Prologue — Clallam County v. United States

(29,475)

SUPREME COURT OF THE UNITED STATES.

OCTOBER TERM, 1922.

No. 925.

“CLALLAM COUNTY, WASHINGTON; WILLIAM A. NELSON,

| SHERIFF OF CLALLAM COUNTY, WASHINGTON; E. C.

* STEWART, TREASURER OF CLALLAM COUNTY, WASH-

INGTON, ET AL.

vs.

“THE UNITED STATES OF AMERICA AND UNITED STATES

; SPRUCE PRODUCTION CORPORATION.

oN CERTIFICATE FROM THE UNITED STATES CIRCUIT COURT OF

APPEALS FOR THE NINTH CIRCUIT.

INDEX.

ie Original. Print.

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Certificate from U. S. Circuit Court of Appeals. 1

1 UNITED STATES CIRCUIT COURT OF APPEALS

FOR THE NINTH CIRCUIT.

No. 3938.

CLaLLaAM County, WasHincTton, Wiiiiam A. Netson, Sheriff of

Clallam County, Washington; E. C. Stewart, Treasurer of Clallam

County, Washington, and J. O. Morse, Assessor of Clallam County,

Washington, Appellants,

vs.

Tue Unrrep States or AMERICA an? UNITED States SprRuCE PRo-

DUCTION CorPORATION, a Corporation, Appellees.

Upon Appeal from the United States District Court for the Western

District of Washington, Northern Division.

Certificate of the United States Circuit Court of Appeals for the

Ninth Circuit Certifying Certain Questions or Propositions

of Law to the Supreme Court of the United States under Sec-

tion 239, Judicial Code.

Before Gilbert, Morrow, and Rudkin, Judges.

This suit was brought in the United States District Court for the

Western District of apy, ae Northern Division, by the United

States Spruce Production Corporation, a corporation incorporated

under the laws of the State of Washington, and the United

2 States, as parties plaintiff, against Clallam County, a munic-

ipal corporation of the State of Washington, and the taxing

officers of said county, all citizens of the State of Washington, de-

fendants, for a decree cancelling taxes levied by said county and state

for the years 1919, 1920 and 1921, upon physical properties, to wit,

a logging railroad, saw mill, timber lands and other physical prop-

erties, legal title to which was, during the years for which taxes were

80 levied, in the said United States Spruce Production Corporation.

On hearing in the District Court a decree was entered, maintain-

ing jurisdiction in said District Court and holding the property

exempt from state and county taxes and permanently enjoining the

collection of the taxes complained of.

From this decree an appeal was perfected and prosecuted to the

United States Circuit Court of Appeals for the Ninth Circuit. The

appeal was presented on written triefs and oral argument. At the

close of the oral argument the said Court of Appeals, desiring the

instructions of the Supreme Court of the United States for proper

decision on certain questions or propositions of law, ordered that such

4 certificate be prepared and filed.

1—925

2 Statement of Facts.

Statement of Necessary Facts to be Considered in Connection

with the Questions Propounded.

The United States, acting under authority contained in the Acts

of Congress of June 3, 1916, March 4, 1917, July 24, 1917,

3 and April 11, 1918, as amended by Act of July 9, 1918, had,

prior to August 21, 1918, entered into a contract with the

Siems-Carey—H. S. Kerbaugh Corporation to construct a logging

railroad, build a saw mill, acquire nights of way, timber and timber

lands in Clallam County, State of Washington, for the production of

air craft for use of the United States in the World War.

On August 21, 1918, the Director of Air Craft Production of the

United States, acting under the authority of the Act of Congress

of July 9, 1918, caused four civilians and three army officers to pre

pare, execute and acknowledge articles of incorporation of the plain-

tiff, Spruce Corporation, conforming to the laws of the State of Wash-

ington, and caused such articles to be filed with the proper state

and county officers of the State of Washington, paying the required

fees and taking all necessary steps to complete the incorporation of

such corporation under the laws of said state.

Although the original articles of incorporation gave the corpora-

tion very broad powers, these articles were amended to confine the

powers of the corporation to those prescribed by Act of Congres

authorizing the creation of the corporation. This was done at

special meeting of the board of trustees, October 23, 1918, anda

special meeting of the stockholders, November 1, 1918, at which all

of the stock was represented in person or by proxy. The change was

in conformity with the suggestion of the Advocate General.

P — capital stock was ten million dollars and was subscribed as

ollows:

The United States subscribed for 99,993 shares, and each of the

seven trustees subscribed for one share. The trustees’ shares

4 being at once assigned to the United States so that the United

States at all times owned or controlled all the capital stock.

At the™time of the trial Lieutenant-Colonel Charles Van Way,

President, and Lieutenant Colonel Arthur L. Fuller, Comptroller

and Treasurer of the corporation, were army officers assigned to dut

with the corporation by the War Department, and they drew their

compensation from the treasury of the United States. Each held one

share of stock and served as trustee of the corporation. The thir

member of the board, who also held one share, was Charles H, Carey,

a civilian.

These persons each signed a waiver in the following form:

“For value received, I hereby assign and set over to the Secret

of War of the United States of America, or to his order for the benefi

of the United States of America, any and all moneys, property a

dividends which are now due me or which may hereafter become due

me or accrue to me from any source whatsoever by reason of any

stock in United States Spruce Production Corporation, a Washing-

Statement of Facts. 3

ion corporation. It is understood that the share of stock now stand-

ing in my name on the books of the corporation has been issued

to me solely for the purpose of qualifying me as a trustee of said

corporation.”

These trustees of the corporation endorsed their shares in blank _

and turned them back to the secretary. Certificate No. 8 was, upon

organization of the corporation, issued to the Director of Aircraft

Production of the United States for 99,993 shares. At the time this

certificate was issued, the number of trustees as provided by the

articles of incorporation was seven. Thereafter the number of trus-

tees was reduced by amendment of the articles to three; whereupon

four shares which were held by the outgoing trustees were

5 issued on certificate No. 17 to the Director of Aircraft Pro-

duction of the United States. The certificates were in the

hands of the Director of Aircraft Production, lodged for safekeeping

with the Chief of Finance of the United States. The physical custody

of the qualifying shares held by the three trustees is in the Secretary

of the United States Spruce Production Corporation.

At the time the corporation was organized the logging railroad and

mill had been partially completed under the Siems-Carey-Kerbaugh

contract, and timber, mill site and rights of wa acquired.

Thereupon, on October 10, 1918, the United States assigned the

Siems-Kerbaugh contract to the corporation, and conveyed to the

corporation by bargain and sale deed all lands and property now

sought to be taxed by Clallam County. This deed contains no re-

srictions or limitations, the conveying clause being as follows:

“The United States of America, represented by the Secretary of

War acting through the Director of Air craft Production, tne

Grantor, has bargained, sold, assigned, transferred and conveyed and

st over, and by these presents does bargain, sell, assign, transfer,

convey and set over unto said United States Spruce Production Cor-

poration, the Grantee, and its successors and assigns, the following

described property.”

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as TTP BS

Bea ese Be

a&e 8

S And the habendum clause is as follows:

ty “To have and to hold all and singular the above described prop-

tM erty, contracts, rights and privileges to the said grantee, its successors

‘i and assigns, forever.”

The consideration recited is “of the sum of $274,164.76 paid to

the United States, the receipt whereof is hereby acknowledged,

6 and of the assumption by the grantee of all outstanding debts

and obligations of the United States of America incurred

through the operation of the Spruce Production Division and the

Bureau of Air Craft Production.”

At the time the corporation was ereated the United States conveyed

to the corporation all of its aeroplane properties and activities. The

corporation’s activities were wholly directed to the government's pro-

gram of production of aeroplane lumber.

9238 Qs

Statement of Facts.

The Spruce Corporation thereupon issued its bonds or debentures

aggregating twenty five million dollars. The United States paid

on its stock subscription $100,000 and purchased twenty-five million

dollars of the Spruce Corporation’s bonds, ten million of which were

taken in. payment of the property so transferred and conveyed as

above set forth; for the remaining fifteen million, credit for a work-

ing capital was given the Spruce Corporation by the United States.

In creating the corporation, the Director of Air Craft Production

directed, and the trustees of the corporation authorized, the issuance

of debentures to the amount of $25,000,000. These were issued and

were delivered to the Register, therein named, for the United States.

By their provisions they are to be retired by liquidation of the cor-

poration, and they bear 5 per cent interest if such interest is earned

by the corporation ; they are payable out of the net assets of the cor-

poration and shall not be payable unless a sum sufficient after liqui-

dation is accumulated to retire them. Originally it was contemplated

that the Allied Governments were to take debentures as well as the

United States, but this was not done, as Potter, the acting

7 Director of Aircraft Production, did not accept this suggestion

of his subordinate and that plan was never carried out. No

debenture was ever sold, none was issued to any other government.

and all that were taken and held by the United States were taken

in exchange for cash or its equivalent in the land and other properties

conveyed by the Secretary of War to the corporation. They are all

to be repaid out of liquidation by the terms of the debentures.

The Spruce Corporation then functioned as a State of Washington

corporation, and continued the completion of the logging railroad,

mill and the acquisition of necessary materials for manufacture of

air-craft for the use of the United States in the World War, prosecut-

ing such work until the armistice. After the armistice its activities

have been directed to liquidating its affairs and in this connection, it,

for a recited consideration, bought and sold timber, entered into con-

tracts for use of its logging railroad, one contract covering a period

of ten years, and another two years, the Spruce Corporation to re-

ceive stipulated payments for use of its road as follows:

There was some timber down on the right of way and two con-

tracts were entered into with C. J. Erickson with respect to cleaning

up the down timber.

There was also a contract with the Puget Sound Mills and Timber

Company, February, 1921. This contract covered a period of ten

years and contemplated transactions affecting the railroad. It pro-

vided for a method whereby the title to this property could be per-

fected and put in salable condition, and provided for the hauling of

logs of the timber company over the railroad during a period

8 of ten years in exchange for deeds. A considerable amount

of right of way acquired by the corporation itself was acquired

from the Puget Sound Mill and Timber Company, and this contract

covered that transaction. The land was necessary as an integral part

of the Spruce Production railroad, a considerable part of it.

These were all the contracts relating to hauling products over this

al I OO Oa), eee.

Sel el ee ee ee ee ee ae ws

ao

Statement of Facts. 5

The corporation also entered into a contract with Clallam Lumber

Company for the purchase of logs, in the latter part of 1920. The

contention was made by the Clallam Lumber Company that an iso-

lated body of timber at the western terminus of this Spruce railroad

No. 1 was made valueless to them by reason of the ownership of the

railroad. And in the settlement of the various claims, both on the

part of the Spruce Production Corporation and the Clallam Lumber

Company the price was set upon this timber, which included some

6,000,000 feet, and it was taken over by the corporation. The cor-

poration, as a part of the same transaction, secured from the Clallam

Lumber Company a release of claims which had been prosecuted by

that company against the corporation. The price paid the Clallam

Timber Company was three dollars per thousand for that timber, and

after holding it a few months, the corporation sold it to Erickson for

five dollars for all species other than hemlock, and two dollars for

hemlock. This contract resulted in a complete clearance of title for

the western terminus of the railroad, which was part of the lands

acquired by the corporation under its activities, the title to which

was not perfected until this contract was entered into.

9 The railroad in question is 36 miles long with a right of

way 100 feet wide and the mill site covers approximately

100 acres, all situated in Clallam County, Washington.

The Spruce Corporation employed both civilians and soldiers. It

was licensed and authorized to transact business in the State of

Washington, and had in all respects complied with the laws of that

state entitled it to transact business in said state. It was organized

and incorporated under the laws of the State of Washington, and

is a citizen of that state, and has been conducted and operated as

a private business corporation organized under the laws of the State

of Washington.

In May, 1918, the President, by virtue of the power conferred

upon him by the so-called Overman Act, created the Bureau of Air

Craft Production and a Division of Military Aeronautics, the ex-

ecutive officer of which was made the Director of Air Craft Pro-

duction.

