Opposition Brief — Delaware, Lackawanna & Western Railroad v. Division of Tax Appeals

. © 27 FILED

DEC 28 1349

CHARLES f

n

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1949

No. 503

THE CENTRAL RAILROAD COMPANY OF NEW

JERSEY,

Appellant,

vs.

DIVISION OF TAX APPEALS, NEW JERSEY STATE

DEPARTMENT OF TAXATION AND FINANCE

AND THE STATE OF NEW JERSEY,

Appellees

APPEAL FROM THE SUPREME COURT OF NEW JERSEY

STATEMENT OPPOSING JURISDICTION AND

MOTION TO DISMISS OR AFFIRM

1 Tueopore D. Parsons,

Attorney General of New Jersey,

Counsel for Appellee,

J State of New Jersey,

State House, Trenton, N. J.

Bensamin C. Van Tixx,

Of Counsel.

INDEX

Sussect Inpex

Page

Statement Opposing Jurisdiction Set Be, Seas

Matters and Grounds Making Against Jurisdic-

tion N 2

A. There are no Federal Questions 8

B. No Substantial Federal Question is Raised 11

Motion to Dismiss or Affirm 14

Taste or Cases CrTEep

Aero Mayflower Transit Co. v. Board of R. R. Com.,

| , ̃ò⅛ Ü ͤV ee 10

Charleston Fed. Sav. 4 L. Asso. v. . Alderson, 324

r os

Ferry v. County of King, 141 U. S. 668 (1891) as on 10

French v. Taylor, 199 U. S. 274 (1905) 11

Jersey City v. State Board of Tax Appeals, 133 N. J. L.

t

Jersey City v. Kelly, 134 N.J.L. 239 (EAA 1946)

Lehigh Valley R. R. Co. v. Martin, 100 F. 2d 239

(C. C. A. 3rd 1938) 11

Norton, Trustee v. State Board of Tax Appeals, 134

N.J.L. 57, 62 (E.&A. 1946)........... 4

Postal Telegraph Cable Co. v. Adams, 155 U. S. 688

7 A 12

Wall v. Chesapeake d Ohio R. Co., 256 U. S. 125

RRS SE RS PA Te o> ee ap ae ey ee

Whitfield v. Ohio, 297 U. S. 431 (1936)

Wilentz v. Hendrickson, 135 N. J. Eq. 244 4.

—. . .

Wilson v. Cook, 327 U. S. 474 (1946)..........

Zucht v. King, 260 U. S. 174 (1922).............. . 1

—6079

— RSENS

ii INDEX

Statutes Cirep

Page

28 U. S. C. A. 1257 (2) ..... 8

P. L. 1941, ch. 291, sect. 12 8 12

P. L. 1941, ch. 291, seet. 13 2

P. L. 1941, ch. 291, sect. 14 2

R.S. 54:29A-13 et seq. 2

P. L. 1941, ch. 291, sect. 74 11

P. L. 1888, ch. 206 11

R. S. 54:19-1 et seq 11,1

Ru.es

Rule 1 :3-2 (e) of the New Jersey Supreme Court 5

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SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1949

No. 503

THE CENTRAL RAILROAD COMPANY OF NEW

JERSEY,

Appellant,

vs.

DIVISION OF TAX APPEALS, NEW JERSEY STATE

DEPARTMENT OF TAXATION AND FINANCE

AND THE STATE OF NEW JERSEY,

Appellees

STATEMENT OF APPELLEE, STATE OF NEW JER-

SEY, MAKING AGAINST THE JURISDICTION OF

THE SUPREME COURT OF THE UNITED STATES

TO REVIEW ON APPEAL THE JUDGMENT IN

QUESTION, INCLUDING APPELLEE'S MOTION TO

DISMISS THE APPEAL OR AFFIRM THE JUDG.

MENT.

The appellee, State of New Jersey, believing that the

matters set forth below will demonstrate the lack of juris-

diction of the Supreme Court and the lack of substance in

the questions raised by this appeal, files this, its statement

in opposition to appellant’s statement as to jurisdiction.

Appellee includes herein its motion to dismiss the appeal

2

for lack of jurisdiction, or in the alternative to affirm the

judgment of the Supreme Court of New Jersey on the

ground that the questions raised by the appellant are so

unsubstantial as not to need further argument.

