1. The issued capital stock of a foreign corporation may
constitutionally be made the basis of a state franchise or license
tax at a flat rate per share when apportioned to the property and
business of the corporation within the state. P.
279 U. S.
426.
2. The kind and number of shares with which a foreign
corporation is permitted to carry on its business within the state
is a part of the privilege which the state extends to it and is a
proper element to be taken into account in fixing a tax on the
privilege.
Id.
3. The measurement of such a tax upon a foreign corporation at a
flat rate upon its issued stock, either par or nonpar, used within
the state is reasonably related to the privilege granted by the
state and to the protection of its own interest in the maintenance
of its similar policy of taxation with respect to domestic
corporations, and so does not infringe any constitutional immunity.
P.
279 U. S.
427.
4. Measurement of the tax at a flat rate per share on nonpar
value stock and at a fixed percentage of par value on par value
stock is based on a reasonable classification because of the
different characteristics
Page 279 U. S. 422
of the two kinds of shares, and is therefore consistent with the
equal protection clause of the Fourteenth Amendment. P.
279 U. S.
428.
28 F.2d 1017 reversed.
Appeal from a judgment of the circuit court of appeals affirming
an order of the district court rejecting a claim for taxes made by
the State of New York in a bankruptcy proceeding. The court below
adopted the opinion of the district court. 26 F.2d 713.
MR. JUSTICE STONE delivered the opinion of the Court.
This is an appeal under § 240 of the Judicial Code from a
judgment of the Circuit Court of Appeals for the Third Circuit
affirming, on the opinion of the court below, 26 F.2d 713, an order
of the District Court for Delaware expunging the claim in
bankruptcy of appellant, the State of New York, for unpaid taxes
assessed by it against the bankrupt corporation.
Section 181, Article 9, of the Tax Law of New York, c. 62, Laws
1909, as amended, imposes on every foreign corporation doing
business in that state a tax computed upon the basis of the capital
stock employed by it within the state during the first year it does
business there, the amount of its stock so employed being that
proportion of its total issued capital stock which its gross assets
employed within the state bear to its gross assets wherever
employed. In the case of stock having a par value, the tax is fixed
at 1/8 of 1% of the par value of its stock so
Page 279 U. S. 423
employed; for stock of no par value, the fee is 6 cents per
share. The tax, denominated a "license fee," is paid but once,
purports to be imposed on the corporation "for the privilege of
exercising its corporate franchises or carrying on its business in
such corporate or organized capacity of this state," and the
obligation to pay it is made a prerequisite to obtaining a
certificate of authority from the state and to the continuance of
business there.
People ex rel. Griffith v. Loughman, 249
N.Y. 369. But the foreign corporation is permitted to transact
business and make valid contracts within the state prior to payment
of the tax, which of necessity cannot be computed or paid until
after the first year has elapsed. The tax is evidently the
complement of the organization fee, computed in like fashion on the
authorized capital stock of domestic corporations by Chapter 143 of
the Laws of 1886.
See People ex rel. Elliott-Fischer Co. v.
Sohmer, 148 App.Div. 514,
aff'd, 206 N.Y. 634.
The bankrupt is a Delaware corporation whose authorized capital
stock consists of 250,000 shares without par value, all of which
has been issued at an average price of $2.32 per share. It
commenced doing business in New York in November, 1924, and its
total assets were used in its business in that state during the
following year. The value of its tangible assets is alleged to have
been but $280,000, or about $1.12 per share, and its intangible
property to have been of no value. A tax of $15,000, computed at 6
cents per share, was assessed against it, and is the basis of the
present claim.
The rejection of the claim by the referee was upheld by the
district court on the sole ground that the tax on the bankrupt's
nonpar stock at the fixed rate of 6 cents per share, without regard
to its true value or the amount paid into the corporation upon its
issue, infringed the equal protection clause of the Fourteenth
Amendment. The
Page 279 U. S. 424
court thought that, as the tax could not be regarded as a true
admission fee imposed as a condition of entrance into the state,
and the corporation was thus in a position to invoke the equal
protection clause,
see Hanover Ins. Co. v. Harding,
272 U. S. 494,
272 U. S. 510,
the invalidity of the taxing statute was established by the
decision of this Court in
Air-Way Electric Appliance Corp. v.
Day, 266 U. S. 71,
266 U. S. 83,
since foreign corporations having the same amount of business and
property, both within and without the state, but with a different
number of issued nonpar shares, might be required to pay a tax
differing from each other and from other foreign corporations with
par value stock having like property within and without the state.
