The Corporation Tax, as imposed by Congress in the Tariff Act of
1909, is not a direct tax, but an excise; it does not fall within
the apportionment clause of the Constitution, but is within, and
complies with, the provision for uniformity throughout the United
States; it is an excise on the privilege of doing business in a
corporate capacity,
Page 220 U. S. 109
and, as such, is within the power of Congress to impose;
franchises of corporations are not governmental agencies of the
state, and the tax is not invalid as an attempt to tax state
governmental instrumentalities; not being direct taxation, but an
excise, the tax is properly measured by the entire income of the
parties subject to it notwithstanding a part of such income may be
derived from nontaxable property; the tax does not take property
without due process of law, nor is it arbitrarily unequal in its
operation, either by differences in corporations or by reason of
the classes exempted; the method of its enforcement is within the
power of Congress, and all corporations, not specially exempted by
the act itself, carrying on any business, are subject to the
provisions of the law.
The substitution of a tax on incomes of corporations for a tax
on inheritance in a bill for raising revenue is an amendment
germane to the subject matter, and not beyond the power of the
Senate to propose under § 7, Art. I, of the Constitution, providing
that such bills shall originate in the House of Representatives,
but that the Senate may propose or concur in amendments as in other
bills. The corporation tax provision of the Tariff Act of 1909 is
not unconstitutional as being a revenue measure not originating in
the House of Representatives under § 7, Art. I, of the
Constitution; but so
held without holding that the
journals of the House or Senate may be examined to invalidate an
act which has been passed and signed by the presiding officers of
both branches of Congress, approved by the President and deposited
with the State Department.
A tax, such as the Corporation Tax imposed by the Tariff Act of
1909, on corporations, joint stock companies, associations
organized for profit and having a capital stock represented by
shares, and insurance companies, and measured by the income
thereof, is not a tax on franchises of those paying it, but a tax
upon the doing of business with the advantages which inhere in the
peculiarities of corporate or joint stock organization of the
character described in the act.
Joint stock companies and associations share many benefits of
corporate organization, and are properly classified with
corporations in a tax measure such as the Corporation Tax.
Spreckels Sugar Refining Co. v. McClain, 192 U.
S. 397.
While the legislature cannot by a declaration change the real
nature of a tax it imposes, its declaration is entitled to weight
in construing the statute and determining what the actual nature of
the tax is.
The Corporation Tax is not a direct tax within the enumeration
provision of the Constitution, but is an impost or excise which
Congress
Page 220 U. S. 110
has power to impose under Art. I, § 8, cl. 1, of the
Constitution.
Pollock v. Farmers' Loan & Trust Co.,
157 U. S. 429;
158 U. S. 158 U.S.
601, distinguished.
Indirect taxation includes a tax on business done in a corporate
capacity; the difference between it and direct taxation imposed on
property because of its ownership is substantial, and not merely
nominal.
Excises are taxes laid upon the manufacture, sale, or
consumption of commodities within the country, upon licenses to
pursue certain occupations and upon corporate privileges; the
requirement to pay such taxes involves the exercise of the
privilege, and if business is not done in the manner described, no
tax is payable.
The only limitations on the power of Congress to levy excise
taxes are that they must be for the public welfare and must be
uniform throughout the United States; they do not have to be
apportioned.
Courts may not add any limitations on the power of Congress to
impose excise taxes to that of uniformity, which was deemed
sufficient by those who framed and adopted the Constitution.
The revenues of the United States must be obtained from the same
territory, and the same people, and its excise taxes collected from
the same activities, as are also reached by the states to support
their local governments, and this fact must be considered in
determining whether there are any implied limitations on the
federal power to tax because of the sovereignty of the states over
matters within their exclusive jurisdiction.
Enactments of Congress levying taxes are, as are other laws of
the federal government acting within constitutional authority, the
supreme law of the land.
Business activities such as those enumerated in the Corporation
Tax Law are not beyond the excise taxing power of Congress because
executed under franchises created by the states.
The power of Congress to raise revenue is essential to national
existence, and cannot be impaired or limited by individuals
incorporating and acting under state authority. The mere fact that
business is transacted pursuant to state authority creating private
corporations does not exempt it from the power of Congress to levy
excise laws upon the privilege of so doing.