The appellant seeks a review of a judgment of the Su-

preme Court of New Jersey on direct appeal from that

Court. Appellee respectfully asserts that jurisdiction to

hear such appeal is lacking under the statute and, further-

more, the grounds stated by the appellant appear on the

face of the record to be so unsubstantial as to warrant the

Court in summarily disposing of the appeal at this stage

of the proceeding.

The matters relied upon by appellee are more partieu—

larly stated below:

1. Matters and Grounds Making Against Jurisdiction

The appellant seeks to invalidate a portion of its fran-

chise excise tax assessment for the tax year 1946, levied

pursuant to the ‘‘railroad tax law of 1941,’’ (P. L. 1941, ch.

291; R.S. 54:29A-13 et seq.) The ‘franchise base“ upon

which the said taxes were levied was required by law to be

computed upon a formula applied to ‘‘the next preceding

year’s net operating income“, (P. L. 1941, ch. 291, sect. 14).

The appellant complains because, in computing the ‘‘next

preceding year’s net operating income (1945), the state tax

commissioner refused to allow: 1.) certain interest amounts

never heretofore charged to operating income accounts but

charged instead to non-operating income account, ‘‘interest

on unfunded debt (Ex. S-11 and Ex. 8-12); and 2.) a pro-

visional payment of additional 1941 taxes and interest made

in 1941 but ultimately determined not to be due.

Concerning the interest item. The record shows that in

1944 the Delaware, Lackawanna and Western Railroad

Company requested advice from the Interstate Commerce

Commission concerning the accounting of interest amounts

—

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3

heretofore invariably charged to non-operating income ac-

count interest on unfunded debt“ (Ex. S-13 Schedule A).

The Interstate Commerce Commission immediately circu-

larized the Association of American Railroads concerning

a change in the accounting practice with respect to interest

charges (Ex. 8-13, Schedules B & C). Two months later

the proposed change was disapproved (Ex. 8-13, Schedules

D & E). The Delaware, Lackawanna and Western Rail-

road Company was therefore advised that there would be

no change in the regulations requiring such amounts gen-

erally to be charged to the said non-operating income ac-

count, but that since in New Jersey the interest was a part

of the tax, the New Jersey railroads could charge such

items to operating income accounts (Ex. 8-13, Schedule F).

In every state except New Jersey, amounts payable on

account of default in payment of taxes, whether such

amounts are called additional assessments“ for failure

to pay taxes when due or interest or penalty, are charge-

able to account 547 ‘‘interest on unfunded debt, which is

below the operating income line and does not affect net

operating income.

Concerning the item of additional 1941 taxes and interest.

Immediately upon passage of the ‘‘railroad tax law of

1941’, the City of Jersey City challenged the constitution-

ality of the new act. The appellant was not a party to that

suit, which was vigorously defended by all of the other

railroad companies operating in New Jersey together with

the Attorney General. The old Supreme Court held the

new Act to be valid prospectively but invalid as to 1941.

Jersey City v. State Board of Tax Appeals, 133 N.J.L.

202, decided August 29, 1945. The Court based its conclu-

ion as to 1941 on the fact that assessments for the year

1941 had already been made in the amount of $18,322,161.33

and that new assessments for that year which totalled only

$15,042,931.07 resulted in an unconstitutional gift to the

>

railroads of an amount in excess of $3,000,000 (p. 208).

Although appellant was not a party to the said suit and

although no demand was made by the State, appellant ob-

tained an ex parte order from the bankruptcy court provid-

ing for a provisional payment of $1,151,145, which the said

appellant calculated the additional 1941 to be on the basis

of the old Supreme Court’s decision, and $532,422, which

appellant calculated the interest to be on the basis of de-

fault since 1941 (Ex. 8 a & b). All of the other railroad

companies paid the amounts they figured would be due

although no demand was made by the State. None of the

others paid any interest. It has never been determined

that, under such circumstances, interest would have been

due. All of the payments were placed in a trust fund to

await the final outcome of the litigation. The payments |

|

|

4

were accepted in order to stop the possible running of any

future interest charges (Witness Zink Ra 5a-10).

