The requirement of § 64
a of the Bankruptcy Law of 1898
in regard to preference of taxes is a wide departure from the act
of 1867, and prefers taxes due to any state, and not only those due
to the state in which proceedings are instituted.
It is the province of the courts to enforce, not to make, laws,
and if a law works inequality, the redress, if any, must be had
from Congress, and arguments directed not to the construction of
the act, but as to the justice of a method of distribution of
assets under the Bankruptcy Law and the hardship resulting
therefrom cannot influence judicial determination.
Generally speaking, a tax is a pecuniary burden laid upon
individuals or property to support the government, and §
64
a of the Bankruptcy Law is very broad, and covers all
taxes, including yearly license fees imposed by the state on
corporations organized under its laws for the privilege of doing
business, whether such business is carried on in that or in other
states.
A state creating a corporation may fix the terms of its
existence and
Page 203 U. S. 484
provide that, for the continued existence of its franchise, it
must yearly pay the state certain sums fixed by the amount of its
outstanding stock. While the state court may construe a statute and
define its meaning, it cannot conclusively determine that which is
not a tax to be a tax within the meaning of a federal statute --
that is a federal question of ultimate decision in this Court.
In this case, this Court reaches independently the same
conclusion as that reached by the state court.
Under the Bankruptcy Act, taxes assessed on returns made prior
to the adjudication are legally due and owing, and entitled to the
preference given by § 64
a although not collectible until
after the adjudication.
137 F. 858 reversed.
This is an appeal from the judgment of the Circuit Court of
Appeals for the Seventh Circuit, affirming the order of the
district court, which affirmed the finding of the referee in
bankruptcy denying to the State of New Jersey a preference for
alleged franchise taxes from the estate of a bankrupt, the
Cosmopolitan Power Company.
On December 21, 1903, the claim for the state was filed, under
the provisions of § 64
a of the Bankrupt Law. The claim is
set forth as follows:
Tax -- 1902 . . . . . . . . . . . . . $5,750.00
Interest to October 15,1903 . . . . . 891.25
Costs on injunction proceedings,
because of nonpayment of taxes. . . 26.15
Tax -- 1903 . . . . . . . . . . . . . 2,500.00
Interest to October 15, 1903. . . . . 87.50
---------
$9,254.90
The Cosmopolitan Power Company is a corporation organized under
the laws of the State of New Jersey on April 30, 1900, for the
purpose of dealing in engines, machines, etc. By its charter, it
had power to do business in any state or Territory of the United
States. While it had its principal office in the State of New
Jersey, located under the terms of its certificate of
incorporation, it had no property in that state, and conducted its
business in the State of Illinois.
The capital stock of the corporation on January 1, 1902, was
forty millions of dollars, of which there was ten millions
Page 203 U. S. 485
outstanding. On May 13, 1902, its capital stock, pursuant to the
laws of New Jersey, was reduced to $2,500,000. The company was
adjudicated a bankrupt on April 23, 1903, upon an involuntary
petition filed in the District Court for the Northern District of
Illinois.
On November 7, 1902, the State Board of Assessors of New Jersey,
the company having failed to make return, levied an assessment for
the license or franchise tax in question for the year 1902 in the
sum of $5,750.00. On June 1, 1903, there was assessed against the
company for the year beginning January 1, 1903, a similar tax on
outstanding capital stock in the sum of $2,500.00 in accordance
with the return of the company filed on May 1, 1903.
On February 12, 1904, the State of New Jersey filed its motion
before the referee for the payment of said taxes as a preferential
debt. The referee disallowed the 1903 tax altogether, and allowed
the 1902 tax as a general claim against the estate for the sum of
$4,949.08. This reduction was made from the assessment for the year
1902, because the state board had made the assessment upon the
basis of $40,000,000 of outstanding capital stock, whereas, in
fact, only $10,000,000 was then issued and outstanding, upon which
basis the referee made the allowance. The district court affirmed
the order of the referee. Upon appeal to the circuit court of
appeals, that court modified the judgment of the district court so
as to allow the taxes claimed for the year 1903 as a general debt,
and in other respects affirmed the district court. 137 F. 858. The
case was then brought here.
Page 203 U. S. 487
MR. JUSTICE DAY delivered the opinion of the Court.
The provisions of the Bankrupt Law governing the payment of
taxes are found in § 64
a, act of 1898, 30 Stat. 563, c.