The exemption from federal taxation of the means and
instrumentalities employed in carrying on the governmental
operations of the states does not extend to state agencies and
instrumentalities used for carrying on business of a private
character.
South Carolina v. United States, 199 U.
S. 437.
Page 220 U. S. 111
The constitutional limitation of uniformity in excise taxes does
not require equal application of the tax to all coming within its
operation, but is limited to geographical uniformity throughout the
United States.
Knowlton v. Moore, 178 U. S.
41.
Even if the principles of the equal protection provision of the
Fourteenth Amendment were applicable, there is no such arbitrary
and unreasonable classification of business activities enumerated
in and subject to the Corporation Tax Law as would render that law
invalid. There is a sufficiently substantial difference between
business as carried on in the manner specified in the act and as
carried on by partnerships and individuals to justify the
classification.
There are distinct advantages in carrying on business in the
manner specified in the Corporation Tax Law over carrying it on by
partnerships or individuals, and it is this privilege which is the
subject of the tax, and not the mere buying, selling or handling of
goods.
While a direct tax may be void if it reaches nontaxable
property, the measure of an excise tax on privilege may be the
income from all property, although part of it may be from that
which is nontaxable, and the Corporation Tax is not invalid because
it is levied on total income, including that derived from municipal
bonds and other nontaxable property.
The measurement of the Corporation Tax by net income is not
beyond the power of Congress as arbitrary and baseless. Selection
of the measure and objects of taxation devolve upon Congress, and
not on the courts; it is not the function of the latter to inquire
into the reasonableness of the excise either as to amount or
property on which it is to be imposed.
Congress has power to impose the Corporation Tax, and the act is
not void as lacking in due process of law under the Fifth
Amendment.
Although the power to tax is the power to destroy,
McCulloch v.
Maryland, 4 Wheat. 316, the courts cannot prevent
its lawful exercise because of the fear that it may lead to
disastrous results. The remedy is with the people by the election
of their representatives.
Business is a comprehensive term and embraces everything about
which a person can be employed, and corporations engaged in such
activities as leasing and managing property, collecting rents,
making investments for profit and leasing taxicabs, are engaged in
business within the meaning of the Corporation Tax Law.
It is no part of the essential governmental function of a state
to provide means of transportation and to supply artificial light,
water and the like, and although the people of the state may derive
a benefit therefrom, the public service companies carrying on such
enterprises
Page 220 U. S. 112
are private, and are subject to legitimate federal taxation,
such as the Corporation Tax, the same as other corporations
are.
Congress has the right to select the objects of excise taxation,
and this includes the right to make exemptions; exceptions in the
Corporation Tax Law of labor, agricultural, religious and certain
other organizations, do not invalidate the tax or render the law
unconstitutional.
Courts cannot substitute their judgment for that of the
legislature; where details as to estimating the amount of an excise
tax, such as the deductions for interest on bonded and other
indebtedness provided by the Corporation Tax Law, are not purely
arbitrary, they do not invalidate the tax.
If an excise tax operates equally on the subject matter wherever
found, its geographical uniformity is not affected by the fact that
it may produce unequal results in different parts of the Union.
Corporations, acting as trustees or guardians under the
authority of laws of a state and compensated by the interests
served and not by the state, are not agents of the state government
in a sense that exempts them from the operations of federal
taxation.
If it is within the power of Congress to impose the tax, it is
also within its power to enact effectual means to collect the tax.
McCulloch v.
Maryland, 4 Wheat. 316,
17 U. S.
421.
The unreasonable search and seizure provision of the Fourth
Amendment does not prevent the federal government from requiring
ordinary and reasonable tax returns such as those required by the
Corporation Tax Law.
This Court will not pass on questions of constitutionality of a
statute until they arise, and no question is now presented as to
whether the provisions of the Corporation Tax Law offend the
self-incrimination provisions of the Fifth Amendment or whether the
penalties for noncompliance are so high as to violate the
Constitution; the penalty provisions of the act are separable, and
their constitutionality can be determined if a proper case
arises.
No case is presented on this record involving the question of
lack of power to tax foreign corporations doing local business in a
state, or whether, if the tax on foreign corporation is
unconstitutional, it would invalidate the tax on domestic
corporations as working an inequality against the latter; nor is
any case presented involving the invalidity of the act as a tax on
exports.
