Opposition Brief — Quaker Oats Co. v. Pennsylvania

Office - Sunreme Oourt, U. &

File

JAN 26 1945

SUPREME COURT OF THE Nite StS yet

OCTOBER TERM, 1944

No. 873

THE QUAKER OATS COMPANY,

Appellant,

vs.

COMMONWEALTH OF PENNSYLVANIA

APPEAL FROM THE SUPREME COURT OF THE STATE OF

PEN NSYLVANLA

STATEMENT OPPOSING JURISDICTION AND

MOTION TO DISMISS OR AFFIRM

/ H. F. Stramsaven,

Special Counsel;

James H. Durr,

Attorney General;

Counsel for Appellee.

INDEX

Supsect INDEX

Page

Statement opposing jurisdiction..................... 1

Nature of the Pennsylvania Franchise Tax on

foreign corporations. .............cceseeeeee. 1

Nature of appellant’s business.................. 3

The Pennsylvania Franchise Tax imposed by the

Act of 1935 is a tax upon the privilege of doing

business in that State and not a tax on property. . 5

The method of allocation provided in the Act of

1935 is not arbitrary or unreasonable........ 10

Neither the Franchise Tax Act of 1935 nor the

* method of allocation used in this case imposes

a tax upon property located outside of Pennsyl-

a Uwussedebetetstivisvecdvecesenedese 13

Appellant’s analysis of Ford Motor Co. v. Beau-

Ee A ESS) ba po edseccoccnescess 17

The Act of 1935 and the tax imposed on appellant

thereunder do not deny to it the equal protection

RS ied ected brug da tdeaaedasa be a 17

Neither the Act of 1905 nor the assessment of tax

against the appellant thereunder impairs the

opligation of comtract.... 666 ccccceccccccess 22

The Act of 1935, as construed by the State Courts,

does not unlawfully burden interstate com-

iri. tases sah k $e e6 we bae-e a0 6b. 34

Motion to dismiss or affirm......................... 39

TABLE oF Cases CITED

EE i)

Allantic Refining Co. v. Virginia, 302 U. 8. 22........ 14

Baltic Mining Co. v. Mass., 231 U.S. 68............. 37

Bass, Ratcliff and Gretton v. State Tax Commission,

cin cbs cou Neb uededesseenne cs 15

Butler Bros. v. McColgan, 315 U. S. 501........... 10,11,13

Cheney Brothers Company v. Massachusetts, 246 U. 8.

CURT knds Cela rerccebiedencr cheese? 18, 20,21

Colgate v. Harvey, 206 U. 8. 404..............600055.

Commonwealth v. The American Gas Co., 54 Daup. 115. . 23

Commonwealth v. Columbia Gas and Electric Corp.,

I <n cit ade ank oa 6 auieetiedenets 5,7,9,13,17

Commonwealth v. Union Trust Company of Pittsburgh,

Daag paca Raat eR et 9,10

ithe. th ndtinedecnscudacaceetesndietnes 25

Concordia Fire Insurance Co. v. Illinois, 292 U. 8. 535.. 18,19

Connecticut Mutval Life Insurance Co. v. Spratley, 172

PE ain dt pnwule pub pessldoneteveses 25

Doyle v. Continental Insurance Co., 94 U. 8. 535.. an

Educational Films Corp. v. Ward, 282 U. 8. 379.. 13

Ellis v. Dodge Broe., 737 F. 860... ... 6... eee ee 25

Flint v. Stone Tracy Co., 220 U. 8. 107............... 13

Ford Motor Co. v. Beauchamp, 308 U. 8. 331.. 8,12,15,16,17

Ford Motor Co. v. Clark, 100 F. (2d) 515............. 15

Ford Motor Co. v. Okla. Tax Comm., 188 Okla. 78, 106

ce Aas is eas tb dee deubudenie ts 12

Great Atlantic & Pacific Tea Co. v. Grosjean, 301 U. 8.

EE a SRE Ee ee eee. a 15

Hammond Packing Co. v. Arkansas, 212 U. 8. 322..... 27 , 28

Hanover Fire Insurance Co. v. Carr, 272 U. 8. 494... .. 20

Heisler v. Thomas Colliery Co., 260 U. 8. 245......... 19

Home Insurance Co. v. Augusta, 93 U. 8. 116......... 25

Hump Hairpin Mfg. Co. v. Emmerson, 258 U. 8. 290. . 37

International Harvester Co. v. Dept. of Treasury, 322

Ut cou ciidhavbubees she etka senses us o00 0+ 36

International Shoe Co. v. Shartel, 279 U. 8. 429........ 37

Interstate Iron & Steel Co. v. Northwestern Bridge & Iron

Gs chbechioakéeds thunnetsthenéscese 26

Tron City Bank v. City of Pittsburgh, 37 Pa. 340....... 28

Kansas City, Memphis & Birmingham Railroad Co. v.

i as sv cess aehanteeey 14,18

Kidd v. Alabama, 188 U. 8. 730.................05-. 18 ,32

Madden v. Kentucky, 309 U. 8. 83................ 18, 19,20

National Leather Co. v, Massachusetts, 277 U. 8. 413.. 16

—— Mutual Life Insurance Co. v. Wisconsin,

People, ex rel. Alpha Portiand Cement Co. v. Knapp,

230 N. Y. 48, 129 N. E. 202, 256 U. 8. 702

Phillips Petroleum Co. v. Jenkins, 297 U. 8. 629.......

Rule v. Price, 323 Pa. 139

Sociely for Savings v. Coite, 73 U. 8. 590

Southern Railway Co. v. Greene, 216 U. 8. 400

Town of Southington v. Southington Water Co., 80 Conn.

Treasury of Indiana v. Allied Mills, 220 Ind. 340, 42

N. E. (2) 34, 318 U.S. 340

Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113

Velie Motor Car Co. v. Kopmeier Motor Car Co., 194

Wagner Free Institute v. Philadelphia, 132 Pa. 612. .

Western Cartridge Co. v. Emmerson, 281 U. 8. 511.

Western Live Stock v. Bur. of Revenue, 303 U. 8. 250... s

SratutTes CiTep

Act of June 22, 1931 of the Pennsylvania Legislature,

Section 1, P.L. 687, 72 P.S. Section 1894

Act of May 16, 1935 of the Pennsylvania Legislature,

P.L. 184 (72 Purdon’s Penna. Stat., Section 1871,

amending the Act of June 1, 1889, P.L. 420 (72

Purdon’s Penna. Stat., Section 1871, et seq.)......

Business Corporation Law of May 5, 1933 of the State

of Pennsylvania, Section 1010-1013 (P.L. 364, 15

P.S. Section 2852-1010)

Constitution of Pennsylvania:

ee

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1944

No. 873

THE QUAKER OATS COMPANY,

Appellant,

vs.

COMMONWEALTH OF PENNSYLVANIA

APPEAL FROM THE SUPREME COURT OF PENNSYLVANIA

STATEMENT OPPOSING JURISDICTION

Appellee respectfully submits that the questions pre-

sented by the appellant’s jurisdictional statement have been

settled by the decisions of this Court and are not substan-

tial.

Nature of the Pennsylvanina Frachise Tax On Foreign

Corporations

The tax in question was imposed by the Act of May 16,

1935, P. L. 184 (72 Purd. Penna. Stat., Section 1871, Pocket

Part). This statute amended the Act of June 1, 1889,

1b

ae

2

P. L. 420 (72 Purd. Penna. Stat., Section 1871 et seq.)

by adding the following provision:

‘*(b) Every foreign corporation, joint-stock asso-

ciation, limited partnership, and company whatsoever,

from which a report is required under the twentieth

section hereof, shall be subject to and pay into the

treasury of the Commonwealth annually, through the

Department of Revenue, a franchise tax at the rate of

five mills upon a taxable value to be determined in the

following manner. The actual value of its whole capi-

tal stock of all kinds, including common, special, and

preferred, shall be ascertained in the manner pre-

scribed in the twentieth section of this act, and shall

then be divided into three equal parts.

