.
Appellate Division
Davip P. Sutton,
Assistant Corporation Counsel, D. C.
Ricuarp L. AcuG.ia,
Assistant Corporation Counsel, D. C.
JaMEs C. McKay, JR.,
Assistant Corporation Counsel, D. C.
Attorneys for Petitioner,
District Building,
Washington, D. C. 20004
Telephone: 727-6248
INDEX
Sussect INpEx Pace
I a te eer
Jurisdiction aelaciat ae
Question Presented nas a= — 2 igiitieleiakeiel 9
Statutes Involved ae sabe 7
Statement Sebetihahets dl shtlin aioe sats at aoelcaiahenedi Acide passiboeakammbsiecnaiaala aaa 2
mentees arr: On OT na ee ee 6
Conclusion _ venti PaO H Meee. nee OED EEE 2 15
Cases CITED
Aleska v. Arctic Maid (1061), 908 U. 8. 190 8
Bates v. State Bar of Arizona (1977), 433 U. S. 350 __________ FRE TT 8
Cohens v. Virginia (1821), 19 U.S. (6 Wheat.) 264 _______ eciasipto dataaaion 5
Commissioner v. Standard Life & Acc. Ins. Co. (1977), 433 U. S. 148 .____ 6
Commonwealth v. Werth (1914), 116 Va. 604, 82 S. E. 695 _______ 9
District of Columbia v. Brady (1960), 109 U. S. App. D. C. 324, 288
F. 2d 108 Se a i ae as ll
District of Columbia v. Murphy (1941), 314 U.S. 441 6, 9
District of Columbia v. Pace (1944), 320 U. S. 698 ____..__..___ 6, 9
District of Columbia v. Pickford (1949), 8 U. S. App. D. C. 17,
et Sh ROTOR aera... Sn seth ee Nea a Ae CLE ll
District of Columbia v. Thompson Co. (1953), 346 U. S. 100 _________ 6, 7, 8
Educational Films Corp. v. Ward (1981), 282 U. S. 379 __-______________ fl
Gardella v. Comptroller (1957), 231 Md. 1, 130 A. 2d 752 _-_-___-.___ 9
Gemsco, Inc. v. Walling (1945), 324 U. S. 24@ _.___________________ 12
General Electric Co. v. Gilsert (1976), 429 U. S. 125 _-____--.__ 12
Groom v. Forst (Circuit Court, Arlington County), At Law No.
Ic US IR a rae 9
Home Ins. Co. v. New York (1890), 134 U. S. 594 A, LES Oe A ll
Key v. Doyle (1977), 434 U.S. 59 -.---_-____- DERI SEATS SSF AST 5
O'Donoghue v. United States (1933), 289 U. S. 516 _-_--___-_----___ 5
Ozawa v. United States (1922), 260 U. S. 178 _____-_--___-___-____________ 12
Pacific Co. Lid. v. Johnson (1982), 285 U. S. 480 _-----------__-_-__ ll
Palmore v. United States (1973), 411 U. S. 389 ____-_________________ 5
Posadas v. National City Benk (1936), 296 U. S. 497 _--------__- 10
Shuttle Corp. v. Transit Comm’n (1968), 398 U. S. 186 __--------__-_____ 6
ii
INDEX—Continued ' Page
Smoot Sand and Gravel Corp. v. District of Columbia (1958), 104
U.S. App. D. C. 292, 261 F. 2d 758 11
Terntory of Alaska v. American Can Co. (1959), 358 U. S. 224 _._______ 8
United States v. American Trucking Ass’ns (1940), 310 U. &. 534 _-_____ 12
Unrtep States Cope Cirzp
Title 28, Section 1257(1) Miles
5
Title 28, Section 1257(2) a 5
Title 28, Section 1257(3) 2, 3, 5
District or Cotumsia Cope, 1973, Crrep
NG P| ARNE SORE Speen nat nS 3
Section 1-124 (Supp. V, 1978) 7
Section 1-147(a)(1) (Supp. V, 1978) sis 3
Section 1-147(a)(5) (Supp. V, 1978) 2, 3, 10
Section 1-147(c) (Supp. V, 1978) 12
Section 47-1551 et seq. ian 3
Section 47-1574 2
Section 47-1580 2, 11
Acts or Concress CITED
District of Columbia Court Reform and Criminal Procedure Act of
Ra, aT, ly: UU OR ig 5
District of Columbia Income and Franchise Tax Act of 1947, Pub. L.
80-195, 61 Stat. 328 et seq., Title VIII, $1 2,3
Title X, $1 St
District of Columbia Professional Act of 1971, Pub. L.
92-180, 85 Stat 576 4
District of Columbia Self-Government and Governmental Reorgani-
zation Act (1973), Pub. L. 93-198, 87 Stat. 774, 2
Section 102 7
Section 102(a) 3
Section 302 7
Section 602(a) (1) 3
Section 602(a) (5) 2, 3, 4, 10, 11, 12, 13, 14
Section 602(c) 12
District of Columbia Revenue Act of 1975, D. C. Law No. 1-23, 22
D. C. Register 2091 ‘ 2
Section 605 2
iii
INDEX—Continued
CONGRESSIONAL MATERIALS CITED
Bills: Pace
H. R. Rep. No. 543 (1947), 80th Cong., Ist Sess. 2-4 ___...__._____-______ 11.
S. Rep. No. 289 (1947), 80th Cong., Ist Sess. 2-4 _..._-_.-.--__-_-_-_--- ll
Hearings:
D. C. Revenue Act of 1971: Hearings before the Senate District of
Columbia Committee on H. R. 11341 (1971), 92nd Cong., 1st Sess. _._ 13
D. C. Revenue Proposals: Hearings before the Subcommittee on
Fisca! ‘Affairs of the Senate District of Columbia Committee on
H. R. 12982 (1969), 91st Cong., Ist Sess, 171-172 __._.______-____ 13
District of Columbia Appropriations: Hearings before the House
Subcommittee on Appropriates (1971), 92nd Cong., Ist Sess.,
Be ae Ne asic pied as piers one ae arate ete telat ach aceenticlcion Shaan ioann 13
District of Columbia Appropriations: Hearings before the Senate
Committee on Appropriations (1971), 92nd Cong., Ist Sess., Part
A phe Pin Bie aren RUE RRs ck AG 8 IO REN eR I US SR 13
Hearings and Dispositions before the Subcommittee on Fiscal Affairs
of the House District of Columbia Committee on H. Con. Res
370 (1975), 94th Cong., Ist Sess., Serial No. 94-5 __.______._____ 12
Revenue Proposals: Hearings before the House Committee on the
District of Columbia (1969), Cong., Ist Sess. 12-13 _._._.._._.____________ 13
OrHer AUTHORITIES CITED
RS ET ELSE RN es SR Oe ane EON 13
Err. Gam. rn PN, aa ae 13
Constitution of the United States, Article 1, Section 8, Clause 17 ______- eae
District of Columbia Government, The Federal Payment FY 1981
Ee = OR RRRTES TARRY RG Sabon Ak AE th Rie Lane ir a ea EESY Os 7
Stern, R. and Gressman, E. (4th ed., 1978), The Supreme Court
Prectes 310 +... Pea BL aA DOr STR To PPR RN 6
wae em ence
IN THE
Supreme Court of the United States
Octoser TERM 1979
No.
District oF CoLUMBIA,
Petitioner,
Vv.
Ricuarp A. BisHop, et al.,
Respondents.
PETITION FOR WRIT OF CERTIORARI TO
THE DISTRICT OF COLUMBIA COURT OF APPEALS
Petitioner, the District of Columbia, petitions for a writ
of certiorari to review the judgment of the District of
Columbia Court of Appeals in this case.
OPINION BELOW
The en banc opinion of the Court of Appeals has not yet
been reported and, as modified, is set forth in Appendices
A and B infra, pp. 1a through 16a. The earlier opinion of
a division of the Court of Appeals is reported at 401 A. 2d
955 and is set forth in Appendix C infra pp, 17a through
1
2
33a. The opinion of the Superior Court of the District of
Columbia is set forth in Appendix D infra, pp. 34a through
54a.
JURISDICTION
The en banc judgment of the Court of Appeals, as modi-
fied, was entered on February 14, 1980. The jurisdiction
of this Court is invoked under 28 U. S. C. § 1257(3).
QUESTION PRESENTED
Whether the District of Columbia Self-Government and
Governmental Reorganization Act, in which Congress
broadly delegated its constitutional power to legislate for
the District, empowers the District to repeal the exemp-
tion for professional and personal service businesses from
the franchise tax imposed by Congress on all other busi-
nesses conducted in the District of Columbia.
STATUTES INVOLVED
District of Columbia Self-Government and Governmental
Reorganization Act, § 602(a)(5), 87 Stat. 813 (1973), D. C.
Code, § 1-147(a)(5) (Supp. V, 1978) ; District of Columbia
Income and Franchise Tax Act of 1947, as amended, Title
VIII, §1, 61 Stat. 345-346, 85 Stat. 582, Title X, ¢1, 61
Stat. 349, D. C. Code, 1973, §§ 47-1574 and 47-1580; District
of Columbia Revenue Act of 1975, D. C. Law No. 1-23, § 605,
22 D. C. Register 2091, 2113, D. C. Code, § 47-1574 (Supp.
V, 1978). These statutes are set forth in Appendix E
infra at pp. 55a through 57a.
STATEMENT
On December 24, 1973, Congress enacted the District of
Columbia Self-Government and Governmental Reorgani-
zation Act, Pub. L. 93-198, 87 Stat. 774 (hereinafter ‘‘the
Self-Government Act’’). The stated purpose of the Act
TR fe SOP ETS
3
was ‘‘* * * to delegate certain legislative powers to the
government of the District of Columbia; * * * grant to
the inhabitants of the District of Columbia powers of local
self-government * * *; and, to the greatest extent possible,
consistent with the constitutional mandate, relieve Con-
gress of the burden of legislating upon essentially local
District matters.’’ §102(a), id., D. C. Code, § 1-121(a)
(Supp. V, 1978).
The Act delegated to the District total power to impose
any tax, other than one on federal or state property or
one on the personal income of a nonresident, which Con-
gress reserved to itself in §§ 602(a)(1) and (5) of the Act.
D. C. Code, §§ 1-147(a)(1) and (5) (Supp. V, 1978).
Acting pursuant to the Self-Government Act, the Dis-
trict repealed the exemption for professional and personal
service businesses, thus making them subject to a tax that
Congress had imposed for almost 30 years on all other in-
corporated and unincorporated businesses conducted in the
District by residents and nonresidents alike. That tax had
its genesis in the District of Columbia Income and Fran-
chise Tax Act of 1947, Pub. L. 80-195, 61 Stat. 328 et seq.,
D. C. Code, 1973, § 47-1551 et seq. (hereinafter ‘‘the 1947
Act’’).
The congressionally stated purpose of the 1947 Act was
(1) to impose an income tax upon the personal net income
of every District resident and (2) to impose a franchise
tax upon every corporation and upon every unincorporated
business, regardless of the residence of its proprietor, for
the privilege of conducting any trade or business within
the District. Congress defined the measure of the fran-
chise tax as that portion of the net income of the business
as is fairly attributable to activities carried on in the Dis-
trict. As a matter of legislative grace, Congress exempted
from the franchise tax two limited classes of unincorpo-
rated businesses: (1) those ‘‘which by law, customs or
ethics cannot be incorporated’’ (professional businesses)
+
and (2) those ‘‘in which more than 80 per centum of the
gross income is derived from * * * personal services * * *
and in which capital is not a mat¢ cial income-producing
factor’’ (personal service businesses) (61 Stat. 345-346).
(Hereinafter bothiclasses of businesses will be called ‘‘pro-
fessional businesses.’’)
In 1971, Congress enacted the District of Columbia Pro-
fessional Corporation Act, Pub. L. 92-180, 85 Stat. 576, to
permit individuals rendering professional services to in-
corporate and thus avail themselves of the tax advantages
and other benefits stemming from a corporate status. The
Act did not, however, disturb the franchise tax exemption
for professional businesses, and the exemption continued
until later repealed by the District under its expanded self-
government powers.
Respondents, a class consisting of nonresident taxpayers
affected by repeal of the exemption, challenged the validity
of this legislative action, contending that it imposed a tax
upon the ‘‘personal income’’ of nonresidents which the
Congress had reserved to itself by § 602(a)(5) of the Self-
Government Act. Respondents also challenged the tax on
other grounds not here pertinent (App. 19a-22a).
Ruling in the District’s favor, the Superior Court held
that in repealing the exemption the District did not sub-
ject nonresident professionals to a congressionally unau-
thorized personal income tax, but imposed a separate and
distinct franchise tax. The court found that the tax was
no less a franchise tax simply because it was measured by
a portion of net income generated by the affected profes-
sional businesses." The court interpreted the phrase in
§ 602(a) (5), ‘* ‘tax on the whole or any portion of the per-
1In determining the measure of the unincorporated business franchise tax,
a professional business is allowed to deduct all ordinary and necessary ex-
penses from gross income. In addition, the business is granted a salary allow-
ance for its proprietor(s) of up to 70% of net income, together with a $2500
exemption. The remaining amount, upon which the tax is imposed, is treated
as income to the business (App. 10a).
5
sonal income’ * * * to mean a personal income tax as that
term is commonly used’’ and found such an interpretation
to be consistent with the legislative history of the Self-
Governmeat Act. (App. 51a).
Respondents appealed, and a division of the District of
Columbia Court of Appeals reversed the Superior Court’s
judgment (App. 33a). Subsequently, upon the District’s
petition for rehearing en banc, the Court of Appeals,
with Judge Mack dissenting, reinstated the opinion of the
division, as modified, as the en bane opinion of the Court.
(App. la-16a) This petition for a writ of certiorari,
invoking the Court’s jurisdiction under 28 U. S. C. § 1257
(3), followed.’
2 Since the enactment of the District of Columbia Court Reform and Crimi-
nal Procedure Act of 1970, Pub. L. 91-358, 84 Stat. 473, this Court has ad-
dressed its jurisdiction to review decisions of the District of Columbia Court
of Appeals under 28 U. S. C. § 1257(1) and (2), but has not yet addressed
its jurisdiction under § 1257(3). See Palmore vy. United States, 411 U. S.
389 (1973); Key v. Doyle, 434 U.S. 59 (1977). This Court has previously
held that when Congress legislates for the District of Columbia, the laws
which it enacts are laws of the United States. Cohens v. Virginia, 19 U. S.
(6 Wheat.) 264 (1821); O'Donoghue v. United States, 289 U. S. 516, 539-540
(1933). In view of the unique status of the District of Columbia and the
plenary power of Congress to fashion a home rule system of government for
the District, jurisdiction exists in this case because the Self-Government Act
is a statute or law of the United States within the purview of § 1257(3).