The Court of Appeals of New York has since reached the opposite
conclusion both as to the nature of the tax and its
constitutionality.
People ex rel. Griffith v. Loughman,
supra.
For present purposes, we need not determine whether the tax may
be sustained because imposed as a condition of entrance into the
state, for, assuming that the bankrupt corporation was within the
state, and thus entitled to equal protection (
Hanover Ins. Co.
v. Hardings, supra, Southern Ry. Co. v. Greene, 216 U.
S. 400,
216 U. S.
417), we do not deem the decision in the
Air-Way case controlling, nor the tax so unreasonable or
discriminatory as to deprive the bankrupt of any constitutional
immunity.
The question presented in the
Air-Way case was whether
a state franchise tax imposed on a foreign corporation, based upon
its total authorized nonpar shares, only a small part of which had
been issued, was forbidden. In holding that the tax infringed the
equal protection clause, the Court was careful to point out that it
was a tax computed upon the number of authorized shares of such a
corporation, whether or not subscribed for or issued, and so had no
relation to the value of the privilege exercised by the foreign
corporation within the state, and was
Page 279 U. S. 425
not a reasonable measure of the tax imposed on such a privilege.
And in
Roberts & Schaefer Co. v. Emmerson,
271 U. S. 50, in
upholding a franchise tax similar to that here involved upon a
domestic corporation having nonpar shares, whose entire authorized
stock had been issued, this Court, in speaking of the decision in
the
Air-Way case, said (p.
271 U. S.
54):
"While one factor in the computation of the tax was properly the
proportion of the corporation's business done and property owned
within the state, the other factor was the amount of its authorized
capital stock, only a part of which had actually been issued. The
authority to issue its capital stock was a privilege conferred by
another state, and bore no relation to any franchise granted to it
by the State of Ohio or to its business and property within that
state. When authorized capital stock is taken as the basis of the
tax, variations in the amount of the tax are obtained according as
the corporation has a large or small amount of unissued capital
stock. This was held, in the
Air-Way case, to be an
unconstitutional discrimination, since it resulted in a tax larger
than the tax imposed on other corporations with like privileges and
like business and property within the state, but with a smaller
capital authorized under the laws of the state of their
creation."
But the computation of the present tax is not, as in the
Air-Way case, based upon the mere authority of the
corporation to issue stock, a privilege conferred by another state
and not fully exercised. Instead, it is calculated on the number of
shares of stock actually issued and used by the corporation in
carrying on its business within the state. There is no complaint of
discrimination between foreign and domestic corporations, and no
attempt to tax property outside the state, since the tax is
apportioned to the property used within it.
See International
Shoe Co. v. Shartel, post, p.
279 U. S. 429. So
we come to different questions from any presented in the
Air-Way case: whether issued
Page 279 U. S. 426
capital stock of foreign corporations may be made the basis of a
franchise or license tax at a flat rate per share when apportioned
to the property and business of the corporation within the state,
and whether the taxing act may discriminate by placing in one class
corporations having par value stock and in another corporations
having stock without par value.
1. It is said that the tax computed on the number of nonpar
shares at a flat rate may bear little relation to the property and
business of the corporation within the state, and consequently
corporations having like property and business within the state,
but with a different nonpar capitalization, may be required to pay
a different tax. But this is equally true of corporations having
par value stock, even though full value be paid in on its issue.
Par value and actual value of issued stock are not synonymous, and
there is often a wide disparity between them. Par value has long
been a familiar basis of computing a franchise tax upon foreign
corporations, and, when otherwise unobjectionable, has been
repeatedly upheld by this Court.
See St. Louis Southwestern Ry.
Co. v. Arkansas, 235 U. S. 350;
Hump Hairpin Co. v. Emmerson, 258 U.
S. 290;
Cheney Brothers Co. v. Massachusetts,
246 U. S. 147.
We have likewise sustained a state franchise tax on foreign
corporations, measured by a fixed percentage of its nonpar stock
valued, as required by the statute, at $25 per share and
apportioned to the property and business of the corporation within
the state.
Margay Oil Corp. v. Applegate, 273 U.S. 666,
aff'g State v. Margay Oil Corp., 167 Ark. 614;
Gilliland Oil Co. v. Arkansas, 274 U.S. 717,
aff'g 171 Ark. 415.
The kind and number of shares with which a foreign corporation
is permitted to carry on its business within the state is a part of
the privilege which the state extends to it, and is a proper
element to be taken into account in fixing a tax on the privilege.