541, which reads:
"SEC. 64
a. The court shall order the trustee to pay all
taxes legally due and owing by the bankrupt to the United
Page 203 U. S. 488
States, state, county, district, or municipality, in advance of
the payment of dividends to creditors, and, upon filing the
receipts of the proper public officers for such payment, he shall
be credited with the amount thereof, and in case any question
arises as to the amount or legality of any such tax, the same shall
be heard and determined by the court."
The statute of the State of New Jersey (Gen.Stat. 1895, §§ 251,
252, 257, 258, 260), by its title, undertakes to provide for the
imposition of state taxes upon certain corporations, and for the
collection thereof. It requires the corporation to make return to
the State Board of Assessors on or before the first Tuesday in May
of each year, and to pay an annual license fee or franchise tax of
a certain percent on its capital stock issued and outstanding on
January 1 of each year, up to and including $3,000,000, a different
percent on sums in excess of $3,000,000, and not exceeding
$5,000,000, and on outstanding capital stock exceeding $5,000,000,
$50 per million or any part thereof. In case the corporation shall
fail to make return, the state board shall ascertain and fix the
amount of the annual license fee or franchise tax, and shall report
to the comptroller on or before the first Monday in June the basis
and amount of the tax as returned by each company to, or
ascertained by, the board, which shall then become due and payable,
and it shall be the duty of the state treasurer to receive the
same. If the tax remains unpaid on July first after the same
becomes due it shall thenceforth bear interest at the rate of one
percent per month. That the tax shall be a debt due from the
company to the state, for which it may maintain an action at law
for recovery thereof, after the same shall have been in arrears for
the period of one month, and the tax shall be a preferred debt in
cases of insolvency, and in cases of arrears for three months the
state may apply for an injunction to restrain the company from
exercising its corporate franchise, and that, if any corporation
shall be delinquent for two years its charter shall be void, unless
further time to given for the payment of taxes.
Page 203 U. S. 489
It is contended for the appellee that these provisions do not
entitle the state to the payment of its claim as a preferred tax
within the meaning of the Bankrupt Act. It is insisted in the first
place that a proper construction of the act of 1898 does not
require the payment of taxes to a state wherein the bankrupt has no
property, and the state no means of collecting the tax from
property within its jurisdiction. And it is urged that the taxes to
be paid are those legally due and owing to the United States,
state, county, district, or municipality, which does not
contemplate payment to any and all states, but only to THE state,
which, it is insisted, should be interpreted with the limitation
stated.
It is to be noted that there is a very significant difference in
this respect in the act of 1898 from the provisions of the Bankrupt
Act of 1867, 14 Stat. 530, c. 176, the law in force last before,
and doubtless in the view of Congress when the present law was
drafted. That act of 1867 gave priority of payment to all debts due
to the United States, and all taxes and assessments under the laws
thereof, all debts due to the state in which the proceedings in
bankruptcy were pending, and all taxes and assessments made under
the laws of
such state, and provided that nothing
contained in the act should interfere with the assessment and
collection of taxes by the authority of the United States or any
state.
The requirement of the present law is a wide departure from the
act of 1867, and specifically obliges the trustee to pay all taxes
legally due and owing, without distinction between the United
States and the state, county, district, or municipality.
An argument is made as to the alleged injustice of this
requirement in that it may take away from the local creditors in
the state where the property of the corporation is situated
practically all the assets of the corporation in favor of the state
where the corporation is organized, but has no business or
property. And it is urged that to permit a state, under such
circumstances, to have a preference in the payment of
Page 203 U. S. 490
taxes would give to it an advantage which it could not otherwise
obtain for want of charge or lien upon the property. But
considerations of this character, however properly addressed to the
legislative branch of the government, can have no place in
influencing judicial determination. It is the province of the court
to enforce, not to make, the laws, and if the law works inequality,
the redress, if any, must be had from Congress.
The question is, is the claim a tax legally due and owing to the
State of New Jersey? We have been cited to many cases in the State
of New Jersey, some of which, it is alleged, maintain the theory of
the appellant that this is a tax, and some the contrary view.
Without undertaking to analyze these numerous cases or to
harmonize the views expressed by different judges, we think the
weight of judicial decision in that state favors the view that this
is a tax imposed upon the right of the corporation to continue to
be a corporation, with power to exercise its corporate franchises,
based upon the amount of its capital stock issued and
outstanding.