The Self-Government Act, in contrast to the more limited congressional
enactments involved in Palmore and Key, is the organic act in which Con-
gress reserves and delegates its constitutional power to legislate for the
District of Columbia. In declaring District legislation repealing the exemp-
tion for professional businesses repugnant to the Self-Government Act, the
Court of Appeals has in effect declared a state statute repugnant to a law
of the United States within the meaning of § 1257(3). In addition, the
Court of Appeals has deprived the District of a “right” claimed under a
statute of the United States, if not a right exercised under the “authority”
of the United States, within the meaning of § 1257(3). In that connection,
the District is claiming that the Self-Government Act grants it both the
“right” and the “authority” to impose taxes on professionals who conduct
their businesses within its borders, whether or not they are District residents.
Each of these theories plainly justifies the exercise of this Court’s certiorari
jurisdiction under 28 U. S. C. § 1257(3).
——
6
REASONS FOR GRANTING THE WRIT
The decision of the Court of Appeals rewrites the Self-
Government Act in a way that seriously curtails the grant
of self-government and deprives the District of its ability
to raise essential revenues.’ By expanding a narrow re-
striction on this grant of self-government far beyond its
intended scope, the Court returns to Congress legislative
powers which it had plainly delegated to the District. The
Court’s decision obliterates carefully conceived taxing con-
cepts established by Congress for the District over 30
years ago and generates a serious dilemma by leaving the
District with an unequal and discriminatory taxing scheme.
' Nor is the impact of the decision limited to the shores of
the Potomac, for it affects attorneys, accountants, and other
professionals throughout the nation who are subject to tax-
ation for the privilege of operating a business in the Dis-
trict of Columbia.
This Court has not hesitated to exercise its certiorari
jurisdiction in cases involving the administration and in-
terpretation of District of Columbia statutes of major im-
portance. See, e.g., District of Columbia v. Thompson Co.,
346 U.S. 100 (1953) ; Shuttle Corp. v. Transit Comm’n, 393
U.S. 186 (1968) ; District of Columbia v. Murphy, 314 U. 8S.
441, 452 (1941) ; District of Columbia v. Pace, 320 U. S. 698
(1944) ; R. Stern and E. Gressman, Supreme Court Prac-
tice, 310 (4th ed. 1978). Measured by these standards,
there is ample justification for this Court’s review.
3 As a direct result of the Court’s decision, the District would lose more
than $40 million in tax collections, which it must refund, together with
interest, in fiscal 1980 to respondents. The decision also places a cloud over
the District’s authority to impose in the years ahead any tax, measured by
net income, on this class of taxpayers under the Self-Government Act. The
existence of “a question important to revenue” has been held by this Court
a factor to be considered in determining whether this Court should exercise
its jurisdiction. See Commissioner v. Standard Life & Acc. Ins. Co., 433 U.
S. 148, 151, and n. 5 (1977). When the other factors in the instant case are
considered in combination with the revenue loss to the District, the exercise
of this Court’s certiorari jurisdiction is fully justified.
7
I
This case turns on the scope of the organic Self-Govern-
ment Act, whereby Congress broadly delegated its power
to legislate for the District under articie I, section 8, clause
17 of the United States Constitution, while expressly re-
serving certain enumerated powers necessary for the pro-
tection of the federal interest in the Nation’s Capital. Cf.
District of Columbia v. Thompson Co., 346 U. S. 100, 109
(1953). In order to achieve the purpose of the Aet, to
grant self-government to the District and relieve Congress
of this legislative burden ‘‘to the greatest extent consist-
ent with the constitutional mandate’’ (\ 102), Congress
delegated the District authority over ‘‘all rightful subjects
of legislation.’’ § 302, D. C. Code, § 1-124 (Supp. V, 1978).
The decision of the Court of Appeals results in a serious
depreviation of self-government and a reimposition on Con-
gress of legislative functions that Congress delegated to
the District. Although Congress imposed certain limita-
tions on this broad grant of power in Title VI of the Act
(Reservation of Congressional Authority), Congress did
not intend that these limitations be invoked to return to it
the burden of legislating on matters logically within the
grant of self-government, at least to the extent that such
legislation does nothing more than a~ply concepts adopted
by Congress itself in antecedent enactments.
The particular legislative power involved in this case
is the most crucial power of any government—the power to
tax and raise revenues necessary to its exsitence.* Sub-
4The unincorporated business franchise tax on professionals is particularly
vital to the District of Columbia given the unique nature of the Nation's
Capital which does not permit heavy industry or other like revenue-generating
activities. Professional and personal service activities are among the top
revenue growth areas in the District of Colunbia. Given ‘he tax exempt
status of over 50% of the real property in the District of Columbia, and
the prohibition on extending the District’s personal income tax laws to non-
residents, which allows over 60% of the income of persons employed in the
District to escape local taxation, the tax base of the District is extremely
narrow. See District of Columbia Government, The Federal Payment FY
1981, 9-10 (1979).
8
ject to the limitations previously noted, the District has
statelike powers to impose taxes. District of Columbia v.
Thompsen Co., supra. In Alaska v. Arctic Maid, 366 U. S.
199, 202 (1961), in which the appellate court invalidated an
Alaska tax, this Court granted certiorari ‘‘because of the
importance of the ruling to the new State of Alaska.’’ Like-
wise, in Territory of Alaska v. American Can Co., 358 U.S.
224, 225 (1959), which involved a State tax, this Court
granted certiorari ‘‘in view of the fiscal importance of the
_ question to Alaska.’’ The ruling of the Court of Appeals
invalidating 1 tax on the ground that it is beyond the Dis-
trict’s newly conferred powers of self-government is no less
important to the District’s ability to govern itself and es-
tablish a sound revenue base essential to its economic
health.
This revision of the Self-Government Act’s allocation of
powers between the District Government and Congress
creates a gaping hole in the District’s franchise tax struc-
ture and generates an inequitable distribution of the tax
burden. As matters now stand, a preferred, exempt status
is granted to nonresident attorneys and other professionals
who practice in the District while all other businesses must
pay the franchise tax no matter where the proprietors re-
side. But, since these professionals are manifestly engaged
in the pursuit of local businesses and may now incorporate
with the advent of the Professional Corporation Act of
1971, there appears no just reason for construing the
Self-Government Act as mandating the continuance of their
exempt status; to do so would contravene the basic purpose
of the Act. This is particularly so in an era in which the
distinction between professional businesses and other busi-
nesses ‘‘has become an anachronism.’’ See Bates v. State
Bar of Arizona, 433 U. S. 350, 371-372 (1977).
In addition to presenting issues of fundamental im-
portance to the people of the District, this case has a signi-
ficant effect on residents of many States across the nation
9
who practice their professions in the District of Columbia.
See District of Columbia v. Murphy, supra. Respondents
are a class consisting of residents of these States who are
affiliated with legal, accounting, and other professional
firms with offices in the District.
The interjurisdictional importance of this case is also
clear from pertinent decisions of the courts in other juris-
dictions. As the Court of Appeals noted (App. 25a-27a),
the highest court of Maryland has held that the District’s
unincorporated business franchise tax is not a personal in-
come tax for purposes of allowing a Maryland taxpayer
a credit on his income tax return. See Gardella v. Comp-
troller, 231 Md. 1, 130 A. 2d 752 (1957). On the other hand,
a lower Virginia court reached an opposite result. See
Groom v. Forst, Cireuit Court, Arlington County, At Law
No. 18809 (filed March 30, 1978) (appeal pending). But
see Commonwealth v. Werth, 116 Va. 604, 82 S. E. 695
(1914).
Therefore, this case has consequences extending far be-
yond the District’s borders, illustrative of ‘‘the unusual
character of the National Capital’’ in a context which is
‘extremely important to the administration of the Dis-
trict’s tax laws.’’ See District of Columbia v. Murphy,
supra, 314 U.S. at 452; District of Columbia v. Pace, supra,
320 U. S. at 700. Review by this Court is most appropriate
in view of the immense impact of the Court of Appeals’
decision on the governmental rights of the District’s citi-
zens and the District’s fiscal stability.
II
In invalidiating the tax in question, the Court not only
violated the spirit and stated purpose of the Self-Govern-
ment Act, but also contravened its plain meaning and vio-
lated settled principles of statutory construction long rec-
ognized by this Court.
10
In holding that the District lacked the power to repeal
the exemption for professional businesses from the fran-
chise tax, the Court ignored critical words in § 602(a) (5)
and the relevant taxing scheme for construing those words.
Section 602(a)(5) of the Self-Government Act, D. C. Code,
§ 1-147(a)(5) (Supp. V, 1978), prov‘des that the District
may not:
* * * impose a tax on the whole or any portion
of the persunal income, either directly or at the
source thereof, of any individual not a resident of
the District (the terms ‘‘individual’’ and ‘‘resi-
dent’’ to be understood for the purposes of this
paragraph as they are defined in section 4 of the
District of Columbia Income and Franchise Tax
Act of 1947) * * *. [Emphasis added. ]
However, this restriction merely precludes the District
from imposing a tax on the personal income of individuals
who are not residents of the District. It plainly does not
prevent the District from imposing a franchise tax on un-
incorporated business entities for the privilege of doing
business in the District.
The explicit reference in § 602(a)(5) of the Self-Govern-
ment Act to the ‘‘District of Columbia Income and Fran-
chise Tax Act of 1947’’ makes clear that the conceptual
distinctions between personal income and franchise taxes
set forth in the 1947 Act were intended by Congress to re-
main controlling in construing that provision. See Posadas
v. National City Bank, 296 U. S. 497, 505 (1936). Yet the
Court, unlike the dissenting judge (App. 8a-12a), complete-
ly ignored the significance of this directly related and long-
standing taxing scheme specifically incorporated in § 602
(a)(5). Instead of utilizing that antecedent enactment and
interpretive decisions as an aid to construction of § 602(a)
(5), the Court relied on decisions of federal and state ap-
pellate tribunals construing completely different taxing
«1. es designed for different purposes. (App. 27a-29a).
11
In the District’s taxing scheme created by the 1947 Act,
Congress conceived the tax in question, not as a tax on
personal income, but as a privilege or franchise tax de-
signed to reach the business income of residents and non-
residents who conducted businesses or trades in the Dis-
trict of Columbia. And, in the same enactment, Congress
specifically distinguished the franchise tax from the tax
it imposed on the personal income of residents. 61 Stat.
349, D. C. Code, 1973, § 47-1580. See also H. R. Rep. No.
543, 80th Cong., Ist Sess. 2-4 (1947); S. Rep. No. 289, 80th
Cong., Ist Sess. 2-4 (1947). That distinction has been re-
peatedly reaffirmed by the United States Court of Appeals
for the District of Columbia Circuit in interpreting the
1947 Act. See District of Columbia v. Pickford, 86 U. S.
App. D.C. 17, 18-19, 179 F. 2d 271, 272-273 (1949). See
also District of Columbia ¥. Brady, 109 U. S. App. D. C.
324, 330, 288 F. 2d 108, 114 (1960) ; Smoot Sand and Gravel
Corp. v. District of Columbia, 104 U. S. App. D. C. 292, 261
F. 2d 758 (1958).5
In repealing the exemption for professional businesses,
the District did not alter the nature of the franchise tax
approved by Congress in 1947. On the contrary, consist-
ent with both the concepts and distinctions embodied in
the longstanding antecedent taxing scheme and the stated
purpose of the Self-Government Act to relieve Congress
of the burden of local legislation, the District filled a gap
in the local franchise tax structure, from which profes-
sionals had been exempted purely as a matter of legisla-
tive grace. That the District’s action did not exceed the
limitations imposed by § 602(a)(5) of the Self-Government
Act is further supported by the congressional. decision not
to disapprove the action following hearings on its validity
5 And as the dissenting judge noted (App. lla-12a), the conceptual distinc-
tion between en income tax and a franchise tax also finds clear support in
the decisions of this Court. See Pacific Co. Lid. v. Jonhson, 285 U. S. 480
(19382); Educational Films Corp. v. Ward, 282 U. S. 379 (1937); Home In-
surance Co. v. New York, 134 U. 8. 594 (1890).
RR ee FIO GP Lad
Se et
RN I INT TERE ELINA i Poi Ri
12 ge
pursnant to the unique review mechanism established in
the Self-Government Act. Jd., § 602(c), D. C. Code §1-
147(c) (Supp. V, 1978). See Hearings and Disposition be-
fore the Subcommittee on Fiscal Affairs of the Committee
on the District of Columbia of the House of Representatives
on H. Con. Res. 370 to Disapprove the D. C. Revenue Act
of 1975, 94th Cong., 1st Sess., Serial No. 94-5 (1975).
Viewed in this light, the construction given the general
language of § 602(a)(5) by the Court of Appeals reverses
over 30 years of congressionally established taxing distinc-
tions in clear contravention of principles of statutory in-
terpretation enunciated by this Court. This Court has re-
peatedly stressed that it will not infer from general statu-
tory phraseology that Congress intends to alter longstand-
ing and established legislative concepts unless Congress
expresses its decision to do so in unmistakable terms. See
Ozawa v. United States, 260 U. S. 178, 193-194 (1922);
United States v. American Trucking Ass’ns, 310 U. S. 534,
542-544 (1940); General Electric Co. v. Gilbert, 429 U. S.
125, 145 (1976).
The Court of Appeals, in its examination of the legisla-
tive history (App. 3a-4a), sets forth no congressional pro-
nouncement which spells out an intent to reconstitute the
the franchise tax as a tax on personal income with respect
to nonresidents who conduct professional businesses in the
District. Yet, this Court has observed that, ‘‘the plain
words and meaning of a statute cannot be overcome by a
legislative history which, through strained processes of de-
duction from events of wholly ambiguous significance, may
furnish dubious bases for inference in every direction.’’
See Gemsco, Inc. v. Walling, 324 U. S. 244, 260 (1945) ; com-
pare General Electric Co. v Gilbert, supra, 429 U.S. at
145.
But, in this case, there were words which were commonly
’
ny’ -stood, as the trial court noted, as well as extensive
13
legislative history. As noted by the dissenting appellate
judge (App. 13a), the legislative history demonstrates that
the prohibition contained in §602(a)(5) of the Self-
Government Act was aimed at the ‘‘commuter”’ and ‘‘re-
ciprocal’’ income tax proposals made by the District prior
to enactment of the Self-Government Act. These proposed
taxes were distinct and separate from the business and
franchise taxes challenged here. Congress rejected these
proposals in 1969 and 1971; and in 1973 it included § 602
(a)(5) in the Self-Government Act to prevent the newly-
created District Government, with greatly expanded legis-
lative powers, from enacting such income taxes on the
wages and personal income of nonresidents employed in
the District.®
The legislative history of the Self-Government Act also |
makes plain that Congress did not intend to place con-
straints on the District’s power to revise or extend the
franchise tax structure. The distinction between an across-
the-board tax on the personal income of nonresidents and
the business franchise taxation involved here, was clearly
articulated by Senator Eagleton, the principal Senate spon-
sor of thé Self-Government Act and Chairman of the Senate
District Committee. See 117 Cong. Rec. 35747 (1971).
6See Revenue Proposals: Hearings before the House Committee on the
District of Columbia, 91st Cong., Ist Sess. 12-13 (1969); D. C. Revenue
Proposals: Hearings before the Subcommittee on Fiscal Affairs of the Sen-
ate District of Columbia Committee on H. R. 12982, 91st Cong., Ist Sess.