Upon appeal from the judgment of the old Supreme

Court, the New Jersey Court of Errors and Appeals modi-

fied the judgment holding the ‘‘railroad tax law of 1941”’

to be constitutional in its entirety. Jersey City v. Kelly,

134 N.J.L. 239, decided on May 3rd, 1946. Thereafter the

above mentioned sums of $1,141,145 and $532,422 were cred-

ited on the 1946 taxes of the appellant in conformity with

the express provisions of the ex parte order of the bank-

ruptey court (Ex. 8 b).

The assessment of the 1946 franchise tax of the appellant

was not arbitrarily or capriciously made but was made in

conformity with the ruling of the Court of Errors and Ap-

peals in Norton, Trustee v. State Board of Tax Appeals,

134 N.J.L. 57, 62 (January 31, 1946) which stated:

„We hold that ‘tax accruals’ mean the current taxes

for the particular year which have been assessed in

conformity with law e.g. the amount certified by the

tax assessor.’’

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5

Neither of the claimed items meets this test.

Nowhere in the record below can be found a forthright

assertion that the railroad tax law of 1941 or any portion

thereof is invalid. The appellant simply has sought to

have a certain portion of its 1946 franchise excise tax as-

sessment invalidated as not conforming to its own idea of

what should constitute ‘‘the next preceding year’s net op-

erating income“'.

Rule 1:3-2 (e) of the New Jersey Supreme Court requires

a statement of questions involved to be printed on a page

by itself in an appellant’s brief. The rule provides that

such requirement is to be considered in the highest degree

mandatory, admitting of no exceptions and that ordinarily

no point will be considered which is not set forth in or neces-

sarily suggested by the statement of questions involved.

In compliance with this rule, the appellant included the

following in its brief below:

‘‘Questions InvoLvED’’

I

‘Does not the action of the State Tax Assessor in

arbitrarily increasing the net railway operating income

of an interstate railroad as reported to the Interstate

Commerce Commission, with the effect of greatly in-

creasing its State taxes, operate as a burden on inter-

state commerce in violation of the Commerce Clause

and involve a denial of due process under the Four-

teenth Amendment?

Il

‘Where a State statute bases a franchise tax on the

‘Net Railway Operating Income’ of an interstate rail-

road and in defining ‘Net Railway Operating Income’

the statute uses words and phrases which for a quarter

of a century had been used and construed by the In-

teretate Commerce Commission in rulings and regula-

tions issued by it pursuant to the Interstate Commerce

Act for the determination of Net Railway Operating

Income,’ should not such usage and construction be

followed in construing the State statute?

III

Where a State statute imposes on an interstate

railroad a franchise tax based upon an apportionment

to the State of a part of the entire ‘Net Railway Op-

erating Income’ of the interstate railroad system, may

the State Tax Assessor legally and constitutionally in-

crease such ‘Net Railway Operating Income’ as de-

fined by the State statute and as reported to and deter-

mined by the Interstate Commerce Commission pur-

suant to the provisions of the Interstate Commerce

Act, so as to increase the amount of the State taxes!“

There is no mention in this statement of the 1941 Act being

unconstitutional. The appellant does not even suggest

that, if the judgment of the Appellate Division should be

sustained, the Act would be in any wise unconstitutional.

On the contrary, the appellant stated in its brief at

page 22:

The New Jersey franchise excise tax can only be jus-

tified as a tax on the New Jersey earnings of appellant.

The only attempt of the statute to determine the earn-

ings of appellant in the State is by taking the Net Rail-

way Operating Income of the System, whether made

in two or more States, and taking as a base for taxa-

tion by New Jersey that proportion thereof which the

mileage of the railroad in New Jersey bears to the

total mileage of the railroad. The Supreme Court has

held that such a method of determining the earnings

of a railroad system in a State is not unreasonable.

Pittsburgh, C. C. & St. L. R. Co. v. Backus, 154 U. 8.

421, 430, 431, 38 L. Ed. 1031, 1038, 1040 (1894); Atlan-

tic Coast Line R. Co. v. Daughton, 262 U. S. 413, 67 L.