In
Hancock v. Singer Manufacturing Co., 62 N.J.L. 289,
it was said:
"The act of 1884 (Pamph. L. p. 232) is entitled 'An Act to
Provide for the Imposition of state Taxes upon Certain Corporations
and for the Collection Thereof.'"
"In this act, this imposition is called a yearly license fee or
tax."
"In a supplement passed to the act of 1884 (Pamph. L. 1891, p.
150), it is styled 'a tax.'"
"In a further supplement, passed in 1892 (Pamph. L. p. 136), it
is called 'an annual license fee or franchise tax.'"
"It is wholly immaterial what name may be given to it. The fact
that it is called a 'license fee' or 'franchise tax' cannot
validate it. It is levied under an act passed 'to authorize the
imposition of state taxes,' and it is nonetheless an interdicted
imposition [having reference to the charter
Page 203 U. S. 491
then being considered], and nonetheless a tax because it is
given a new name."
"Although, under our adjudications, it is not a tax on property
in a sense which brings it within article 4, § 7, paragraph 12, of
our state constitution, it is a tax on the capital stock of the
corporation. Otherwise, the act would be manifestly void for want
of a title expressing its object, and the state would be deprived
of all its revenue under the act of 1892. The franchise of the
company is the right to hold property and exercise its corporate
privileges. The Supreme Court of the United States has decided
that, where a corporation is exempted from taxation, it is not
subject to a tax on its franchise.
Wilmington Railroad v.
Reid, 13 Wall. 264."
While we take this view of the decisions of the Supreme Court of
New Jersey, and reach the conclusion that the claim in question is
for a tax within the meaning of the law as construed by that court,
the Bankruptcy Act is a federal statute the ultimate interpretation
of which is in the federal courts. It is doubtless true, as was
said in the opinion of the learned judge speaking for the circuit
court of appeals in this case that, if the highest court of the
state should decide that a given statute imposed no tax within the
meaning of the law as interpreted by it, a federal court, in
passing upon the Bankruptcy Act, would not compel the state to
accept a preference from the bankrupt's estate upon a different
view of the law. Conceding the doctrine that the meaning of a
statute is a state question except where rights, the subject of
adjudication by the federal courts, have accrued before its
construction by the state court or the question of contract within
the protection of the federal Constitution is involved, still a
state court, while entitled to great consideration, cannot
conclusively decide that to be a tax within the meaning of a
federal law providing for the payment of taxes, which is not so in
fact. The section (64
a) itself declares that, in case of
disputes as to the amount or legality of any such tax, they
Page 203 U. S. 492
shall be heard and determined by the court. The state court may
construe a statute and define its meaning, but whether its
construction creates a tax within the meaning of a federal statute,
giving a preference to taxes, is a federal question of ultimate
decision in this Court.
We are of opinion that this claim was for a tax. The language of
the act, as we have said, is very broad, and includes all taxes. It
is not necessary to enter upon a discussion of the different forms
which taxes may take. Generally speaking, a tax is a pecuniary
burden laid upon individuals or property for the purpose of
supporting the government. We think this exaction is of that
character. It is required to be paid by the corporation after
organization
in invitum. The amount is fixed by the
statute, to be paid on the outstanding capital stock of the
corporation each year, and capable of being enforced by action
against the will of the taxpayer. As was said by Mr. Justice Field,
speaking for the Court in
Meriwether v. Garrett,
102 U. S. 472,
102 U. S.
513:
"Taxes are not debts. It was so held by this Court in the case
of
Oregon v. Lane County, reported in 7 Wall. Debts are
obligations for the payment of money founded upon contract, express
or implied. Taxes are imposts levied for the support of the
government or for some special purpose authorized by it. The
consent of the taxpayer is not necessary to their enforcement. They
operate
in invitum. Nor is their nature affected by the
fact that, in some states -- and we believe in Tennessee -- an
action of debt may be instituted for their recovery. The form of
procedure cannot change their character."
It is urged by the appellee, and upon this ground the case was
decided in the circuit court of appeals, that this is in no just
sense a tax levied by the state, but is the result of a contract by
which the corporation was brought into existence, the consideration
being the payment of annual sums for the privileges given it by the
state, for which no lien is given upon the property, but only a
right of action for their recovery.
Page 203 U. S. 493
But this imposition is in no just sense a contract. The amount
to be paid, fixed by the statute, is subject to control and change
at the will of the state. It is imposed upon all corporations,
whether organized before or after the passage of the act. The
corporation is not consulted in fixing the amount of the tax, and,
under the laws of New Jersey, the charter of such corporations as
this may be amended or repealed.