On January 29, 1919, subsequent to the Armistice, these two

divisions were placed together, forming the Air Service, as then

provided for by Army Regulations, functioning under the Director

of Air Service, whose title was subsequently.(July 11, 1919) changed

to Chief of Air Service by Act of Congress approved on that date.

This Air Service, with its powers, functions and duties, as then pro-

vided by orders and Army Regulations, continued until June 30,

1920, on which date the National Defense Act, Amended, came into

effect and provided for the office of Chief of Air Service. Army

Regulation No, 95-5 November 17, 1921, Paragraph E. as prescribed

by the Chief of Air Service, is as follows:

“T will in accordance with instructions from the Secretary

10 of War, exercise administrative supervision over the liqui-

dation of the Bureau of Air Craft Production and the United

States Spruce Production Corporation.”

Questions Cer’ ified.

The United States never advanced direetly any money to the

Spruce Corporation, but subscribed for its stock and purchased its

bonds as above stated, and the corporation was financed solely Ly

money paid by the United States on its stock subscription and for

the bonds.

The legal title to and possession of the property assessed for state

and county taxes and involved in this suit, during the period for

which taxes were assessed, has been in the Spruce Corporation.

The Spruce Corporation has never declared any dividends. At

the time of the trial it owed the United States on bonds purchased

$5,338,667.09 and the $100,000 paid by the United States on its

stock subscription. It owed current debts, $28,482.49 and had assets

of book value, $11,953,904.57.

The operations of the corporation as a whole show loss, and the

total liquidation of all the remaining assets will not be equivalent to

the total amount expended.

The questions of law concerning which the Circuit Court of

Appeals of the Ninth Circuit desires the instruction of the Supreme

Court of the United States are:

g,

Did the United States District Court have jurisdiction of the suit?

Il.

Is the property held by the Spruce Corporation under the above

statement of facts, subject to state taxation?

WM. B. GILBERT,

WM. W. MORROW,

FR. H. RUDKIN,

Judges of the United States Circuit

Court of Appeals for the Ninth Circuit.

11 [ Endorsed: ] Certificate of the United States Circuit Court

of Appeals for the Ninth Circuit, Certifying Certain Questions

or propositions of law to the Supreme Court of the United States

under section 239 Judicial Code. Filed March 5, 1923, F. D.

Monckton, Clerk, By Paul P. O’Brien, Deputy Clerk.

A true copy.

Attest March 10, 1923.

[Seal of United States Circuit Court of Appeals, Ninth Circuit. |

F. D. MONCKTON,

Clerk,

By PAUL P. O'BRIEN,

Deputy Clerk.

Endorsements. 7

12 [Endorsed:] No. 3938. United States Circuit Court of

Appeals for the Ninth Circuit. Clallam County, Washington,

et al., Appellants, vs. The United States of America, et al., Appellees.

Certified Copy of Certificate of the United States Cireuit Court of

Appeals for the Ninth Circuit, Certifying Certain Questions or Pro-

positions of Law to the Supreme Court of the United States under

Section 239 Judicial Code.

Endorsed on cover: File No. 29,475. U. S. Cireuit Court of

Appeals, Ninth Cireuit. Term No. 925. Clallam County, Wash-

ington; William A. Nelson, sheriff of Clallam County, Washington ;

E. C. Stewart, treasurer of Clellam County, Washington, et al. vs.

The United States of America and United States Spruce Production

Corporation. Filed March 26th, 1925. File No. 29,475.

Eee Pe aeaee Tee Lo peed

Argument 7

- Question I (Jurisdiction) 17

» Question II (Is the property taxable) 26

~~ S$tatement §

Cases under Question I (U. 8. not a proper party)

| Astoria Marine Iron Works v. Fleet Corporation. 20

- Bank of U. S. v. Planters Bank of Georgia... BEEPS |

Barrow Steamship Co. v. Kane 18

Fitzgerald v. Mo. Pac. Ry. Co. 19

Fleet Corporation v. Wood . 20

Greenleaf, in re 19

Hawes v. Oakland 18

- Jellenik v. Mining Co. 18

~ Manufacturers L. & I. Co. v. Fleet Corporation 20

-§$loan Shipyards v. Fleet Corporation 20

U. S. v. Mathews 20

U. 8. v. Strang 20

Re Cases Under Question I (A Federal Question

Arkansas v. Choctaw etc. R. Co.

Bankers etc. Co. v. Minneapolis ete. R. Co.

Blackburn v. Mining Co.

_ Dandridge Case

-» Dartmouth College case

- Earle Case

| Fitzgerald v. Mo. Pac. Ry. Co.

- Head & Armonry v. Prov.. Ins. Co.

' Little York Gold W. W. Co. v. Keyes

'* Miller v. Ill. Cent. R. Co.

' Montana Ore. etc. Co. v. Boston ete. Mining Co.

- Shoshone Mining Co. v. Reutter

Statutes of State of Washington

Western U. Tel Co. v. Ry. Co.

Cases Under Question II (Property of Federal

a Agent not exempt from state taxation)

_ Central Pac. R. Co. v. California

- Choctaw O. & G. R. Co. v. Mackey

County of Santa Clara v. So. Pac. R. Co. 34 &

SRBSSSSRRESRRRN

BSS

INDEX —Continued

Page

McCulloch v. Maryland 27

Osborne v. Bank of U. 8. 28

Thompson v. U. P. R. Co. 29

U. P. R. Co. v. Peniston —_.. 31 & 45

Williams v. Taladega 37

Western U. Tel. Co. v. Texas 38

Western U. Tel. Co. v. Attorney General 39

Cases under oestion II (Property of the Corporation

was not \"ned by or held in trust for U. 8.)

Act of July 9, 1918 — 56

Arnold v. Hall 48

Barger v. Barger 51

Brown v. U. 8. 58

Catoe v. Catoe 51

County of Santa Clara v. So. Pac. R. Co. 61

Croup v. DeMoss 48, 50, 51

Denny v. Holden 51

Eells v. Ross 58

Farrell v. Mentzer 48 & 50

Fitzgerald v. Mo. Pac. R. Co. 52 & 53

Gloucester 53

Greenleaf, in re 52 & 53

Hatton v. Cunningham 51

Jacobs v. Prichard 58

Kalinowski v. McNeny 48

King County v. Fleet Corporation 58

Osterman v. Baldwin 48

Owensboro Nat’] Bank v. Owensboro 64

Panama R. Cé:-v. Minnix 47

Pomeroy Equity Jurisprudence 47, 49, 50, 51

Sewell v. Sewell 51

Sheehan v. Dullivan 51

Sloan Shipyards v. Fleet Corporation 46

Thompson v. U. Pac. R. Co. 62

U. 8. v. Moore 58

U. 8. v. Strang 46

U. 8S. v. Mathews 47

Western U. Tel. Co. v. Attorney Gen. 61

Williams v. Taladega 61

Wood v. Fleet Corporation 46

Supreme Court of the

United States

CLALLAM CouNTy, WASHINGTON ;

WruiuM A. NEtson, Sheriff of Clal-

lam County, Washington,

E. C. Stewart, Treasurer of Clallam

County, Washington, and

J. A. Morse, Assessor of Clallam

County, Washington,

Appellants,

vs.

THE Untrep States OF AMERICA, and

UnITED StaTES SPRUCE PRODUCTION

CorPORATION, a Corporation,

Appellees.

Weiiecnniaitinin

|

UPON CERTIFICATE FROM THE UNITED

STATES CIRCUIT COURT OF APPEALS

FOR THE NINTH CIRCUIT

APPELLANTS’

BRIEF

ae ae

STATEMENT

This cause comes to this Court from the United

States Circuit Court of Appeals for the Ninth Circuit,

on certificate certifying certain questions or propositions

of law to this Court under section 239, Judicial Code.

The certificate is as follows (omitting the caption) :

“Upon Appeal from the United States District Court

for the District of Washington. (No. 3938).

Certificate of the United States Circuit Court of

Appeals for the Ninth Circuit, certifying certain ques-

tions or propositions of law to the Supreme Court of the

United States under Section 239, Judicial Code.

Before GILBERT, Morrow and RupkIn, Judges.

This suit was brought in the United States District

Court for the Western District of Washington, Northern

Division, by the United States Spruce Production Cor-

poration, a corporation incorporated under the laws of

the State of Washington, and the United States, as par-

ties plaintiff, against Clallam County, a municipal cor-

poration of the State of Washington, and the taxing offi-

cers of said county, all citizens of the State of Washing-

ton, defendants, for a decree cancelling taxes levied by

said county and state for the years 1919, 1920 and 1921,

upon physical properties, to-wit, a logging railroad, saw

/ mill, timber lands and other physical properties, legal

title to which was, during the years for which taxes were

ai ass

so levied, in the said United States Spruce Production

Corporation.

On hearing in the District Court a decree was en-

tered, maintaining jurisdiction in said District Court and

holding the property exempt from state and county taxes

and permanently enjoining the collection of the taxes

complained of.

From this decree an appeal was perfected and prose-

cuted to the United States Circuit Court of Appeals for

the Ninth Circuit. The appeal was presented on written

briefs and oral argument. At the close of the oral argu-

ment the said Court of Appeals, desiring the instructions

of the Supreme Court of the United States for proper

_ decision on certain questions or propositions of law, or-

dered that such a certificate be prepared and filed.

SraTEMENT oF Necessary Facts To Be ConsmpereD IN

CoNNECTION WITH THE QUESTIONS PROPOUNDED.

The United States, acting under authority contained

in the Acts of Congress of June 3, 1916, March 4, 1917,

July 24, 1917, and April 11, 1918, as amended by Act of

July 9, 1918, had, prior to August 21, 1918, entered into

a contract with the Sims-Carey-H. 8S. Kerbaugh Corpora-

tion to construct a logging railroad, build a saw mill,

acquire rights-of-way, timber and timber lands in Clal-

lam County, State of Washington, for the production of

air craft for use of the United States in the World War.

iid

On August 21, 1918, the Director of Air Craft Pro-

duction of the United States, acting under the authority

of the Act of Congress of July 9, 1918, caused four civil-

ians and three army officers to prepare, execute and ac-

knowledge articles of incorporation of <e plaintiff,

Spruce Corporation, conforming to the laws of the State

of Washington, and caused such articles to be filled with

the proper state and county officers of the State of Wash-

ington, paying the required fees and taking all necessary

steps to complete the incorporation of such corporation

under the laws of said state.

Although the original articles of incorporation gave

the corporation very broad powers, these articles were

amended to confine the powers of the corporation to those

prescribed by Act of Congress authorizing the creation

of the corporation. This was done at a special meeting

of the board of trustees, October 23, 1918, and a special

meeting of the stockholders, November 1, 1918, at which

all of the stock was represented in person or by proxy.

The change was in conformity with the suggestion of the

Advocate General.

The capital stock was ten million dollars and was

subscribed as follows:

The United States subscribed for 99,993 shares, and

each of the seven trustees subscribed for one share. The

trustees’ shares being at once assigned to the United

Stats so that the United States at all times owned or con-

trolled all the capital stock.

_ seer

a ee

At the time of the trial Lieutenant-Colonel Charles

Van Way, President, and Lieutenant Colonel Arthur L.

Fuller, Comptroller and Treasurer of the corporation,

were army officers assigned to duty with the corporation

by the War Department, and they drew their compensa-

tion from the treasury of the United States. Each held

one share of stock and served as trustees of the corpora-

tion. The third member of the board, who also held one

share, was Charles H. Carey, a civilian.

These persons each signed a waiver in the following

form:

‘‘For value received, I hereby assign and set

over to the Secretary of War of the United States

of America, or to his order for the benefit of the

United States of America, any and all moneys, prop-

erty or dividends which are now due me or which

may hereafter become due me or accrue to me from

any source whatsoever by reason of any stock in Unit-

ed States Spruce Production Corporation, a Wash-

ington corporation. It is understood that the share of

stock now standing in my name on the books of the

corporation has been issued to me solely for the pur-

pose of qualifying me as a trustee of said corpora-

tion.”’

These trustees of the corporation endorsed their

shares in blank and turned them back to the secretary.