The facts, which involve the constitutional validity of the
Corporation Tax Law, being § 38 of the
Page 220 U. S. 113
Payne-Aldrich Tariff Act of August 5, 1909, are stated in the
opinion.
Page 220 U. S. 142
MR. JUSTICE DAY delivered the opinion of the Court.
These cases involve the constitutional validity of § 38 of the
Act of Congress approved August 5, 1909, known as "the corporation
tax" law. 36 Stat., c. 6, 11, 112-117.
It is contended in the first place that this section of the act
is unconstitutional, because it is a revenue measure, and
originated in the Senate in violation of § 7 of Article I of the
Constitution, providing that "all bills for raising revenue shall
originate in the House of Representatives, but the Senate may
propose or concur with the amendments, as on other bills." The
history of the act
Page 220 U. S. 143
is contained in the government's brief, and is accepted as
correct, no objection being made to its accuracy.
This statement shows that the tariff bill of which the section
under consideration is a part originated in the House of
Representatives, and was there a general bill for the collection of
revenue. As originally introduced, it contained a plan of
inheritance taxation. In the Senate, the proposed tax was removed
from the bill, and the corporation tax, in a measure, substituted
therefor. The bill having properly originated in the House, we
perceive no reason in the constitutional provision relied upon why
it may not be amended in the Senate in the manner which it was in
this case. The amendment was germane to the subject matter of the
bill, and not beyond the power of the Senate to propose. In thus
deciding, we do not wish to be regarded as holding that the
journals of the House and Senate may be examined to invalidate an
act which has been passed and signed by the presiding officers of
the House and Senate, and approved by the President, and duly
deposited with the State Department.
Marshall Field & Co.
v. Clark, 143 U. S. 649;
Harwood v. Wentworth, 162 U. S. 547;
Twin City Bank v. Nebeker, 167 U.
S. 196.
In order to have in mind some of the more salient features of
the statute, with a view to its interpretation, a part of the first
paragraph is here set out, as follows:
"SEC. 38. That every corporation, joint stock company, or
association organized for profit and having a capital stock
represented by shares, and every insurance company now or hereafter
organized under the laws of the United States or of any state or
territory of the United States, or under the Acts of Congress
applicable to Alaska or the District of Columbia, or now or
hereafter organized under the laws of any foreign country, and
engaged in business in any state or territory of the United States
or in Alaska or in the District of Columbia, shall be subject
Page 220 U. S. 144
to pay annually a special excise tax with respect to the
carrying on or doing business by such corporation, joint stock
company or association, or insurance company equivalent to one
percentum upon the entire net income over and above five thousand
dollars, received by it from all sources during such year,
exclusive of amounts received by it as dividends upon stock of
other corporations, joint stock companies or associations, or
insurance companies subject to the tax hereby imposed; or, if
organized under the laws of any foreign country, upon the amount of
net income over and above five thousand dollars received by it from
business transacted and capital invested within the United States
and its territories, Alaska, and the District of Columbia, during
such year, exclusive of amounts so received by it as dividends upon
stock of other corporations, joint stock companies or associations,
or insurance companies subject to the tax hereby imposed."
A reading of this portion of the statute shows the purpose and
design of Congress in its enactment and the subject matter of its
operation. It is at once apparent that its terms embrace
corporations and joint stock companies or associations which are
organized for profit, and have a capital stock represented by
shares. Such joint stock companies, while differing somewhat from
corporations, have many of their attributes and enjoy many of their
privileges. To these are added insurance companies, and they, as
corporations, joint stock companies, or associations, must be such
as are now or hereafter organized under the laws of the United
States or of any state or territory of the United States, or under
the Acts of Congress applicable to Alaska and the District of
Columbia. Each and all of these, the statute declares, shall be
subject to pay annually a special excise tax with respect to the
carrying on and doing business by such corporation, joint stock
company or association, or insurance company. The tax is to be
equivalent to one percent of the entire net
Page 220 U. S. 145
income over and above $5,000 received by such corporation or
company
from all sources during the year, excluding,
however, amounts received by them as dividends upon stock of other
corporations, joint stock companies or associations, or insurance
companies, subject to the tax imposed by the statute. Similar
companies organized under the laws of any foreign country, and
engaged in business in any state or territory of the United States,
or in Alaska or the District of Columbia, are required to pay the
tax upon the net income over and above $5,000 received by them from
business transacted and capital invested within the United States,
the territories, Alaska, and the District of Columbia, during each
year, with the like exclusion as to amounts received by them as
dividends upon stock of other corporations, joint stock companies
or associations, or insurance companies, subject to the tax
imposed.
