Opinion — Stanton v. Baltic Mining Co.

STANTON v. BALTIC MINING CO. 103

240 U. S. Argument for Appellant.

STANTON v. BALTIC MINING COMPANY.

APPEAL FROM THE DISTRICT COURT OF THE UNITED STATES

FOR THE DISTRICT OF MASSACHUSETTS.

No. 359. Argued October 14, 15, 1915.—Decided February 21, 1916.

Brushaber v. Un. Pac. R. R., ante, p. 1, followed to effect that the

District Court has jurisdiction of an action by a stockholder against

the corporation to enjoin it from voluntarily paying the tax under

the Income Tax Law of 1913 on the ground of its unconstitutionality.

This court has, under § 238, Jud. Code, jurisdiction of a direct appeal

from the judgment of the District Court refusing to enjoin a cor-

poration from paying the tax under the Income Tax Law of 1913,

in a suit brought by a stockholder on the ground of unconstitutional-

ity of the statute.

The Income Tax Law of 1913 is not unconstitutional as not conforming

with, or being beyond the authority of, the Sixteenth Amendment.

Brushaber v. Un. Pac. R. R., ante, p.1. _

There is no authority for taking taxation of mining corporations out

of the rule established by the Sixteenth Amendment; nor is there

any basis for the contention that, owing to inadequacy of the allow-

ance for depreciation of ore body, the income tax of 1913 is equivalent

to one on the gross product of mines, and as such a direct tax on

the property itself, and therefore beyond the purview of that amend-

ment and void for want of apportionment.

Independently of the operations of the Sixteenth Amendment, a tax

on the product of the mine is not a tax upon property as such be-

cause of its ownership, but is a true excise levied on the result of the

business of carrying on mining operations. Stratton’s Independence

v. Howbert, 231 U.S. 399.

RAIDER eT E eS

THE facts, which involve the constitutionality and

construction of provisions of the Income Tax Law of

1913, and its application to mining corporations, are

stated in the opinion.

Mr. Charles A. Snow for appellant:

The Income Tax Law, as applied to mining companies,

directly taxes a portion of their principal or capital, with-

RAPE RE WE ge res wr a? he PEO g PELE FER HO EES

104 OCTOBER TERM, 1915.

Argument for Appellant. 240 U.S.

out apportionment according to population, and, there-

fore, is unconstitutional. Direct taxes on principal or

capital, not being taxes on income, are not authorized by

the Sixteenth Amendment.

Stratton’s Independence, 231 U. S. 399, which is sole

reliance of Government, holds merely that sales of cre

do not vepresent principal exclusively, but include capital,

in part, and income, in part, and differs essentially from

case at bar.

Net income is the gain or profit derived from the use

of capital, without impairment thereof. Unless the prin-

cipal is left intact, by proper allowances for losses, depre-

ciation and depletion of capital assets, the proceeds from

sales of mining products cannot represent “net income”

wholly and exclusively. See Nipissing Mines Case, 202

Fed. Rep. 803; Von Baumbach v. Sargent Land Co., 207

Fed. Rep. 423; 219 Fed. Rep. 31; Stevens v. Hudson’s

Bay Co., 101 L. T. Rep. 96. Exhaustion of value of ore

deposits by mining and sale does not differ essentially

from sale of land at a purchase price payable in yearly

instalments. Secretary v. Scoble, 89 L. T. Rep. 1; Foley

v. Fletcher, 3 H. & N. 769. See also Merchants’ Ins. Co.

v. McCartney, Fed. Cas. 9,443; Commonwealth v. Central

Transp. Co., 145 Pa. St. 80; Gibson v. Cooke, 1 Met. 75.

Mining dividends are uistributable, although largely

capital, because such action is contemplated by purposes

of the charter. Lee v. Neuchatel Co., L. R. 41 Ch. Div. 1.

Cases arising under wills or trusts, and involving rights

of life tenants in mining properties, have no proper ap-

plication here. They rest on the terms of the trust.

Daly v. Beckett, 24 Beav. 114; Eley’s Appeal, 103 Pa. St.

300. ;

Taxation cases cited have no importance here, as they

arise under laws totally different. Gay v. Baltic Mining

Co., 220 U. S. 107; Coltness Iron Co. v. Black, L. R. 6

App. Cas. 315; Commonwealth v. Ocean Oil Co., 59 Pa. St.