Certificate No. 8 was, upon organization of the corpora-

tion, issued to the director of Aircraft Production of the

United States for 99,993 shares. At the time this certifi-

cate was issued, the number of trustees as provided by

the articles of incorporation was seven. Thereafter the

ais Oe

number of trustees was reduced by amendment of the

articles to three; whereupon four shares which were held

by the outgoing trustees were issued on certificate No.

17 to the Director of Aircraft Production of the United

States. The certificates were in the hands of the Direc-

tor of Aircraft Production, lodged for safekeeping with

_the Chief of Finance of the United States. The physical

custody of the qualifying shares held by the three trustees

is in the Secretary of the United States Spruce Produc-

tion Corporation.

At the time the corporation was organized the log-

ging railroad and mill had been partially completed un-

der the Siems-Carey-Kerbaugh contract, and _ timber,

mill site and rights of way acquired.

Thereupon, on October 10, 1918, the United States

assigned the Siems-Kerbaugh contract to the corporation,

and conveyed to the corporation by bargain and sale deed

all lands and property now sought to be taxed by Clallam

County. This deed contains no restrictions or limita-

tions, the conveying clause being as follows:

“The United States of America, represented by the

Secretary of War acting through the Director of Aircraft

Production, the Grantor, has bargained, sold, assigned,

transferred and conveyed and set over, and by these pres-

ents does bargain, sell, assign, transfer, convey and set

over unto said United States Spruce Production Cor-

poration, the Graniee, and its successors and assigns, the

following described property.”’

pan. Yee

And the habendum clause is as follows:

“TO HAVE AND TO HOLD all and singular the

above described property, contracts, rights and privileges

to the said grantee, its successors and assigns, forever.”’

The consideration recited is ‘‘of the sum of

$274,164.76 paid to the United States, the receipt where-

of is hereby acknowledged, and of the assumption by the

grantee of all outstanding debts and obligations of the

United States of America incurred through the operation

of the Spruce Production Division and the Bureau of

Air Craft Production.”’

At the time the corporation was created the United

States conveyed to the corporation all of its aeroplane

_ properties and activities. The corporation’s activities

were wholly directed to the government’s program of

production of aeroplane lumber.

The Spruce Corporation thereupon issued its bonds

or debentures aggregating twenty-five million dollars.

The United States paid on its stock subscription $100,000

and purchased twenty-five million dollars of the Spruce

Corporation’s bonds, ten million of which were taken in

payment of the property so transferred and conveyed as

above set forth; for the remaining fifteen millions, credit

for a working capital was given the Spruce Corporation

by the United States.

In creating the corporation, the Director of Air

Craft Production directed, and the trustees of the cor-

oe ee

poration authorized, the issuance of debentures to the

amount of $25,000,000. These were issued and were de-

livered to the Registrar, therein named, for the United

States. By their provisions they are to be retired by

liquidation of the corporation, and they bear 5 per cent

interest if such interest is earned by the corporation;

they are payable out of the net assets of the corporation

and shall not be payable unless a sum sufficient after

liquidation is accumulated to retire them. Originally

it was contemplated that the Allied Governments were

to take debentures as well as the United States, but this

was not done, as Potter, the acting Director of Aircraft

Production, did not accept this suggestion of his subor-

dinate and that plan was never carried out. No deben-

ture was ever sold, none was issued to any government,

and all that were taken and held by the United States

were taken in exchange for cash or its equivalent in the

land and other properties conveyed by the Secretary of

War to the corporation. They are all to be repaid out

of liquidation by the terms of the debentures.

The Spruce Corporation then functioned as a State

of Washington corporation, and continued the comple-

tion of the logging railroad, mill and the acquisition of

necessary materials for manufacture of air-craft for the

use of the United States in the World War, prosecuting

such work until the armistice. After the armistice its

activities have been directed to liquidating its affairs

and in this connection, it, for a recited consideration,

bought and sold timber, entered into contracts for use of

ents —13—

its logging railroad, one contract covering a period of

ten years, and another two years, the Spruce Corporation

to receive stipulated payments for use of its road as

follows:

There was some timber down on the right of way

and two contracts were entered into with C J. Erickson

with respect to cleaning up the down timber.

There was also a contract with the Puget Sound

Mills and Timber Company, February, 1921. This con-

tract covered a period of ten years and contemplated

transactions affecting the railroad. It provided for a

method whereby the title to this property could be per-

fected and put in salable condition, and provided for the

hauling of logs of the timber company over the railroad

‘ during a period of ten years in exchange for deeds. A

considerable amount of right of way acquired by the

corporation itself was acquired from the Puget Sound

Mill and Timber Company, and this contract covered

that transaction. The land was necessary as an integral

part of the Spruce Production railroad, a considerable

part of it.

These were all the contracts relating to hauling

products over this road.

The corporation also entered into a contract with

Clallam Lumber Company for the purchase of logs, in

the latter part of 1920. The contention was made by

the Clallam Lumber Company that an isolated body of

re pee

timber at the western terminus of this Spruce Railroad

No 1 was made valueless to them by reason of the owner-

ship of the railroad. And in the settlement of the vari-

ous claims, both on the part of the Spruce Production

Corporation and the Clallam Lumber Company the price

was set upon this timber, which included some 6,000,000

feet, and it was taken over by the corporation. The

corporation, as a part of the same transaction, secured

from the Clallam Lumber Company a release of claims

which had been prosecuted by that company against the

corporation. The price paid the Clallam Timber Com-

pany was three dollars per thousand for that timber,

and after holding it a few months, the corporation sold

it to Erickson for five dollars for all species other than

hemlock, and two dollars for hemlock. This contract

resulted in a complete clearance of title for the western

terminus of the railroad, which was part of the lands

acquired by the corporation under its activities, the title

to which was not perfected until this contract was en-

tered into.

The railroad in question is 36 miles long with a

right of way 100 feet. wide and the mill site covers ap-

proximately 100 acres, all situated in Clallam County,

Washington.

The Spruce Corporation employed both civilians and

soldiers. It was licensed and authorized to transact

business in the State of Washington, and had in all re-

spects complied with the laws of that state entitled it

ise ce

to transact business in said state. It was organized and

incorporated under the laws of the State of Washing-

ton, and is a citizen of this state, and has been conducted

and operated as a private business corporation organ-

ized under the laws of the State of Washington.

In May, 1918, the President, by virtue ci the power

conferred upon him by the so-called Overman Act, cre-

ated the Bureau of Aircraft Production and a Division

of Military Aeronautics, the executive officer of which

was made the Director of Aircraft Production.

On January 29, 1919, subsequent to the Armistice,

these two divisions were placed together, forming the

Air Service, as then provided for by Army Regulations,

functioning under the Director of Air Service, whose

title was subsequently (July 11, 1919,) changed to Chief

of Air Service by Act of Congress approved on that date.

This Air Service, with its powers, functions and duties,

as then provided by orders and Army Regulations, con-

tinued until June 30, 1920, on which date the National

Defense Act, Amended, came into effect and provided

for the office of Chief of Air Service. Army Regula-

tions No 95-5, November 17, 1921, paragraph E, as pre-

scribed by the Chief of Air Service, is as follows:

**T will, in accordance with instructions from the

Secretary of War, exercise administrative supervision

over the liquidation of the Bureau of Aircraft Produc-

tion and the United States Spruce Production Corpora-

tion.”’

es

The United States never advanced directly any

money to the Spruce Corporation, but subscribed for its

stock and purchased its bonds as above stated, and the

corporation was financed solely by money paid by the

United States on its stock subscription and for the bonds.

The legal title to and possession of the property

assessed for state and county taxes and involved in this

suit, during the period for which taxes were assessed,

has been in the Spruce Corporation.

The Spruce Corporation has never declared any

dividends. At the time of the trial it owed the United

States on bonds purchaser $5,338,667.09 and the $100,000

paid by the United States on its stock subscription. It

owed current debts, $28,482.49, and had assets of book

value, $11,953,904.57.

The operations of the corporation as a whole show

loss, and the total liquidation of all the remaining assets

will not be equivalent to the total amount expended.

The questions of law concerning which the Circuit

Court of Appeals of the Ninth Circuit desires the in-

struction of the Supreme Court of the United States are:

I.

Did the United States District Court have jurisdic-

tion of the suit?

ae ws

II.

Is the property held by the Spruce Corporation

under the above statement of facts subject to state taxa-

tion?

WM. B. GILBERT,

WM. W. MORROW,

FR. H. RUDKIN,

Judges of the United States Circuit Court of Appeals

for the Ninth Circuit.’’

ARGUMENT.

QUESTION I.

Did the United States District Court have juris-

diction of the suit?

1. The United States is neither a necessary or

proper party to this suit.

The interest of the United States in the Spruce Cor-

poration is merely that of a stock and bond holder, and

the United States is neither a necessary or proper party

to litigation by or against the Spruce Corporation, or in-

volving its property.

Bank of U. S. v. Planters Bank of Georgia,

6 L. Ed. (U. 8.) 244.

Judge Marshall in the above case says:

‘*Many states of the Union which have an in-

terest in banks are not sueable even in their own

ssh ORE

courts. * * * As a member of a corporation

the government never exercises its sovereignty. It

acts merely as a corporator and exercises no other

power in the management of the affairs of the cor-

poration than are expressly given by the incorpora-

tion act.’’

(That is, by the laws of the State of Washington.)

The above case also holds that suits by or against

The Bank of the United States in which the United

States owned stock, were not suits against the United

States.

Hawes v. Oakland, 26 L. E. (U. 8.) 827, holds that

a stockholder cannot maintain an action without show-

ing that he ‘‘has exhausted all means within his reach

to obtain within the corporation its redress of his griev-

ance.’’ (P. 832).

To the same effect, Equity Rule No. 27.

Jellenik v. Mining Co., 44 L. Ed. (U. 8.) 647, holds:

**As the domicile of the company is and must be

in the state that created it, the preety represented

by its certificates of stock may be deemed to be held

by the company within the state whose creature it is

whenever it is sought by suit to determine who is

its real awner.’’ (P. 651).

Barrow Steamship Co. v. Kane, 42 L. Ed. (U. 8.)

964, holds:

“There is a conclusive presumption of law that

the persons composing the corporation are citizens

of the same state with the corporation.’’ (P. 966).

aS.

So, in the case at bar, the United States, a stock-

holder, is conclusively presumed for jurisdictional pur-

poses, to be a citizen of the State of Washington.

Fitzgerald v. Mo. Poc. Ry. Co., 45 Fed Rep., 812,

hoids a corporation is amenable to the laws of the state

creating it. (P. 815).

‘‘The owner of all the stock and bonds of a cor-

poration does not own the corporate property. The

corporate property which includes all rights of ac-

tion and claims for damages, belongs to the corpora-

tion and is subject to the management and control

of its board of directors and if it be conceded that

the defendant owns all the stock and bonds of the

Denver Company, that fact gives it no title to or

interest in the right-of-way or other property of

that company, which it can make the basis of an

action or plea in its own behalf.’’ (Pp. 818-819).

This case also holds that in case of doubtful juris-

diction, jurisdiction should be refused.

In re Greenleaf, 56 N. E. (Ill.), 295, the court says:

‘“‘That tangible property of the corporation and

the shares of stock therein are separate and distinct

kinds of property and belong to different owners—

the first being the property of the artificial person,

the corporation; the latter the property of the indi-

vidual owner thereof,’’

and holds that the shares of stock may be taxed in one

jurisdiction and the physical property in another. .

The Spruce Corporation is a separate entity and a

citizen of the State of Washington. It is bound by its

on DE) cw

contracts and is capable of suing and being sued. Its

property can be subjected to execution. If its property

is threatened by execution or wrongful seizure, the

United States would have no standing to sue for injunc-

tion. The fact that the State or Clallam County are

threatening to seize the property for taxes does not

change the situation. It neither makes the United

States a necessary or proper party nor involves the con-

struction of any law of the United States.

See

U.S. v. Strang, 254 U 8S. 491; 65 L. Ed. 368.

Sloan Ship Yards Corporation, Astoria Marine

Iron Works v. U. 8S. Shipping Board

Emergency Fleet Corp. and Fleet Cor-

poration v. Wood, Trustee in Bankruptcy,

257 U. S. p.—; 66 L. Ed. (U. 8.) p.—.

The Ninth Circuit, in the recent case of U. S. v.