**(1) Of one third, such portion shall be attributed

to business carried on within the Commonwealth, as

shall be found by multiplying said third by a fraction,

whose numerator is the value of the taxpayer’s

tangible property not actually and exclusively used in

manufacturing, situated within the Commonwealth, and

whose denominator is the value of all the taxpayer’s

tangible property wherever situated.

‘*(2) Of another third, such portion shall be at-

tributed to business carried on within the Common-

wealth, as shall be found by multiplying said third by

a fraction, whose numerator is the expenditures of the

taxpayer for wages, salaries, commissions, or other

compensation to its employes not exclusively engaged

in manufacturing in this Commonwealth and assign-

able to this Commonwealth as hereinafter provided,

and whose denominator is the total expenditures of the

taxpayer for wages, salaries, commissions, or other

compensation to all its employes.

“*(3) Of the remaining third, such portion shall be

attributed to business carried on within the Common-

wealth, as shall be found by multiplying said third by

a fraction, whose numerator is the amount of the tax-

payer’s gross receipts from business not strictly in-

3

cident or appurtenant to manufacturing in this Com-

monwealth assignable to this Commonwealth as here-

inafter provided, and whose denominator is the amount

of the taxpayer’s gross receipts from all its business.

‘‘The sum of the amounts, determined in accordance

with the foregoing three rules, shall be the taxable

value. * * *”’ (Italics ours)

The final tax assessment, approved by the Supreme Court

of Pennsylvania, was calculated as follows:

‘‘Tangible property in Penna $22,440

Total tangible property 25,072,615

Wages paid in Penna. $143,259

Total wages paid 6,212,221

Gross receipts in Penna. $7,224,347

Total gross receipts 66,067,332

(218a)’’

22,440 x 14 x $74,885,804 = $22,340

25,072,615

143,259 x 4 x $74,885,804 = $575,643

6,212,221-

7,224,347 x 14 x $74,885,804 = $2,729,543

66,067,332

Total taxable value $3,327,526

Rate of tax 5 mills $16,637.38

(253a)

Nature of Appellant’s Business

The Quaker Oats Company, the appellant, is a New Jersey

corporation, and on August 24, 1933, received a certificate of

authority under the Business Corporation Law of May 5,

1933, P. L. 364, 15 P. S. Section 2852, which authorized it

“to transact in the Commonwealth of Pennsylvania the

4

business of selling and dealing in cereals and cereal

products.’’ (137a)

The Quaker Oats Company in 1935 operated sales offices

in Philadelphia and Pittsburgh. During that year it

owned tangible property in Pennsylvania amounting to

$22,400 and paid wages to its employes in Pennsylvania,

in the sum of $143,259, and secured gross receipts from

sales in Pennsylvania amounting to $7,224,347 (218a). In-

cluded in tangible property were inventories on stocks of

goods, and automobiles maintained at its two sales branches

(75a-76a, 86a-87a, 98a).

The territory of the Philadelphia branch included south-

ern New Jersey and portions of Maryland and Delaware,

in addition to Pennsylvania (96a-97a). The territory of

the Pittsburgh office included the entire State of West Vir-

ginia, with the exception of two counties, the eastern por-

tion of Ohio, and one town in Virginia, in addition to

Pennsylvania (94a).

The receipts of sales were deposited in a treasurer’s

account in Philadelphia and Pittsburgh. These accounts

were subject to the exclusive control of the Chicago office

(99a). Also each of the branches in Philadelphia and Pitts-

burgh had a sales office account in which the Chicago office

deposited money to pay salaries and expenses of salesmen,

office rent and incidentals (98a, 99a).

The average balance in the Philadelphia sales office ac-

count was $3,567.48 (74a). The average balance in the

Pittsburgh sales office account was $1,218.04 (74a). The

average balance in the treasurer’s account in Philadelphia

was $351,553.42, and the average balance in the treasurer’s

account in Pittsburgh was $54,695.54 (74a).

Defendant’s sales were divided into two classes: sales

of package goods and sales of goods in bulk. No separate

books were kept for these two classes of business (118a),

5

and it was not possible to separate the total sales into the

respective amounts for these two classes.

The total sales in Pennsylvania were made up as follows

(21st Find. 221a) :

Sales to Pa. customers on orders filled from

Se a So Deere $ 171,773

Sales to Pa. customers on orders filled from

stocks outside of Pa.................. 5,341,783

Sales to customers outside of Pa. delivered

from stocks in Pa....... ...... ioe 14,815

Sales to customers outside of Pa. delivered

frem stocks outside of Pa........... .. 1,710,769

The method of making the sales through salesmen is

detailed under heading (g).

The contention in appellant’s statement as to jurisdic-

tion will be considered in their order.

(a)

The Pennsylvania Franchise Tax imposed by the Act of

1935 is a tax upon the privilege of doing business in that

State and not a tax upon property.

The nature of the tax was defined by the opinion of the

Supreme Court of Pennsylvania in this case as follows:

“* * * This Act imposes a franchise or excise tax

upon foreign corporations, as distinguished from a

property or ad valorem tax. * * * (Opinion, p. 3)

Previously the same court had definitely announced the

same conclusion in Commonwealth v. Columbia Gas and

Electric Corporation, 336 Pa. 209 (1939), where it said:

‘Did the legislature intend to change its o!d policy

of levying a property tax and create in its stead a fran-

chise tax upon foreign corporations? We coneur with

the court below in its conclusion that the tax is a fran-

2b

6

chise tax and not a property tax. * * * (217) The

incidence of a franchise or privilege tax is upona

franchise or privilege and not upon property or capi-

—"- * * oe

‘“# * * These fractions, as stated above, concern

corporate activity. While they bear some relation to

capital stock value, intrinsically they determine the

taxable value of the corporate activity within this

State rather than of the property located here. That

it is the value of the franchise rather than the actual

value of the property which is taken into account is

clear from the factors which enter into the apportion-

ment. * * * It does not ascertain physical worth of

assets located in this State, but arrives at a value

which the functional or operating organic unit within

this State possesses. It represents what the right to

do business is worth. It must follow that the tax is

not levied on property but on the franchise to do

business measured by a taxable value secured through

the application of the factors of gross receipts, tangi-

bles and payrolls to the capital stock value. It is rep-

resentative of the value of that very franchise.’’ (221-

222)

Appellant argues that if a tax is measured by property

according to its appraised value, it is a tax upon property.

This contention overlooks the fact that the Pennsylvania

franchise tax is based upon three fractions: not merely

upon the proportion of tangible assets in Pennsylvania,

but upon the proportion of wages paid and gross receipts

obtained in this state. The second and third of these frac-

tions have nothing to do with property. The first fraction

may show the proportion of tangible property employed

in Pennsylvania, but the second and third fractions do not.

As the Supreme Court of Pennsylvania has said in the

passage above quoted, the application of the three frac-

7

tions ‘‘determine the taxable value of the corporate ac-

tivity within this State rather than of the property located

here.’’ (221)

The wages fraction clearly measures activity. The re-

ceipts fraction also measures activity by considering the

amount of business done and the amount of money which

the corporation captures and removes from this State. If

the appraised value of property employed in Pennsylvania

were the sole measure, one-sided results would be obtained.