171-172 (1969); District of Columbia Appropriations for 1972: Hearings be-
fore the House Subcommittee on Appropriations, 92nd Cong., Ist Sess., Part
1, 90 (1971); D. C. Appropriations: Hearings before the Senate Committee
on Appropriations, 92nd Cong., Ist Sess., Part I, 18 (1971); D. C. Revenue Act
of 1971: Hearings before the Senate District of Columbia Committee on
H. R. 11341, 92d Cong., Ist Sess. 195 (1971); 119 Cong. Rec. 33653, 42452
(1973). See also the debates on the 1947 Act for further evidence of the
problem with which Congress has been concerned for years and which Con-
gress reserved strictly to itself under the Self-Government Act: viz. placing
income taxes on the salaries and wages of the thousands of Federal Govern-
ment and congressional employees who work in the District but do not re-
side there. See 93 Cong. Rec. 6633-6655 (1947).
14
The decision of the Court of Appeals presents a glaring
inconsistency. For, if, contrary to what Congress spelled
out in the 1947 Act, a tax aimed at the business income of
locally practicing professionals is now to become a tax on
‘‘personal income,’’ the same may logically be said of any
tax measured by net income. Carried to its logical con-
clusion, the Court’s decision amounts to a recharacteriza-
tion of the District’s franchise tax, at variance with settled
rules of censtruction as they relate to longstanding con-
gressionally spproved taxation concepts. Indeed, given
the approach of the Court of Appeals in construing § 602
(a)(5) of the Self-Government Act, without due reference
to the 1947 Act, it is difficult to conceive how the District
may impose any kind of franchise tax on businesses con-
ducted by nonresident proprietors within its borders (cf.
App. 5a with App. 29a, 33a), except by shifting the burden
of local enactment back to Congress. Yet, as the dissenting
judge cogently observes (App. 12a), this class of businesses,
like all other businesses (whose nonresident owners are
incontrovertibly amenable to the franchise tax involved
here), has
* * * the privilege of deriving income from
sources within the District, while enjoying the use
of District facilities and reaping the benefits of
protective and environmental services. Certainly
the minimum return in the way of a franchise ex-
action is not too much to ask. * * *
These factors, viewed in light of the inequitable taxation
structure that results from the Court’s interpretation of
the Self-Government Act, and the devastating impact that
the Court’s decision has on the exercise of the revenue rais-
ing power so vital to the District Government under home
rule, and the unsupportable redefinition of the powers re-
served by Congress itself under the Self-Government Act,
surely present a question of sufficient substance and im-
portance to warrant review by this Court.
—, —_
~ ow Tee
15
CONCLUSION
Upon the foregoing, it is respectfully submitted that the
petition for a writ of certiorari should be granted.
JupitrH W. RocErs,
Corporation Counsel, D. C.
Ricuarp W. Barton
Deputy Corporation Counsel, D. C.
Appellate Division
Davip P. Sutton,
Assistant Corporation Counsel, D. C.
Ricwarp L. AcuGtia,
Assistant Corporation Counsel, D. C.
James C. McKay, JR.,
Assistant Corporation Counsel, D. C.
Attorneys for Petitioner,
District Building,
Washington, D. C. 20004
Telephone: 727-6248
eee
APPENDIX
INDEX TO APPENDIX
A
En Bane Opinion of District of
Columbia Court of Appeals ‘
Dated February 12, 1980 -.-...--.----------------------------- la
B
Order dated February 14, 1980,
Modifying En Bane Opinion ~~ 15a
C .
Opinion of the District of
Columbia Court of Appeals
Dated April 20, 1979 —....-.-------------------—---- 17a
Order and Opinion of the Tax Division
of the Superior Court of the
District of Columbia
Dated October 18, 1977 -...---------------------------—-- 34a
Ra caine lente ct tanec ante tnnnnemnt rnin 5da
|
Are. —
7 > —— a4 > 3
la
APPENDIX A
DISTRICT OF COLUMBIA COURT OF APPEALS
No. 12871
RICHARD A. BISHOP, APPELLANT,
Vv.
DISTRICT OF COLUMBIA, APPELLEE.
3 No. 12872
DISTRICT OF COLUMBIA, APPELLANT,
Vv.
RICHARD A. BISHOP, APPELLEE.
No. 12920
AXEL-FELIX H. KLEIBOEMER, APPELLANT,
V.
DISTRICT OF COLUMBIA, APPELLEE.
No. 12921
DISTRICT OF COLUMBIA, APPELLANT,
v. :
AXEL-FELIX H. KLEIBOEMER, APPELLEE.
On Petition for Rehearing En Banc
(Argued en bane October 15, 1979
Decided February 12, 1980)
John M. Bizler, with whom Ronald D. Aucutt was on
the brief, for Richard A. Bishop.
[285-A]
es \ a Oe ae
2a
Philip L. Kellogg, with whom James L. Lyons and
Bradley G. McDonald were on the brief, for Axel-Felix
H. Kleiboemer.
Judith W. Rogers, Corporation Counsel, with whom
Richard W. Barton, Deputy Corporation Counsel, Robert
E. McCally,* David P. Sutton, Richard L., Aguglia and
James C. McKay, Assistant Corporation Counsel, were on
the brief, for the District of Columbia.
Before NEWMAN, Chief Judge, and KELLY, KERN,
GALLAGHER, NEBEKER, HARRIS, MACK, FERREN
and PRYOR, Associate Judges, and PAIR, Associate
Judge, Retired.
Opinion for the court by Associate Judge KELLY.
Dissenting opinion by Associate Judge MACK at p. 6.
KELLY, Associate Judge: The arguments advanced by
the government in the en banc rehearing of this case do
not persuade this court to disturb ihe division’s holding
in Bishop v. District of Columbia, D.C.App., 401 A.2d
955 (1979), that Section 605 of the Revenue Act of
_ 1975" was an impermissible exercise of the District of
Columbia Council’s authority under § 602(a) (5) of the
Home Rule Act.?
Section 605 of the Revenue Act of 1975 repealed the
professional exemption to D.C. Code 1978, § 47-1574 (the
unincorporated business tax provision) and thereby im-
‘ The Revenue Act was enacted on October 21, 1975, as D.C.
Law No. 1-23.
? District of Columbia Self-Government and Governmental
Reorganization Act, Pub. L. No. 98-198, 87 Stat. 774 (1973)
(codified at D.C. Code 1978 Supp., §§ 1-121 to -171).
, [285-B]
3a
posed a tax on nonresident unincorporated professionals
and personal service businesses. The division concluded
that this repeal circumvented the intention of Congress,
as stated in the Home Rule Act, that: “The Council shall
have no authority ... to (5) impose any tax on the whole
or any portion of the personal income . . . of any in-
dividual not a resident of the District ....” D.C. Code
1978 Supp., § 1-147(a) (5). The division thus held that
the resulting tax on unincorporated professionals was not
a franchise or gross receipts tax but, rather, a tax levied
upon the personal income of “individuals who are pro-
fessionals and are not protected by the corporate veil... .”
Supra at 961.
We here underscore the division opinion’s holding with
several instructive comments from the legislative history
of the Home Rule Act that were drawn to our attention
on rehearing en banc; we also emphasize the limits of
that holding.
During the Senate hearings on the Home Rule Act,
in response to the query whether “the [Senate] Com-
mittee [on the District of Columbia] has eliminated any-
thing in regard to a commuter tax,” the Committee
Chairman, Senator Thomas Eagleton, responded, “Yes.
There is a specific prohibition as to the imposition of a
commuter tax, a reciprocal income tax, or any other tax
on nonresidents of the District of Columbia.” 117 Conc.
REC. 42498 (1971) (emphasis added).
Senator Charles Mathias elucidated the rationale for
enacting the prohibition found in § 602(a)(5) of the
Act: “The increased Federal payment [to the District]
also compensates for the Congress’ refusal to permit the
District to levy taxes on the income of nonresidents.” Jd.
at 42502.
[285-C]
4a
Senator Eagleton clearly distinguished the permissible
franchise tax from the impermissible commuter tax in
the October 12, 1971, debates on S. 2652:
For example . . . of utmost significance . . .
the present mayor-commissioner and council
have jurisdiction over taxes—to wit, the real
property tax. They can raise it or lower it.
As to all other taxes, including franchise taxes,
sales taxes, local taxes, that jurisdiction is in
Congress. We transfer the jurisdiction of taxa-
tion to the elected city council and to the elected
mayor——holding back, as I said before, the com-
muter tax. [117 Conc. REC., supra at 35747;
(emphasis added) .]
The remarks of Representative Breckenridge of Ken-
tucky, are particularly revealing on the question of con-
gressional intent: “I am concerned about the phrase,
‘personal income tax.’ I take it what we are driving at
here is precluding any tax which is based on a percentage
of income regardless of whether it is technically con-
sidered personal income . . . .” Congressman Gude of
Maryland (the House of Representatives proponent of the
amendment enacted as § 602(a)(5)) answered: “The
thrust of this amendment, the interpretation would be
that that would be included under this amendment. That
was the intent when the amendment was offered in the
Senate.” Background and Legislative History of H.R.
9056, H.R. 9682 and Related Bills Culminating in The
District of Columbia Self-Government and Governmental
Reorganization Act, ch. II (Dec. 31, 1974) 1126. H.R.
REP. No. 83-92, 92d Cong., Ist Sess. {1971).
The government cites Palmore v. United States, 411
U.S. 389, 395 (1973) for the proposition that we must
presume Congress “legislated with care” when it enacted
[285-D]
5a
§ 602(a), arguing that “had [Congress] intended to pro-
hibit the Home Rule Government from taking the action
in question, it would have said so expressly, and not left
the matter to mere implication.” District of Columbia
Petition for Rehearing En Banc at 7. We agree, and
reiterate our conclusion that Congress expressly and
specifically withheld the District of Columbia Council’s
authority to impose a tax on the income of nonresidents.
By enacting § 605 of the Revenue Act of 1975, which
repealed the professional exemption contained in § 47-
1574, the Council circumvented this express congres-
sional prohibition. Section 605 is therefore invalid.
The government also contends that the division opinion
“places other existing and proposed taxing measures of
the District Government under a cloud.” District of
Columbia Petition for Rehearing En Banc at 2. This
contention betrays a misunderstanding of our judicial
role. We did not, and as a nonlegislative body could not,
_ intend to instruct the District of Columbia Council as
to the relative propriety of alternative schemes for rais-
ing tax revenues. We are limited to deciding the case
before us. The division’s discussion of a gross receipts
tax, Bishop v. District of Columbia, supra at 966 et seq.,
was employed as an illustrative device, to contrast the
features of a gross receipts tax with those of a net in-
come tax. This discussion, therefore, should not be read
to either prescribe or proscribe the District of Columbia
Council’s adoption or continued imposition of a gross
receipts tax, or of any taxing measure other than the
one before the division at that time.
The division opinion, vacated June 11, 1979, is here-
by reinstated as the en banc opinion of the court.
So ordered.
[285-E]
6a
MACK, Associate Judge, dissenting: I agree with the
majority that the District of Columbia cannot levy a
tax upon the personal income of nonresidents. The ma-
jority apparently agrees with me that the District of
Columbia can levy a tax upon nonresident professionals
who operate an unincorporated business in the city. Hav-
ing agreed to this extent, we disagree. In my opinion the
majority’s rationale evidences a common, and understand-
able, failing of those of us whose lives have been shaped
in this federal city; in its preoccupation with what the
City Council cannot do, it has lost sight of what the
Council did, and what Congress, which has not been re-
luctant to say what the Council can or cannot do, has
chosen not to countermand.
The prohibition of § 602(a) (5) of the Home Rule Act!
is clear enough; Congress proscribed the imposition of
“any tax on the whole or any portion of the personal
income, either directly or at the source... of any in-
dividual not a resident of the District.” D.C. Code 1978
Supp., § 1-147(a) (5). But this provision, and its legis-
lative history, relied upon by both sides in this litigation,
address but one aspect of the total picture. We must look
to the challenged action of the Council—here the amend-
ment to Title VIII of the 1947 Revenue Act, a provision
specifically addressed to “Tax on Unincorporated Busi-
nesses.” Pub. L. No. 80-195, 61 Stat. 345 (codified at
D.C. Code 1973, § 47-1574). As the division opinion
adopted by the majority en banc points out ( Bishop v,
District of Columbia, D.C.App., 401 A.2d 955, 957
(1979) ), the purpose of this title was to “ ‘impose a tax
upon all business income which would be subject to the
? District of Columbia Self-Government aad Governmental
Reorganization Act, Pub. L. No. 93-198, 87 Stat. 774 (1973)
(codified at D.C. Code 1978 Supp., §§ 1-121 to 1-171).
[285-F]
7a
corporation franchise tax if incorporated, regardless of
whether the business is carried on by an individual, by
a partnership, or by some other unincorporated entity.’ ”
Id. at 957, quoting 16 DCRR § 307 p. 122.
What the City Council did in enacting § 605 of the
Revenue Act of 1975,? was to delete the last sentence
from this business tax provision which had heretofore
exempted certain professional and personal services en-
tities from its coverage.* The issue here cannot be as-
*D.C. Law No. 1-23, § 605 (codified at D.C. Code 1973,
§ 47-1547).
3’ The tax provision read as follows:
Title VIII.—Tax on Unincorporated Businesses
§ 47-1574. Definition of unincorporated business.
For the purposes of this subchapter (not alone of this
title) and unless otherwise required by the context, the
words “unincorporated business” means any trade or
business, conducted or engaged in by an individual,
whether resident or nonresident, statutory or common-
law trust, estate, partnership, or limited or special part-
nership, society, association, executor, administrator, re-
ceiver, trustee, liquidator, conservator, committee as-
signee, or by any other entity or fiduciary, other than a
trade or business conducted or engaged in by any corpo-
ration; and include any trade or business which if con-
ducted or engaged in by a corporation would be taxable
under sections 47-1571 and 47-157la. The words “unin-
corporated business” do not include any trade or business
which by law, customs, or cthics cannot be incorporated,
any trade, business, or profession which can be incorpo-
rated only under chapter 11 of title 29, or any trade or
business in which more than 80 per centum of the gross
income is derived from the personal services actually
rendered by the individual or members of the partnership
or other entity in the conducting or carrying on of any
trade or business and in which capital is not a material
income-producing factor. [Emphasis supplied to identify
deletion. }
[285-G]
8a
sessed without resort to a closer look at the scheme of the
taxing statute in question, which for close to thirty
years has been applied to residents and nonresidents alike.
1. The provisions of Title VIII of the 1947 Act are
explored in an early decision of this jurisdiction, District
of Columbia v. Pickford, 86 U.S.App.D.C. 17, 179 F.2d
271 (1949). The rationale of that decision is instructive
both as to the purpose of our unincorporated business tax
and its character as a franchise tax despite its levy on net
income. In holding that a nonresident owner of a hotel,
who leased the hotel to another, was not engaged in an
unincorporated business, the court said:
Title VIII of the statute levies the tax for the
privileges both of carrying on business and of
receiving income from sources within the Dis-
trict. But the ievy is upon the net income of an
unincorporated business only. The privilege of
receiving income from sources within the Dis-
trict, for which the statute imposes the tax, is,
under this statute, a privilege being exercised
by an unincorporated business. So, if there be no
“business” within the meaning of the statute,
there is no tax. [Jd. at 18, 179 F.2d at 272.]