It may be assumed that, if the doing of business with a greater
number of nonpar shares
Page 279 U. S. 427
is not deemed by the taxpayer to be a valuable privilege, it
will reduce the number of shares as the statute permits. A state
which has adopted a permissible scheme of franchise tax for
domestic corporations, based on capital stock (
Roberts &
Schaefer Co. v. Emmerson, supra), has a legitimate interest in
imposing a like burden on foreign corporations which it permits to
carry on business there, and we can perceive no constitutional
objection to its protecting that interest by such a tax where, as
here, it is limited to shares actually issued, is not assailed as
confiscatory, does not reach either directly or indirectly property
beyond the state, and does not discriminate between foreign and
domestic corporations or between foreign corporations of like
organization and property.
There is nothing in the Constitution which requires a state to
adopt the best possible system of taxation.
Southwestern Oil
Co. v. Texas, 217 U. S. 114,
217 U. S. 126;
Delaware Railroad Tax
Cases, 18 Wall. 206,
85 U. S. 231.
Although permissible, a franchise tax need not be based solely on
the amount of business done or property owned within the state. It
may be rested on the nature of the business (
Southwestern Oil
Co. v. Texas, supra: Quong Wing v. Kirkendall, 223 U. S.
59;
American Sugar Refining Co. v. Louisiana,
179 U. S. 89;
Williams v. Fears, 179 U. S. 270,
179 U. S. 275;
see Connolly v. Union Sewer Pipe Co., 184 U.
S. 540,
184 U. S.
562), or the particular form in which it is carried on
(
see Home Insurance Co. v. New York, 134 U.
S. 594,
134 U. S.
606), so long as it bears some real and reasonable
relation to the privilege granted or to the protection of the
interests of the state.
See Roberts & Schaefer Co. v.
Emmerson, supra, at
271 U. S.
57.
We think that the measurement of such a tax upon a foreign
corporation at a flat rate upon its corporate stock, either par or
nonpar, used within the state is likewise reasonably related to the
privilege granted by the state and to the protection of its own
interest in the maintenance
Page 279 U. S. 428
of its similar policy of taxation with respect to domestic
corporations, and so does not infringe any constitutional
immunity.
2. Nor is such a tax to be deemed a denial of equal protection
because a different measure or method of computing the tax is
applied to corporations having nonpar stock from that applied to
corporations having stock of par value. In
Roberts &
Schaefer Co. v. Emmerson, supra, at
271 U. S. 56, it
was pointed out that there were such differences between par and
nonpar shares, both in their legal incidents and their actual use,
and such practical difficulties in measuring a tax by the latter,
except by assigning to them an artificial or fixed value or
assessing them at a flat rate, as to justify the classification for
purposes of franchise tax on domestic corporations. It was
accordingly held that such a tax may be based on the par value of
shares of corporations having par value stock, and on a fixed value
assigned to nonpar shares, regardless of their actual value or the
varying amounts paid in upon them.
But these differences between the two classes of stock, and
especially the difference in the rights of creditors of the two
classes of corporations,* equally justify classification and
discrimination between them in fixing a franchise tax based on
corporate stock of foreign corporations. The inequalities in the
tax result from a classification founded upon real differences,
hence the resulting
Page 279 U. S. 429
discrimination is not arbitrary or prohibited by the Fourteenth
Amendment.
Reversed.
MR. JUSTICE McREYNOLDS and MR. JUSTICE BUTLER concur in the
result.
* The use of nonpar stock, which may be issued at any price
deemed wise at the particular time, by the directors or
stockholders,
see New York Stock Corporation Law § 69;
Missouri Stock Corporation Law, § 5, or in many cases for property
without fixing a price, and which has no fixed or designated amount
dedicated to capital or surplus, respectively, makes difficult the
determination of the true capital of the corporation which it is
required to keep intact and the amount which any particular
stockholder is bound to pay for his stock.
See Berle,
Problems of Nonpar Stock, 25 Columbia Law Rev. 43; Ballantine,
Corporations (1927) § 217.
Cf. Johnson v. Louisville Trust
Co., 293 F. 857. Resulting difficulties in the enforcement by
creditors of the liability of directors for improper diversion of
capital or of stockholders for unpaid subscriptions have been often
urged as arguments against any use of nonpar stock. 1 Cook,
Corporations (1923) § 45d; Bonbright, Dangers of Shares without Par
Value, 24 Columbia Law Rev. 449; Ripley, Railroads-Finance and
Organization (1915) 91; Cook, Stock without Par Value, 19 Michigan
Law Rev. 583.