For example, if a foreign corporation had its manufactur-

ing plant, shipping facilities and inventory entirely in

Pennsylvania, then it would have to be taxed on substan-

tially its entire assets, although its sales were made en-

tirely in Ohio or some other state. Vice versa, if the

manufacturing plant and inventory were located in Ohio

but the corporation sold all its products in Pennsylvania

and had only salesmen operating in Pennsylvania, the tax

to be collected by Pennsylvania would be negligible. The

tax to be collected by Pennsylvania could not be influenced

by the sales activities and large receipts obtained in this

State. This, of course, applies especially to the Quaker

Oats appeal.

As the Supreme Court of Pennsylvania said in Common-

wealth v. Columbia Gas and Electric Corporation, 336 Pa.

209, at page 221, the use of three fractions is an attempt

to make the measure more representative of the actual

worth of the franchise to do business and to average out

any hardship which might arise by reliance upon any single

one of the fractions. All this is wholly inconsistent with

the contention that the tax is a tax upon property.

While the three fractions are applied to the value of the

capital stock, two of these fractions do not depend at all

upon property or the amount thereof.

8

An examination of the Pennsylvania formula and its

three fractions as they appear above on page 3 will demon-

strate that a tax is not imposed according to a valuation

of property.

Furthermore, the tax base is obtained by multiplying

two factors. The multiplier is the average of the three

fractions or percentages. The muitiplicand is the value of

the capital stock. The multiplier is just as important as

the multiplicand in determining whether the tax is a tax

upon property.

While the multiplicand is the value of the capital stock,

the multiplier—the average of the three fractions—does

not represent value at all. When a figure representing

value of the capital stock or property is multiplied by an-

other figure which does not represent value, the product

is not the value of property. Multiplying the value of the

capital stock by proportion of wages and gross receipts

cannot produce a figure which represents the value of prop-

erty. The product is a composit figure and represents the

value of the privilege of doing business in Pennsylvania.

On page 14 of appellant’s statement of jurisdiction a

distinction is attempted to be made between a tax measured

by property according to valuation and a tax measured by

property not requiring a valuation. The decisions cited

do not reach the full length of appellant’s contention.

In Ford Motor Company v. Beauchamp, 308 U. 8. 331

(1940), this court sustained a tax under a Texas statute

which imposed a franchise tax based upon the proportion

of outstanding capital stock, surplus and undivided profits

which the gross receipts from business done in Texas bore

to total gross receipts.

Mention may also be made of an earlier decision in

Society for Savings v. Coite, 73 U. 8. (6 Wall.) 590 (1867),

which sustained a tax upon deposits of a savings bank al-

9

though part of such deposits were invested in securities

of the United States. Speaking of a tax measured by the

amount of business done, this court said:

‘Experience shows that the latter mode is better

calculated to effect justice among the corporations re-

quired to contribute to the public burdens than any

other which has been devised, as its tendency is to

graduate the required contribution to the value of the

privileges granted, and to the extent of their exer-

cise. © ° °° (608)

In this Quaker Oats Company case property, although

valued, played very little part in the computation of the

tax base. In the numerators of the three fractions prop-

erty in Pennsylvania amounted to only $22,440, wages paid

in Pennsylvania amounted to $143,259, gross receipts in

Pennsylvania amounted to $7,224,347. The tax base was

determined almost entirely by activity and business done,

and not by property owned, in Pennsylvania. It seems

absurd, therefore, to call the franchise tax a tax on property

rather than a tax on a franchise or a privilege.

The decisions in Arrott’s Estate, 322 Pa. 367 (1936), and

Commonweaith v. Union Trust Company of Pittsburgh, 345

Pa. 298 (1942), do not conflict with out contention.

In Arrott’s Estate, decided before Commonwealth vy.

Columbia Gas and Electric Corporation, 336 Pa. 209 (1939),

the question involved was defined by Chief Justice Kep-

hart as follows:

‘*The question to be determined is whether resident

owners of stock of foreign corporations subject to the

Franchise Tax Act are required to pay the four mill

personal property tax imposed by the Four Mill

County Act. The question is precipitated by the sub-

stitution of a franchise tax on foreign corporations

for the privilege of doing business in this State for

the capital stock tax heretofore exacted by the Capi-

tal Stock Tax Act, * * * (369)

10

After the decision in the Columbia Gas and Electric

case, the Arrott case was reconsidered in Commonwealth

v. Union Trust Company of Pittsburgh, 345 Pa, 298 (1942).

The Supreme Court said:

‘s# © * While, in Commonwealth v. Columbia Gas

& Electric Corp., 336 Pa. 209, 8 A. (2d) 404, it was

pointed out that the tax under the Act of 1935 is not

a capital stock tax, being levied on a franchise or privi-

lege and not on property or capital of the corporation,

that case did not impair the ruling in Arrott’s Estate,

322 Pa. 367, 185 A. 697, that there was such a close

identity between the capital stock tax and the fran-

chise tax that the owners of shares of stock in foreign

corporations which paid the franchise tax were not

obliged to pay a personal property tax on such shares,

it being the general policy of the State to avoid double

taxation. * * *°’’ (307)

We have quoted at some length from the Pennsylvania

statute and the opinions of the Supreme Court, because of

the inconsistent assertions of the appellant that the Penn-

sylvania Franchise tax is a tax upon property. In particu-

lar, appellant’s points (b) to (d) are based on the assump-

tion that the tax is upon property.

The Supreme Court of Pennsylvania characterized ap-

pellant’s argument as a ‘‘studied confusion of the essential

differences between a property tax and a franchise tax’’

(p. 13).

(b)

The method of allocation provided in the Act of 1935 is

not arbitrary or unreasonable.

In Butler Bros. v. McColgan, 315 U. S. 501 (1942), the

statute imposed a tax upon net income derived from busi-

ness done within the State, to be ‘‘determined by an alloca-

tion upon the basis of sales, purchases, expenses of manu-

facturer, pay roll, value and situs of tangible property.”

11

The percentage used in the assessment ‘‘was determined

by averaging the percentages which (a) value of real and

tangible personal property, (b) wages, salaries, commis-

sions and other compensation of employees, and (c) gross

sales, less returns and allowances, attributable to the San

Francisco house bore to the corresponding items of all

houses of appellant.’’ (505)

In the opinion, Mr. Justice Douglas said:

‘*We cannot say that property, pay roll, and sales

are inappropriate ingredients of an apportionment

formula. We agree with the Supreme Court of Cali-

fornia that these factors may properly be deemed to

reflect ‘the relative contribution of the activities in the

various states to the production of the total unitary

income,’ so as to allocate to California its just propor-

tion of the profits earned by appellant from this uni-

tary business. * * *’’ (509)

The statement in paragraph 3 at the end of appellant’s

point (b), that under the California statute involved in the

Butler Brothers case the income from intangibles was ‘*spe-

cifically allocated according to situs of intangibles,’’ seems

to us to be without foundation.

The ruling in the Butler Brothers case, we submit, covers

the case at bar, unless there is merit in the distinction ad-

vanced by appellant, that in the Butler Brothers case the

tax was imposed upon income, and not upon capital stock.

In reply to this distinction we submit:

(1) Appellant has offered no proof that the application

of the Pennsylvania formula would be arbitrary or unrea-

sonable because a portion of the capital stock rather than

a portion of the net income was the tax base. ‘‘One who

attacks a formula of apportionment carries a distinct bur-

den of showing by ‘clear and cogent evidence’ that it results

in extraterritorial values being taxed.’’ (Butler Bros. v,

McColgan, 315 U. S. 501, 507.)

12

(2) Appellant’s contention is ultimately based upon the

same assumption that the Pennsylvania tax is a tax upon

property.

. (3) Appellant incorrectly states that ‘‘capital stock rep.

resenting property and assets value is selected as the basis

of the tax.’’ The tax base is not capital stock as such

but a composite figure obtained by multiplying the value

of the capital stock by fractions representing the propor-

tion of wages paid and gross receipts obtained, as well

as of tangible property in the State. This figure represents

the value of the privilege of doing business in Pennsylvania.