The court made crystal clear the difference that the
statute makes between a tax levied on business income and
a tax levied on the personal income of an individual,
noting:
It is striking that this act does not levy a tax
upon nonresident individuals generally upon in-
come from sources within the District, as the
federal income tax law and the laws of many
states do in respect to nonresidents of their re-
spective jurisdictions. While Title VI [taxing
[285-H]
9a
income] is headed “Tax on Residents and Non-
residents”, the tax levied by it is upon residents
only, as that term is defined in the act. [Jd.]
With respect to the general scheme of our statute in
relation to nonresidents, the court added:
The scheme of the statute seems to be that non-
residents be taxed only upon income of a “busi-
ness”, and that tax is to be effected by a fran-
chise exaction. If this were not the scheme of
the statute, we see no reason for the elaborate
and precisely worded provisions to that effect
and the omission of any general levy upon non-
residents. There is a broad definition of resi-
dent, but, outside “he borders of that definition,
nonresidents seem to be untaxed except by way
of the franchise upon “unincorporated business”.
[(Id. at 19, 179 F.2d at 273.]
If we accept the precedential impact of the Pickford
decision (which it seems to me that the Division, at least,
was required to do)‘ three conclusions necessarily follow:
1) the tax to which appellants have been subjected by the
Council’s action is a franchise tax for the privilege of
doing business in the District of Columbia, 2) it is
properly imposed upon nonresidents, and 3) the fact that
it is imposed upon net income does not make it a per-
sonal income tax. The issue then becomes, not one of
whether the Home Rule Act prohibits the taxing of the
personal income of nonresidents, but whether a non-
resident engaging in professional practice in the District
may be an unincorporated business for the purpose of
the franchise tax. I suggest that there is no reason in
law or logic for concluding that a professional doing busi-
*M.A.P. v. Ryan, D.C.App., 285 A.2d 310 (1971).
[285-I]
ae
id,’
Poe
10a
ness in the District is not a business entity subject to a
franchise tax. It seems clear enough from the broadly
worded definition of unincorporated business in § 47-1574,
as well as the efforts of the Bar itself to maintain the
exemption for professionals, that the exemption was
granted by Congress purely as a matter of legislative
grace. Moreover, in view of this court’s careful dis-
avowal of any intent to imply that the District of Colum-
bia cannot impose an unincorporated business tax on non-
resident professionals, that would seem to be the end of
the matter.
2. If, however, the en bane majority is inclined to
ignore the teaching of Pickford that § 47-1574 properly
exacts a franchise from nonresidents based upon business
net income, I suggest it is in no better position. I, like
the majority, look to the method and effects of the tax
computation; I do: not find the incidents of a personal
income tax.’ Under the scheme, after normal business
deductions are subtracted from gross business earnings,
a salary allowance equal to 70% of the net income com-
puted without this deduction, plus a $2,500 exemption, are
permitted prior to imposition of the tax for calendar year
1975. (D.C. Code 1978, § 47-1557b(a) (15) and D.C.
Code 1978 Supp., § 47-1574c.) [It is this salary allow-
ance (or share thereof) plus the share of the exemption
that a District of Columbia resident reports on his per-
sonal income tax return.] Under the tax scheme of § 47-
1574, earnings or deductions that are not business related
5 As a result of the prior exemption of professionals from
the obligation of paying a tax for the privilege of doing busi-
ness in the District of Columbia, I fear that some have grown
accustomed to treating the whole of the business net income
as their personal income. The franchise tax 1..ust be viewed as
another business expense which must be deducted from busi-
ness income.
[285-J]
lla
are not computed as part of the gross income or allowable
expenses. The 70% salary allowance recognizes the legis-
lative deletion of personal income in a reasonable amount
from the imposition of the tax, leaving 30% of net resi-
dual business income less $2,500 as the measure of the
taxable business income. Payment of the tax is a joint
and/or several liability of the owners or managers. D.C.
Code 1973, § 47-1574d. For example, one partner could
be held liable for the entire business franchise tax, al-
though that payment has no relation to his personal earn-
ings. Id. Unlike a personal income tax, there is a mini-
mum tax liability of $25. Id. § 47-1574b.
The majority’s focus on the distinction between gross
receipts and net income says very little in light of the
purpose and scheme of § 47-1574. The object of the stat-
ute is not to tax the consumable wealth of nonresidents
but to levy a tax for the privilege of doing business here.
See District of Columbia v. Pickford, supra. In imposing
such a tax, a legislature may employ either a net income
approach or a gross receipts approach as a matter of
administrative convenience. Repeated holdings of the
Supreme Court recognize that there is a distinction be-
tween an income tax and a franchise tax imposed on the
privilege of doing business, even though the latter tax is
measured with reference to net income. See, e.g., Pacific
®The New Jersey legislature, in imposing an unincorpo-
rated business tax, noted:
The Committee considered using a net income approach
rather than gross receipts but concluded that such an
approach would be entirely too cumbersome considering
the low rates and yields involved. At the levels suggested,
it did not appear that a gross receipts approach would
be unduly burdensome. [Foosaner v. Director, Division
of Taxation, 58 N.J. 57, , 275 A.2d 129, 181 (1971).]
[285-K]
12a
Co., Ltd. v. Johnson, 285 U.S. 480 (1932) ; Educational
Films Corp. v. Ward, 282 U.S. 879 (1931) ; Home Insur-
ance Co. v. New York, 134 U.S. 594 (1890).
Moreover, the rationale of the majority reasoning ap-
pears to be clouded by preoccupation with notions of
franchise taxation as applied to corporations. Thus, it is
said ‘“[t]o the extent that we deal with individuals who
are professionals and are not protected by the corporate
veil, we must find that the tax burdens the taxpayer
personally.” Bishop v. District of Columbia, supra at
961. Following this reasoning, it does not appear to me
exactly why a nonprofessional engaged in an unincor-
porated business, and likewise not protected by a cor-
porate veil, would not be equally burdened. And therein,
it seems to me lies the danger of the majority’s holding;
it makes the District of Columbia franchise statute vul-
nerable to attack by others on constitutional grounds.’
It gives preferential treatment to nonresident profession-
als. Yet both professional and nonprofessional residents
and nonresidents alike enjoy the privilege of incorporating
a business. See District of Columbia Professional Cor-
poration Act, Pub. L. No. 92-180, 85 Stat. 576 (codified
at D.C. Code 1973, § 29-1101 et seg.). Similarly, all have
the privilege of deriving income from sources within the
District, while enjoying the use of District facilities and
reaping the benefits of protective and environmental
services. Certainly the minimum return in the way of a
franchise exaction is not too much to ask. As the New
7I find it somewhat disingenuous for the taxpayers here
to argue that nonresidents are denied equal protection by
the Council’s action because residents may receive tax credit
when filing District of Columbia personal income tax re-
turns. Obviously the District of Columbia has no control over
te tax credits neighboring jurisdictions extend to their
residents.
[285-L]
13a
Jersey Supreme Court has noted, in quoting from a
legislative report with respect to an unincorporated busi-
ness statute, and in holding that lawyers were subject
to the tax: §
This tax does not represent a major revenue
source under the Committee’s proposal. It
could be eliminated easily through an adjust-
ment of the rates from the other three tax
sources. The Committee concluded, however, that
such a tax was desirable because it would re-
tain within the tax umbrella certain elements of
the business commurity which would otherwise
escape all or most business taxes. This is par-
ticularly true of professional and service areas.
[Foosaner v. Director, Division of Taxation, 58
N.J. 57, , 275 A.2d 129, 181 (1971) (em-
phasis in original) .]
3. Underlying all of this discussion is the indisputable
fact that the Home Rule Act does not prohibit the Coun-
cil from legislating with respect to a franchise tax. The
reference to a “commuter” tax only triggers an emotional
response and obscures the issue. The Corporation Coun-
sel, in its supplemental brief on rehearing en banc, has
meticulously set forth the specific proposals introduced
in at least four sessions of Congress (90th, 91st, 92nd,
93rd) which, in dealing with such measures as reciprocal
income tax provisions, constitute the true reasons for
commuter tax concerns at the time of the passage of
Home Rule. In my view, these concerns have nothing to
do with the privilege of conducting a business in the
District of Columbia, as the reasoning of Pickford makes
8 See also Shapiro v. New York, 32 N.Y.2d 96, 296 N.E.2d
230, 343 N.Y.S.2d 323 (1973), holding that professionals are
properly subjected to a business income tax.
[285-M]
l4a
clear. I submit there is an appreciable difference between
taxing the personal income of a federal (or district)
employee or official, who comes from a neighboring juris-
diction into the city to work in a defined enclave at a
fixed salary paid by the government, and the levying
of a tax on a business owned and operated by a nonresi-
dent who derives a source of income from within the
city itself.
4. Followed to its logical conclusion, what the court
does today is to strike down the validity of the Council’s
action only as to nonresident professionals, since it is not
questioned that resident professionals can be taxed even
if it were true that “personal income” was involved. Not
only does the court’s action deprive the District of Colum-
bia of revenue from the very persons who are the most
likely candidates to pay for doing business in the city,
contrary to all principles of taxation, but the decision also
forecasts the beginning of what may be an administrative
quagmire.
I would affirm the order of the trial court denying the
taxpayers’ petitions for refunds.
[285-N]
15a
APPENDIX B
DISTRICT OF COLUMBIA COURT OF APPEALS
No. 12871, 12872, 12920, 12921
_ TAX 2362
Ricuarp A. Bisnop, Appellant,
v.
District or CotumsBia, Appellee.
District or Cotumsia, Appellant,
Vv.
Ricuarp A. Bisuop, Appellee.
TAX 2379
AxeEL-Feuix H. KiLerpoemer, Appellant,
Vv.
District or CotumBtia, Appellee.
District or Cotumsta, Appellant,
v.
AxeL-FEe.ix H. KLerpoemer, Appellee.
Berore: Newman, Chief Judge, Kelly, Kern, Gallagher,
Nebeker, Harris, Mack, Ferren and Pryor, As-
sociate Judges, and Pair, Associate Judge, Re-
tired.
ORDER
In the above case, the last paragraph on page 285-E of
the opinion of February 12, 1980, shall be deleted, and the
following inserted in lieu thereof:
16a
The division opinion, vacated June 11, 1979, is
hereby reinstated and, with this elaboration, con-
stitutes the en banc opinion of the court.
Per CuRIAM.
Copies to:
HonoraB_eE JOHN GARRETT PENN
Clerk, Superior Court
Joun M. Brxuer, Esquire
Ronatp D. Aucutt, Esquire
1700 Pennsylvania Avenue, N.W.
Washington, D. C.
Rocer C. Outricu, Esquire
910 17th Street, N.W., Suite 300
Washington, D. C. 20006
Purp L. Keiioce, Esquire
James L. Lyons, Esquire
1776 F Street, N.W.
Washington, D. C. 20006
Brap.tey G. McDonatp, Esquire
1701 Pennsylvania Avenue, N.W.
Washington, D. C. 20006
Ricuarp W. Barton, Esquire
Deputy Corporation Counsel.
17a
APPENDIX C
DISTRICT OF COLUMBIA COURT OF APPEALS
No. 12871
RICHARD A. BISHOP, APPELLANT,
V.
DISTRICT OF COLUMBIA, APPELLEE.
No. 12872
DISTRICT OF COLUMBIA, APPELLANT,
v.
RICHARD A. BISHOP, APPELLEE.
No. 12920
AXEL-FELIX H. KLEIBOEMER, APPELLANT,
V.
DISTRICT OF COLUMBIA, APPELLEE.
No. 12921
DISTRICT OF COLUMBIA, APPELLANT,
v.
AXEL-FELIX H. KLEIBOEMER, APPELLEE.
[883]
18a
Appeals from the Superior Court of the
District of Columbia
(Hon. John Garrett Penn, Trial Judge)
(Argued May 10, 1978 Decided April 20, 1979)
John M. Bixler, with whom Ronald D. Aucutt, was on
the briefs and supplemental memorandum of Richard A.
Bishop.
Philip L. Kellogg, with whom James L. Lyons and
Bradley G. McDonald, were on the briefs and supplemen-
tal memorandum of Axel-Felix Kleiboemer.
Louis P. Robbins, Acting Corporation Counsel, with
whom John R. Risher, Jr., Corporation Counsel at the
time the briefs were filed and the case was argued,
Robert E. McCally, Deputy Corporation Counsel, Henry
E. Wixon and Richard L. Aguglia, Assistant Corporation
Counsel, were on the briefs and supplemental memoran-
dum for the District of Columbia.
Roger C. Ohlrich, Edward M. Iuria and Gregory
Burr Macaulay, filed a brief on behalf of the Bar Asso-
ciation Amicus Curiae.
Before KELLY and GALLAGHER, Associate Judges, and
Pair, Associate Judge, Retired.
KELLY, Associate Judge: On June 24, 1975, the Dis-
trict of Columbia Council (hereinafter the Council), pur-
suant to the District of Columbia Self-Government and
Governmental Reorganization Act (hereinafter the Home
[884]
19a
Rule Act),’ adopted the Revenue Act of 1975 (subse-
quently enacted as D.C. Law No. 1-23). The Act was
signed by the Mayor and sent to both Houses of Congress
for a 30-day review in accordance with § 602(c) (1) of
the Home Rule Act.? It was not disapproved by a con-
current resolution and consequently became effective Oc-
tober 21, 1975.
The focus of the instant case is the validity of § 605 of
the Revenue Act, codified at D.C. Code 1973, § 47-1574 *
(hereinafter the tax, the professional tax, or the unin-
corporated business tax), which repealed an existing “pro-
fessional exemption,” thereby allowing the District of
Columbia to impose an unincorporated business tax upon
unincorporated professionals and personal service busi-
nesses.‘ Appellant Bishop, a Virginia resident practicing
1 District of Columbia Self-Government and Governmental
Reorganization Act, Pub. L. No. 98-198, 87 Stat. 774 (1973)
(codified at D.C. Code 1978 Supp., §§ 1-121 to -171).
* Section 602(c)(1) provides that no act of the Council
“shall take effect until the end of the 30-day period” after it
has been transmitted to Congress “and then only if during
such 30-day periv:: both Houses of Congress do not adopt a
concurrent resolution disapproving such act.” Pub. L. No.
93-198, 87 Stat. 813 (codified at D.C. Code 1978 Supp., § 1-
147).
*For the sake of clarity and uniformity, all subsequent
references to the tax will be cited to the D.C. Code. When
discussing the extension of the tax to professionals, we cite
to the Revenue Act (of 1975).
* Section 47-1574 was also the subject of litigation in two
prior cases filed in the District of Columbia Courts. In the
first case filed, Committee for Fair Taxation of Professionals
v. District of Columbia, Civil Action No. 11269-75 (Sup. Ct.