Ed. 1051, 43 S. Ct. 620 (1923); Southern NR. Co. v. Ken-

tucky, 274 U. S. 76; 71 L. Ed. 934 (1927); Norfolk &

W. NR. Co. v. North Carolina, 297 U. S. 682, 684, 80 L.

Ed. 977, 980 (1936); Western Live Stock v. Bureau of

Revenue, 303 U. S. 250 (C. L. Stone) (1938).

6

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7

We do not question the constitutionality of the New

Jersey statute as it is written. When, however, the

Director, Division of Taxation, so construes the stat-

ute as to permit him arbitrarily to increase the system

Net Railway Operating Income of a railroad carrier to

the end that the portion subject to taxation in this

State is much greater than the ‘franchise base’ as spe-

cified in the statute, it necessarily follows that New

Jersey is assessing a franchise tax not only on the

earnings fairly attributable to New Jersey, but actually

upon the earniags of the railroad in other states as

well, for 66.3709% of all tracks of The Central Rail-

road Company of New Jersey System are in New Jer-

sey (Ex. 2, Ap. 44a). In the case at bar the Net Rail-

way Operating Income of the System for the year 1945

was $145,349, but was increased 1600% to an ‘adjusted

Net Railway Operating Income of the System’ of

$2,323.265 (Ex. 2, Ap. 45a), upon which an effective

franchise excise tax for 1946 was calculated of $422,769

(Ex. 2, Ap. 46a), or an amount three times the amount

of the Net Railway Operating Income of the System

as reported to and determined by the Interstate Com-

merce Commission.”’

In addition to the above, the Supreme Court of New Jer-

sey had before it the opinion of the Superior Court, Appel-

late Division, which makes no mention of any claim of un-

constitutionality if the construction, followed ever since the

authoritative opinion in Norton, Trustee v. State Board,

supra, should be reaffirmed. The New Jersey Supreme

Court had every reason to believe, as has this Court by the

moving papers in the instant appeal, that the appellant is

complaining because the State Tax Commissioner had im-

properly applied the statute and because the said Commis-

sioner had, according to the appellant, arbitrarily and

capriciously increased the 1946 assessment. (See assign-

ment of errors.) The absence from the opinions in the

Appellate division and the New Jersey Supreme Court of

8

any reference to the federal question of constitutionality

of the statute itself was not an oversight. Such question

was never argued. The sole question argued was the

proper construction of the franchise provision of the act.

When the New Jersey Supreme Court answered that ques-

tion and reaffirmed the rule of Norton, Trustee v. State

Board, supra, it had completed its assignment.

Since the appellant never brought in question the con-

stitutionality of a state statute and had the question de-

cided adversely to its contention, there is no matter prop-

erly before the Supreme Court on appeal. Also since the

Supreme Court is bound by the construction placed by the

New Jersey Supreme Court upon a state tax statute, the

matter sought to be raised by the designation of errors pre-

sents frivolous and fictitious issues, which are not the sub-

ject of appeal or are of such unsubstantial nature as to

warrant summary disposal upon this motion. Also even

if the necessary constitutional question had been properly

raised below, the issue would have been so unsubstantial

as to warrant summary disposal because the ‘railroad

tax law of 1941 is in substitution of a higher straight

property tax which time after time had been held wholly

constitutional. (History of litigation set out in Wilentz

v. Hendrickson, 135 N. J. Eq. 244, 258 (E. & A. 1944).) To

support these various contentions, the following is respect-

fully submitted:

A. Tuere Are No Fepera, Questions

The Supreme Court is without jurisdiction of an appeal

under 28 U.S. C. A. 1257 (2) unless there was drawn in

question“ before the Supreme Court of New Jersey the

validity of the state statute under review. In Wilson v.

Cook, 327 U. S. 474, 480 (1946), the Court said that the

purpose of this requirement is to make certain that no

judgment of a state court will be reviewed on appeal

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by the Supreme Court unless the highest Court of the

State has first been apprised that a state statute is being

assailed as invalid on Federal grounds, citing Charleston

Fed. Sav. & L. Asso. v. Alderson, 324 U. S. 182 (1945).