PIE NI LIEN MELE IP CNET PREIS EP POET LE MELEE TOL ig! ID MILES TE PH AA DS Oy Mel P Rh

STANTON v. BALTIC MINING CO. 105

2406 U.S. Argument for Appellant.

61; Commonwealth v. Penn Gas Coal Co., 62 Pa. St. 241.

Depreciation, depletion and losses must be allowed for

in any income tax. Unless allowed for, the tax is not

limited to income, but also covers a portion of the prin-

cipal. And this is true, not merely of wasting properties,

like mines, but also of all kinds of depreciable property.

The Income Tax Law arbitrarily, capriciously and

unequally discriminates between mining companies and

all other classes of corporations, without any reasonable

basis for distinction or classification. It, accordingly,

deprives mining companies of their property without “due

process of law,” as guaranteed by the Fifth Amendment.

The special clause limiting mines to a maximum allow-

ance of five per cent of their annual gross receipts or

output, for depletion of ore deposits, is unconstitutional.

Or, if the clause is not separable, the entire Income Tax

Law is unconstitutional, as applied to mining companies.

As palpably arbitrary classification, this law, as applied

to mines, is unconstitutional, because it violates due proc-

ess of law, as guaranteed by the Fifth Amendment.

The distinction between mining companies and other

classes of corporations, for purposes of direct taxation,

would afford no reasonable basis for classification. See

Gulf, Colorado &c. v. Ellis, 165 U. 8. 150; Missouri, Kan-

sas & Texas Ry. v. Cade, 233 U.S. 642; Cotting v. Kansas

City Stockyards Co., 183 U. 8. 79; Connolly v. Union Sewer

Pipe Co., 184 U. 8. 540; Southern R. R. Co. v. Greene, 216

U.S. 400; Flint v. Stone Tracy Co., 220 U. 8. 107, distin-

guished, and see Smith v. Texas, 233 U. 8. 630; San Ber-

nardino v. Southern Pac. R. R., 118 U. 8. 417; Kentucky

Railroad Tax Cases, 115 U. S. 321; Michigan Central Rail-

road v. Powers, 201 U. 8. 245; Ohio Tax Cases, 232 U.S.

576. Distinctions between mining and other corporations,

for purposes of taxation, are merely fanciful.

Mining lands, in no essential respect, differ from farm-

ing lands or other forms of real estate.

106 OCTOBER TERM, 1915.

Argument for Appellant. 240 U.S.

The discrimination against mines is of an ‘‘unusual

character’ wholly ‘unknown to the practice of our govern-

ments,” and is pure favoritism, class legislation and

palpably arbitrary classification, resting upon no reason-

able basis for distinction.

The act is open to other general constitutional objec-

tions, founded on palpably arbitrary discrimination against

all corporations.

The tax amounts to double taxation, in case of operating

corporations controlled by holding companies.

Under the Fifth Amendment, Congress is prohibited

from enacting laws, which are palpably arbitrary and

unequal, resting upon no reasonable basis for classifica-

tion. Such laws deprive a taxpayer of his property with-

out due process of law. The Fifth Amendment, however,

allows, reasonable classification. Such laws also are void,

because they violate the implied limits to the power of

taxation which are inherent in our form of government.

The obvious limitations upon the tax powers of Con-

gress are not affected by the Sixteenth Amendment,

so far as property taxation is concerned, except that it

authorizes direct income taxes, when they are not arbi-

trary, unequal or oppressive.

The Sixteenth Amendment merely obviated the ob-

jection founded on lack of apportionment, leaving open

all other constitutional objections to an income tax.

Direct taxation upon incomes must still be imposed

subject to the rule of equality and uniformity.