Feb. 14, 1977), a group of nonresident professionals sought
declaratory and injunctive relief, claiming that § 47-1574
Was an unauthorized exercise of the legislative powers of the
Council and that it violated various provisions of the Consti-
[885]
20a
law in the District of Columbia, and appellant Klei-
boemer,’ a Maryland resident also practicing in the Dis-
trict of Columbia, paid the District’s unincorporated
business tax for their respective 1975 calendar years,
pursuant to § 47-1574. Appellants subsequently claimed
a refund, and following denial of their claims at the
administrative level, filed petitions for refunds in the
Tax Division of the Superior Court, where their petitions
were consolidated for trial.
On October 18, 1977, the trial court denied appellants’
requests for refunds and dismissed their petitions with
prejudice. It thereafter, sua sponte, ordered a rehearing
on the provisions of tne Act setting the effective dates of
imposition of the tax. In a supplemental opinion dated
October 27, 1977, the trial court held that imposition of
the tax on members of the same class according to their
respective tax years, calendar or fiscal, discriminated
tution. On April 15, 1976, the District’s motion for summary
judgment was granted and the suit was dismissed. An appeal
was taken but subsequently dismissed by consent of all parties
as a result of the filing of the appeal in the instant case.
In the second case, Commonwealth of Virginia v. District
of Columbia, Civil Action No. 76-0533 (D.D.C. June 1, 1976),
the Commonwealth of Virginia, as parens patriae, brought a
declaratory judgment action against the District of Columbia
to have the professional tax declared void and unenforceable,
stating the same claims as those raised in the Committee suit.
On June 1, 1976, the Commonwealth’s complaint was dis-
missed and on June 22, its motion to vacate and reconsider its
order and for a rehearing was denied. No appeal was taken.
5 Appellant Kleiboemer’s suit was brought as a class action
on behalf of all nonresident professionals subject to the tax
in question. On October 17, 1977, the case was certified as a
class action on behalf of all nonresident professionals sub-
ject to the tax and who had paid the tax, except for appellant
Bishop.
[886]
21a
against the calendar year taxpayers in favor of the fiscal
year taxpayers. Accordingly, the court fixed the time for
the start of tax liability for all members of the class as
of December 1, 1975—the earliest date on which the tax
would apply to all taxpayers using the latest (December
through November) fiscal year—and ordered the appro-
priate refunds to the class of affected taxpayers.
Appellants Bishop and Kleiboemer appealed the trial
court’s order of October 18; the District of Columbia
cross-appealed the October 27 supplemental order.* Ap-
pellants contend on appeal that the professional tax (1)
is an unauthorized exercise of the legislative powers of
the Council under the Home Rule Act; (2): is in violation
of several provisions of the United States Constitution;
and (3) does not comply with the notice requirements of
the Home Rule Act and City Council Resolution 1-1-2.
Appellee argues that the trial court improperly held that
the effective date provisions of the Act discriminate
against calendar year taxpayers in favor of fiscal year
taxpayers. For the reasons which follow, we reverse.
Appellants’ initial challenge to § 47-1574 is that it is
an ultra vires measure, enacted by the Council in vio-
lation of its delegated powers. Thus, the central issue is
whether that section violates the limitation imposed on
the legislative authority of the Council by § 602(a) (5)
of the Home Rule Act (codified at D.C. Code 1978 Supp.,
§ 1-147(a) (5)), which provides in pertinent part: ©
The Council shall have no authority .. . to
* * * *
* Throughout this opinion, reference to appellants means
appellants Bishop and Kleiboemer.
[887]
22a
(5) impose any tax on the whole or any portion
of the personal income, either directly or at the
source thereof, of any individual not a resident
of the District ....
The question is whether § 47-1574 imposes a tax on the
personal income of nonresidents or whether the tax is
levied on something other than income (e.g., the privilege
of doing business in the District). If the former is the
case, the law is an impermissible exercise of the Council’s
legislative authority in the area of taxation and must be
declared invalid.
The District of Columbia Revenue Act of 1947, Pub. L.
No. 80-195, 61 Stat. 398, enacted by Congress on July 16,
1947, imposed, inter alia, a tax on incorporated and un-
incorporated businesses for the privilege of carrying on a
trade or business within the District and of receiving
income from sources within the District. D.C. Code 1973,
§§ 47-1571la, -1574b. The purpose of the unincorporated
tax was to
impose a tax upon all business income which
would be subject to the corporation franchise
tax, if incorporated, regardless of whether the
business is carried on by an individual, by a
partnership, or by some other unincorporated
entity. [Section 8-1(b) of the Regulations of
the Government of the District of Columbia,
promulgated August 28, 1947 (Title 16, DCRR
Part 307, p. 122).]
In defining the term “unincorporated business,” however,
Congress excluded a trade or business
which by law, customs or ethics cannot be in-
corporated . .. or any trade or business in
which more than 80 per centum of the gross in-
[888]
23a
come is derived from the personal services ac-
tually rendered by the individual or members of
the partnership or other entity in the conducting
or carrying on of any trade or business and in
which capital is not a material income produc-
ing factor. [See D.C. Code 1973, § 47-1574.]
When the Professional Corporation Act (P.L. No. 92-180,
85 Stat. 576 (1971)) was enacted, the D.C. Income and
Franchise Act was amended to maintain the exemption
for unincorporated professional associations. The legis-
lative history indicates the following concerns underlying
preservation of the exemption at that time:
[rJepresentatives of the Bar Association, for
example, stated they have opposed previous at-
tempts to repeal this exemption on essentially
two grounds. Both the States of Maryland
and Virginia grant a credit to their residents
for income taxes paid to another jurisdiction on
income generated in that jurisdiction. The Dis-
trict unincorporated business tax does not quali-
fy for this credit since it is a franchise tax
rather than an income tax. Accordingly, the
professional who resides in Maryland or Vir-
ginia and conducts his practice in the District
would, if his present tax exemption were re-
moved, be subject to double tax on the net in-
come for his practice. [H.R. REP. No. 92-508,
92d Cong., 1st Sess. (1971) at 4 (emphasis sup-
plied) .]
Section 605 of the Revenue Act of 1975 repealed this
professional exemption (by deleting the second sentence
[889]
ee
24a
of § 47-1574),” thereby allowing the District of Columbia
for the first time to impose the unincorporated business
tax upon unincorporated professionals and personal serv-
ice businesses, which, by their nature, do not require a
physical nexus with the District in order to do business
in the District. Therefore, the tax on the income of un-
incorporated businesses suddenly burdened the personal
income of thousands of previously untaxed individuals
who do not reside in the District. The issue is does this
tax, in light of its incidents and effects, circumvent the
stated intention of Congress.
Although the legislative history of § 602(a) (5) of the
Home Rule Act (codified at D.C. Code 1978 Supp.,
§ 1-147(a) (5)), is slight, we do know that by adopting
the provision, Congress intended to prevent the District
from enacting a commuter tax. STAFF OF THE SENATE
COMM. ON THE DISTRICT OF COLUMBIA, 93RD CONG., 1ST
SESS., LEGISLATIVE HISTORY OF THE DISTRICT OF COLUM-
BIA SELF-GOVERNMENT AND GOVERNMENTAL REORGANI-
ZATION ACT 1469-70 (Comm. Print 1974). A commuter
* That sentence read:
The words “unincorporated business” do not include
any trade or business which by law, customs, or ethics
cannot be incorporated, any trade, business, or profession
which can be incorporated only under chapter 11 of title
29, or any trade or business in which more than 80 per
centum of the gross income is derived from the personal
services actually rendered by the individual or members
of the partnership or other entity in the conducting or
carrying on of any trade or business and in which capital
is not a material income-producing factor.
8 “The Bill] states there shall not be a commuter tax, and
it is very plain. Until Congress repeals this there shall not be
a commuter tax.” Jd. at 1469 (Statement of Rey. Rees, D.
Calif.).
[890]
Hi en I a at
Bote et
25a
tax, loosely defined, is a levy by a jurisdiction upon in-
dividuals who do not live in that jurisdiction but work
there on a daily basis.° Although the levy could, con-
ceptually, attach to any basis, Congress specifically pro-
vided in the act that the District of Columbia could enact
no tax which levied upon personal income of nonresidents.
In terms of art,” Congress’ proscription meant that no
- commuter tax could be levied on net income.
The general definition of commuter tax presented above
is, by necessity, overbroad. Indeed, it is the breadth of
such a tax which presents us with problems here. Were
the commuter tax a simple, discernible fiscal tool, we
could simply look to the incidents of the tax and determine
if they were on all fours with the tax presented here.
Since such an endeavor is not possible, we must accept at
their literal meaning the words Congress chose to use in
prohibiting the commuter tax, namely, a “tax ... on
personal income” of nonresidents. In doing so, we can
come to no conclusion other than that the professional
tax is such a tax.
A conflict of authority presently prevails in neighboring
jurisdictions as to whether this tax is an income tax.
Compare Gardella v. Comptroller of Maryland, 218 Md.
° Of course, if there is a sufficient nexus between that in-
dividual and the jurisdiction, such as a corporation which
does business exclusively within the jurisdiction, then the tax
is no longer a commuter tax. For that and other obvious
reasons, a commuter tax could be levied only on natural
persons.
10 Absent a succinct statement of congressional intent to the
contrary, we interpret the words “impose a tax on the per-
sonal income of . . . nonresidents” by reference to their
technical meaning as accepted by the courts, legislatures, and
the tax bar.
[891]
26a
1, 180 A.2d 752 (1957), with Groom v. Forst, At Law
No. 18809 (filed March 30, 1978) (aff'd on rehearing
mem., Oct. 28, 1978). The issue in both Gardella and
Groom was whether the tax paid pursuant to § 47-1574
was an “income tax” paid to a foreign jurisdiction. As
an income tax, the amount paid to another state can be
taken under both Maryland and Virginia law as a direct
credit against income taxes paid to them. See Md. Code
1951, § 81-286(h); Va. Code 1974, § 58-151.015. Al-
though both the Gardella and Groom courts addressed the
threshold characterization question that we face herein—
income versus franchise—those courts came to opposite
conclusions. In Gardella, the Maryland Court of Appeals
ruled that the unincorporated business tax is not an
income tax; in Groom, the Circuit Court of Arlington
County, Virginia, ruled that that same unincorporated
business tax, as applied to professionals, is an income
tax." The Groom court based its ruling on the fact that
the tax “seeks out a net gain or profit.” As the court
stated:
Although this Congressional prohibition
[§ 602(a) (5) ] has served to protect nonresidents
of the District of Columbia who are salaried
employees or wage earners from D.C. income
taxes, the removal of the exemption . . . by the
D.C. Council had the effect of subjecting all per-
sons engaged in business, self-employed trades
or professional occupations to the same tax in
The question of whether the unincorporated business tax
as applied to professionals is in violation of the Home Rule
Act was not before the Virginia court and was not addressed
by that court. The sole issue in Groom was whether the Vir-
ginia taxpayer was entitled to a credit against his Virginia
taxes.
[892]
—
‘ a EE i
27a
another guise. [Groom v. Forst, supra at 3
(emphasis supplied) .]
As to the characterization of a tax, it is fundamental
that the nature and effect of a tax, not its label, de-
termine if it is an income tax or not. E.g., Dawson v.
Kentucky Distilleries, 255 U.S. 288, 292 (1921); Com-
missioner v. American Metals Co., 221 F.2d 184, 187
(2d Cir.), cert. denied, 350 U.S. 829 (1955); New York
and Honduras Rosario Mining Co. v. Commissioner, 168
F.2d 745 (2d Cir. 1948). While it is true that mere
legislative designation that a tax is of a particular char-
acter is not controlling,” that designation is entitled to
much weight. County Commissioners of Anne Arundel
County v. English, 182 Md. 514, 522, 35 A.2d 135, 148
(1943) ; accord, Flint v. Stone Tracy Co., 220 U.S. 107
(1910).
The District of Columbia Code calls this tax an un-
incorporated business franchise tax. Even if we were to
find that in form and substance the unincorporated busi-
ness tax is a franchise tax, however, our inquiry would
not stop there. Franchise taxes can be considered prop-
erty taxes, excise taxes, gross income taxes, and most
importantly, income taxes,“ depending on the incidents of
taxation. While thirty-one states and this jurisdiction
levy a franchise tax, [1958 All States] State Tax CAs.
Rep. (C.C.H.) 700, some levy that tax on an annual
basis, some on an initial basis; some measure the tax on
the basis of gross income, some on the basis of net in-
“ This is particularly true when it is apparent that the tax
at issue cannot be so designated consistently with the meaning
and effect of the Act. See Flint v. Stone Tracy Co., 220 U.S.
107, 145 (1910).
18 See the discussion of the distinction between gross income
taxes and (net) income taxes, infra.
[893]
28a
come; some merely assess a flat fee. Therefore, Pennsyl-
vania’s tax on the capital stock of domestic corporations
was termed a property tax. Commonwealth v. Standard
Oil Co., 101 Pa. 119 (1882). In similar fashion, the
Supreme Court of Minnesota has held that its franchise
tax is an ad valorem property tax, the value of the prop-
erty being measured by the net income of the corporation.
The Pullman Co. v. Commissioner, 223 Minn. 96, 25
N.W.2d 838 (1947). In Republic Acceptance Corporation
v. DeLand, 275 F. 632 (E.D. Mich. 1921), the United
States District Court held that Michigan’s franchise tax
was in actuality an excise tax. Other jurisdictions have
likewise styled their tax a franchise tax only to have the
courts intercede to reclassify the tax. See, e.g., Gaulden
v. Kirk, 47 So.2d 567 (Fla. 1950) (privilege tax was an
excise tax) ; State ex rel. McKay v. Keller, 140 Fla. 346,
191 So. 542 (1939) (license tax was an income tax) ;
Commissioners of Sinking Fund v. Howard, 248 S.W.2d
340 (Ky. 1952), aff'd, 344 U.S. 624 (1953) (occupational
license tax was an income tax); City of Louisville v.
Sebree, 308 Ky. 420, 214 S.W.2d 248 (1948) (license fee
was an occupation tax) ; Carter Carburetor Corp. v. City
of St. Leuis, 356 Mo. 646, 203 S.W.2d 438 (1947) (earn-
ings tax was an income or an excise tax).
The impact of this judicial reclassification is most tell-
ing when viewed in terms of the gross receipts/net in-
come distinction. A tax on gross receipts is not the same
as a tax on net income. The former contemplates an
annual levy on the total receipts of the taxpayer, regard-
less of the cost of attaining those receipts. Cf. North-
west Lumber Co. v. Wisconsin Tax Commissioner, 202
Wis. 372, 231 N.W. 865 (1930) (income taxes are as-
sessed on actual profit or loss); People ex. rel. Klauber
v. Wendell, 196 App. Div. 827, 188 N.Y.S. 301, aff'd,
232 N.Y. 549, 184 N.E. 567 (1921) (income tax on
[894]
29a
gains from sale or disposition, levied only if there is an
actual gain or profit). The latter denotes gross income
less certain deductions. Doyle v. Mitchell Bros. Co., 247
U.S. 179 (1918) ; People ex. rel. Standard Oil Co. of New
York v. Law, 287 N.Y. 142, 142 N.E. 446 (1923). But
see Jones v. United Artist Corp., 305 U.S. 410 (1939)
(gross income tax levied on income less deductions al-
lowed by statute).