The jurisdictional requirement is only satisfied if the

record shows that the validity of the statute has been either

presented for decision to the highest court of the State,

Wall v. Chesapeake & Ohio R. Co., 256 U. S. 125 (1920) or

has been decided by that Court. Whitfield v. Ohio, 297

U. S. 431. (1936).

The record in the instant case does not disclose that

appellant did at any time assert that the construction

placed by the New Jersey Courts on the franchise pro-

visions of the 1941 tax law caused such provision to violate

the Constitution of the United States. On the contrary

since the beginning of this litigation, the appellant has

complained only of the „arbitrary and capricious’’ action

of the state taxing authorities and has alleged that the

said action or conduct violated the constitutional rights

of the appellant. g

Furthermore, even in the present assignment of errors,

the appellant does not explicitly assert that, if the legis-

lature intended to permit only the inclusion of current

items for the purpose of calculating the next preceding

year’s net operating income, this would make the 1941

franchise tax provision unconstitutional. This in itself

would make the appeal defective for, as it was held in

Charleston Fed. Sav. & L. Asso. v. Alderson, supra, even

where the Federal questions have been properly raised

below an appeal may be dismissed where the appellant

fails to attack a statute explicitly in its assignment of

errors.

It is obvious from the course charted by the appellant

below and from the moving papers in this case, that the

appellant is attacking specific assessments and has no wish

Bi

that any portion of the 1941 tax law should be declared to

be unconstitutional. In Wilson v. Cook, supra (p. 482), the

Court restated the well established rule that, in order

te anna. n. pfl, “te ‘os reecessury kunt ‘tue vülidiity

of the statute itself and not an assessment under the

act be presented, citing many cases to support the rule.

In Ferry v. County of King, 141 U. S. 668 (Wash. 1891),

it was held that the Supreme Court will not consider a

ease where a state law is admitted to be valid and the only

question is whether it has been correctly construed. The

quotation from the appellant’s brief below (p. 22) shows

clearly that the instant case is squarely within rule of the

Ferry case.

The present appeal must fall not only because the

validity of the statute was not properly drawn in question

but, because the matters sought to be raised on this appeal

are frivolous or fictitious. The moving papers disclose

that appellant still urges that the New Jersey tax statute

was improperly construed. The appellant seeks by this

appeal to establish a constryction more favorable to itself.

But there is no jurisdiction in the Supreme Court to under-

10

take such an inquiry for as was said in Aero Mayflower

Transit Co. v. Board of N. R. Com., 332 U. S. 495, 499

(1947):

„We put aside at the start appellant’s suggestion

that the Supreme Court of Montana has misconstrued

the state statutes and therefore that we should con-

sider them, for purposes of our limited function, ac-

cording to appellant’s view of their literal import.

The rule is too well settled to permit of question that

this Court not only accepts but is bound by the con-

struction given to state statutes by state courts.’’

Since the question of the constitutionality of the ‘‘rail-

road tax law of 1941“ was never submitted to the New

Jersey Courts but, on the contrary, the constitutionality of

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11

such law as written was repeatedly urged below and, since

any other questions sought to be raised by the instant

appeal are frivolous or fictitious, there is no jurisdiction

in the Supreme Court to hear suth appehl. eau

Taylor, 199 U. S. 274 (1905.)

But even if the appellant had explicitly drawn in ques-

tion the validity of the statutes, the question would have

been so unsubstantial as to require the Supreme Court to

dispose of the matter summarily by dismissing the appeal

or affirming the judgment, because

B. No Susstantian Feverat Question Is RAUi

Prior to 1941, New Jersey levied a straight property tax.

(P. L. 1888, ch. 208, as amended ; R.S. 54:19-1 et seq.) The

1888 law had been the source of much litigation. The

said law was repeatedly held to be constitutional. One

complaint had been that earnings were not taken into con-

sideration in determining valuations. The Circuit Court

of Appeals commented upon this lack in Lehigh Valley N. N.

Co., et al. v. Martin, 100 Fed. 2d 139 (C. C. A. 3rd 1938),

(all the railroads). The New Jersey Legislature sought to

remedy this lack by the ‘‘railroad tax law of 1941“. As

was said by the Court in Norton, Trustee v. State Board,

supra:

„The new system was devised to provide some meas-

ure of relief in poor earning years while providing

for a greater return to the state in times of high

earnings.