Mathews, (Fed. Rep. Adv. Sheets, Vol. 282, No. 1, Oct.

6, 1922, p. 266), decided that the United States has not

sufficient interest to maintain a suit to recover money

paid out by the Fleet Corporation, hence it would seem

that it could not join in a suit for the purpose of giving -

Federal Court jurisdiction.

In the late case from the Third Circuit, of Manufac-

turers L. & I. Co. v. United States S. B. E. Fleet Cor-

poration (Advance Sheets Federal Reporter, Vol 284,

page 231), the Court holds that a suit is maintainable

against the Fleet Corporation; that it and not the |

ea as

United States is the real party defendant. The Court

also holds (page 236) that the Fleet Corporation having

requistioned the fee of certain lands, that such lands

‘“‘then belonged absolutely to the Fleet Corporation.”’

2. This cause does not arise under the laws of the

United States in the sense that a Federal Court would

have jurisdiction.

The constitution is in no way involved nor is a con-

struction of any law of the United States involved. The

Acts of Congress, pleaded in the complaint, their mean-

ing and purposes as claimed, are not put in issue.

The sole question raised is one of fact as to the owner-

ship of the properties taxed. There is no sound reason

to have this question of fact presented to a Federal

Court.

If a Federal Law is involved, it is only as it may

tend to prove this fact of ownership. No disputed con-

struction is involved.

The source of the money that bought the stock ana

bonds, the activities of the United States Officers, the

activities of the Spruce Corporation, are all facts ana

involve no construction of Federal Law.

: Blackburn v. Mining Co., 44 L. E. (U. 8.), p. 276.

holds that the application of the Federal statute must

not only be involved, ‘‘but that the controversy was de-

termined by a construction put upon the statute adverse

in A dees

to the contention of one of the parties.’’ (P. 283). Thai

there must be a denial of right arising out of the con-

struction of a Federal Statute.

To the same effect see

Shoshone Mining Co. v. Reutter, 44 L. Ed. |

(U. 8.) 864;

Western Union Tel. Co. v. Ry. Co., 44 L. Ed

(U. 8.) 1052;

Little York Gold W. W. Co. v. Keyes, 24 L. Ed

(U. 8.) 656;

Bankers, etc., Co. v. Minneapolis, etc., R. Co.,

48 L. Ed. (U. 8.) 484.

In the Fitzgerald case, supra (45 Fed. Rep., 812)

the court says (on page 819) :

“‘Tf there is no dispute between the parties as to

the meaning of the Act of Congress, there is no Fed-

eral controversy between them and no cause for re-

moval. The Supreme Court has settled the rule on

this subjeet.’’

In the ease of Arkansas v. Choctaw, etc., R. Co., 134

Fed., 106, it is held that any doubt must be resolved

against the jurisdiction and quotes from Judge Brewer

as follows:

‘When a a has once been decided by

the Supreme Court, it can no longer be said that in

it there still remains a Federal question.”’

el a

The Ninth Circuit has also held the same doctrine in

the case of Montana Ore Producing Company v. Boston,

etc., Mining Co., 85 Fed., 867.

In the case of Miller v. Illinois Central R. Co., 168

Fed., 982, on page 987, the court says:

‘“‘Tt does not appear that a construction of the

act known as the ‘Employers Liability Act’ of Con-

gress is in any way involved in this case. It seems

to be a case where the decision will depend entirely

upon the facts of the case as applied to the law The

mere application of an act of Congress to a case gives

no right of removal.”’ Se

The Spruce Corporation is a creature of the laws

of the State of Washington—a citizen of that state. No

_ eonstitutional question or construction of Federal law

is involved. The United States is not a proper party

plaintiff. On what principle can a Federal Court have

jurisdiction ?

In Head & Armory v. The Provident Ins. Co., (2

Cranch, 127), Chief Justice Marshall said:

‘A state corporation is a creature of state law.

Its qualities and disabilities are ‘what the incorpor-

ating act has made it—to derive all its powers from

that act, and to be capable of exerting its faculties

only in the manner which that act authorizes. To

this source of its being, then, we must recur to ascer-

tain its powers.”’

In the Dartmouth College case (4 Wheaton, 636), it

is said:

ev ki

‘*Being a mere creature of the law, it possesses

only those properties which the charter of its crea-

tion confers upon it.’’

In the Dandridge case (12 Wheaton, 64), it is said:

‘Corporations created by statute must depend

both for their powers and the mode of exercising

9 9 upon the true construction of the statute it-

In the Earle case (13 Peters, 519, opinion, 587),

Chief Justice Taney said:

“A state corporation can do no acts ‘except

such as are authorized by its charter; and those acts

must also be done by such officers or agents, and in

such manner as the charter authorizes.’ ”’

And on page 588:

“‘Tt is very true that a corporation can have no

legal existence out of the boundaries of the sover-

senty by which it is created. It exists only in con-

plation of law, and by force of the law; and when

that law ceases to operate, and is no longer obliga-

tory, the corporation can have no existence. It

must dwell in the place of its creation, and can-

not migrate to another sovereignty.”’

The acts of this corporation must be done by its of-

ficers and agents and in the manner authorized and pre-

scribed by the laws of Washington. The fact that it con-

fined, if it did confine, its activities to furthering the in-

terests and purposes of its dominant stockholder, the

United States, would not change the law; such acts are

the acts of a creature of state law and are governed and

_ limited by that law.

in Shi

How is it permissable for this creature of state law,

this citizen of the State of Washington, to be singled out

from other citizens of Washington as a class by itself,

and be allowed to present its controversies to a Federal

Court?

Why should such a citizen be relieved from the obli-

gations imposed by the same law on other citizens to sup-

port the state administration that gives its property pro-

tection ?

The incorporation laws of the State of Washington

are full and complete.

Remington’s 1915 Code, Sec. 3677 and follow- |

ing.

Superior Courts of the State of Washington have

jurisdiction of suits involving ‘‘title to real estate, or

the legality of any tax.”’

Rem. 1015 Code, Sec. 15.

Suits to enjoin tax collection must allege and prove

tender of taxes justly due,

Rem. Code, 1915, Sec. 955.

The State Board of Taxing Commissioners have

‘general supervision of the system of taxation through-

out the state,’’ with very broad powers.

Rem. Code, 1915, Sec. 9084, and following.

os SE

All property in the State of Washington is subject

to taxation.

Rem. Code, 1915, See. 9091.

Suits by a state corporation must allege and prove

payment of last annual license fee to the State.

Rem. Code, 1915, See. 3715.

If the Spruce Corporation engages in bazardous

work it is subject to the State Workmen’s Compensation

Law, and must pay the State a percentage of its pay roll.

Rem. Code, 1915, Sec. 6604, and following.

If it operates its railroad as a common carrier it is

subject to and governed by the Public Service Commis-

sion Law of the State of Washington.

Rem. Code, 1915, Secs. 8626-1 and following.

QUESTION II.

Is the property held by the Spruce Corporation,

under the facts set forth in the certificate, subject to state

taxation?

1. Exemption from State Taxation of a Federal

Agency can only arise by necessary implication or by

express Congressional declaration.

Such necessary implication depends not upon the

fact of the agency, but upon the character and necessary

a eae

effect of the tax. From a tax which deprives the agent

of the power to serve the Government, or directly and

necessarily obstructs the exercise of that power, there

is a necessary implication of exemption. From any

other tax there is no such implication of exemption.

The tax upon the operation or right to function of

the agent has the necessary effect of destroying or ob-

structing the power of the agent to serve, hence is im-

pliedly prohibited. A tax upon the local property of

the agent has no such necessary effect, hence is not im-

pliedly prohibited and the exemption, if any, must arise

from express Congressional declaration. This distinc-

tion runs through all the decisions.

McCulloch v. Maryland (4 Wheat., 316; 4 Law Ed.,

‘ 579-600-609) is the leading case. It involved a stamp

tax on notes issued by the Maryland branch of the old

United States Bank, a corporation created by act of Con-

gress. The Maryland law sought to prohibit the issu-

ance of such notes except upon stamps for which must

be paid to the state a graduated tax according to the de-

nomination of the notes, and to prohibit the issuance of

such notes except in specified denominations, not pre-

scribed by the act of Congress creating the bank. The

Federal Supreme Court, speaking through Chief Justice

Marshall, held in substance that this was an attempt to

tax the operations of the bank and to control or impede

its right to function, as a governmental agency, and that

the Maryland law was therefore unconstitutional and

void. In his final summary Chief Justice Marshall said:

nse) Aine

“This opinion does not deprive the states of any

resources which they originally possessed. It does

not extend to a tax paid by the real property of the

bank, in common with the other real property with-

in the state, nor to a tax im on the interest

which the citizens of Maryland may hold in this in-

stitution, in common with other property of the same

description throughout the state. But this is a tax

on the operation of an instrument employed by the

Government of the Union to carry its powers into

execution. Such a tax must be unconstitutional.”’

Osborn v. Bank of United States, 9 Wheat., 738-867 ;

6 Law Ed., 204-235, involved a law of the State of Ohio

imposing upon each office of discount and deposit of the

Bank of the United States within that state an annual

occupation tax of $50,000. The Court, again speaking

through Chief Justice Marshall, held in substance, that

the capacity of discount and deposit were essential to the

operation of the bank and that therefore the exemption

from a state tax on these operations, though not expressed

by the Act of Congress, was necessarily implied. Notic-

ing the alleged resemblance between the bank and a gov-

ernmental contractor, Chief Justice Marshall said:

“Qan a contractor, for su plying a military post

chases within np oro al Cnamberting the

any or e

rovisions to the place at which the troops were sta-

eoned, or could he be fined or taxed for doing sof We

have not yet “sag 3. “gamete? 9 etna

affirmative. ,, It is true, that the property of the con-

zens 80 the local property of the bank.

Sed we do not adult that the act of purchasing, or of

nics,

conveying the articles purchased, can be under state

control,.’

This language clearly recognizes the distinction upon

which we insist, namely, between a tax upon the prop-

erty of a governmental agent and a tax upon the action

or right to function of such agent. This distinction, as

said by Justice Strong in the Peniston case, ‘‘has ever

since been recognized.’’

Thompson v. Union Pacific R. Co., 9 Wall., 579; 19

Law Ed., 792-798, was a suit to enjoin a state tax on the

railroad’s property. The railroad was incorporated by

the Territorial Legislature and State Legislature of

Kansas. Chief Justice Chase reviews prior decisions

and finds in substance that exemption from state taxa-

‘ tion of corporations employed as governmental agencies

have been sustained in two classes of cases: (1) where

the corporation was created under act of Congress and

the tax was sought to be imposed on its operations or

right to function, as in McCulloch v. Maryland, and, (2)

where the act under which the corporation was formed

expressly exempted the corporation or its property from

state taxation or limited such taxation, as in Bradley v.

People, 4 Wall., 459; 18 L. Ed., 433. He says:

‘But we are not aware of any case in which the

real estate, or other property of a corporation not

organized under act of Congress, has been held to be

exempt, in the absence of express legislation to that

effect, to just contribution, in common with other

property, to the general expenditure for the common

ie We

benefit, because of the employment of the corpora-

tion in the service of the government.”’

He adds:

**We do not think ourselves warranted, there-

fore, in extending the exemption established by the

case of McCulloch v. Maryland, beyond its terms.

We cannot apply it to the case of a corporation de-

riving its existence from state law, exercising its

franchise under state law, and holding its property

within state jurisdiction and under state protection.

‘*We do not doubt the propriety or the necessity,

under the Constitution, of maintaining the suprem-

acy of the General Government within the constitu-

tional sphere. We fully recognize the soundness of

the doctrine, that no state has a ‘right to tax the

means employed by the Government of the Union

for the execution of its powers.’ But we think there

is a clear distinction between the means employed by

the government and the property of agents employed

by the government. Taxation of the agency is taxa-

tion of the means; taxation of the property of the

agent is not always, or generally, taxation of the

means.