The distinction between a tax on gross receipts and
one on net income is important. When a jurisdiction taxes
net income, it does so, in effect, because its object is to
raise revenue by taxing the consumable wealth of its
taxpayers. See generally Andrews, Personal Deductions
in an Ideal Income Tax, 86 Harv. L. REv. 309 (1967),
discussed in Comment, Tax Policies in Relation to Non-
business Legal Expenses and Prepaid Legal Services, 26
Am. U.L. REv. 451, 491-93 & n.236 (1977) [hereinafter
cited as Tax Policies]. Moreover, it seeks to serve auxili-
ary purposes such as redistribution of wealth, equaliza-
tion of consumption, and taxation of the ability to pay.
E.g., Tax Policies, supra at 491-93. One thing is clear, a
net income tax seeks to tax only disposable income. See,
e.g., id. at 486; I.R.C. §§ 162(a), 212.
A tax on gross receipts offers a very different result.
Since a gress receipts tax can be collected even if the
taxpayer has no funds remaining, after legitimate ex-
penses, with which to pay the tax, the tax cannot be one
on personal wealth. Rather a gross receipts tax is levied
for the purpose of either taxing a privilege, such as the
right to do business,“ or simply raising revenue, as in
the case of the sales tax.
%4In this respect, a gross receipts tax is similar to an
annual graduated license fee based on the amount of business
done as measured by gross receipts.
[895]
30a
The Court of Appeals of Maryland called the District
of Columbia Unincorporated Business Tax a franchise
tax. Gardella v. Comptroller of Maryland, supra. Vir-
ginia calls it an income tax. Groom v. Forst, supra.
New York treats both its franchise” and its unincor-
porated business tax as income taxes. People ex. rei.
Froelick v. Graves, 259 App.Div. 30, 18 N.Y.S.2d 418
(1940) (unincorporated business tax); People ex. rel.
Alpha Portland Cement Co. v. Knapp, 230 N.Y. 48, 129
N.E. 202 (1920) (franchise tax). Consonant with the
analysis presented above, we agree with New York and
Virginia.
The court in Gardella relied heavily on the decision in
Keasbey & Mattison Co. v. Rothensies, 183 F.2d 894 (3d
Cir.), cert. denied, 320 U.S. 739 (1948). In a much
quoted passage, the court there stated:
The Supreme Court, without advancing any pre-
cise definition of the term “income tax,” has un-
mistakably determined that taxes imposed on
subjects other than income, e.g., franchises,
privileges, etc., are not income taxes, although
measured on the basis of income. [Jd. at 897].
We can, and do, agree with that language and still hold
that the D.C. unincorporated business tax is an income
tax. The court in Keasbey noted the same distinction that
we note here: a tax on gross receipts is not an income
tax; a tax on net income is so, regardless of its nomen-
clature. Id. at 898." f
* The District of Columbia corporate franchise tax im-
plicitly has been treated, by this court, as an income tax. See
Jantzen, Inc. v. District of Columbia, D.C.App., 395 A.2d 29,
31 (1978).
The court implicitly drew this distinction. In holding
that the tax contained in the Quebec Mining-Act was not an
income tax, the court noted:
[Continued]
[896]
3la
The professional tax, by its very terms, is a tax on net
income. D.C. Code 1978, § 47-1574a defines taxable in-
come, for purposes of the tax on unincorporated busi-
nesses, as “the amount of net income derived from sources
within the District . . . in excess of the exemption granted
by section 47-1574c (emphasis added).” Net income is
defined in D.C. Code 1973 and 1978 Supp., §§ 47-1557 to
-1557b. Cf. D.C. Code 1978 Supp., § 47-1557b(b) (5)
(disallowing the deductions allowed ir subsection (a) for
individuals who share in the net income of an unincor-
porated business and who have used those deductions in
determining the net income of the unincorporated busi-
ness). :
Appellee would have us hold that this tax is a tax on
the right to earn income in the District, measured by the
amount of income earned, and nothing more. That argu-
ment would be persuasive if the incident of this tax were
the right to do business. Were such the case, the tax
would be levied upon any act of earning income, regard-
less of any other consideration. Since a nonresident
could earn substantial income within the District, but
because of business expenses, medical expenses, interest
payments, and the like, pay very little tax,” it cannot
1° [Continued]
It is significant that the allowable deductions are re-
stricted to the costs actually incurred in the mining
operation and nothing more. The expenses incident to the
general conduct of the business, as distinguished from
the costs incurred in the mining operation, are not de-
ductible. [Keasbey & Mattison Co. v. Rothensies, supra
at 898.]
The restricted nature of the allowable deductions demon-
strated Quebec’s desire to tax the output of the mines and not
the wealth of the corporation.
** The minimum tax payable is $25. Appellee urges that to
the exteni some tax is payable even if no profits are earned,
[897]
32a
be said that the tax falls solely on the right to earn in-
come within the District.
Appellants cite a long line of cases and revenue rulings
in support of their position that the tax is an income
tax. E.g., Commissioner v. American Metal Co., supra;
New York & Honduras Rosario Mining Co. v. Commis-
sioner, supra; Rev. Rul. 435, 1974-2 C.B. 204; Rev. Rul.
588, 1973-2 C.B. 268. In addition, they highlight the his-
torical aspects of the tax for the proposition that it was
intended to tax personal income. While we find the for-
mer argument more persuasive than the latter, the result
is, nonetheless, that this tax is levied upon net income.”
the tax has thé attributes of a franchise tax. While we agree
that. a.flat fee would not violate the Home Rule Act, we cannot
agree that the single provision for a minimum payment can
sustain this tax. By design and in practice, the tax vests on
net income; in only exceptional circumstances would the tax
liability be assessed by any other measure.
48 The scheme of the tax further demonstrates its nature as
a personal net income tax. In order to determine taxable in-
come, the taxpayer first must determine the gross income of
the unincorporated business. From that amount, the taxpayer
may exclude items designated as excludable in D.C. Code 1973
& 1978 Supp., § 47-1557a, and deduct amounts allowable under
D.C. Code 1973 & 1978 Supp., § 47-1557b, with the exception
of the reasonable wages deduction found in D.C. Code 1978
Supp., § 47-1557b (a) (15). The taxpayer then takes his wages
paid deduction, which cannot be greater than 70% of net in-
come computed without this deduction. Jd. Since the tax is on
unincorporated businesses, and is therefore in reality a tax
on the associates or partners who run the business, D.C. Code
1973, § 47-1574d, see discussion infra, the computation of
wages paid is usually artificial. The figure thus derived is
called net income. Taxable income is ascertained by reducing
net income by a set exemption of $2,500 for a personal service
organization (as defined by the code) or $5,000 for all other
unincorporated businesser. D.C. Code 1978 Supp., § 47-1574e.
The tax liability is determined by taking a set percentage
[898]
nal Sire en ABD Sine nO
33a
The tax is levied upon personal income. If we dealt
here with a corporate franchise tax, the result would be
different. To the extent that we deal with individuals
who are professionals and are not protected by the cor-
porate veil, we must find that the tax burdens the tax-
payer personally.
We do not by this opinion mean to imply that the Dis-
trict of Columbia cannot tax nonresident professionals
who operate an unincorporated business. We say only
that the District of Columbia cannot tax the net personal
income of nonresidents.’*
For the above reasons, we conclude that the profes-
sional tax here at issue is an invalid exercise of the City
Council’s legislative authority under the Home Rule Act.”
Accordingly, the judgments on appeal in Nos. 12871 and
12920 are reversed and the appeals in Nos. 12872 and
12921 are dismissed.
So ordered.
of taxable income; to wit, 12% for 1975 and 9% thereafter.
The minimum tax liability is $25. D.C. Code 1978 Supp.,
§ 47-1574b; see note 15 supra. The individuals who conduct
the unincorporated business are jointly and severally liable
for the tax. D.C. Code 19738, § 47-1574d.
19 A number of the aspects of the current tax could be re-
tained and pass our scrutiny. Che $25 minimum tax certainly
does not suggest a tax on net income. The same may be true
for certain deductions as long as they merely serve to ad-
just the tax base, reflect the true incident of taxation, and
facilitate the tax. Keasbey & Mattison v. Rothensies, supra
at 898.
20 In view of this disposition of the case, we need not dis-
cuss the other issues raised by Bishop and Kleiboemer on ap-
peal or those raised by the District on cross-appeal.
[899]
34a
APPENDIX D
SUPERIOR COURT OF THE DISTRICT OF COLUMBIA
TAX DIVISION
Docket No. 2362
Ricuarp A. Bisnop, Petitioner
v.
District or Cotumsia, Respondent
Docket No. 2379
AxeEL-FEtix Kiermormer, Petitioner
v.
District or Cotumsia, Respondent
ORDER AND OPINION
These petitioners have filed these actions in order to ob-
tain a refund for franchise taxes paid to the District of Co-
lumbia pursuant to D. C. Code 1973, § 47-1574 et seq. (Supp.
IV 1977). The amount of the tax is not in dispute, how-
ever, the petitioners challenge the legality of the tax and
have requested the court to declare D. C. Law No. 1-23 to
be a tax on all or a portion of the personal income of these
petitioners, to rule that the tax unlawfully discriminates
against nonresident owners of unincorporated personal
service businesses in the District of Columbia and to further
rule that that tax was enacted without adequate public
notice as guaranteed by D. C. Code 1973, § 1-144(c) (Supp.
IV 1977).
The two cases have been consolidated for purposes of
this appeal and the Court has granted the request of peti-
tioner Kleiboemer to treat this case as a class action with
35a
that class consisting of those nonresident taxpayers who
have paid the tax imposed by Section 47-1574. The class
which petitioner Keiboemer represents does not include
petitioner Bishop.!
I
The facts in this case have been fully stipulated and the
parties have also stipulated a number of joint exhibits.
Based upon that stipulation of facts the Court makes the
following findings of fact:
1. The application of an unincorporated business fran-
chise tax to unincorporated professions and unincorporated
personal service businesses by the Revenue Act of 1975
(D.C. Law No. 1-23) was accomplished by the District’s
repeal of the exemption afforded to professionals and per-
sonal service businesses contained in D. C. Code 1973,
§ 47-1574. Before the adoption of Section 605 of the Reve-
nue Act of 1975, Section 47-1574 read'‘as follows:
‘‘For the purposes of this subchapter (not alone
of this title) and unless otherwise required by the
context, the words ‘‘unincorporated business’’
means any trade or business, conducted or engaged
in by any individual, whether resident or nonresi-
dent, statutory or common-law trust, estate, part-
nership, or limited or special partnership, society,
association, executor, administrator, receiver, trus-
tee, liquidator, conservator, committee assignee,
or by any other entity or fiduciary, other than a
trade or business conducted or engaged in by any
corporation; and include any trade or business
which if conducted or engaged in by a corporation
would be taxable under sections 47-1571 and 47-
1 This Court had previously dismissed an action in which another petitioner
had requested injunctive relief. Committee for Fair Taxation of Professionals
v. District of Columbia, Civil No. 11269-75. That case is presently on appeal
and these petitioners have incorporated the record in that case as a part of
the record in this case.
36a
1571la. The words ‘‘unincorporated business’’ do
not include any trade or business which by law,
custom, or ethics cannot be incorporated, any
trade, business, or profession which can be incor-
porated only under chapter 11 of title 29, or any
trade or business in which more than 80 per centum
of the gross income is derived from the personal
services actually rendered by the individual or
members of the partnership or other entity in the
conducting or carrying on of any trade or business
and in which capital is not a material income-
producing factor.’’
Section 605 of the Revenue Act repealed the ‘‘profes-
sional’? exemption by deleting the second sentence con-
tained in section 47-1574.
2. The rate of tax on unincorporated businesses was im-
posed under D. C. Code 1973, § 47-1574b which, before the
adoption of section 604 of the Revenue Act of 1975, read
as follows:
For the privilege of carrying on or engaging in
any trade or business within the District and of
receiving income from sources within the District,
there is hereby levied for each taxable year a tax
at the rate of 8 per centum upon the taxable in-
come of every unincorporated business, whether
domestic or foreign (except those expressly ex-
empt under section 47-1554). The minimum tax
payable shall be $25.00.
Section 604 of the Revenue Act of 1975 amended section
47-1574b and as amended that section reads as follows:
For the privilege of carrying on or engaging in
any trade or business within the District and of
receiving income from sources within the District,
there is hereby levied for one taxable year begin-
ing on or after January 1, 1975, a tax at the rate
37a
of 12 per centum upon the taxable income of every
unincorporated business, whether domestic or fo-
reign (except those expressly exempt under sec-
tion 47-1554). The minimum tax payable shall be
$25.00. For the taxable years beginning on and
after January 1, 1976, there is hereby levied a
tax at the rate of 9 per centum upon the taxable
income of every unincorporated business, whether
domestic or foreign (except those expressly ex-
empt under section 47-1554). The minimum tax
payable shall be $25.00.
3. The only notice of Council hearings to appear in the
D. C. Register on the Mayor’s proposed Revenue Act of
1975 was dated March 6, 1975, and was published in the
March 10, 1975, edition of the District of Columbia Regis-
ter. (Joint Ex. 1.)
4. A copy of the Mayor of the District of Columbia’s
proposed Revenue Act of 1975, which included legislation
proposing a gross receipts tax upon professionals and
other business entities, but not the unincorporated business
franchise tax here in dispute, was published in the March
21, 1975, edition of the D. C. Register. (Joint Ex. 2.)
5. Section 404(c) of the D. C. Self-Government Act,
(D.C. Code 1973, § 1-144(c) (Supp. IV 1977)), provides:
The Council shall adopt and publish rules of
procedures which shall include provisions for ude-
quate public notification of intended actions of the
Council.
6. Pursuant to section 404(c), the Council adopted Reso-
lution No. 1-1-2 on January 7, 1975. Section 6G of the
Resolution provides:
The Council shall, at least fifteen (15) days prior
to the adoption of any act, resolution, rule or the
amendment or repeal thereof, publish in the Dis-
trict of Columbia Register (unless all persons sub-
ject thereto are named and either personally
38a
served or otherwise have actual notice thereof in
accordance with law) notice of the intended action
so as to afford interested persons opportunity to
submit data and views either orally or in writing
as may be specified in such notice. Resolution No.
1-1-2, adopted on ‘January 7, 1975, Section 6G.’
7. On or shortly after March 6, 1975, copies of the Dis-
trict of Columbia City Council’s notice of hearings, as
described in paragraph 3 hereof, were mailed by the Coun-
cil’s Committee on Finance and Revenue to the numerous
persons and organizations inciuding bar associations, civic
associations, and other professional associations. (Joint
Ex. 3.)
8 The record of the hearings held by the Council’s
Committee on Finance and Revenue pursuant to the notice
described in paragraph 3 above is contained as an appen-
dix to the Hearings Before the Committee in the District
of Columbia United States Senate on the District of Colum-
bia Revenue Act of 1975, 94th Congress, First Session,
Sept. 8-11, 1975, Part I, pp. 463-838. (Joint Ex. 4.)