That the new railroad tax law was in substitution of the

old law is shown by P. L. 1941, ch. 291, see. 74 which after

providing for abatement of taxes levied under the old

law said:

„„This act shall be construed as a revision of chap-

ters nineteen through twenty-nine inclusive of Title

54 of the Revised Statutes

12

Also by sec. 12 it is provided:

‘*Taxes assessed pursuant to this act shall be in lieu

of all other State or local taxation of or measured

by property taxable hereunder, other than assessments

for benefits.’’

The total tax levied under the new act is less than that

levied under the old tax act. For the year 1941, the re-

duction for the appellant alone was $1,151,145. For the

period 1941 to 1947 inclusive, the amount required to be

paid by appellant under the 1941 act was substantially

lower even on the basis of the present construction, than

under the 1888 act (R. S. 54:19-1 et geg.). Although such

period included the war years when the earnings were very

high, the State for the whole period collected $6,921,000

less from appellant. (Local and average tax rate applied

to valuations shown on Ex. 8-14). For the years 1946

and 1947, the reductions of appellant amounted to approxi-

mately $1,793,300 and $2,605,500 respectively. Since the

combined tax under the 1941 act was in substitution of

and was less than the straight property tax would have

been, this case comes squarely under the rule of Postal Tele-

graph Cable Co. v. Adams, 155 U. S. 688 (1894), wherein

the Court said (p. 700) :

We are of the opinion that it was within the power

of the state to levy a charge upon this company in the

form of a franchise tax, but arrived at with reference

to the value of its property within the state and in

lieu of all other taxes, and that the exercise of that

power by this statute, as expounded by the highest

judicial tribunal of the state in the language we have

quoted, did not amount to a regulation of inter-

state commerce or put an unconstitutional restraint

thereon.”’

As has been pointed ‘out, appellant had admitted the

constitutionality of the 1941 act as written. (Brief below

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13

at pg. 22.) It is difficult to comprehend how, if a fran-

chise tax based upon the next preceding year 's net operat-

ing income, is constitutional, it may reasonably be claimed

that such tax could become unconstitutional because operat-

ing income charges are confined to those of the years under

consideration and charges never heretofore placed in

operating income accounts are excluded therefrom. We have

found no case which supports a finding of unconstitutional-

ity based upon so flimsy a premise. We respectfully submit

that the constitutionality pf State tax laws cannot be made

to depend upon the acceptance by a State of the bookkeep-

ing practices of a taxpay

The railroad tax law of 1941, as construed, has sub-

stantially benefitted the railroads generally in New Jersey.

There is no general attack upon the constitutionality of that

law. On the contrary in a concerted defense, the railroad

companies were successful in sustaining the validity of the

1941 railroad tax law in its entirety, Jersey City v. Kelly,

supra. Nothing shown in the moving papers on this ap-

peal would even raise a suspicion that this Court would at

this time interfere with the operation of that act as con-

strued.

We have shown above the frivolous nature of the appeal

as a reason for the Supreme Court not accepting jurisdic-

tion. We beg leave to repeat that argument including the

very appropriate observation of the Court in Aero

Mayflower Transit v. Board of R. R. Com., supra, to the

effect that:

„he rule is too well settled to permit of question

that this Court not only accepts but is bound by the

construction given a state statute by state courts.’’

It would appear therefore that, even if the appellant had

properly raised the invalidity of the 1941 railroad tax law

below, the questions presented by the appeal would be of

14

such an unsubstantial nature as to warrant the Supreme

Court summarily dismissing the appeal or affirming the

judgment of the New Jersey Supreme Court. Zucht v. King,

260 U. S. 174 (1922).

2. Motion to Dismiss or Affirm

Appellee respectfully submits this statement showing

there is no Federal question involved and consequently a

lack of jurisdiction; and further that the questions upon

which the decision of this case depends are so unsubstan-

tial as not to need further argument.

Wherefore appellee respectfully moves the Court to dis-

miss this appeal, or in the alternative to affirm the judgment

of the Supreme Court of New Jersey.

Respectfully submitted,

Txeopore D. Parsons,

Attorney General of New Jersey,

Counsel for Appellee,

State of New Jersey,

State House, Trenton, N. J.

Bensamin C. Van Trine,

Of Counsel.

(6079)