‘**No one questions that the power to tax all prop-

erty, business and persons, within their respective

limits, is original in the states, and has never been

surrendered. It cannot be so used, indeed, as to de-

feat or hinder the operations of the National Gov-

ernment; but it will be safe to conclude, in general,

in reference to persons and state corporations em-

pret in government service, that when Con

not interposed to protect their property from

state taxation, such taxation is not obnoxious to that

objection.

a oes

‘Lane County v. Oregon (ante, 105); Bank v.

“Kentucky (ante, 701).

‘“We perceive no limits to the principle of ex-

emption which complainants seek to establish. It

would remove from the reach of state taxation all

the property of every agent of the Government.

Every corporation engaged in the transportation of

mails, or of government property of any descrip-

tion, by land or water, or in supplying materials for

the use of the government, or in performing any ser-

vice of whatever kind, might claim the benefit of the

exemption. The amount of property now held by

such corporations, and having relations more or less

direct to the National Government and its service,

is very great. And this amount is continually in-

creasing; so that it may admit of question whether

the whole income of the property which will remain

liable to state taxation if the principle contended for

is admitted and applied in its fullest extent, may not

ultimately be found inadequate to the support of

the state governments.”’

Union Pacific R R. Co. v. Peniston, 18-Wall., 5-50;

21 Law Ed., 787-791, was also a suit to enjoin a state

tax on the property of the railroad in the state. The rail-

road corporation was created by Congress, as an agent

of the general government, designed to be employed and

actually employed in the service of the government, both

military and postal. It was aided by a land grant and

bonds advanced to it by the government, and the govern-

ment expressly had the right to name five of its directors.

The Court said:

“‘That the taxing power of a state is one of the

attributes of sovereignty; that it exists independent-

oi SR

Vy of the Constitution of the United States, and un-

erived from that instrument; and that it may be ex-

ercised to an unlimited extent upon all property,

trades, business and avocations existing or carried

on within the territorial boundaries of the state, ex-

cept so far as it has been surrendered to the Federal

Government, either expressly or by necessary impli-

cation,.are propositions that have often been asserted

by this court. And in thus acknowledging the ex-

tent of the power to tax belonging to the states, we

have declared that it is indispensable to their con-

tinued existence.’’ (Italics ours.)

After reviewing the Thompson case the Court said:

“Tt may, therefore, be considered as settled that

no constitutional implications prohibit a state tax

upon the property of an agent of the government

merely because it is = age of such agent. A

contrary doctrine d greatly embarrass the

states in the selinstion of their neeessary revenue

without any corresponding advantage to the United

States. A very large proportion of the property

within the states is employed in execution of the

powers of the es It belongs to govern-

mental agents, and is not only used, but is necessary

for their agencies. United States mails, troops and

munitions“of war are carried upon almost every

railroad ; telegraph lines are employed in the national

service. So are steamboats, horses, coaches,

foundries, ship-yards, and multitudes of manufac-

turing establishmertts. They are the property of

natural persons, or of crepe are instru-

ments or agian d of th ernment, and

dep ares tansds by which Cae ohjorts of the gor-

ernment are attained. Were they exempt from lia-

de cunieianate ta tien pevetane 02 the ‘etate-1k ie

the state governments would be paralyzed.

ae

While it is of the utmost importance that all the

powers vested by the Constitution of the United

States in the General Government should be pre-

served in full efficiency, and while recent events have

called for the most unembarrassed exercise of many

of those powers, it has never been decided that state

taxation of such property is impliedly prohibited.”

Referring to McCulloch v. Maryland the Court said:

‘‘The institution was prohibited from issuing

notes at all except upon stamped paper furnished

by the state, and to be paid for on delivery, the

stamp upon each note being proportioned to its de-

nomination. The tax, therefore, was not upon any

property of the bank, but upon one of its operations;

in fact, upon its right to exist as created. It was a

direct impediment in the way of a governmental

operation performed through the bank as an agent.

It was a very different thing, both in nature and its

effect, from a tax on the property of the bank. No

wonder, then, that it was held illegal. But even in

that ease the court carefully limited the effect of the

decision.”’

The court thus makes plain the distinction upon

which we insist here, namely, a tax on the operations or

right to function is prohibited by necessary implication ;

but a tax on the local property of the corporate agency

is not prohibited by implication. It follows that such a

tax can only be prohibited by express declaration of Con-

gress. The court said:

“‘This distinction, so clearly drawn in the earlier

decisions, between a tax on the property of a gov-

ernmental agent, and a tax upon the action of such

iM hee

agent, or upon his right to be, has ever since been

recognized.’”’

The court further said:

“‘It is, therefore, manifest that exemption of »

Federal agencies from state taxation is dependent,

not upon the nature of the agents, or upon the mode

of their constitution, or upon the fact that they are

agents, but upon the effect of the tax; that is, upon

the question whether the tax does in truth deprive

them of the power to serve the government as they

were intended to serve it, or does hinder the efficient

exercise of their power. A tax upon their property

has no such necessary effect. It leave them free to

discharge the duties they have undertaken to per-

form. A tax upon their operations is a direct ob-

struction to the exercise of Federal powers.”’

* Justice Field dissented in this Peniston case, but in

the next case which we shall notice he receded from his

former position and said: ‘‘But on further considera-

tion I have come to the conclusion that the rule laid down

in the Thompson case is the true and sound rule.”’

County of Santa Clara v. Southern Pacific R. Co.,

18-Fed., 385; involved county taxes levied upon the fran-

chises and property of the defendant railroad corpora-

tions formed under the laws of the State of California.

Two of these companies, with consent of the Legislature

of California, were selected as special agents of the Fed-

aral Government and received grants of power and

privileges from the Federal Government as postal and _

military roads, not possible under the original organiza- —

tion. They contended that the power to tax their fran- a

ani.

chises involved the power to destroy the companies and

urged that the tax was therefore void.

The opinion was written by Justice Field. Follow-

ing the rule in the Thompson case he said:

‘The state, it is conceded, cannot use its taxing

power so as to defeat or burden the operation of the

general government. And when the government

has itself created the instrumentality used, its ex-

emption from a state taxation necessarily follows.

But we are of the opinion yielding to the decision

cited, that when the instrumentality is the creation

of the state,—a corporation formed under its laws,—

and is employed or adopted by the general govern-

ment for its convenience, although to enlarge its use

and render it more available additional privileges

and benefits are conferred by the government upon

the corporation, it remains subject to the taxing

power of the state, unless Congress declares it to be

exempt from such power. Congress can undoubt-

edly exempt any agencies it may employ for services

to the general government from such taxation as will

in its Judgment impede or enh their perform-

ance. Occasions may arise hereafter, especially in

time of war, where the necessities of the Federal

Government will require such exemption of the roads

of the companies, and of their franchises and appur-

tenances, to be declared, and enforced; the exemp-

tion to continue until the necessities ing for it

shall cease. But as yet Con has not declared

any such exemption either of their property or of

their franchises, and we therefore think that none

exists.

The above language is directly applicable here. The

: Spruce Corporation is organized under the laws of the

a we as

State of Washington. Therefore, “it remains subject

to the taxing power of the State, unless Congress declares

it exempt from such power.’’ This is especially true

where, as here, the tax is purely a property tax and not

a tax on the franchise.

Central Pacific Railroad Co. v. California, 162 U.S.,

91-128; 40 Law Ed., 903-915, involved the validity of a

tax on the railroad’s franchise included in its return with

its other property for taxation. The railroad company

was organized under the laws of the State of California

and derived its franchise from those laws. It appeared

also that it had as an agency of the Federal Government

an additional franchise from the Federal Government. —

It was contended that the whole tax was void in that it

included a tax on the Federal franchise which was ex-

empt from State taxation. The Court, speaking through

Chief Justice Fuller, held that the State franchise was

not exempt from taxation, and that in the absence of a

showing to the contrary the franchise taxed was pre-

sumed to be that which the State could legally tax,

namely, the.State franchise and not the Federal fran-

chise. The tax was held valid.

Choctaw, Oklahoma & Gulf R. Co. v. Mackey, (U.

§S. Supreme Court Adv. Opinions No. 16, July 1st, 1921,

- p. 639) is the most recent expression of the Supreme

Court of the United States on this question of state taxa-

tion of property of Federal agencies. The railroad there |

in question served certain coal mines situated upon lands |

is A

leased from the Choctaw Indians and it was conceded

that the railroad was used by the Government as an

agency in carrying out its policy toward the Indians.

The Court, following the rule in the Peniston and other

cases, held the state tax on the railroad’s property valid.

The Court said:

‘*And even though it be granted that the Fed-

eral Government utilized the railroad as an instru-

ment in working out its policy toward the Indians,

the tax upon the railroad property would be none

the less valid.’’

It is thus plain that the Supreme Court of the

United States in its latest utterance has evinced no dis-

position to recede from the original distinction made in

McCulloch v. Maryland, between a tax upon the opera-

‘tions of a government agency or its rights to function,

and the tax upon the property of such an agency located

within the taxing state, and still holds that the latter is

not exempt from taxation in the absence of a specific

declaraion of Congress to that effect.

This distinction between taxation of the operations

or right to function of the governmental agency and

taxation of its local property is also clearly recognized

in the Telegraph cases which were cited by appellees in

the trial court as showing that the ‘‘means’’ employed

by the Federal Government cannot be taxed by the states.

Williams v. Talladega, 226 U. S. 404; 57 Law Ed.

275, involved a municipal license fee in the nature of an

as oe

occupation tax of $100 per year upon the right of the

Western Union Telegraph Company to transmit mes-

sages. In consideration of permission conferred by Act

of Congress to construct and maintain its lines upon

the military and post roads of the United States, the

company was required as an instrumentality of the Fed-

eral Government to transmit messages for the govern-

ment at reduced rates and give such messages priority

over other business.

The license tax did not except from its operation

such Federal business. The ordinance was held void as

an attempt to tax the right of the company to function

as a governmental agency. But the Court, speaking

through Justice Day, after reviewing the prior telegraph

cases, said:

“These cases, taken together, establish the

—. that the privilege given under the terms

of the act to use the military and post roads of the

United States for the poles and wires of the company

is to be regarded as permissive in character, and not

as creating corporate rights and i gg com to carry

on the business of telegraphy, which were derived

from the laws of the state incorporating the com-

pany, and that this permissive grant did not prevent

the state from taxing the real or personal property

belonging to the company within its borders, or from

imposing a license tax upon the right to do a local

business within the state.”

Western Union Tel. Co. v. Texas, 105 U S., 530; 26

Law Ed., 1067, involved an occupation tax which im-

_ posed a specific tax on each message transmitted by the

in 2

company. This was in addition to the usual taxes on the

real and personal property of the company within the

state. The Federal Supreme Court held that in trans-

mitting messages from points within to points without

the state the company was an instrument of interstate

commerce, and that in transmitting messages for the

Federal Government it was a government agency, and

that therefore neither interstate messages nor messages

for the government could be subjected to the occupation

tax. But, referring to the Act of Congress giving to the

company the right to use military and post roads, the

Court said:

‘‘The Western Union Company having accepted

the restrictions and obligations of this provision by

Congress, occupies in Texas the position of an instru-

ment of foreign and interstate commerce, and of gov-

ernment agent for the transmission of messages on

public business. Its property in the State is sub-

ject to taxation the same as other property, and it

may undoubtedly be taxed in a proper way on ac-

count of its occupation and business. The precise

question now presented is, whether the power to tax .

its occupation can be exercised by placing a specific

tax on each message sent out of the state, or sent by

public officers on the business of the United States.’’

Western Union Tel. Co. v. Attorney General, 125

U. S., 580; 31 Law Ed., 790, likewise sustains our posi-

tion that an exemption from state taxation of the prop-

erty of a corporation employed as a governmental

agency is never implied though such exemption is im-

_ plied as to its operations or right to function. The Court

said:

neeas

‘*While the state could not interfere by es spe-

cific statute to prevent a corporation from placing

its lines along these post roads, or stop the use of

them after they were placed there, nevertheless the

company receiving the benefit of the laws of the state

for the protection of its property and its rights is

liable to be taxed upon its real or personal property

as any-other person would be. It never could have

been intended by the Congress of the United States,

in conferring upon a corporation of one state the au- _

thority to enter the territory of any other state and

ce its poles and limes therein, to establish the

so pose that such a company owed *bedience to

ws of the state into which it thus entered, and

pa under no obligation to pay its fair proportion of

the taxes necessary for its support.”’