(4) The State makes no presumption, such as appellant

implied, ‘‘that capital or property is employed in the same

ratio as business activities.’’ The purpose of the Pennsyl-

vania statute in employing the wages fraction and the gross

receipts fraction in the formula, is to measure business

activity to an extent that property might not measure it,

in order to obtain a fairer valuation of the privilege or

franchise to be taxed.

Furthermore, in Ford Motor Company v. Beauchamp,

308 U. 8. 331, this court sustained a franchise tax based

upon capital stock rather than on income. The tax statute

there considered imposed ‘‘a franchise tax * * * based

upon that proportion of the outstanding capital stock, sur-

plus and undivided profits, plus the amount of outstanding

bonds, notes and debentures * * * as the gross receipts

from its business done in Texas bears to the total gross

veotats: >.> *”*

In Ford Motor Company v. Oklahoma Tax Commission,

188 Okla. 78, 106 Pac. (2d) 803 (1940), an assessment was

upheld which was made under an Oklahoma statute which

imposed a franchise tax upon the proportion of the capital

stock which property owned and business done in Oklahoma

bore to total property owned and business done,

13

Appellant also relies much upon the ruling in People ex

Rel. Alpka Portland Cement Co. v. Knapp, 230 N. Y. 48,

129 N. E. 202 (1920), certiorari denied 256 U. S. 702.

In this case three judges concurred in the opinion, one

judge concurred in the result and three judges dissented in

this case. The statute in this case imposed a tax upon the

proportion of income determined by the ratio of specified

assets within the state to the aggregate of such assets every-

where. Bonds were not included in these assets, but the

interest from the bonds was included in the income taxed.

This decision, we submit, is directly contrary to the ruling

of this court in Butler Bros. v. McColgan, 315 U. S. 501.

This court has frequently held that it is no objection that

the measure of taxation is found in income produced, in

part, from property, which in itself, is nontaxable, or from

the receipts from interstate commerce which may not be

taxed as such. (See Flint v. Stone Tracy Co., 220 U.S. 107,

165; Educational Films Corp. v. Ward, 282 U. S. 379, 389.)

Appellant’s objection that the gross receipts fraction in-

cludes receipts from interstate transactions, will be con-

sidered under point (g) hereof.

(ce)

Neither the Franchise Tax Act of 1935 nor the method

of allocation used in this cree :nposes a tax upon property

located outside of Pennsylvania.

As already shown, the Supreme Court of Pennsylvania

has held that the Act of 1935 does not impose a tax upon

property whose situs is beyond the limits of the State.

Thus in Commonwealth v. Columbia Gas and Electric Cor-

poration, 536 Pa. 209 (1939), Chief Justice Kephart said:

““# * * These fractions, as stated above, concern

corporate activity. While they bear some relation to

capital stock value, intrinsically they determine the tax-

3b

14

able value of the corporate activity within this State

rather than of the property located here. * * * It

does not ascertain physical worth of assets located in

this State, but arrives at a value which the functional

or operating organic unit within this State possesses.

It represents what the right to do business is worth. It

must follow that the tax is not levied on property but

on the franchise to do business measured by a taxable

value secured through the application of the factors of

gross receipts, tangibles and payrolls to the capital

stock value. It is representative of the value of that

very franchise.’’ (221-222)

This court has frequently held that while a state may not

tax property beyond its borders, it may measure a tax by

capital stock which, in part, represents property outside

the state.

Thus in Kansas City, Memphis, & Birmingham Railroad

Company v. Stiles, 242 U. 8. 111 (1916), Mr. Justice Day

said:

‘«# * * while the state could not tax property be-

yond its borders, it might measure a tax within its

authority by capital stock which in part represented

property without the taxing power of the state. * * °”’

(119)

In Atlantic Refining Company v. Virginia, 302 U. 8S. 22

(1937), Mr. Justice Brandeis said:

‘e* * * The value of the privilege acquired is

obviously dependent upon the financial resources of the

corporation. * * * Obviously, the power inherent

in the possession of large financial resources is not

dependent upon, or confined to, the place where the

assets are located. Compare Great Atlantic & P. Tea

Co. v. Grosjean, 301, U. S. 412, 81 L. ed. 1193, 57

S. Ct. 735, 112 A. L. R. 293. Great power may be

exerted by the company in Virginia although it has

little property located there. * * °”’

15

In Ford Motor Co. v. Beauchamp, 308 U. S. 331 (1940),

Mr. Justice Reed said:

‘‘In a unitary enterprise, property outside the state,

when correlated in use with property within the state,

necessarily affects the worth of the privilege within the

state. Financial power inherent in the possession of

assets may be applied, with flexibility, at whatever

point within or without the state the managers of the

business may determine. For this reason it is held that

an entrance fee may be properly measured by capital

wherever located. The weight, in determining the

value of the intrastate privilege, given the property be-

yond the state boundaries is but a recognition of the

very real effect its existence has upon the value of the

privilege granted within the taxing state. * * *”

(336)

Other decisions to the same effect are:

Great Atlantic & Pacific Tea Company v. Grosjean, 301

U. S. 412, 424-425 (1937);

Underwood Typewriter Co. v. Chamberlain, 254 U. 8.

113 (1920) ;

Bass, Ratcliff and Gretton v. State Taa Commission,

266 U. S. 271, 282 (1924).

Counsel for appellant repeatedly argues that the in-

tangible assets included in the value of the capital stock

have a business situs outside of Pennsylvania.

It is fundamental, however, that the business or commer-

cial situs of intangible assets is irrelevant in applying

the formula to determine the value of the franchise of a

foreign corporation to do business in the taxing state.

The question as to the intangibles is not, where is their

business situs, but whether they contribute to the activity

carried on in the taxing state.

In Ford Motor Co. v. Clark, 100 F. 2d 515 (1938), the

same stocks and government securities, as are involved in

16

this case, were held to be properly included in assessment

of franchise tax.

Cireuit Judge Sibley, for the Circuit Court of Appeals

for the Fifth Circuit, said:

‘It is further argued that the United States bonds

and stocks in foreign corporations owned by the tax-

payer cannot reasonably be included in capital con-

tributing to sales in Texas. The presumption is that

all the property of a business corporation is useful in

its business. It should not have it otherwise. The

Ford Motor Company has no business except the mak-

ing and selling of cars. The securities can readily be

used as a means of raising cash for working capital.

* * *%? (518) (Italics ours).

This decision was affirmed by the Supreme Court under

the title of Ford Motor Co. v. Beauchamp, 308 U. 8S. 331

(1940).

In National Leather Co. v. Massachusetts, 277 U.S. 413

(1928), Mr. Justice Sanford said:

‘*For present purposes it may be assumed that the

capital stocks of the two subsidiary companies had no

situs in Massachusetts which brought them within the

jurisdiction of that state for the purpose of imposing a

direct property tax. * * * But here the statute

does not impose any direct tax upon these stocks and,

as construed by the Massachusetts court, merely treats

them as assets employed by the petitioner in its busi-

ness within the state, and therefore requires that they

be included when the total assets so employed by it

are computed for the purpose of arriving at the propor-

tionate part of the value of its own capital shares—

deterfnined by comparing the assets employed in busi-

ness within the state with the total assets wheresoever

employed or located—on which the excise for the

privilege of carrying on its business within the State

is imposed.’’ (422-423)

17

This last decision was cited with approval by Mr. Justice

Reed in Ford Motor Co. v. Beauchamp, 308 U. 8S. 331, 335-

336 (1940).