9. The May 30, 1975, edition of the Washington Post
contained an article concerning the proposed Budget and
alternatives thereto. (Joint Ex. 5.)
10. The June 2, 1975, edition of the Washington Post
contained an article concerning the proposed Budget and
alternatives thereto. (Joint Ex. 6.)
11. The June 6, 1975, edition of the Washington Star
contained an article concerning the proposed Budget and
alternatives thereto. (Joint Ex. 7.)
12. On June 24, 1975, the Council of the District of
Columbia passed at second reading the Revenue Act of
1975 (Act No. 1-34) which included the repeal of the ‘‘pro-
fessional’? exemption, as described in Finding of Fact
No. 1.
2 Sevtion 6G has since been amended to require publication at least 30 days
prior to any intended legislative action. Resolution PR No. 1-30.
39a
13, The June 29, 1975, edition of the Washington Post
contained an article concerning the Council’s action on the
Budoet 3 ‘ ‘ ;
whi including their repeal of the exemption. (Joint
14. A meeting regarding the imposition of the tax here
in controversy was held by Edward Meyers, Staff Director
of the Council’s Committee on Finance and Revenue, on
June 30, 1975. The meeting was attended by members of
the council, members of the Office of the Corporation Coun-
sel, and various members and representatives of the Bar
These persons, (excluding District of Columbia employees)
questioned the amount of revenue estimated by the Depart-
ment of Finance and Revenue to be gained by the imposi-
tion of the tax in controversy and asked the Committee to
consider possible alternatives to it.
15. On July 8, 1975, a meeting was again held by the
Committee on Finance and Revenue with respect to the
tax here in controversy. The meeting was attended by
— rs the Council, members of the Office of the Cor-
poration Counsel, and various memb
ac aR ' ers and representa-
The amount of revenue to be gained by the imposition
of this tax was again discussed as well as possible alterna-
tives to it.
16. On July 14, 1975, Councilmember Barry sent a memo-
randum entitled ‘‘Professionals in the Unincorporated
Business Tax’’ to Kenneth Back, Director of the Depart-
ment of Finance and Revenue. That memorandum re-
i a ae with members of the Department of
ance and Revenue to di i i
ig et gl iscuss the unincorporated busi-
17. The July 16, 1975 editions of both the Washington
Post and Washington Star contained articles concerning
the opposition to the tax on professional i
pi p ionals. (Joint Exs. 10
40a
18. On July 16, 1975, Councilmember Barry sent a memo-
randum entitled ‘‘Professionals in the Unincorporated
Business Tax’’ to C. Francis Murphy, then Corporation
Counsel of the District of Columbia inviting further dis-
cussion on the removal of the exemption and alternatives
thereto. (Joint Ex. 12)
19. On July 21, 1975, a memorandum entitled ‘‘The Un-
incorporated Business Franchise Tax Section of the Coun-
cil’s Revenue Act of 1975’’ answering the July 16, 1975,
memorandum described in Finding No. 18 hereof was sent
from C. Francis Murphy to Councilmember Barry. (Joint
Ex. 13.)
20. On July 21, 1975, a meeting of the Committee on
Finance and Revenue was held to discuss the tax here in
controversy. The meeting was attended by members of
the Council, members of the Office of the Corporation
Counsel, and various members and representatives of the
Bar.
At the conclusion of that meeting, the Committee voted
to amend from 20% to 50% the maximum salary allowance
for professionals that they would recommend to the Coun-
cil of the District of Columbia.
21. On July 22, 1975, the Committee on Finance and
Revenue again met, further considered the percentage of
salary allowance to be recommended, and voted to amend
the amount allowed from 50% to 55% of net income.
22. On August 5, 1975, the Council of the District of Co-
lumbia passed at second reading Act No. 1-43, which raised
the salary allowance described in paragraphs 20 and 21
hereof from 20% to 55%. (Joint Ex. 14.)
23. The August, 1975 edition of the Washington Metro-
politan Board of Trade News contained an article, concern-
ing the proposed tax on professionals. (Joint Ex. 15.)
24. Hearings on the tax in dispute were held in both the
House of Representatives and the Senate of the United
4la
States Congress during the month of September 1975. The
testimony and exhibits introduced at those hearings are
contained in one volume entitled ‘‘Hearings and Disposi-
tion before the Subcommittee on Fiscal Affairs of the Com-
mittee on the District of Columbia House of Representa-
tives to Disapprove the District of Columbia Revenue Act
of 1975 and to Amend the District of Columbia Tax Laws
Applicable to Unincorporated Business Income,’’ 94th Con-
gress, First Session, September 17 and 19, 1975, (Joint Ex.
16), and in two volumes entitled ‘‘Hearings Before the
Committee on the District of Columbia United States
Senate on the District of Columbia Revenue Act of 1975’’,
94th Congress, First Session, September 8-11, 1975 (Joint
Exs. 4 and 17.)
25. On October 2, 1975, Councilmember Barry sent a
memorandum entitled ‘‘Committee Report on Bill 1-188,
the ‘Amended District of Columbia Unincorporated Busi-
ness Franchise Tax Revision Act of 1975’ ’’ to all members
of the council of the District of Columbia. (Joint Ex. 18.)
The primary purpose of the Bill was to propose a salary
allowance of 70% for professionals and other personal
service businesses with a standard exemption of $2500.
26. On October 7, 1975, the Council of the District of
Columbia passed the District of Columbia Professional
Corporation Revision Act of 1975 (Act No. 1-61), which
was signed by Mayor Washington on October 29, 1975. On
November 11, 1975, Act No. 1-61 was transmitted to Con-
gress for review. Act No. 1-61 amends the District of
Columbia Professional Corporation Act (D. C. Code 1973,
§ 29-1101 et seq.) by treating professional corporations as
‘‘unincorporated businesses’’ for purposes of the Act of
1947. No other corporations are so treated. (Joint Ex.
19.)
27. On October 10, 1975, Councilmember Barry sent a
memorandum to all members of the Council of the District
42a
of Columbia entitled ‘‘Amended Committee Report, Bill
1-170, the District of Columbia Professional Corporation
Revision Act of 1975’’. (Joint Ex. 20.)
28. On October 21, 1975, the Revenue Act of 1975 became
law (D. C. Law No. 1-23) pursuant to Section 602(c) (1)
of the Self-Government and Governmental Reorganization
Act (D. C. Code 1973, § 31-147(c)(1), (Supp. IV, 1977)
which reads as follows:
(c)(1) Except acts of the Council which are
submitted to the President in accordance with the
Budget and Accounting Act, 1921 [31 U.S.C. 1 et
seq.], any act which the Council determines acord-
ing to section 412(a), should take effect immediate-
ly because of emergency circumstances and acts
proposing amendments to title IV of this Act, the
Chairman of the Council shall transmit to the
Speaker of the House of Representatives, and the
President of the Senate a copy of each act passed
by the Council and signed by the Mayor, or vetoed
by the Mayor and repassed by two-thirds of the
Council present and voting (and with respect to
which the President has not sustained the Mayor’s
»veto), and every act passed by the Council and
allowed to become effective by the Mayor without
his signature. Except as provided in paragraph
(2), no such act shall take effect until the end of
the 30-day period (excluding Saturdays, Sundays,
and holidays, and any day on which either House
is not in session) beginning on the day such act
is transmitted by the Chairman to the Speaker of
the House of Representatives and the President
of the Senate and then only if during such 30-day
period both Houses of Congress do not adopt a
concurrent resolution disapproving such act. The
provisions of section 604, except subsections (d),
(e), and (f) of such section, shall apply with re-
spect to any concurrent resolution disapproving
any act pursuant to this paragraph.
a at a
43a
29. On November 1, 1975, Act No. 1-62 became law (D.C.
Law No. 1-31) pursuant to the provisions of the Self-
Government Act described in Finding No. 28.
30. As of March 30, 1976, according to the records of
Lawrence Cook, Assistant Supervisor of the Business Reg-
istration Section of the Department of Finance and Reve-
nue of the District of Columbia Government, approximately
1064 unincorporated business franchise tax returns had
been filed on an estimated basis by professionals and per-
sonal service businesses subject to this tax for the first
time. Of the returns filed, approximately 1060 were filed
with either partial of full payment of the amount of tax
estimated.
31. Section 602(a)(5) of the D.C. Self-Government and
Governmental Reorganization Act, (D. C. Code 1973, § 1-
147(a)(5) (Supp. IV 1977)) as enacted by the Congress of
the United States limits the legislative authority of the
Council of the District of Columbia with respect to the
taxation of nonresidents of the District of Columbia as
follows:
§ 1-147. Limitations.
(a) The Council shall have no authority to pass
any act contrary to the provisions of this Act ex-
cept as specifically provided in this Act, or to—
* * * cd
(5) impose any tax on the whole or any portion
of the personal income, either directly or at the
source thereof, of any individual not a resident of
the District (the terms ‘‘individual’’ and ‘‘resi-
dent’’ to be understood for the purposes of this
paragraph as they are defined in section 47-1551e;
32. Under the provisions of D. C. Code 1973, § 47-
1557a(b) (10) there is excluded from the gross income of
District of Columbia resident taxpayers that portion of an
individual taxpayer’s gross income which has been taxed
44a
under the provisions of the unincorporated business fran-
chise tax, D. C. Code 1973, § 47-1574 et seq., (Supp. IV
1977).
II
The petitioners’ first contention is that so much of the
Revenue Act of 1975 which purports to amend Section 47-
1574 is invalid due to the failure of the City Council to
publish adequate notice as required by D. C. Code 1973,
§1-144(c) (Supp. IV 1977) and Resolution No. 1-1-2
adopted January 7, 1975.*
All of the underly‘ng facts are set forth in the Findings
of Fact therefore the Court need only refer to the more
pertinent facts at this time.
The Mayor sent his proposed Revenue Act of 1975 to the
City Council in early 1975. A notice of Council hearings
dated March 6, 1975, was published in the District of Co-
lumbia Register on March 10, 1975. There is no dispute
that a proper notice published in the District of Columbia
Register would be in full compliance with the notice re-
quirements. The notice gave the time, date and place for
the hearings ‘‘on the impact of revenue proposals con-
tained in the Mayor’s Fiscal 1976 Budget’’. It went on
to provide:
Comments are welcome on tax and related reve-
nue measures contained in the Budget (property,
sales, income, other) and on new and alternative
methods of raising revenue for the District of Co-
lumbia. (Emphasis this Court’s.)
It then set forth a schedule of meetings to be held on
March 18, April 3 and April 4, 1975, and advised the reader
that on each day the Committee on Finance and Revenue
would hear witnesses on the ‘‘entire revenue package’’ and
* The text of both the statute and the resolution are set forth in Findings
of Fact Nos. 5 and 6.
45a
on ‘‘new revenue ideas’’ (emphasis this Court’s). The no-
tice set forth the name and number of the person to contact
if a citizen wished to offer testimony and ‘‘encouraged’’
written statements and advised those offering such state-
ments that the ‘‘record will be closed on April 7, 1975’’. Set-
ting aside for the moment the issue before the Court, it can
be observed that the above notice was complete and met all
due process requirements. Any person wishing to be heard
was advised of the exact procedure he should follow.
Petitioners argue that the notice was invalid however
because it failed to give notice that the Council would or
might consider the repeal of the exemption granted to the
petitioners under Section 47-1574. Actually, although the
proposed Revenue Act of 1975 did purport to amend Sec-
tion 47-1574, it did not in any way suggest a repeal of the
exemption granted to the petitioners under that section.
Thus, the petitioners argue that the notice itself did not
suggest that the Council would consider removing the ex-
emption from the franchise tax and that they were further
mislead because the proposed Revenue Act of 1975, which
was the subject of the hearing, did not purport to amend
Section 47-1574 so as to delete the exemption.
The respondent contends on the other hand that the ori-
ginal notice was adequate but that in any event, there was
adequate opportunity for the petitioners and their class to
comment or submit written submissions subsequent to June
24, 1975, the date when the amended Act was finally passed
by the City Council.
Before addressing the adequacy of the notice of March
10, 1975, this Court notes that it finds that respondent’s
arguments that any defect was cured by the new hearings
held in July and August 1975, after the challenged Act
had been passed, to be totally without merit. First, the
Act had already been passed and second the primary dis-
cussion of the hearings at that point was not whether the
exemption should be repealed or reinstated as the case may
46a
be, but rather whether the salary allowance allowed profes-
sionals should be increased. Such comments or hearings
after passage of the Act hardly amounts to what is con-
templated by Section 1-144(c) or Resolution No. 1-1-2. The
Resolution clearly provided for a notice at least ‘‘ Fifteen
(15) days prior to the adoption of any Act.’’* Moreover, the
purpose of the notice before the adoption of an act is ‘‘to
afford interested persons opportunity to submit data and
views either orally or in wrting as may be specified in
such notice’’. Resolution No. 1-1-2. This Court holds that
the notices of hearings after the adoption of the Act failed
to satisfy the mandatory requirements for notice.
The respondent also argues that notices were mailed to
numerous persons and organizations. This argument also
fails however, since presumably the notice was the same
as that published in the District of Columbia Register and
more important, because the notice was not sent to ‘‘all
persons subject thereto’’. See Resolution 1-1-2, § 6G.
Any attempt to give actual notice to all taxpayers or po-
tential taxpayers who may be the subject of a particular
tax enactment is risky business at least and for this very
reason the Council has provided for constructive notice by
publishing in the District of Columbia Register.
Respondent also argues that the petitioners and their
class received actual or constructive notice by virture of
a number of articles published in the Washington Post and
the Washington Star. The argument that such publications
are actual notice must fail for the reasons just discussed
and the Resolution provides for publication for the purpose
of constructive notice only in the District of Columbia Reg-
ister. Last, there is no suggestion that the ‘‘notices’’ found
in the Washington Post and the Washington Star, if they
can be so described, were in the required notice form giv-
ing the subject, the date, the time, and the place of the
4Since amended to thirty (30) days. Resolution PR No. 1-30.
47a
hearings and of procedures for appearing before the
Council or submitting written comments.
As is readily apparent, the question concerning notice
can only be resolved by looking at the notice published in
the District of Columbia Register on March 10, 1975. If
that notice failed to comply with the notice requirements,
which are mandatory in this case, then so much of the
Revenue Act of 1975 which repeals the petitioners’ exemp-
tion under Section 47-1574 is invalid. See 5 MeQuillin,
Municipal Corporations, §§ 16.76, 16.77 (3d ed, 1969 Re-
vised Volume).
Turning to the March 10, 1975 notice, this Court con-
cludes that petitioners argument that the notice is invalid
must fail. As already noted, the form of the notice com-
plied with all legal requirements.
While it is true that the notice itself did not refer to
the possible repeal of the exemption which is the subject of
these petitions, it did make quite clear that the Committee
on Finance and Budget would not only consider the May-
or’s Budget but also ‘‘new and alternative methods of
raising revenue for the District of Columbia’’. The sched-
ule advised that ‘‘new revenue ideas’’ would be discussed
on each hearing day. The above language put the peti-
tioners and the members of their class on notice that their
exemption might be the subject of discussion and repeal
notwithstanding the fact that the Mayor’s proposed Bud-
get would have continued the exemption. ‘‘New’’ methods
refers to metnods not yet in use and ‘‘alternative’’ methods
refers to alternatives to some or all of the Mayor’s pro-
posal. It also cannot be overlooked that the attention of
one interested in the franchise tax exemption would have
been drawn to Section 47-1574 since the Mayor’s proposal
itself would have amended that very section even though
not repealing the specific exemption.