While the mere declaration contained in a statute that it shall
be regarded as a tax of a particular character does not make it
such if it is apparent that it cannot be so designated consistently
with the meaning and effect of the act, nevertheless the
declaration of the lawmaking power is entitled to much weight, and
in this statute, the intention is expressly declared to impose a
special excise tax with respect to the carrying on or doing
business by such corporation, joint stock company, or association,
or company. It is therefore apparent, giving all the words of the
statute effect, that the tax is imposed not upon the franchises of
the corporation, irrespective of their use in business, nor upon
the property of the corporation, but upon the doing of corporate or
insurance business, and with respect to the carrying on thereof, in
a sum equivalent to one percentum upon the entire net income over
and above $5,000 received from all sources during the year; that
is, when imposed in this manner it is a tax upon the doing of
business, with the advantages which inhere in the peculiarities
Page 220 U. S. 146
of corporate or joint stock organization of the character
described. As the latter organizations share many benefits of
corporate organization, it may be described generally as a tax upon
the doing of business in a corporate capacity. In the case of the
insurance companies, the tax is imposed upon the transaction of
such business by companies organized under the laws of the United
States or any state or territory, as heretofore stated.
This tax, it is expressly stated, is to be equivalent to one
percentum of the entire net income over and above $5,000 received
from
all sources during the year -- this is the measure of
the tax explicitly adopted by the statute. The income is not
limited to such as is received from property used in the business,
strictly speaking, but is expressly declared to be upon the entire
net income above $5,000 from all sources, excluding the amounts
received as dividends on stock in other corporations, joint stock
companies or associations, or insurance companies also subject to
the tax. In other words, the tax is imposed upon the doing of
business of the character described, and the measure of the tax is
to be income, with the deduction stated, received not only from
property used in business, but from every source. This view of the
measure of the tax is strengthened when we note that as to
organizations under the laws of foreign countries, the amount of
net income over and above $5,000 includes that received from
business transacted and capital invested in the United States, the
territories, Alaska, and the District of Columbia.
It is further strengthened when the subsequent sections are
considered as to deductions in ascertaining net income and
requiring returns from those subject to the act. Under the second
paragraph, the net income is to be ascertained by certain
deductions from the gross amount of income received within the year
"from all sources;" and the return to be made to the collector of
internal revenue
Page 220 U. S. 147
under the third section is required to show the gross amount of
the income, received during the year "from all sources." The
evident purpose is to secure a return of the entire income, with
certain allowances and deductions which do not suggest a
restriction to income derived from property actively engaged in the
business. This interpretation of the act, as resting upon the doing
of business, is sustained by the reasoning in
Spreckels Sugar
Ref. Co. v. McClain, 192 U. S. 397, in
which a special tax measured by the gross receipts of the business
of refining oil and sugar was sustained as an excise in respect to
the carrying on or doing of such business.
Having thus interpreted the statute in conformity, as we
believe, with the intention of Congress in passing it, we proceed
to consider whether, as thus construed, the statute is
constitutional.
It is contended that it is not; certainly so far as the tax is
measured by the income of bonds nontaxable under federal statutes,
and municipal and state bonds beyond the federal power of taxation.
And so of real and personal estates, because as to such estates the
tax is direct, and required to be apportioned according to
population among the states. It is insisted that such must be the
holding unless this Court is prepared to reverse the income tax
cases decided under the Act of 1894.
Pollock v. Farmers' Loan
& Trust Co., 157 U. S. 429,
s.c. 158 U. S. 158 U.S.
601.
The applicable provisions of the Constitution of the United
States in this connection are found in Article I, § 8, clause 1,
and in Article I, § 2, clause 3, and Article I, § 9, clause 4. They
are respectively:
"The Congress shall have power to lay and collect taxes, duties,
imposts, and excises, to pay the debts and provide for the common
defense and general welfare of the United States; but all duties,
imposts, and excises shall be uniform throughout the United States.
"
Page 220 U. S. 148
"Representatives and direct taxes shall be apportioned among the
several states which may be included within this Union, according
to their respective numbers."