(d)

Appellant’s analysis of Ford Motor Co. v. Beauchamp,

308 U. 8. 331.

Appellant’s analysis of this decision deals with accidents

and not the essentials of this case.

Appellant does not suggest how the particulars of the

Texas statute as recited by it, affect the principles laid down

by this Court in the Beauchamp case.

The tax in Texas, as well as in this State, was a franchise

tax for the privilege of doing business in the State. The

principles by which the tax base was determined in the

Beauchamp case are applicable to the case at bar, regard-

less of the rate of the tax or the duration of the right to do

business.

(e)

The Act of 1935 and the tax imposed on appellant there-

under do not deny to it the equal protection of the laws.

No discrimination has been shown in either the purpose

or the effect of the Act of 1935.

The Legislature did not enact the statute for the purpose

of discriminating against foreign corporations.

No one contends that they did.

On the contrary, the purpose was to remove the discrimi-

nation against domestic corporations, which had previously

existed.

This purpose was recognized and expressed by the court

in Commonwealth v. Columbia Gas and Electric Corpora-

tion, 336 Pa. 209 (1939). Referring to the capital stock

tax law, that court said:

‘“* * * Under this arrangement foreign cor-

porations, transacting a large part of their business

18

here, escaped their fair share of the tax burden. The

assets of foreign corporations, so far as they were com-

prised of intangibles, were wholly free of tax notwith-

standing that they have played an important part in

the conduct of the company’s local business. The old

tax did not even reach all the tangible property of the

enterprise located in this State. It made no attempt to

value foreign corporations either as going concerns

within this State, or as parts of going concerns which

the foreign corporations had created through opera-

tions in this and other states. The discrimination

under the old tax law was not only unfair, but operated

unjustly in favor of foreign corporations and against

domestic corporations, even though they might be

similarly situated. * *

‘*The legislature sought to remedy this condition by

amending the law so that foreign corporations would

pay substantially the same amount of tax as domestic

corporations though the amount of the tax was arrived

at by a different method. The new tax is more in keep-

ing with the benefits received from this State. The tax

base represents the value of their right to do business

in this State.’’ (215-216)

That no discrimination was made, follows from principles

well settled by the decisions of this Court:

(1) A State may place a foreign corporation in a differ-

ent class from domestic corporations for the purpose of

taxation, and impose a different rate of tax upon the

foreign corporation for the privilege of doing business

within its territory:

Kansas City, Memphis, € Birmingham Railroad Com-

pany v. Stiles, 242 U. S. 111, 118 (1916);

Madden v. Kentucky, 309 U. S. 83, 87-88 (1940) ;

Concordia Fire Insurance Company v. Illinois, 292

U. S. 535, 547-548 (1934) ;

Kidd v. Alabama, 188 U. S. 730, 732 (1903) ;

Cheney Brothers Company v. Massachusetts, 246 U. 8.

147, 157 (1918).

19

(2) The burden is on the party attacking the classifica-

tion to negative every conceivable basis which might sup-

port it:

Madden v. Kentucky, 309 U. S. 84 (1940).

(3) Mathematical equivalence, or exact identity are not

necessary :

Concordia Fire Insurance Company v. Illinois, 292 U. 8.

535, 547-548 (1934).

(4) Only clear and hostile discriminations against par-

ticular persons or classes are prohibited:

Heisler v. Thomas Colliery Co., 260 U. 8S. 245, 255

(1922) ;

Colgate v. Harvey, 296 U. S. 404, 436-437 (1935),

overruled on other grounds in Madden v. Kentucky,

309 U. S. 83, 93 (1940).

(5) The absence of discrimination is conclusively shown

by the fact that if appellant were incorporated under the

laws of Pennsylvania, its tax to this Commonwealth would

amount to more than fourteen times the assessment made

in this case.

This comparison is calculated in the opinion of the trial

court as follows:

‘© * © * Pomestie corporations are taxed at the

rate of 5 mills upon the value of the capital stock.

The foreign franchise tax imposes the same rate upon

the privilege of doing business in the State. If the

defendant had been a domestic corporation the capital

stock tax would have been figured approximately as

follows :

35,766,852

————_ x_ $75,000,000

60,821,913

which would result in a tax of $220,521.99."’ (243a)

The assessment as recalculated in the judgment of the

court below was $16,637.38 (253a).

20

In Madden v. Kentucky, 309 U. S. 83, 88 (1940), Mr.

Justice Reed said:

‘««* * © Since the members of a legislature neces-

sarily enjoy a familiarity with local conditions which

this Court cannot have, the presumption of constitu-

tionality can be overcome only by the most explicit

demonstration that a classification is a hostile and

oppressive discrimination against particular persons

and classes. The burden is on the one attacking the

legislative arrangement to negative every conceivable

basis which might support it.’’

(6) The cases of Southern Railway Company v. Greene,

216 U.S. 400 (1910) and Hanover Fire Insurance Company

v. Carr, 272 U. S. 494 (1926), cited by the appellant, are

elearly distinguishable in the case at bar, because —

(a) In each of these cases the tax imposed upon the

foreign corporation amounted to a clear discrimination.

In the Southern Railway Company case domestic and

foreign corporations had been subject to a franchise tax

at the same rate, and then the Legislature provided for

an additional annual franchise tax by foreign corporations

only. In the Hanover Fire Insurance Company case the

domestic insurance corporation paid a tax on the assess-

ment of personal property at a valuation reduced to one-

half of 60% of the value of the property, whereas the

foreign insurance corporation was re jyuired to pay a tax

at the same rate but imposed upon 100% of its net receipts.

(b) In each case the foreign corporation had invested

a large amount of money in property devoted to a limited

and special use and not readily available for other uses.

In the Southern Railway Company case the company had

purchased and built and improved lines of railroad which

connected with other lines owned by it. This case is dis-

tinguished in Cheney Brothers Company v. Massachusetts,

21

246 U. S. 147, 157 (1918), and in Northwestern Mutual Life

Insurance Company v. Wisconsin, 247 U. S. 132, 140 (1918).

In this last case this court said:

«ce ¢ * In that case we laid stress upon the fact

that the tax related to railroad property not susceptible

of other uses, which, placed in the state, had to remain

there permanently, and could not be withdrawn at the

pleasure of its owners. Under such circumstances, and

dealing with that character of property, we held that

the particular tax constituted such discrimination as

‘ to deny to the company the equal protection of the

ae. Cae

In the Hanover Fire Insurance Company case the com-

pany had done business in Illinois for a number of years

and had built up a large business and good will and had

many agents and extensive records there. In this last case,

however, Chief Justice Taft said:

“eo 6°) * 6 We have said in Cheney Bros. Co. v.

Massachusetts, 246 U. S. 147, 62 L. ed. 632, 38 Sup.

Ct. Rep. 295, and in Kansas City, M. & B. R. Co. v.

Stiles, 242 U. S. 111, 118, 61 L. ed. 176, 187, 37 Sup.

Ct. Rep. 58, that a state does not surrender or abridge

its power to change and revise its taxing system and

tax rates by merely licensing or permitting a foreign

corporation to engage in local business and acquire

property within its limits, and that a state may impose

a different rate of taxation upon a foreign corporation

for the privilege of doing business within the state

than it applies to its own corporations upon the fran-

chise which the state grants them; * * *’’ (514-515)

In the Cheney Bros. Co. case, the fact that the foreign

corporation had made a very substantial investment —

$175,000—in lands and buildings for an auto service sta-

tion and garage did not prevent the State of Massachusetts

from increasing its annual license fee.

(f)

Neither the Act of 1905 nor the assessment of tax against

the appellant thereunder impairs the obligation of contract.