The challenged notice left no doubt that the Council
would consider, not only the Mayor’s tax proposals, but any
48a
and all reasonable alternatives thereto. The Council made
significant changes to the proposal but those changes were
the direct result of the Council’s consideration of ‘‘new and
alternative methods of raising revenue’’ which result was
a ‘logical outgrowth of the hearing and related proce-
dures’’. Moreover, ‘‘[{p]arties have no right to insist that
a rule remain frozen in its vestigal form’’. South Termi-
nal Corp. v. Environmental Protection Agency, 504 F.2d
646, 659 (1st Cir. 1974). The facts in South Terminal Cor-
poration, although not involving taxes, are similar to those
here and the Court while noting substantial changes be-
tween what had been proposed and what was adopted
nevertheless found the notice adequate. ‘that court’s com-
ments have equal applicability here when it concluded that
‘‘interested persons were sufficiently alerted [by the notice ]
to likely alternatives to have known what was at stake.’’
Id. at 659. There the published notice mentioned alterna-
tive measures for effective reduction in the number of park-
ing spaces in downtown Boston; here the notice made men-
tion of ‘‘new and alternative methods of raising revenue.”’
To follow petitioners argument would mean that the
Council ‘‘can learn from the comments on its proposals
only at the peril of starting a new procedural round of com-
mentary’’. International Harvester Co. v. Ruckelhaus, 155
U.S. App. D.C. 411, 428, 478 F.2d 615, 632.n. 51 (1973).
See also Owensboro On The Air, Inc. v. United States, 104
U.S. App. D.C. 391, 262 F.2d 702 (1959); Davis, Adminis-
trative Law of the Seventies, § 6.01-1 (1976).
The notice in this case was fair and was reasonably calcu-
lated to put interested persons on notice that new and al-
ternative tax measures to raise revenue were being con-
sidered by the Council. That notice gave sufficient and
adequate notice of the Council’s consideration of Section
47-1574 and of its amendment of that section repealing
the exemption now challenged.
49a
III
The petitioners next argue that, even though this Court
should find there was adequate notice of the intent to
amend or consider amendment of Section 47-1574 so as to
repeal the exemption granted petitioners, such action was
beyond the power of the Council due to the limitations on
Council power to enact legislation contained in D. C. Code
1973, § 1-147(a) (5) (Supp. IV 1977).5 There, Congress
has provided that the Council ‘‘shall have no authority”’
to ‘‘impose any tax on the whole or any portion of the
personal income, either directly or at the source thereof,
of any individual not a resident of the District’’. They
contend that the tax now imposed by virtue of repeal of
the exemption contained in Section 47-1574 amount to a tax
on their personal income. This Court cannot agree.
Section 47-1574 imposes a franchise tax on unincor-
porated businesses for the ‘‘privilege of carrying on or en-
gaging in any trade or business within the District and of
receiving income from sources within the District’’. See
Sections 47-1571la, 47-1574b. The above language used by
Congress in imposing the tax is unambiguous and is con-
sistent with the legislative history of the tax. See H.R.
Rep. No. 543, 80th Cong., Ist Sess. 3-4 (1947).
No court in this jurisdiction has decided the issue pre-
sented here, that is, whether the tax is an income tax or
a franchise tax. The question was raised in Gardella v.
Comptroller of Maryland, 130 A.2d 752 (Md. 1957), where
the taxpayers, who were residents of Maryland and paid
income taxes to that state; attempted to deduct from their
state income tax the amount of their unincorporated busi-
ness franchise tax paid to the District of Columbia pursu-
ant to Sections 47-1574 et seq. In a persuasive Opinion,
the Maryland Court of Appeals ruled that the tax was a
true franchise tax and not an income tax and therefore not
5See the Self-Government and Government Reorganization Act, Pub. L.
93-198, § 602, 87 Stat. 774.
50a
deductible from the Maryland income tax. That court
noted that the tax was imposed for the privilege of doing
business and receiving income from sources within the
District of Columbia and placed upon the unincorporated
entity and not upon the individuals composing that entity.
Td. at 753-754.
Petitioners cite Commissioner v. American Metal Co.,
221 F.2d 134 (2d Cir. 1955) and New York & Honduras Ro-
sario Mining Co. v. Commissioner, 168 F.2d 745 (2d Cir.
1948) as supportive of their argument, however, each case
must be judged upon its own peculiar facts. In American
Metal Co. the court held that the tax challenged in that case
was an excise tax noting that the tax attached when the ore
was extracted regardless of whether it was thereafter
transported or sold. 221 F.2d at 137. In New York &
Honduras Rosario Mining Co., the same court had earlier
ruled that another tax was an income tax and not an excise
tax because it was the substantial equivalent of an income
tax as that tax was understood in the United States. It
was significant in that case that the tax imposed by Hon-
duras was the equivalent of an income tax in this country
and that Honduras, in addition to the ‘‘income tax’’, im-
posed genuine excise taxes for the privilege of mining.
168 F.2d at 748. In Keasbey & Mattison Co. v. Rothensies,
133 F.2d 894 (3d Cir. 1943), the court concluded that a tax
imposed by the Province of Quebec, Canada, was in
reality an excise tax since it was imposed upon the privi-
lege of mining as measured on the basis of gross value.
That court found the tax to fall within the ‘‘accepted
standards of an excise tax’’ and felt it significant that the
‘‘allowable deductions are restricted to the cost actually
incurred in the mining operation and nothing more’’. 133
F.2d at 898.
Such cases as those briefly discussed can only suggest
guidelines which this Court should follow in deciding the
issue. As noted above, the Opinion in Gardella is persua-
5la
sive. Moreover, the unincorporated business tax is imposed
in addition to any income tax the taxpayer may be com-
pelled to pay. Congress has provided that the tax is im-
posed for the privilege of carrying on or engaging in any
trade or business and of receiving income from sources in
the District. The fact that the tax is measured based upon
the taxable income makes it no less a franchise tax.
Furthermore, unlike an income tax, a minimum tax is pay-
able regardless of whether there is taxable income. See
Section 47-1574b. For all of the above reasons, this Court
concludes that the tax imposed by Section 47-1574 is a
franchise tax as opposed to an income tax.
Petitioners argue that Section 1-147(a)(5) prohibits the
Council from enacting not just an income tax on nonresi-
dents but any tax which is derived from the nonresidents
personal income. This Court interprets the term ‘‘tax on
the whole or any portion of the personal income”’ as set
forth in Section 1-147(a)(5) to mean a personal income tax
as that term is commonly used. That interpretation is
consistent with the Legislative History of the Self-Govern-
ment and Governmental Reorganization Act. See H.R. Rep.
No. 93-482, 93d Cong., 1st Sess. (1973).
These petitioners also overlook the fact that the exemp-
tion was merely granted by way of legislative grace and
that the tax itself was imposed not by the Council of the
District of Columbia but by the Congress of the United
States.
This Court finds nothing in the Self-Government and
Governmental Reorganization Act which would prohibit
the Council from repealing the exemption granted peti-
tioners under Section 47-1574. The Court holds that the
tax is a franchise tax and not an income tax and that
Section 1-147(a)(5) merely prohibits the Council from
enacting a personal income tax on nonresidents.
52a
IV
The petitioners argue that the tax as imposed upon them
violates both the Privileges and Immunities Clause of U.S.
Const., Art. IV, § 2, C. 1 and the equal protection provi-
sions of U.S. Const., Amend. XIV as well. The equal pro-
tection provision of the Constitution applies to citizens of
the District of Columbia by virtue of the due process pro-
visions of the Fifth Amendment. See Bolling v. Sharpe,
347 U.S. 497 (1954). Their claim is based on the fact that
a resident unincorporated business has the right to deduct
a portion of the franchise tax from its District of Columbia
income tax returns. See D. C. Code 1973, § 47-1557a(b)
(10). A nonresident has no such privilege in the District
of Columbia simply for the reason that the nonresident is
not required to pay an income tax in the District.
Petitioners place heavy reliance on two cases, namely,
Austin v. New Hampshire, 420 U.S. 656 (1975) and Travis
v. Yale &€ Towne Manufacturing Co., 252 U.S. 60 (1920).
In Austin, the State of New Hampshire imposed a com-
muter tax on all nonresidents earning income in New Hamp-
shire. That state also imposed a commuter tax on income
earned by its residents working in another state but ex-
empted such income from the tax if that income was taxed
by the state where earned, if it was exempted by the state
where earned, or if the state where it was earned had no
tax on income. 420 U.S. at 658. The practical effect inso-
far as New Hampshire residents were concerned was that
they paid no commuter tax to that state. The Supreme
Court found that the tax was unconstitutional under the
Privileges and Immunities Clause since the overall result
was that the tax fell exclusively on the income of nonresi-
dents. 420 U.S. at 665. In Travis, the discrimination
against nonresidents was perhaps even more blatant. There
New York imposed a tax on both residents and nonresidents
but granted residents an exemption on the first $1,000 or
$2,000 of income, depending upon their circumstances, while
53a
denying a like exemption to nonresidents of that state.
That tax was held to be in violation of the Constitution
in that it resulted in an unwarranted discrimination against
nonresidents who worked side by side with residents of
New York. That case was distinguished from Shaffer v.
Carter, 252 U.S. 37 (1920) where the ‘‘nonresident was
not treated more onerously than the resident’’. 420 U.S.
at 664. See also Travellers’ Insurance Co. v. Connecticut,
185 U.S. 364 (1902).
The facts in the instant case are clearly distinguishable.
Here the tax is imposed equally on both the resident and
the nonresident alike and both are entitled to the same ex-
emptions and deductions insofar as the franchise tax is
concerned. The only distinction is that a resident is en-
titled to take a deduction from his District of Columbia
income tax return while of course, nonresidents are re-
quired to pay no such tax. The fact that a resident may
deduct the amount paid for the franchise tax from his local
income tax return does not make the tax unconstitutional
under any of the cases cited by the petitioners. Petitioners
are correct when they argue that the fact that Maryland or
Virgnnia could perhaps make the tax more ‘equitable by
allowing them to deduct the franchise tax from their respec-
tive state taxes, Gardella v. Comptroller of Maryland,
supra, would not save the local tax from a constitutional
challenge. See Austin v. New Hampshire, supra at 666-
668. However, this Court finds that the franchise tax as
imposed under the District of Columbia of Code affords
equal treatment to both the resident and nonresident and
does not violate the Privileges and Immunities Clause or
the Equal Protection Clause of the Constitution.
V
The petitioners have made several other arguments but
this Court finds those arguments to be totally without merit
54a
and they need not be discussed. Since these petitioners
do not seek a refund on the grounds that the amount of
the tax imposed was excessive, it follows that the Court’s
action denying their request for, what amounts to declara-
tory relief, is dispositive of all issues.
ORDER
It is hereby
ORDERED that petitioners request for refund is denied
and it is further
ORDERED that these Petitions are dismissed with prej-
udice.®
/s/ Joun Garrett PENN
Judge
Dated: October 18, 1977
6 Separate Judgment Orders shall be entered in each case.
55a
APPENDIX E
Section 602(a)(5) of the District of Columbia Self-
Government and Governmental Reorganization Act (Self-
Government Act), 87 Stat. 813, D. C. Code § 1-147(a) (5)
(Supp. V, 1978). provides:
The Council shall have no authority to pass any
act contrary to the provisions of this Act except
as specifically provided in this Act, or to—
(5) impose any tax on the whole or any portion
of the personal income, either directly or at the
source thereof, of any individual not a resident of
the District (the terms ‘‘individual’’ and ‘‘resi-
dent’’ to be understood for the purposes of this
paragraph as they are defined in section 4 of title
I of the District of Columbia Income and Fran-
chise Tax Act of 1947) * * *.
Section 1 of Title XIII of the District of Columbia In-
come and Franchise Tax Act of 1947, 61 Stat. 345-346, as
amended by 85 Stat 582, D. C. Code, 1973, § 47-1574, pro-
vides:
For the purposes of this article (not alone of
this title) and unless otherwise required by the
context, the words ‘‘unincorporated business’’
mean any trade or business, conducted or engaged
in by any individual, whether resident or nonresi-
dent, statutory or common-law trust, estate, part-
nership, or limited or special partnership, society,
association, executor, administrator, receiver, trus-
tee, liquidator, conservator, committee, assignee,
or by any other entity or fiduciary, other than a
trade or business conducted or engaged in by any
corporation; and include any trade or business
which if conducted or engaged in by a corporation
56a
would be taxable under title VII of this ar-
ee
* * * «(The words ‘unincorporated business’ do
not include any trade or business which by law,
eustoms, or ethics cannot be incorporated, any
trade, business, or profession which can be incor-
porated only under the District of Columbia Pro-
fessional Corporation Act, or any trade or busi-
ness in which more than 80 per centum of the gross
income is derived from the personal services actu-
ally rendered by the individual or members of the
partnership or other entity in the conducting or
carrying on of any trade or business and in which
capital is not a material income-producing factor.”’
Section 1 of Title X of the District of Columbia Income
and Franchise Tax Act of 1947, 61 Stat. 349, D. C. Code,
1973, § 47-1580, provides:
It is the purpose of this article to impose (1)
an income tax upon the entire net income of every
resident and every resident estate and trust, and
(2) a franchise tax upon every corporation and un-
incorporated business for the privilege of carry-
ing on or engaging in any trade or business within
the District and of receiving such other income as
is derived from sources within the District: Pro-
vided, however, That, in the case of any corpora-
tion, the amount received as dividends from a cor-
poration which is subject to taxation under this
article, and, in the case of a corporation not en-
gaged in carrying on any trade or business within
the District, interest received by it from a corpora-
tion which is subject to taxation under this article
shall not be considered as income from sources
within the District for the purposes of this article.
The measure of the franchise tax shall be that por-
tion of the net income of the corporation and un-
incorporated business as is fairly attributable to
any trade or business carried on or engaged in
d7a
within the District and such other net income as
is derived from sources within the District.
Section 605 of the District of Columbia Revenue Act of
1975, D. C. Law 1-23, 22 D. C. Register 2113, D. C. Code,
§ 47-1574 (Supp. V, 1978), provides:
Section 1 of Title VIII of the District of Colum-
bia Income and Franchise Tax Act of 1947 (D. C.
Code, sec. 47-1574) is hereby amended by striking
the following sentence:
‘‘The words ‘unincorporated business’
do not include any trade or business which
by law, customs or ethics cannot be incor-
porated, any trade, business, or profession
which can be incorporated only under the
District of Columbia Professional Cor-
poration Act, or any trade or business in
which more than 80 per centum of the
gross income is derived from the personal
services actually rendered by the indi-
vidual or members of the partnership or
other entity in the conducting or carrying
on of any trade or business and in which
capital is not a material income-producing
factor.’’
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.