"No capitation or other direct tax shall be laid, unless in
proportion to the census or enumeration hereinbefore directed to be
taken."
It was under the latter requirement as to apportionment of
direct taxes according to population that this Court in the
Pollock case held the statute of 1894 to be
unconstitutional. Upon the rehearing of the case, Mr. Chief Justice
Fuller, who spoke for the Court, summarizing the effect of the
decision, said:
"We have considered the act only in respect of the tax on income
derived from real estate, and from invested personal property, and
have not commented on so much of it as bears on gains or profits
from business, privileges, or employments, in view of the instances
in which taxation on business, privileges, or employments has
assumed the guise of an excise tax and been sustained as such."
158 U.S.
158 U. S.
635.
And as to excise taxes, the Chief Justice said:
"We do not mean to say that an act laying by apportionment a
direct tax on all real estate and personal property, or the income
thereof, might not also lay excise taxes on business, privileges,
employments, and vocations."
P.
158 U. S.
637.
The
Pollock case was before this Court in
Knowlton
v. Moore, 178 U. S. 41. In
that case, this Court sustained an excise tax upon the transmission
of property by inheritance. It was contended there, as here, that
the case was ruled by the
Pollock case, and of that case
this Court, speaking by the present CHIEF JUSTICE, said:
"The issue presented in the
Pollock case was whether an
income tax was direct within the meaning of the Constitution. The
contentions which the case involved were thus presented. On the one
hand, it was argued that only
Page 220 U. S. 149
capitation taxes and taxes on land as such were direct, within
that previous adjudications had construed as a matter of first
impression, and that previous adjudications had construed the
Constitution as having that import. On the other hand, it was
asserted that, in principle, direct taxes, in the constitutional
sense, embraced not only taxes on land and capitation taxes, but
all burdens laid on real or personal property because of its
ownership, which were equivalent to a direct tax on such property,
and it was affirmed that the previous adjudications of this Court
had settled nothing to the contrary."
"
* * * *"
"Undoubtedly, in the course of the opinion in the
Pollock case, it was said that, if a tax was direct within
the constitutional sense, the mere erroneous qualification of it as
an excise or duty would not take it out of the constitutional
requirement as to apportionment. But this language related to the
subject matter under consideration, and was but a statement that a
tax which was, in itself, direct,
because imposed upon property
solely by reason of its ownership, could not be changed by
affixing to it the qualification of excise or duty. Here we are
asked to decide that a tax is a direct tax on property which has at
all times been considered as the antithesis of such a tax -- that
is, that it has ever been treated as a duty or excise, because of
the particular occasion which gives rise to its levy."
"
* * * *"
"Considering that the constitutional rule of apportionment had
its origin in the purpose to prevent taxes on persons
solely
because of their general ownership of property from being
levied by any other rule than that of apportionment, two things
were decided by the court: first, that no sound distinction existed
between a tax levied on a person solely because of his general
ownership of real property, and the same tax imposed solely because
of his general ownership of personal property; secondly, that
the
Page 220 U. S. 150
tax on the income derived from such property, real or personal,
was the legal equivalent of a direct tax on the property from which
said income was derived, and hence must be apportioned. These
conclusions, however, lend no support to the contention that it was
decided that duties, imposts, and excises, which are not the
essential equivalent of a tax on property generally, real or
personal, solely because of its ownership, must be converted into
direct taxes, because it is conceived that it would be demonstrated
by a close analysis that they could not be shifted from the person
upon whom they first fall."
The same view was taken of the
Pollock case in the
subsequent case of
Spreckels Sugar Ref. Co. v. McClain,
supra.
The act now under consideration does not impose direct taxation
upon property solely because of its ownership, but the tax is
within the class which Congress is authorized to lay and collect
under Article I, § 8, clause 1 of the Constitution, and described
generally as taxes, duties, imposts, and excises, upon which the
limitation is that they shall be uniform throughout the United
States.
Within the category of indirect taxation, as we shall have
further occasion to show, is embraced a tax upon business done in a
corporate capacity, which is the subject matter of the tax imposed
in the act under consideration. The
Pollock case construed
the tax there levied as direct, because it was imposed upon
property simply because of its ownership. In the present case, the
tax is not payable unless there be a carrying on or doing of
business in the designated capacity, and this is made the occasion
for the tax, measured by the standard prescribed. The difference
between the acts is not merely nominal, but rests upon substantial
differences between the mere ownership of property and the actual
doing of business in a certain way.