Appellant contends that a contract was created between

itself and the Commonwealth of Pennsylvania by Section

1010 of the Pennsylvania Business Corporation Law of

May 5, 1933, P. L. 364, 15 P. S., Section 2852-1010, which

provides as follows:

‘*A foreign business corporation which shall have

received a certificate of authority under this act, so

long as such certificate of authority shali not be revoked

or cancelled, shall enjoy the same rights and privileges

as a domestic business corporation, but no more, and,

except as in this act otherwise provided, shall be sub-

ject to the same liabilities, restrictions, duties and

penalties now in force or hereafter imposed upon

domestic business corporations, to the same extent as

if it had been organized under this act to transact the

business set forth in its certificate of authority.”

(Italics ours.)

Our position is that no impairment of the obligation of

contract has resulted, because —

(1) Section 1010, above quoted, even if it embodies a

contract between the appellant and the Commonwealth,

does not confer the same rights or impose the same liabili-

ties on a foreign corporation in the matter of taxation:

The peculiar wording of this section distinguishes it

from analogous clauses which have been employed in

statutes or constitutions of other states. What is peculiar

is the language:

o * * to the same extent as if it had been

organized wnder this act to transact the business sel

forth im its certificate of authority.’’ (Italics ours.)

23

These words, we submit, define what is meant by the

‘same rights and privileges’’ and the ‘‘same liabilities.’’

The language means the rights and liabilities which would

be conferred if the foreign corporation had been organized ~

under this act, namely, the Business Corporation Code. It

means the rights conferred and liabilities imposed by this

elaborate Business Corporation Code itself.

The language does not mean every right or liability which

might be created under any existing law of the Common-

wealth.

This, we submit, is what Section 1010 means, and is all

that it means. Section 1010 does not mean that the foreign

corporation must be subject to the same identical liabilities

as the domestic corporation in the matter of taxation, be-

cause the problem of the state in taxing a foreign corpora-

tion is very different from the problem of taxing a domestic

corporation. This has been recognized in many decisions of

the Supreme Court of this State and also by the Supreme

Court of the United States, which hold that a state may

place the domestic and foreign corporations in different

classes for the purpose of taxation.

In Commonwealth v. The American Gas Company, 54

Dauph. 115 (1943), Judge Hargest of the Common Pleas

of Dauphin County said:

“The Business Corporation Law is a regulatory

Act; it is not a taxing statute; and we are of opinion

that the words ‘liabilities, restrictions, duties and

penalties’ in that act have no reference to taxation.’’

(152)

In the opinion of the court of Common Pleas, in this

case, Judge Hargest also said:

‘*We do not understand that the Business Corpora-

tion Law deprives the State of its well-recognized

power to differently classify foreign and domestic cor-

24

porations for taxation, provided there is no arbitrary

discrimination against one class or the other. * ° *”

(243a)

Section 1010 of the Business Corporation Code does not

say that the rate of taxation shall not be changed or be

identical with the rate charged to domestic corporations,

but only that the foreign corporation shall enjoy the same

rights and privileges as a domestic corporation.

Hence, so long as the foreign corporation does not pay

higher taxes than does the domestic corporation, the for-

eign corporation had no ground for complaint.

If this interpretation is correct, there has been no im-

pairment of the obligation of the alleged contract sought

to be derived from Section 1010 and the record presents

no Federal question of impairment of obligation of con-

tract.

(2) The alleged contract would not be impaired because

the tax liability of the appellant im this case is far less

than it would have been if it had been organized under this

Business Corporation Law of 1933.

The contract right ‘‘to the same liabilities’’ as if appel-

lant ‘‘had been organized under this act’’ would not be

violated by the assessment made in this case, which was

less than one-fourteenth of the assessment that would have

been made against the appellant if it had been organized

under the Pennsylvania Code. See the calculations above

under (5) of point (e) and page 253a of the printed record

in the Supreme Court of Pennsylvania.

(3) Section 1010 did not create a contract between the

appellant and the Commonwealth.

(a) The certificate of authority issued to the appellant

under Section 1010 conferred only a revocable license:

25

Connecticut Mutual Life Insurance Company v. Sprat-

ley, 172 U. 8. 602, 620 (1899) ;

Doyle v. Continental Insurance Company, 94 U. 8S. 535,

540-541 (1877);

Home Insurance Company of New York v. Augusta,

Georgia, 93 U. 8. 116, 120, 122 (1876) ;

Commonwealth ex rel. Baldrige v. Sun Oil Co., 294 Pa.

99, 105 (1928) ;

Rule v. Price, 323 Pa. 139, 143-144 (1936).

(b) The right or license which appellant secured under

Section 1010 was made expressly revocable.

The right was to continue only ‘‘so long as the certificate

of authority shal) not be revoked or canceled.”’

Section 1010 states unqualifiedly that the certificate of

authority is to continue only so long as it shall not be re-

voked or canceled.

The Commonwealth, which granted the license, has the

sole power to ‘‘revoke’’ or ‘‘cancel’’ the license.

This provision is wholly inconsistent with the existence

of a contract.

(c) It is an elementary rule of the law of contracts that

if one party reserves the right to cancel, the proposed agree-

ment is void for lack of mutuality.

Thus in 1 Williston on Contracts, Section 105, page 365,

the author states:

‘“e * * As has been seen an agreement which the

party reserves the right to cancel at his pleasure can-

not create a contract.’’

In Ellis v. Dodge Bros., 237 F. 860, 867 (1916), a con-

tract by a manufacturer granted a license to a dealer to

sell cars, but provided that the contract might be cancelled

by either party at any time upon fifteen days’ notice.

The court held that the dealer’s administrator could not

recover at all on the contract, saying:

“e ¢ * Even if there were an agreement here on

the part of the Dodge Bros. to deliver the cars, this

right to cancel would seem to nullify any such agree-

ment. To agree to do something and reserve the right

‘to cancel the agreement at will is no agreement at all.”

Other decisions to the same effect are:

Interstate Iron & Steel Co. v. Northwestern Bridge é

Tron Co., 278 F. 50 (1922);

Velie Motor Car Co. v. Kopmeier Motor Car Co., 194

F. 324 (1912);

City of Pocatello v. Fidelity & Deposit Co. of Mary-

land, 267 F. 181 (9th C.C.A. 1920) ;

Williston on Contracts (Rev. ed.), Section 43, page 126.

Any right which appellant could obtain under Section

1010 would be revocable under the reserved power con-

tained in the Pennsylvania Constitution.

Section 1010 confers upon a foreign corporation—

“e * * the same rights and privileges as a

domestic business corporation, butno more * * *°.”

Therefore, if a domestic corporation could only secure

a revocable right to do business in this State, the same

must be true of a foreign corporation registering under

Section 1010.

The license or right of a domestic corporation and there-

fore of a foreign corporation, was subject to the right of

the General Assembly to alter, revoke or annul under

Article XVI, Section 10 of the Pennsylvania Constitution.

Article XVI, Section 10 provides:

‘The General Assembly shall have the power to

alter, revoke or annul any charter of incorporation

27

now existing and revocable at the adoption of this

Constitution, or any that may hereafter be created,

whenever in their opinion it may be injurious to the

citizens of this Commonwealth, in such manner, how-

ever, that no injustice shall be done to the cor-

porators. . . *

The domestic corporation has only a revocable right to

do business, and the foreign corporation is expressly

given the same right, but no more.

Clearly the right of a foreign corporation to do business

in this state is thereby made revocable at any time.

Again, the foreign corporation—

* * shall be subject to the same liabilities,

restrictions, duties, * ° *°’’ ete.

imposed upon domestic business corporations, to the same

extent as if the foreign corporation had been organized

under the Business Corporation Code.