A clearer recognition of the distinction between

taxation of the operations or right to function of a gov-

ernment agency and taxation of its local property,

than that made in these telegraph cases can hardly be

conceived. They all hold that the operations or right to

function of the governmental agency are the means em-

ployed by the government, without which the agent can-

not serve the government; that state taxation of such

operations or rights has a direct and necessary tendency

to obstruct or impair the agent’s power to serve, hence

it is prohibited by necessary implication, but that taxa-

tion of the local property of the agency in the same

manner as other property in the state, has no such neces-

sary tendency, hence is not impliedly prohibited.

It is no answer to say, as was said by the trial court, —

that the properties of the Spruce Corporation are “the —

OS ae

only means and instrumentality by which the purpose

and employment could be carried out.’’ Obviously the

timber lands, mill and railroad of the Spruce Corpora-

tion are no more the ‘‘means’’ employed by the govern-

ment for the production of airplanes, than were the local

tracks and rights-of-way of the railroad in the Thomp-

son and Peniston cases the ‘‘means’’ employed by the

government in the transportation of troops, munitions

and mails. Obviously the property here taxed was no

more the ‘‘means’’ employed for the government’s pur-

pose than were the local poles, wires and real estate of

the telegraph companies the means employed for the

messages in the Telegraph cases.

Obviously, equal taxation of the property here in-

‘volved with other like property in the State has no more

direct or necessary tendency to obstruct or destroy the

power of the Spruce Corporation to produce timber for

airplanes than the tax on the railroad’s tracks and rights-

of-way, involved in the Thompson, Peniston and other

railroad cases, had to obstruct or destroy the power of

the railroads to carry government troops, war munitions .

or the mails. It is no more true that this corporation

could not produce airplane lumber without its timber

lands than it was that the railroads could carry govern-

ment troops, munitions and mails without their tracks

and rights-of-way, or that the telegraph companies could

transmit government messages without their poles and

sais ME

It is too plain for cavil that all these cases hold that

the ‘‘means’’ employed by the government are the cor-

porations themselves with their right to be, to operate

and to function; that the direct and necessary effect of a

state tax on any of these rights would be to obstruct or

destroy the power to serve, hence it is impliedly prohib-

ited, but a tax on the local property commensurate with

other like property in the state has no such direct or

necessary tendency, hence is not impliedly prohibited.

This is the criterion laid down by Chief Justice Mar-

shall in McCulloch v. Maryland over a hundred years

ago and consistently followed ever since in an unbroken

line of decisions. Congress must be presumed to have

known of these decisions and that the rule they announced

had been followed for a century when it authorized the

creation under the State law, and the employment of the

Spruce Corporation as a governmental agency. Had it

intended or desired to exempt the local property of that

corporation from State taxation it must be assumed that

in the act authorizing the employment of such agencies it

would have.so declared. It did not so declare and no

implication of such.an intention can be reasonably in-

dulged.

In practically every case in which the Federal Su-

preme Court has held that the “‘means’’ employed by the —

Federal Government are impliedly exempt from state —

taxation, the term “means”’ is defined as the corporate —

agency itself, its right to operate, to function and to be. —

wis i

In none of them is it used as including the local physical

property of the agency. In every such case such local

property is expressly excluded from that term.

The adoption of the Fourteenth Amendment to the

Federal Constitution has destroyed the force of the often-

quoted dictum of Chief Justice Marshall in McCulioch

v. Maryland that ‘‘the power to tax involves the power

to destroy.’’ The answer is found in the opinion of

Judge Field in County of Santa Clara v. Southern Pa-

cific R. Co., 18 Fed., 365, above cited. It is true that in

that case the tax on the property of the railroad was held

invalid, not on the ground of exemption, but for gross

inequality as compared with the taxes on other property

in the state, thus impinging the Fourteenth Amendment

of the Federal Constitution. The court held that that

amendment declaring that no state shall deny to any per-

son within its jurisdiction the ‘‘equal protection of the

laws’’ imposes a limitation upon the exercise of all the

powers of the state which can touch the individual or his

property, including the power of taxation. Judge Field

said:

‘*Unequal taxation, so far as it can be prevented,

is, therefore, with other unequal burdens, prohibited

by the amendment. There undoubtedly are, and al-

ways will be, more or less inequalities in the opera-

tion of all general legislation arising from the differ-

ent conditions of persons from their means, business,

or position in life, against which no foresight can

guard. But this is a very different thing, in

purpose and effect, from a carefully devised scheme

to produce such inequality; or a scheme, if not so

isis

devised, necessarily producing that result. Absolute

equality may not be atiainable, but gross and de-

signed departures from it will necessarily bring the

legislation authorizing it within the prohibiton. The

amendment is aimed against the perpetration of in-

justice, and the exercise of arbitrary power to that

end. The position that unequal taxation is not

within the scope of its prohibitory clause would give

to it a singular meaning. It is a matter of history

that unequal and discriminatory taxation, leveled

against special classes, has been the fruitful means of

oppressions, and the cause of more commotions and

disturbance in society, of insurrections, and revolu-

tions, than any other cause in the world. It would,

indeed, as counsel in the San Mateo case ironically

observed, be a charming spectacle to present to the

civilized world, if the amendment were to read, as

contended it does in law, ‘Nor shall any state de-

prive any person of his property without due pro-

cess of law, except it be in the form of taxation; nor

deny to any person within its jurisdiction the equal

protection of the laws, except it be S taxation.’ No

such limitation can thus be ingrafted by implication

upon the broad and comprehensive language used.

e power of oppression by taxation without due

rocess of law is not thus permitted; nor the power

y taxation to deprive any person of the equal pro-

tection ofthe laws.”’

It is thus made plain that the Fourteenth Amend-

ment constitutes an insuperable bulwark against destruc-

tion of a Federal Agency by taxation of its property. By |

guaranteeing equality of taxation it makes it impossible @

for any state to destroy such an agency by taxing its —

property without at the same time destroying every other

business enterprise in the state and thus destroying itself.

mie

No such inequality is claimed in the case here. The

property of the Spruce Corporation is taxed just as other

property in the state is taxed.

It is certainly no more true that ‘‘the power to tax

involves the power to destroy’ a Federal agency, than it

is that the power to prohibit state taxation involves the

power to destroy the state. This is clearly pointed out

in the Thompson and Peniston cases. In the Peniston

ease the Court said:

‘*A very large proportion of the property with-

in the states is employed in execution of the powers

of the government. It belongs to government agents

and is not only used, but it is necessary for their

agencies. * * Were they exempt from liabil-

ity to contribute to the revenue of the states it is

manifest that the state governments would be para-

lyzed. While it is of the utmost importance that all

the powers vested by the Constitution of the United

States in the General Government should be pre-

served in full efficiency, and while recent events have

called for the most unembarrassed exercise of many

of these powers, it has never been decided that state

taxation of such property is impliedly prohibited,’

It is the plain purport of these and many other de-

cisions of the Federal Supreme Court that the intention

to exercise a power fraught with such potential disaster

to these states should never be implied except where the

B® implication is positively essential to the service of the

government by its agents. It is equally plain that un-

less thé line of implied exemption from taxation be

drawn between taxation of the right of the agent to op-

aa BS

erate, to function, or to be, and taxation of its local prop-

erty, where it has been consistently drawn by that Court

for a century, there is no line. It is only safe and sane

to continue to hold, as has been so long held, that if Con-

gress intends to exempt such property from state taxa-

tion it must say so and when it has not so declared, no

- such exemption shall be implied.

2. The property of the Spruce Corporation was not

owned by nor held in trust for the United States.

All of this property during the years for which it

was taxed stood in the name of the Spruce Corporation

by deed absolute, without reservation, condition or de-

feasance of any kind. The Spruce Corporation actually

paid the full consideration therefor from money realized

on the sale of its own debenture bonds. That the Spruce

Corporation is a separate entity, not endowed with the

sovereignty of the United States; that it is not the gov-

ernment nor a part of the government of the United

States, but is a private corporation and as such subject

to suits both on contracts and tort, are things now con-

clusively éstablished.

United States v. Strang, 254 U 8. 491; 65 L.

Ed. 368;

Sloan Shipyards Corp. v. U S. Shipping Board _

Emp. F. Corp; Astoria Marine Corp.; —

Fleet Corp. v. Wood, Trustee, 257 US. ...

66 L. Ed. ....; No. 14 Adv. Op. U. 8. Sup.

Ct., July 1, 1922, p. 456; =

iE

Panama R. Co. v. Minniz, 282 Fed. Rep Adv.

_ Sheets, No. 1, p. 47;

United States v. Matthews, 282 Fed Rep. Adv.

Sheets No. 1, p. 266.

The Spruce Corporation is a separate entity, a cor-

poration organized under the laws of the State of Wash-

ington. The title of all of this property at the time it

was taxed and during the years for which it was taxed

was in that corporation. If it was the property of the

United States it must be because of some trust created

either expressly or by operation of law.

It is elementary that the burden of proving a trust

in lands contrary to the apparent legal title rests upon

him who asserts it. Broadly speaking, there are only

three kinds of trusts known to the law. These are (a)

express trusts, (b) constructive trusts, and (¢) resulting

or implied trusts.

3 Pomeroy, Equity Jurisprudence (4th Ed.),

Sec. 987.

(a) Express trusts are ‘‘those created by the con-

tract vf the parties and intentionally.”’

Farrell v. Mentzer, 102 Wash., 629-632;

3 Pomeroy, Equity Jurisprudence (4th Hid.),

See. 987.

It is the settled law of the State of Washington that

“an express trust cannot be proven by parol testimony.’’

It must be proved by written evidence.

ag arn ny errmmearwnr en nea

sis See

Arnold v. Hall, 72 Wash., 50-52;

Kalinowski v. McNeny, 78 Wash., 681-684;

Croup v. DeMoss, 78 Wash., 128-131-132;

Farrell v. Mentzer, 102 Wash., 629-649-650.

The Federal Courts are of course bound by the con-

struction put upon the laws of the State by the Supreme

Court of the State. This is as true in the attempt to as-

sert a trust as in other cases.

Osterman v. Baldwin, 6 Wall., 116; 18 L. Ed,

(U. 8.) 730.

There is no written evidence in this case even tend-

ing to show that the property here in question is or ever

was held by the Spruce Corporation in trust for the

United States. The deed from the United States to the

corporation is a deed absolutely without reservation,

condition or defeasance. It does not mention any trust

and the corporation is not even referred to as a trustee.

There is no other writing declaring any trust. The con-

sideration for the conveyance negatives any trust. The

land was ‘actually paid for by the corporation with the

proceeds of the salé of debenture bonds of the corpora-

tion which were purchased by the United States, and

which, so far as they remain unpaid, are still held by the

- United States.

There are no facts in this case from which any court

can find the existence of an express trust for any pur- —

pose.

~~ - - a a eee

a eee

(b) Constructive trusts are those raised by the doc-

trines of equity to effectuate justice ‘‘where there is no

intention of the parties to create such a relation, and in

most eases contrary to the intention of the holder of the

legal title, and where there is no express or implied writ-

ten or verbal declaration of the trust.’’ All constructive

trusts ‘‘may be referred to what equity dominates fraud,

either actual or constructive, as an essential element, and

as their final source.”’

3 Pomeroy, Equity Jurisprudence, (4th Ed.),

Sec. 1044.

Manifestly there is no constructive trust in this case.

It is not pretended that the Spruce Corporation acquired

title to this property through any fraud or by breach of

any duty which it owed to the United States.

‘(e) Resulting trusts are of two types:

First, those arising from gift by will or deed, with

an intention appearing from the face of the instrument

that the legal and beneficial estates are to be separated,

but no valid or complete trust being declared and no con-

sideration stated.