The five per cent clause is separable from remainder of

Income Tax law. It may be declared unconstitutional

and the remainder of the act allowed to stand. Or the law

may be declared void, as applied to mines. Adams Fx-

press Co. v. Ohio, 165 U.S. 194; 166 U. S. 185; American

Sugar Refining Co. v. Louisiana, 179 U. 8. 89; Appeal of

Shoemaker, 106 Pa. St. 392; Armour Packing Co. v. Lacy,

200 U. 8. 226; Ballard v. Hunter, 204 U. 8. 241; Baltic

ener

ieee epeenenn a . 7 RMIT D LTE ON TE ATO MLG OIE LONE EMA

STANTON v. BALTIC MINING CO. 107

240 U.S. Opinion of the Court.

Mining Co. v. Massachusetts, 231 U. 8S. 68; Bank of Co-

lumbia v. Okely, 4 Wheat. 235; Barbier v. Connolly, 113

U. 8. 27; Barrett v. Indiana, 229 U.S. 26; Beers v. Glynn,

211 U.S. 477; Bell’s Gap R. R. Co. v. Pennsylvania, 134

U. S. 232; Berea College v. Kentucky, 211 U. 8. 45; Black,

Income Tax, §§ 32, 34; Blackstone, Commentaries, Vol. 2,

p. 282; Blackstone, Commentaries, Vol. 2, p. 18; Bradley

v. Richmond, 227 U.S. 477; Brown-Forman Co. v. Kentucky,

217 U.S. 563; Buford v. Houtz, 123 U. 8. 320; Caldwell v.

Fulton, 31 Pa. St. 475; Chicago Dock Co. v. Fraley, 228

U. S. 680; Chicago, R. I. & Pac. Ry. Co. v. Arkansas, 219

U. 8S. 453; Clark v. Kansas City, 176 U. S. 114; Co. Lit.

4 (a), 4 (b); Cook v. Marshall County, 196 U. 8S. 261;

Cooley, Const. Law, p. 387; Cooley, Const. Lim., pp. 434,

490; Coulter v. Louisville & N. R. R. Co., 196 U.S. 599; Cov-

ington v. First National Bank, 198 U.S. 100; Cox v. Texas,

202 U. 8S. 446; Daly v. Beckett, 24 Beav. 114; Davidson v.

New Orleans, 96 U. 8. 97; Denver v. New York Trust Co.,

229 U.S. 123; District of Columbia v. Brooke, 214 U.S. 138.

The Solicitor General and Mr. Assistant Attorney Gen-

eral Wallace for the United States as amicus curi@ in

support of the decree appealed from.’

Mr. Cuter Justice Wuire delivered the opinion of the

court.

As in Brushaber v. Union Pacific R. R., ante, p. 1, this

case was commenced by the appellant as a stockholder of

the Baltic Mining Company, the appellee, to enjoin the

voluntary payment by-the corporation and its officers

of the tax assessed against it under the Income Tax

section of the Tariff Act of October 3, 1913, ¢. 16, § 2, 38

Stat. 166, 181. As the grounds for the equitable relief

‘ For abstract of argument in this and other cases argued simulta-

neously herewith, see p. 5, ante.

PERNT TAAM IE RRS eats yes

108 OCTOBER TERM, 1915.

Opinion of the Court. 240 U.S.

sought in this case so far as the question of jurisdiction

is concerned are substantially the same as those which

were relied upon in the Brushaber Case, it follows that the

ruling in that case upholding the power to dispose of that

controversy is controlling here and we put that subject

out of view.

Further also like the Brushaber Case this is before us on

a direct appeal prosecuted for the purpose of reviewing

the action of the court below in dismissing on motion the

bill for want of equity.

The bill averred: “‘That, under and by virtue of the

alleged authority contained in said Income Tax law, if

valid and constitutional, the respondent company is

taxable at the rate of 1 per cent. upon its gross receipts

from all sources, during the calendar year ending De-

cember 31, 1914, after deducting (1) its ordinary and

necessary expenses paid within the year in the mainte-

nance and operation of its business and properties and (2)

all losses actually sustained within the year and not com-

pensated by insurance or otherwise, including deprecia-

tion arising from depletion of its ore deposits to the limited

extent of 5% of the ‘gross value at the mine of the out-

put’ during said year.’ It was further alleged that the

company would if not restrained make a return for taxa-

tion conformably to the statute and would pay the tax

upon the basis stated without protest and that to do so

would result in depriving the complainant as a stockholder

of rights secured by the Constitution of the United States

as the tax which it was proposed to pay without pro-

test was void for repugnancy to that Constitution. The

bill contained many averments on the following subjects

which may be divided into two generic classes: (A) Those

concerning the operation of the law in question upon

individuals generally and upon other than mining corpora-

tions and the discrimination against mining corporations

which arose in favor of such other corporations and in-

SER ANCE LOREEN DATARS SSG AREA A LAL DIL I YN AES SEL ELE IE ILE ET

STANTON v. BALTIC MINING CO. 109

240 U.S. Opinion of the Court.

dividuals by the legislation, as well as discrimination which

the provisions of the act operated against mining corpora-

tions because of the separate and more unfavorable

burden cast upon them by the statute than was placed

upon other corporations and individuals—, averments all

of which were obviously made to support the subsequent

charges which the bill contained as to the repugnancy

of the law imposing the tax to the equal protection, due

process and uniformity clauses of the Constitution. And

(B) those dealing with the practical results on the com-

pany of the operation of the tax in question evidently

alleged for the purpose of sustaining the charge which the

bill made that the tax levied was not what was deemed to

be the peculiar direct tax which the Sixteenth Amend-

ment exceptionally authorized to be levied without ap-

portionment and of the resulting repugnancy of the tax

to the Constitution as a direet tax on property because

of its ownership levied without conforming to the regula-

tion of apportionment generally required by the Constitu-

tion as to such taxation.