The franchise of a domestic corporation is subject to

the definite ‘‘restriction’’ that it may be revoked at any

time by the Legislature. The foreign corporation is ex-

pressly made subject to the same restriction as a domestic

corporation. To make the language more certain, Section

1010 expressly declares that the foreign corporation shall

be subject to the same restrictions, etc., ‘‘as if it had been

organized under this act,’’ as a domestic corporation.

As the contract right asserted by appellant may be re-

voked by the Legislature at any time, such right does not

amount to a contract at all.

In Hammond Packing Company v. Arkansas, 212 U. 8.

322 (1909) (quoted in appellee’s brief, page 80), the

Arkansas constitution (Article 12, Section 111) authorized

foreign corporations to do business in the State, subject

to the same reg#%ations and with the same rights as those

enjoyed by domestic corporations.

Article 12, Section 16 of the same constitution contained

a provision similar to Article XVI, Section 1010 of the

Pennsylvania Constitution, authorizing the Legislature to

repeal charters provided that ‘‘no injustice shall be done

to incorporators.”’

The Supreme Court of the United States held that in

view of this clause a foreign corporation obtained no con-

tract right.

Mr. Justice White said:

se * * The claim of an irrepealable contract

cannot be predicated upon a contract which is repeal-

able. * * *’’ (345-346) (Italics ours.)

The Legislature of Pennsylvania did not intend that a

foreign corporation should have a better right and pay less

taxes in proportion than a Pennsylvania corporation.

(d) The reserved power to revoke may be exercised by

any general law amending or changing Section 1010, and

without first enacting a statute expressly revoking the li-

cense or charter.

Hammond Packing Company v. Arkansas, 212 U. S.

322, 345-346 (1909) ;

Phillips Petroleum Co. v. Jenkins, 297 U. S. 629, 635

(1936) ;

Wagner Free Institute v. Philadelphia, 132 Pa. 612

(1890) ;

The Iron City Bank v. The City of Pittsburgh, 37 Pa.

340 (1860).

In Town of Southington v. Southington Water Co., 8

Conn. 646, 69 Atl. 1023 (1908), the Supreme Court of Con-

necticut said:

sc* * *

Amendmeats or alterations of charters

may result from the operation of general laws, as well

as from special legislation addressed to the corporation

in question. * * *’’ (1026)

The courts have held that the mere passage of a later

statute inconsistent with the charter is sufficient act of

revocation, without any notice. The State need not first

give some notice or form of revocation. The later tax or

other statute need not refer to the charter at all.

(e) The power of the Commonwealth to revoke a certifi-

cate or authority of a foreign corporation under the lan-

guage of Section 1010—‘‘so long as such certificate of au-

thority shall not be revoked or cancelled’’—is not limited

or restricted by Section 1013 of the Business Corporation

Code.

Section 1013 provides:

‘‘Whenever the Department of State shall find that

a foreign business corporation, authorized by a certifi-

cate of authority to do business in this Commonwealth,

is engaged in this Commonwealth in any business which

it is not authorized to transact by its tertificate of au-

thority or by any amended certificate of authority, or

has changed its name or the location of its registered

office without first securing an amended certificate of

authority, as required by this act, or is violating any

of the laws of this Commonwealth, the Department of

State shall give notice by registered mail to such corpo-

ration that such default exists and that its certificate

of authority, including any amendments thereto, will

be revoked and cancelled unless such default shall be

cured within thirty days after the mailing of such no-

tice. If such default shall not be cured within such

period of thirty days, the Department of State shall

revoke and cancel the certificate of authority of such

foreign corporation, including any amendments thereto.

* * *)9)

30

That Section 1013 does not limit or restrict the authority

to revoke in Section 1010 is shown by the following:

(1) The power to revoke conferred in Section 1013 is

only the power which is given to the Department of State.

Nothing is said about the power of the Legislature to revoke

or amend.

(2) The purpose of Section 1013 is to provide for an

administrative supervision of a foreign corporation to keep

it within the bounds of its certificate of authority and within

the laws of this Commonwealth.

Section 1013 permits a revocation by the Department of

State only in cases where the foreign corporation (1) en-

gages in a business not authorized by its certificate, or (2)

changes its name or location without first securing an

amended certificate, or (3) violates a law of the Common-

wealth.

These few cases, however, do not constitute an exhaustive

enumeration of the causes of revocation. There is no inten-

tion shown that these causes are the sole and exclusive

causes for revocation. If they were such, the Common-

wealth could not revoke a certificate of authority if a corpo-

ration should cease to do business or become defunct, or

be unable to pay or defaulted in paying its Pennsylvania

corporation taxes. These and numerous other grounds still

exist for the revocation of a certificate of authority.

(3) Section 1013 does not, in terms or in reason, limit

the reserve power of the Legislature ‘‘to alter, revoke or

annul.’’

Nothing in the section shows any intention to deprive the

Legislature of this essential power. In fact, this reserved

power of the Legislature is created by the Constitution

and could not be limited by the Legislature. Even without

the language in Section 1010, appellant’s certificate of

authority is revocable,

31

(4) Section 1010 does not in any way refer to Section

1013, and therefore is not limited by it.

Section 1010 does not say ‘‘so long as not revoked or

eancelled’’-—

by the Department of State

or

as provided in Section 1013 for causes herein

or

in this Act provided.

(f) Nothing in Section 1010 or in the Business Corpo-

ration Code generally, was intended to deprive the Legis-

lature of its well-recognized power to place foreign and

domestic corporations im classes for the purpose of taxation.

Section 1010 does not mention taxation at all. Its lan-

guage is not sufficient to confer upon foreign corporations

an exemption or a more favorable return of taxation than

domestic corporations enjoy.

We repeat, Section 1010 gives a foreign corporation ‘‘the

same rights and privileges as a domestic corporation, but

no more.”’

(4) The failure to deduct from the multiplicand or cap-

ital stock value of foreign corporations certain intangible

assets which are deducted from the appraised value of the

capital stock of domestic corporations, does not impair the

obligation of contract or deny the equal protection of the

laws.

Section 1 of the Act of June 22, 1931, P. L. 687, 72 P. 8.

Section 1894 (Pocket Part), provides:

‘‘Whenever any corporation, limited partnership,

joint-stock association, or company, incorporated or

formed under the laws of this Commonwealth, and

liable to the payment of tax upon its capital stock, or

32

specifically exempted therefrom under the laws of this

Commonwealth, shall own, either directly, or through

subsidiary or sub-subsidiary corporations, a majority

of the total issued and outstanding shares of voting

stock of any corporation, iimited partnership, joint-

stock association or company, then, in such eases, so

much of the value of all shares of stock, so owned in

such other corporation, limited partnership, joint-stock

association, or company, as represents property or

assets located or having a legal situs without this Com-

monwealth, shall not be liable to taxation, under the

laws of this Commonwealth providing for the taxation

of capital stock of corporations, limited partnerships,

joint-stock associations, and companies, but shall be

excluded in determining the value of the capital stock

of such owning company for purposes of taxation.’’

This provision as to domestic corporations, however, does

not violate the requirement of equality, because—

(1) It is well established hy decisions of this court and

of the Supreme Court of the United States that the Legis-

lature may place foreign corporations in a different class

from domestic corporations for the purpose of taxation.

(2) As the Legislature may so classify them differently,

it may also impose upon foreign corporations a different

tax from that imposed upoa domestic corporations, pro-

vided no unreasonable discrimination results against the

foreign corporations.

See Kidd v. Alabama, 188 U.S. 730 (1903).

Furthermore, the reason for granting a deduction or

exemption of certain government securities and stocks of

subsidiaries in taxing a domestic corporation, did not apply

to a franchise tax upon foreign corporations.

The Pennsylvania Capital Stock Tax was a tax upon

property and ould not have been applied to the govern-

ment securities. Further, only such proportion, not all, of

33

the value of stocks of subsidiary companies as represents

assets located without the Commonwealth, is deducted under

the Capital Stock Tax Law.