Hancock v. Singer
Manufacturing Co., 62 N.J.L. 289, 328.
The form of the collection of taxes is left to the discretion of
the taxing power; sometimes a lien is provided, sometimes a summary
method of collection is awarded; in other cases, an action for debt
is given; and, as in the present case, with the right of
prohibition of the exercise of corporate franchises by injunction
for failure to pay.
We think, then, that, as denominated in the statute, this was a
tax imposed by the state upon the corporation for the privilege of
existence and the continued right to exercise its franchise.
The state which created this corporation had the right to fix
the terms of its existence and to provide, if it saw fit so to do,
that, for the continued existence of its franchise, the corporation
should pay certain sums to the state fixed by the amount of its
yearly outstanding capital stock.
Metropolitan St. Ry. Co. v.
New York, 199 U. S. 1,
199 U. S. 37
et seq.
Coming to the specific objections to the claim for the year
1902, the claim was presented upon the basis of $40,000,000 of
outstanding capital stock, when in fact there was only $10,000,000
of such stock, the assessment by the state board being upon the
former sum, and made upon the failure of the corporation to report.
But we do not think the finding of the state board is conclusive.
The tax is to be assessed upon capital stock actually outstanding.
It may well be doubted whether the board had power to tax any other
stock. But be that as it may, § 64
a specifically provides
that, in case any question arises as to the amount or legality of
taxes, the same shall be heard and determined by the court with a
view to ascertaining
Page 203 U. S. 494
the amount really due. We do not think it was the intention of
Congress to conclude the bankruptcy courts by the findings of
boards of this character, and that the claim should have been upon
the basis of the capital stock actually outstanding.
The amount claimed for the year 1903, it is insisted, had not
accrued at the time of the adjudication in bankruptcy, which was on
April 23, 1903, the return being made on May 2, 1903, and the
assessment was not made until July 1, 1903; but the annual return,
required to be made to the board on or before the first Tuesday in
May, is upon the basis of the capital stock issued and outstanding
the first of January preceding the making of the return. The
Bankrupt Act requires the payment of all taxes legally due and
owing. We think the tax thus assessed upon that basis was legally
due and owing, although not collectible until after the
adjudication.
We reach the conclusion that, under the Bankruptcy Act, these
taxes, in the amounts hereinbefore indicated, were entitled to
preferential payment in favor of the State of New Jersey, and that
the circuit court of appeals erred in reaching a contrary
conclusion.
Its judgment will be
Reversed, and the cause will be remanded to the district
court for further proceedings in conformity with this
opinion.
MR. JUSTICE HARLAN (with whom concurred MR. CHIEF JUSTICE FULLER
and MR. JUSTICE PECKHAM) dissenting:
THE CHIEF JUSTICE, MR. JUSTICE PECKHAM, and myself dissent from
the opinion of the Court. In our judgment the "taxes" owing by a
bankrupt to a state -- which § 64
a of the Bankruptcy Act
provides shall be paid in advance of the payment of dividends to
creditors -- do not embrace an "annual license fee or franchise
tax" (the words of the New Jersey statute) which strictly is not a
property tax, but only an exaction by the state for the privilege
given to a corporation
Page 203 U. S. 495
to do certain business under its charter. We think the
Bankruptcy Act should be so construed. It cannot be otherwise
construed without doing gross injustice to those creditors of the
bankrupt corporation who have business transactions with it at its
place of business. Here, the bankrupt corporation did no business
in New Jersey. So far as appears, it did not have nor expect to
have any connection with that state except to become incorporated
under its laws. It had its seat of operations and all its tangible
property in the State of Illinois. It had no property in New
Jersey. Its scheme was to get a charter from New Jersey and then go
to another state for purposes of its business. We do not think that
Congress intended that, in the distribution of the assets of a
bankrupt, preference should be given to the claims of a state which
have their origin in, and are wholly based upon, a bargain with the
state whereby certain privileges are granted in exchange for
certain payments -- privileges which the state may grant or
withhold at pleasure. In our opinion, the word "taxes" in the
Bankruptcy Act was intended to embrace only burdens or charges
imposed
in invitum, and which were in their nature and in
reality "taxes," as distinguished from governmental exactions for
privileges granted. The claim of New Jersey, whatever its true
amount, should not be given priority, but should be placed upon the
same footing with claims of other creditors. This view is
consistent with the act of Congress.