We need not more particularly state the averments

as to the various contentions in class (A), as their char-

acter will necessarily be made manifest by the statement

of the legal propositions based on them which we shall

hereafter have occasion to make. As to the averments

concerning class (B), it suffices to say that it resulted

from copious allegations in the bill as to the value of the

ore body contained in the mine which the company worked

and the total output for the year of the product of the

mine after deducting the expenses as previously stated,

that the five per cent. deduction permitted by the statute

was inadequate to allow for the depletion of the ore body

and therefore the law to a large extent taxed not the

mere profit arising from the operation of the mine, but

taxed as income the yearly product which represented

to a large extent the yearly depletion or exhaustion of

AERP GET ELC Big

Su as aan Ne a

110 OCTOBER TERM, 1915.

Opinion of the Court. 240 U.S.

the ore body from which during the year ore was taken.

Indeed, the following alleged facts concerning the rela-

tion which the annual production bore to the exhaustion

or diminution of the property in the ore bed must be

taken as true for the purpose of reviewing the judgment

sustaining the motion to dismiss the bill.

“That the real or actual yearly income derived by

the respondent company from its business or property,

does not exceed $550,000. That, under the Income Tax,

the said company is held taxable, in an average year,

to the amount of approximately $1,150,000, the same

being ascertained by deducting from its net receipts of

$1,400,000 only a depreciation of $100,000 on its plant

and a depletion of its ore supply limited by law to 5%

of the value of its annual gross receipts and amounting

to $150,000; whereas, in order properly to ascertain its

actual income $750,000 per annum should be allowed to be

deducted for such depletion, or five times the amount

actually allowed.”

Without attempting minutely to state every possible

ground of attack which might be deduced from the aver-

ments of the bill, but in substance embracing every ma-

terial grievance therein asserted and pressed in argument

upon our attention in the elaborate briefs which have

been submitted, we come to separately dispose of the

legal propositions advanced in the bill and arguments

concerning the two classes.

Class A. Under this the bill charged that the provisions

of the statute “‘are unconstitutional and void under the

Fifth Amendment, in that they deny to mining companies

and their stockholders equal protection of the laws and

deprive them of their property without due process of

law,”’ for the following reasons:

(1) Because all other individuals or corporations were

given a right to deduct a fair and reasonable percentage

for losses and depreciation of their capital and they were

STANTON v. BALTIC MINING CO. 111

240 U.S. Opinion of the Court.

therefore not confined to the arbitrary 5% fixed as the

basis for deductions by mining corporations.

(2) Be. »se by reason of the. differences in the allow-

ances which the statute permitted the tax levied was

virtually a net income tax on other corporations and

individuals and a gross income tax on mining corporations.

(3) Because the statute established a discriminating

rule as to individuals and other corporations as against

mining corporations on the subject of the method of the

allowance for depreciations.

(4) Because the law permitted all individuals to deduct

from their net income dividends received from corpora-

tions which had paid the tax on their incomes, and did

not give the right to corporations to make such deductions

from their income of dividends received from other cor-

porations which had paid their income tax. This was

illustrated by the averment that 99 per cent. of the stock

of the defendant company was owned by a holding com-

pany and that under the statute not only was the corpora-

tion obliged to pay the tax on its income, but so also was

the holding company obliged to pay on the dividends

paid it by the defendant company.

(5) Because of the discrimination resulting from the pro-

vision of the statute providing for a progressive increase

of taxation or surtax as to individuals and not as to cor-

porations.

(6) Because of the exemptions which the statute made

of individual incomes below $4,000 and of incomes of

labor organizations and various other exemptions which

were set forth.

But it is apparent from the mere statement of these

contentions that each and all of them were adversely

disposed of by the decision in the Brushaber Case and they

all therefore may be put out of view.

Class B. Under this class these propositions are relied

upon:

BELEN EN tA ERENT RY, NL OO RS OME LENIN AR PT SEEM EE ALES NENG MOO aE

112 OCTOBER TERM, 1915.

Opinion of the Court. 240 U.S.