3 Pomeroy, Equity Jurisprudence, (4th Ed.),

Secs. 1033-1035.

Second, these trusts arising where the legal estate is

conveyed to one person and the purchase price is paid

either in whole or an aliquot part thereof by another.

in BO ee

3 Pomeroy, Equity. Jurisprudence, (4th Ed),

See. 1037.

In each of these types ‘‘there is always the element,

although it is an implied one, of an intention to create a

trust.’’ The law raises the trust as a result of this im-

plied intention.

3 Pomeroy, Equity Jurisprudence, (4th Ed.),

See. 1031.

Farrell v. Mentzer, 102 Wash., 620-632-633 ;

Croup v. DeMoss, 78 Wash., 128-132-133.

There are no facts in this case to sustain a resulting

trust of the first type, namely, those arising by implica-

tion from the terms of a gift by will or deed. The deed

in this case is absolute on its face, states a full considera-

tion and contains no mention of a trust or anything from

which a trust can be implied. In such a case no extrinsic

evidence is ever admissible to raise a trust, in the absence

of fraud or mistake.

3 Pomeroy, Equity Jurisprudence, (4th Ed.),

See. 1036.

There are no facts to create a resulting trust of the

second type defined by Judge Pomeroy as above noted,

namely, that resulting from the payment of the purchase

price by one party, the title being taken in the name of

: _ another. As in other claims of trust, the burden of

proving the trust is upon him who asserts it. Though

a resulting trust of this second type may be proven by

wii

parol evidence the proof must be of the strongest char-

acter. The rule as to quantum of proof is thus stated by

the same eminent authority:

“Where the trust does not appear on the face

of the instrument of transfer, a resort to parol evi-

dence is indispensable. It is settled by a complete

unanimity of decision that such evidence must be

clear, strong, unequivocal, unmistakable, and must

establish the fact of the payment by the alleged bene-

ficiary beyond a doubt.”’

3 Pomeroy, Equity Juris., (4th Ed.), See 1040.

See also

Denny v. Holden, 55 Wash., 22-23;

Croup v. DeMoss, 78 Wash., 128-132-133;

Sewell v. Sewell, 109 Wash., 252-255;

Sheehan v. Sullivan, (Cal.) 58 Pac., 543-544;

Barger v. Barger, (Or.) 47 Pac. 702-704;

Catoe v. Catoe, (8. C.) 10 8. E., 1078-1079;

Hatton v. Cunningham, (Ind.) 62 N. E. 644.

A legion of cases to the same effect might be cited, but

these should suffice.

The facts are that the purchase price was paid by

the corporation to the United States from the proceeds

of the sale of the debenture bonds of the corporation.

The facts, so far from establishing a resulting trust in

favor of the United States, are conclusive that the Spruce

Corporation actually paid the full purchase price and

Sa

that the United States by taking the debentures of the -

corporation which it still holds, became and is a mere

creditor of the corporation.

True, the Spruce Corporation is a governmental

agency, but that does not make its property the property

of the government nor make the corporation a trustee

for the government as to such property. True, also, the

United States owns all of the stock of the Spruce Sor-

poration, but that does not make the government the

owner of the property of the corporation.

Fitzgerald v. Missouri Pac. R. Co., 45 Fed., 313.

In re Greenleaf, (Ill.) 56 N. E., 295.

The decision in the Sloan case, holding that the

Emergency Fleet Corporation is a separate entity from

the United States, conclusively establishes our claim that

the Spruce Corporation is a separate entity from the

United States. If it is, then property which it holds

under deed absolute, without reservation or condition,

for whichit paid full consideration, is the property of

the corporation and not the property of the United

States.

There is no express trust, since the written evidence

contains no declaration of trust. The deed to the cor-

poration is absolute. There is no constructive trust.

ES The corporation acquired title to this property Barone

| no fraud or breach of duty. There is no resulting trust.

ee TD as

The deed recites and the facts show a consideration paid

by the corporation.

If there is any trust it must have arisen under some

settled principle. Yet these are the oitty classes of trusts

known to the law and the facts here negative every one

of them. The courts cannot create some new species of —

trust in order to defeat a tax any more than for other

purposes.

The contracts and operations after the armistice

show a purely private use, commencing over two years

after the armistice and to continue for ten years there-

after, created by contract of the corporation, enforcable

under the laws of this State.

Ownership of capital stock does not carry ownership

of corporate property.

Fitzgerald v. Missouri P. 8. E. R. Co., 45 Fed.

313;

In re Greenleaf, (Tll.) 56 N. E. 295.

The Gloucester, The Federal Reporter, (De

cided Jan. 12, 1923. Advance Sheets Mar.

15, 1923, p. 579.)

In the above case District Judge Morton says:

‘‘When a corporate form of organization has

been resorted to for fraudulent purposes, courts

under some circumstances disregard it and look to

the individuals behind it, but the general rule is that.

at Glas

a corporation is a separate entity distinct from its

stockholders.’

It is, of course, true that ‘‘courts will not be blinded —

by form of law,’’ but will look through corporate form

to attain justice or prevent fraud, but there is no fraud

or injustice in the tax here involved; it is not claimed —

that it is unequal with other taxes, or that it is excessive

in rate, or that it is based upon an excessive valuation,

or that it is inherently unjust for any other reason. It

is an equal tax upon the property within the State, pro- —

tected by the laws of the State just as other like property ©

is protected. There is no inherent injustice in this prop-

erty bearing its equal proportion of the taxes levied for

the protection of all property within the State.

That it was never the intention of Congress that the

property vested in this corporation should be the prop-

erty of the United States, is conclusively shown by the

act of Congress authorizing the creation of the corpora- _

tion. That act in terms contemplated that private per-

sons might. acquire and own as much as forty-nine per —

cent of the capital. stock of the corporation. Congress _

was thus plainly of the opinion that the power to select : |

and control the managing directorate of the corporation ‘

which would follow from the ownership of a majority of — 2

the capital stock as completely as from the ownership of

all, was an ample guaranty that this property would be _

_ used by the corporation for the desired purpose of pro- :

ducing airplane timber, without any declaration of any —

ae. Toa

trust for or retention of any owneship by the United

States in the property itself.

Suppose that private persons had acquired (as they

might have done under the Act of Congress) 49 per cent,

or any other part, of the capital stock of the corporation.

Would anyone then have claimed that the property of

the corporation was the property of the United States

held in trust for the United States, either in whole or in

part? Would anyone then have claimed that a part of

this property, proportioned to the capital stock held by

the United States, exempt from State taxation, and that

the balance was not? We apprehend that no one would

have seriously advanced either of these views.

Again, as we have pointed out, the very manner in

which the operations of this corporation were financed,

is conclusive evidence that the ownership of the property

was not intended to be retained by the United States nor

held in trust for the United States. It was financed and ©

the very property here in question was purchased with

the proceeds of the sale to the government of bonds of

the corporation, which, so far as they have not been paid,

are still held by the government. ~

These things are not mere matters of corporate form

_ but are matters of substance going to show the intention

_ of Congress in enacting the law authorizing the forma-

tion of this corporation under the laws of the State of

Washington.

oe OR en

Let us examine a few of the provisions of that act:

By Section 1 it is left to the director of aircraft to

choose the state under the laws of which the corporation

was to be formed and no restriction is placed upon his

powers in that regard except the total investment shall

not exceed $100,000,000.

By Section 2 that officer is given permission to sub-

scribe on behalf of the United States for the capital stock

of the corporation and no restriction is placed upon the

nature or extent of the liability so assumed. In the same

section he is authorized to buy such evidences of indebt-

edness as the corporation may offer for sale. He may sell

the interest of the United States in the corporation, either

all’or in part, the only restriction being that the United

States shall not be made a minority stockholder.

By Section 3 it is provided that one year after the

signingof peace the Director of Aircraft shall, ‘‘on be-

half of the United States as a stockholder,’’ institute pro-

ceedings in the proper State Court to dissolve the cor-

poration afid’upon such dissolution the corporation ‘‘shall

be liquidated and the assets distributed in accordance

with the laws”’ of the State. This provision is without

any restriction.

| These provisions make it too plain for doubt that the

United States assumed the status of, and intended to ex-

ercise, and can only exercise in this corporation, the

powers and rights of a stockholder. If the Federal —

inc os

Government had intended to exercise the sovereign gov-

ernmental control over this corporation which it exer-

cises over its boards and departments, why the provision

that it should always retain a controlling interest in the

voting power of the corporation? If the Government

had intended to retain the ownership of the property

vested in this corporation, why the provision that on its

dissolution the assets be distributed by the Court of the

State in accordance with the laws of the State? If it

ever intended that this corporation should hold its prop-

erties merely in trust for the Government, why the tncon-

sistent provision that private persons might acquire and

own as much as forty-nine per cent of the capital stock?

Section 4 of the Act, touching the personnel of the

‘ officers of the corporation, expressly provides that the

corporation may employ “‘civilians in the manner cus-

tomary in the conduct of ordinary business under corpo-

rate organization.’’ This further manifests a plain intent

that this corporation shall operate as a mere private cor-

poration under the laws of the State.

Section 5 expressly authorizes the Director of Air-

craft to transfer to the corporation any interest of the

United States in any contracts necessary for carrying

out the corporate business and that he may transfer by

appropriate instrument ‘‘the title to any lands plants,

railroads or equipment used in or in ‘connection with the

production of aircraft, aircraft equipment or materials

therefor.’’

ia WE acs

If it had been intended that the Government should my

retain the ownership of such contracts and property and

that the corporation should take and hold them as a mere |

trustee, what easier or more natural than to say so in ea s

act authorizing the transfer? These properties were

actually transferred to the corporation by deed absolute, —

without reservation, condition or declaration of any trust,

an instrument of that officer’s own selection. Thus in~

carrying out the legislation which the War Department

had doubtless inspired and intrusted to its Director of ©

Aircraft for carrying out, he construed it as contemplat-—

ing no reservation of ownership in, or trust for, the

United States. Such a contemporaneous construction by —

the officer intrusted by the statute itself with the carry-_

ing out of its own provisions is entitled to the greatest

weight and will be followed by the courts unless there are

the most cogent reasons to the contrary.

United States v. Moore, 95 U. 8., 760; 24 L. |

Ed., 588;

Brown v. United States, 113 U. S., 568; 28 L.

we Ed., 1079; ‘

Fells v. Ross, (9th Circuit) 64 Fed., 417-420;

Jacobs v. Prichard, 223 U. 8., 200-214; 56.

Ed., 405-409.

The case of King County, Washington, v. The U.S. Fi

Shipping Board Emergency Fleet Corporation, decided — |

by the Ninth Circuit on September 5, 1922, will no doubt |

moeaiiioen

be cited by opposing counsel. There are certain consid-

erations which vitally distinguish that case from this.

In the first place, the property there in question was

not acquired by the Fleet Corporation with funds coming

from the sale of its own bonds or debentures, nor even,

as the Court in substance says, from the sale of its capital

stock. It was purchased with money directly appro-

priated by the government for that purpose, the naked

title being taken in the name of the Fleet Corporation.

This is apparently the controlling factor in that decision.

Whereas in this case the property was purchased from

the United States by the Spruce Corporation and the

government actually took in payment therefor the de-

benture bonds of the Spruce Corporation in the full value

‘of the property, which bonds, so far as they have not

_ been paid by the corporation, are still held by the govern-

ment. The government thus became a mere creditor of

the corporation, not the owner of the corporate property.

In the second place, the Fleet Corporation was organ-

ized under the laws of the District of Columbia, which

were enacted by Congress itself. Whereas the Spruce

Corporation was organized under the laws of the State

of Washington. It may be, as said in the King County

case, that it is one thing for the government to commit

to its agent the control of public property and authorize

it to contract and to sue and be sued in relation thereto,

_ “but quite another thing to permit such property to be

encumbered with burdens in the imposition of which

a

- neither it nor its agent has any part.’’ That language —

may have persuasive force as applied to the Fleet Cor- —

poration, but hardly as applied to the Spruce Corpora- —

tion. The government, by organization of the Spruce

Corporation under the laws of the State of Washington,

did have just that part in imposing upon the local prop-

erty of the corporation the same burdens which the laws

of that state place upon other like corporate property.