The franchise tax, however, is not a tax upon property,

and would not be imposed upon such government securities,

or stocks of subsidiaries, as such, but such securities and

stocks were considered only along with all other assets of

the foreign corporation in determining the value of a fran-

chise or privilege to do business in Pennsylvania. The

same reasons which support the consideration of the value

of tangible property outside of Pennsylvania in the for-

mula to determine the value of the franchise, also justify

the consideration of the government securities and the

stocks, instead of deducting or exempting the same.

The capital stock tax is imposed upon all of the assets

of a domestic corporation, including intangibles, excepting

the intangibles deducted in accordance with the Act of June

22, 1931, and tangible property outside of the State. The

franchise tax upon foreign corporations. sowever, is im-

posed only upon a proportion or percentuge—4.4% in the

case of appellant—of the value of the tota: capital stock.

The average percentage resulting from the three allocat-

ing fractions amounts to .044434. (162a)

A foreign corporation unquestionably has still, in spite

of the franchise tax amendment of 1935, a comparative

advantage over domestic corporations in the matter of tax-

ation, because its tax is calculated upon 4.4% only of the

capital stock value.

As stated in the decisions of this court, the burden was

upon appellant to prove that a greater tax burden in fact

was imposed upon a foreign corporation than upon a do-

mestic corporation. This it has wholly failed to do.

(g)

34

(g)

The Act of 1935, as construed by the State courts, does

not unlawfully burden interstate commerce.

Appellant contends that of the $7,224,347 of sales, $7,052,-

574 were made in interstate commerce and should have been

excluded from the numerator of the third fraction which

represents gross receipts.

Section 21 (b) of the Act of May 16, 1935, P. L. 184, 72

P. 8. Section 1871 (Pocket Part), defines ‘‘ gross receipts”

as follows:

‘‘The amount of the taxpayer’s gross receipts from

business assignable to this Commonwealth shall be the

amount of its gross receipts for the taxable year from,

(1) sales, except those negotiated or effected in behalf

of the taxpayer by agents or agencies chiefly situated

at, connected with, or sent out from premises for the

transaction of business owned or rented by the tax-

payer outside the Commonwealth, and sales otherwise

Getermined, by the Department of Revenue, to be at-

tributable to the business conducted on such premises

* . @

The Court of Common Pleas (Pa. Rec. 234-237) and the

Supreme Court (350 Pa. at page 259) found that all of the

sales in question were included within the term ‘‘gross

receipts’’ in the statute quoted.

It is, therefore, unnecessary to recite the particulars of

appellant’s business, except as they bear upon the question

of a possible violation of the Commerce Clause.

The total sales were made up as follows: (21st Find,

221a) —

(1) Sales to Pa. Customers on orders

filled from stocks in Pa.

(2) Sales to Pa. customers on orders

filled from stocks outside of Pa.

(3) Sales to customers outside of Pa. de-

livered from stocks in Pa.

35

(4) Sales to customers outside of Pa. de-

livered from stocks outside of Pa. 1,710,769

The above description of these four classes, however,

does not indicate the full extent of the activity in Penn-

sylvania.

The trial court found, and appellant does not deny, that

all of these sales ‘‘were negotiated by Pennsylvania

agents’? (235a). The order for all of these sales were

secured by salesmen working out of the two offices which

appellant maintained in Pennsylvania.

In addition, all of these sales were closed in Pennsylvania

and the sales price was collected by the offices in Penn-

sylvania and deposited in Pennsylvania banks to the credit

of appellant (236a, 99a).

Sales were of two kinds: package sales and bulk sales.

In negotiating package sales the salesman secures an

order from the customer and this order is forwarded to

the Chicago office. There the credit department may either

approve or reject the credit of the customer. Then the

sales department approves or disapproves the price. If

the Pittsburgh office does not hear from Chicago within

two days, it is entitled to treat the order as accepted.

Only ‘‘a very small percentage’’ of such orders were

disapproved or rejected by the Chicago office (89a-90a).

When an order for bulk goods is secured from a customer

this order blank is sent to the Chicago office and if the

Pittsburgh branch receives confirmation of the order a

formal contract is prepared by the office in Pennsylvania

and executed there.

Only a ‘‘comparatively small’’ percentage of the total

orders sent to Chicago are contract orders (10la), and

only a ‘‘small percentage’ of contract orders are not ap-

proved (95a).

In the exceptional case where the credit department or

36

the sales department disapproves an order, it merely ex-

ercises a power of veto. The credit department consults

its filesand ascertains the credit standing of the customer.

The sales department checks the price and the time of

delivery.

None of these activities has anything to do with the

contacting of the customer or securing the order or the

closing of the sale. A credit manager and the sales man-

ager in Chicago might function perpetually, but they would

never sell a pound of goods. It is the Pennsylvania office

which gets the business and closes the business. The action

in Chicago was purely negative. The only affirmative

activity throughout the whole business of selling is that of

the agents of the Pennsylvania office. They are the pro-

curing cause of the sale.

Appellant did not offer proof to show what proportion

of its sales were package sales or bulk sales. Therefore,

if either package or bulk sales were properly included in

the computation, the assessment should be sustained.

The first class— sales to Pennsylvania customers on

orders filled from stocks in Pennsylvania — were intrastate

sales. The second class — sales to Pennsylvania customers

on orders filled from stocks outside of Pennsylvania —

seems to be identical with the class of sales which were

held properly subject to a gross receipts tax in Department

of Treasury of State of Indiana v. Allied Mills, 220 Ind.

340, 42 N. E. (2d) 34, affirmed per curiam in 318 U. S.

340, and followed in International Harvester Co. v. De-

partment of Treasury, 322 U. S. 340, 346 (1944).

However, the Pennsylvania tax is not a tax upon gross

receipts, but is a franchise tax upon the privilege of doing

business in that state.

Under the decisions of this court it is clear, we submit,

that all four classes of these sales in interstate commerce

37

were properly included and used as a measure in com-

puting the franchise tax.

Not all, but only part of the gross receipts, used in the

computation were receipts from interstate commerce.

Furthermore, gross receipts from interstate commerce

are used as a measure only in one of three fractions in

computing the amount of the tax. No tax is imposed upon

gross receipts from interstate commerce as such.

The applicable rule will be found in such decisions as:

International Shoe Company v. Stratton Shartel, 279

U. 8. 429 (1929) ;

Hump Hairpin Manufacturing Company v. Emmerson,

258 U. S. 290 (1922) ;

Baltic Mining Company v. Massachusetts, 231 U. 8. 68

(1913) ;

Western Cartridge Co. v. Emmerson, 281 U. 8. 511

(1930) ;

Western Live Stock v. Bureau of Revenue, 303 U. 8.

250 (1938).

Harry F. Stampaven,

Special Counsel.

James H. Durr,

Attorney General.

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1944

No. 873

THE QUAKER OATS COMPANY,

vs.

COMMONWEALTH OF PENNSYLVANIA.

Appellant,

APPEAL FROM THE SUPREME COURT OF PENNSYLVANIA

MOTION TO DISMISS OR AFFIRM

Now comes the appellee, the Commonwealth of Penn-

sylvania and moves that the appeal in the above case be

dismissed on the ground that the case presents no sub-

stantial Federal question, and it further moves that, if

the motion to dismiss be not granted, this court affirm the

decision of the Supreme Court of Pennsylvania on the

ground that the questions on which the decision of this

cause depends, are so unsubstantial as not to need further

argument. In support of this motion the appellee advances

the reasons set forth in the statement opposing jurisdiction

filed in connection with this appeal.

H. F. Stamsaven,

Special Counsel.

James H. Durr,

Attorney General.