(1) That as the Sixteenth Amendment authorizes only

an exceptional direct income tax without apportionment,

to which the tax in question does not conform, it is there-

fore not within the authority of that Amendment.

(2) Not being within the authority of the Sixteenth

Amendment the tax is therefore, within the ruling of Pol-

lock v. Farmers’ Loan & Trust Co., 157 U.S. 429; 158 U.S.

601, a direct tax and void for want of compliance with the

regulation of apportionment. .

As the first proposition is plainly in conflict with the

meaning of the Sixteenth Amendment as interpreted in

the Brushaber Case, it may also be put out of view. As to

the second, while indeed it is distinct from the subjects

considered in the Brushaber Case to the extent that the

particular tax which the statute levies on mining corpora-

tions here under consideration is distinct from the tax on

corporations other than mining and on individuals which

was disposed of in the Brushaber Case, a brief analysis

will serve to demonstrate that the distinction is one with-

out a difference and therefore that the proposition is also

foreclosed by the previous ruling. The contention is that

as the tax here imposed is not on the net product but in a

sense somewhat equivalent to a tax on the gross product

of the working of the mine by the corporation, therefore

the tax is not within the purview of the Sixteenth Amend-

ment and consequently it must be treated as a direct tax

on property because of its ownership and as such void

for want of apportionment. But aside from the obvious

error of the proposition intrinsically considered, it mani-

festly disregards the fact that by the previous ruling it

was settled that the provisions of the Sixteenth Amend-

ment conferred no new power of taxation but simply

prohibited the previous complete and plenary power of

income taxation possessed by Congress from the begin-

ning from being taken out of the category of indirect

taxation to which it inherently belonged and being placed

STANTON v. BALTIC MINING CO. 113

240 U.S. Opinion of the Court.

in the category of direct taxation subject to apportion-

ment by a consideration of the sources from which the

income was derived, that is by testing the tax not by

what it was—a tax on income, but by a mistaken theory

deduced from the origin or source of the income taxed.

Mark, of course, in saying this we are not here consider-

ing a tax not within the provisions of the Sixteenth

Amendment, that is, one in which the regulation of ap-

portionment or the rule of uniformity is wholly negligible

because the tax is one entirely beyond the scope of the

taxing. power of Congress and where consequently no

authority to impose a burden either direct or indirect

exists. In other words, we are here dealing solely with

the restriction imposed by the Sixteenth Amendment on

the right to resort to the source whence an income is

derived in a case where there is power to tax for the

purpose of taking the income tax out of the class of in-

direct to which it generically belongs and putting it in

the class of direct to which it would not otherwise belong

in order to subject it to the regulation of apportionment.

But it is said that although this be undoubtedly true as a

general rule, the peculiarity of mining property and the

exhaustion of the ore body which must result from work-

ing the mine, causes the tax in a case like this where an

inadequate allowance by way of deduction is made for

the exhaustion of the ore body to be in the nature of

things a tax on property because of its ownership and

therefore subject to apportionment. Not to so hold, it is

urged, is as to mining property but to say that mere form

controls, thus rendering in substance the command of

the Constitution that taxation directly on property be-

cause of its ownership be apportioned, wholly illusory or

futile. But this merely asserts a right to take the taxa-

tion of mining corporations out of the rule established by

the Sixteenth Amendment when there is no authority

for so doing. It moreover rests upon the wholly fallacious

a RPE ME BORER TYE, FDU 4A MME PPSET TRAN ARF po Neale AN ERAMRT A A OSA OREN EOS RI AIEEE RTI A ey

114 OCTOBER TERM, 1915.

©pinion of the Court. 240 U.S.

assumption that looked at from the point of view of

substance a tax on the product of a mine is necessarily

in its essence and nature in every case a direct tax on

property because of its ownership unless adequate allow-

ance be made for the exhaustion of the ore body to result

from working the mine. We say wholly fallacious as-

sumption because independently of the effect of the op-

eration of the Sixteenth Amendment it was settled in

Stratton’s Independence v. Howbert, 231 U. 8. 399, that

such a tax is not a tax upon property as such because of

its ownership, but a true excise levied on the results of

the business of carrying on mining operations (pp. 413

et seq.)

As it follows from what we have said that the conten-

tions are in substance and effect controlled by the Brush-

aber Case and in so far as this may not be the case are

without merit, it results that for the reasons stated in the

opinion in that case and those expressed in this, the

judgment must be and it is

Affirmed.

Mr. Justice McReyno.ups took no part in the con-

sideration and decision of this case.