By causing the Spruce Corporation to be organized under

the laws of the state it made that corporation a creation

of the state deriving its franchise and its right to be from

the state law and as a corallary subjected its property to

the same burdens of taxation as other like corporate

property in the state. As said in the case of Thompson —

v. Dnion Pac. R. Co., supra:

**But we are not aware of any case in which the

real estate, or other property of a corporation not

organized under act of Congress, has been held to be

exempt, in the absence of express legislation to that

effect, to cag ecagerbouse ge in —. — other

roperty, to the general expenditure for the com-

ok benefit, because of the employment of the cor-

poratiomin the service of the government.”’

Further in the same case it is said:

““We do not think ourselves warranted, there-

-. fore, in extending the exemption established by the

ease of McCulloch v. Maryland, beyond its terms.

We cannot apply it to the case of a corporation de-

| oe oe ‘from state law, exercising its

“ under state law, and holding its p

within state jurisdiction and under state protection.” °

me wes

As said in County of Santa Clara v. So. Pac R. Co.,

supra, after citing the Thompson case:

““But we are of the opinion, yielding to the de-

cision cited, that when the instrumentality is the cre-

ation of the state—a corporation formed under its

laws—and is employed or adopted by the general

government for its convenience, although to enlarge *

its use and render it more available, additional privi-

leges and benefits are conferred by the government

upon the corporation, it remains subject to the tax-

ing power of the state, unless Congress declares it to

be exempt from such power.”

See also to same affect:

Western Union Tel. Co. v. Attorney Gen., 125

U. 8., 530; 31 Law Ed., 790;

Wuliams v. Talladega, 226 U. 8., 404; 57 L.

Ed., 275.

Congress, when it passed the act authorizing the or-

ganization of corporations under state laws, must be pre-

sumed to have known of these decisions of the Federal

Supreme Court. If it had intended that such corpora-

tion should be wholly exempt from state taxation it

would have so declared.

In the third place, the provisions of Section 4 of the

Act of June 5, 1920, touching the Fleet Corporation,

which the Circuit Court in the King County case con-

strued as giving to the government an “unqualified right

__ to dispose of property, without any action on the pert of

the corporation, and to transfer it to the Shipping

a

Board,’’ has no counterpart so far as can be found in the —

legislation touching the Spruce Corporation. There is —

nothing in the legislation touching the Spruce Corpora- —

tion evidencing an intention on the part of the govern-

ment to retain any control over the property vested in

that corporation other than what it might exercise as a

majority stockholder. Even on a dissolution of the cor-

poration any residue of the property remaining undis-

posed of by the corporation can pass to the United States

only as a stockholder by order of the State court in a pro-

ceeding instituted pursuant to state law. This is specifi-

cally provided in Section 3 of the Act.

We submit that, insofar as the decision in the case

of King County, Wash., v. U. S. Shipping Board E F.

Corp. is based upon the theory that the states are with-

out power to levy any tax upon the property of a cor-.

poration employed as a governmental agency without

permissive legislation of Congress so to do, it is directly —

contrary to a line of decisions of the Federal Supreme —

Court extending back for a century, including the McCul-

lach case, the Thompson case, the Peniston case, the Tele-_

graph cases and many other cases which we have cited —

and quoted elsewhere in this brief. eS

It is said in the Thompson case, 9 Wall., 579-592; 19

Law Ed., 792-798: -

“No one questions that the power to tax all prop-

erty, business and persons, within their respective

limits, is original in the state and has never been sur-

rendered. It cannot be so used,, indeed, as to defeat

cote ae

or hinder the operations of the National Govern-

ment; but it will be safe to conclude, in general, in

reference to persons and state corporations employed

in government service, that when Congress has not

interposed to protect their property from state taxa-

tion, such taxation is not obnoxious to that objec-

tion.’’

It is said in the Peniston case, 18 Wall., 5.50; 21 Law

Ed., 787-791:

“‘That the taxing power of the state is one of its

attributes of sovereignty; that it exists independent-

ly of the Constitution of the United States, and un-

derived from that instrument; and that it may be

exercised to an unlimited extent upon all property,

trades, business and avocations existing or carried on

within the territorial boundaries of the State, except

so far as it has been surrendered to the Federal Gov-

ernment, either expressly or by necessary implica-

tion, are propositions that have often been asserted by

this court. And in thus acknowledging the extent of

the power to tax belonging to the States. we have de-

clared that it is indispensable to their continued ex-

istence. No one ever doubted that before the

tion of the Constitution of the United States, each of

the States possessed unlimited power to tax, either

directly or indirectly, all persons and pro with-

in their jurisdiction, alike by taxes on polls, or duties

on internal production, manufacture or use, except 80

far as such taxation was inconsistent with certain

treaties which had been made. And the Constitution

contains no express restriction of this power other

than a prohibition to lay any duty of tonnage, or any

impost, or duty on imports or exports, except that

may be absolutely necessary for executing the State’s

inspection laws.”’

| ae

The decision in the King County case quotes from the _

opinion in Owensboro National Bank v. Owensboro, 173 —

U. S., 664-668; 43 L. Ed., 850, as follows: s

“It follows then necessarily from these conclu- —

sions, that the respective states would be wholly with-

out power to ays 4 any tax, direct or indirect, upon

national banks, their property, assets or franchises,

were it not for the permissive legislation of Con-

gress.”’

That this language, if given the meaning accorded to _

it in the King County case, expresses the direct converse —

of the rule as expressed in the above quotations from the

Thompson and Peniston cases, is self-evident. That the

true rule is that expressed in those cases is also self-evi- _

dent when it is remembered that the powers of the states -

are original powers and the powers of the Federal Gov- —

ernment are granted powers.

Moreover, the above language quoted from the

Owensboro case was used in relation to national banks —

and the governing statute (U. S. Rev. Stat., Sec. 5219) :

expressly. gays:

‘*Nothing herein shall be construed to exempt

the real property\of associations from either state,

county, or municipal taxes, to the same extent, ac-

cording to its value, as other real property is taxed.”

This language of the statute is in no sense a permis- _

_ sion to tax. Plainly no such permission was necessary. _

On the contrary, it was @ mere disclaimer on the part of

Congress of any intention to prohibit state taxation of —

OF

Tee ee

sar Ml cae

real estate belonging to national banks, which is a very

different thing. If express permission were necessary,

why any necessity to disclaim an intention to prohibit?

The statute thus clearly defining its own meaning it is

manifest that if the above quoted language from the

Owensboro case was intended to apply to real estate it

was wholly unnecessary to the decision and hence obiter

dictum. If, however, it was intended to apply only to

the franchises of national banks, (and we think a reading

of the opinion will show it was so intended) then it is

sound, since the exemption of the corporate franchises,

the right to function and to be, of a governmental agency

is necessarily implied as an incident to the granted powers

of the Federal Government.

On what principle can it be asserted that a sovereign

state is without power, and especially when unprohibited

by national legislation if it could be so prohibited, to

maintain itself by taxing the property within the state

belonging to a citizen of the state?

On .what principle can property of a citizen pro-

tected by state sovereignty and subjected to state pro-

cesses, purchased and held under state law, be exempt

from burden, with other property, of maintaining such

_ sovereignty to which it owes its existence?

: Congress when it authorized an application to be

| _ made to the sovereign state for permission to create under

_ State laws a citizen of such state, did not attempt to ex-

. _ empt such citizen or its property from the duty of con-

SS pes Bo

tributing to the support and existence of the state ereat-

ing such citizen corporation. This was no doubt delib-—

erate for at the time such national legislation was en-

acted no one could hazard a guess as to the extent to which —

this Government would have to go to win the war. It

was possible and even probable that almost every field ©

of activity would be called for war service, and if the

properties to be used in such activities were to be exempt |

from state taxation, the states’ ability to function would —

be necessarily much impaired, if not destroyed, and its

citizens impoverished if property used in war activities |

were exempt and remaining property had to carry the -

entire burden. .

» On what principle can one state corporation be dis-

tinguished from another? Does the personnel of owner-

ship of stock differentiate one from another so that a

state corporation whose stock is owned by individual

owners must pay the state taxes upon its property, where-

as if the stock was owned by the United States it would

not? Such corporations may be engaged exclusively in

serving thé-government either by reason of contractual —

relation or by reason'of the fact that the government has

purchased or subscribed for a major part of the stock

and hence enabled to dominate the activities of the cor-

poration. |

This state corporation exists solely under and by ‘

reason of state law; it is obedient and must conform to all.

Jaws of the State of Washington.

nee

The State of Washington incorporation laws do not

say that a corporation formed under and existing by rea-

son of its laws is subject to all state laws except the tax

laws. This corporation had to file articles with the

state officials and if such articles had contained such an

exemption they would not have been accepted.

If it was intended to raise a trust for or reserve title

in the United States in the properties of this state cor-

poration, there would have been some such suggestion in

the deed of conveyance or in the national legislation.

The Constitution of the State of Washington, Article

XII, Section 6, provides:

‘‘Corporations shall not issue stock, except to

bona fide subscribers therefor, or their assignees;

nor shall any corporation issue any bond or other ob-

ligation for the payment of money, except for money

or property received or labor done.’’

And Article VII, Section 1, provides:

‘*All property in the state not exempt under the

laws of the United States or under this constitution,

shall be taxed in proportion to its value, to be ascer-

tained as nrovidel by law. The legislature shall pro-

- vide by law for an annual tax sufficient, with other

sources of revenue, to defray the estimated ordinary

expenses of the state for each fiscal year.’’

Section 2 provides:

“The legislature shall provide by law a uniform

and equal rate of assessment and taxation on all

ai Os

property in the state, according to its value in money, _

and shall prescribe such regulations by general law

as shall secure a just valuation for taxation of all :

property, so that every person and corporation shall

pay a tax in proportion to the value of his, her, or its

prope "3 9

Section 3 provides:

“The legislature shall provide by general law

for assessing and levying of taxes on all corporation

property as near as may be by the same methods as _

are provided for the assessing and levying of taxes

on individual property.”’

Under such provisions a claim that the Spruce Cor-

poration was only a matter of form; that the issuance of

stock and bonds a matter of book-keeping would be to

claim that a fraud was intended and practiced upon the

State of Washington.

The fact that the United States owns the stock would

not change the principle that must apply if the United

Sates only,.owned fifty-one per cent as it was authorized

by the Acts of Congress. It would not make it the owner

of the property of the corporation any more in the one

ease than in the other.

There must an an underlying principle of general —

application. The United States cannot be singled out

from other owners of stock. It cannot be asserted that

when it owns the stock it owns the property unless the :

4

a

— 69.~

same may be asserted of all owners of stock in state cor-

porations.

- If the United States as a stockholder owns the prop-

erty, then the corporation is a fraud on the Constitution

of the State of Washington; a mere shell surrounding

nothing, with no independent existence.

Such a principle must further be applicable to a

state corporation already formed under state law, 51 per

cent of whose stock the United States has bought. In

such ease would the purchase by the United States of

stock and bonds change the ownership of the property

from the corporation to the purchaser or convert the cor-

poration into a trustee?

On what principle can it be asserted that the na-

tional sovereignty can, by implication (or by express en-

actment which is not the case here) destroy the state sov-

ereignty? The states must exist to maintain the ‘‘indis-

soluble union of the indestructible states.”’

When the Spruce Corporation applies to the State

of Washington for a charter, it necessarily subjected its

property to the just burdens, with other citizens, of state

taxation to support the sovereignty to which it owned is

existence and allegiance. It assumed all the burdens of

citizenship and obedience to the laws of the state upon

which it depended for existence and protection.

be

We respectfully submit that Question I should be

answered in the negative and Question IJ in the affirm

tive. ’

Respectfully submitted,

OverTON G. ELLIS,

JoHN D. FLETCHER,

Rosert E. Evans,

Wim B. RitcHE,

Tuomas F. TRUMBULL,

F. L. PLUMMER,

JoHN M. WILSON,

Solicitors and Attorneys for Appellants, ~

Tacoma, Washingtom

Of Counsel:

S. WARBURTON.