It is unnecessary to enter upon an extended consideration of the
technical meaning of the term "excise." It has
Page 220 U. S. 151
been the subject matter of considerable discussion -- the terms
duties, imposts, and excises are generally treated as embracing the
indirect forms of taxation contemplated by the Constitution. As Mr.
Chief Justice Fuller said in the
Pollock case,
supra:
"Although there have been from time to time intimations that
there might be some tax which was not a direct tax nor included
under the words 'duties, imposts, and excises,' such a tax for more
than one hundred years of national existence has as yet remained
undiscovered, notwithstanding the stress of particular
circumstances has invited thorough investigation into sources of
revenue."
And in the same connection the Chief Justice, delivering the
opinion of the court in
Thomas v. United States,
192 U. S. 363, in
speaking of the words "duties," "imposts," and "excises," said:
"We think that they were used comprehensively, to cover customs
and excise duties imposed on importation, consumption, manufacture,
and sale of certain commodities, privileges, particular business
transactions, vocations, occupations, and the like."
Duties and imposts are terms commonly applied to levies made by
governments on the importation or exportation of commodities.
Excises are
"taxes laid upon the manufacture, sale, or consumption of
commodities within the country, upon licenses to pursue certain
occupations, and upon corporate privileges."
Cooley, Const.Lim., 7th ed., 680.
The tax under consideration, as we have construed the statute,
may be described as an excise upon the particular privilege of
doing business in a corporate capacity,
i.e., with the
advantages which arise from corporate or
quasi corporate
organization; or, when applied to insurance companies, for doing
the business of such companies. As was said in the
Thomas
case,
192 U. S. 363,
supra, the requirement to pay such taxes involves the
exercise of
Page 220 U. S. 152
privileges, and the element of absolute and unavoidable demand
is lacking. If business is not done in the manner described in the
statute, no tax is payable.
If we are correct in holding that this is an excise tax, there
is nothing in the Constitution requiring such taxes to be
apportioned according to population.
Pacific
Ins. Co. v. Soule, 7 Wall. 433;
Springer v.
United States, 102 U. S. 586;
Spreckels Sugar Ref. Co. v. McClain, 192 U.
S. 397.
It is next contended that the attempted taxation is void because
it levies a tax upon the exclusive right of a state to grant
corporate franchises, because it taxes franchises which are the
creation of the state in its sovereign right and authority. This
proposition is rested upon the implied limitation upon the powers
of national and state governments to take action which encroaches
upon or cripples the exercise of the exclusive power of sovereignty
in the other. It has been held in a number of cases that the state
cannot tax franchises created by the United States or the agencies
or corporations which are created for the purpose of carrying out
governmental functions of the United States.
M'Culloch
v. Maryland, 4 Wheat. 316;
Osborn v.
Bank of United States, 9 Wheat. 738;
Railroad Co. v.
Peniston, 18 Wall. 5;
California v. Central
Pac. R. Co., 127 U. S. 1.
An examination of these cases will show that in each case where
the tax was held invalid, the decision rested upon the proposition
that the corporation was created to carry into effect powers
conferred upon the federal government in its sovereign capacity,
and the attempted taxation was an interference with the effectual
exercise of such powers.
In
Osborn v. Bank of United States, supra, a leading
case upon the subject, whilst it was held that the bank of the
United States was not a private corporation, but a public one,
created for national purposes, and therefore beyond the
Page 220 U. S. 153
taxing power of the state, Chief Justice Marshall, in delivering
the opinion of the Court, conceded that, if the corporation had
been originated for the management of an individual concern, with
private trade and profit for its great end and principal object, it
might be taxed by the state. Said the Chief Justice:
"If these premises [that the corporation was one of private
character] were true, the conclusion drawn from them would be
inevitable. This mere private corporation, engaged in its own
business, with its own views, would certainly be subject to the
taxing power of the state, as any individual would be, and the
casual circumstance of its being employed by the government in the
transaction of its fiscal affairs would no more exempt its private
business from the operation of that power than it would exempt the
private business of any individual employed in the same
manner."
The inquiry in this connection is how far do the implied
limitations upon the taxing power of the United States over objects
which would otherwise be legitimate subjects of federal taxation
withdraw them from the reach of the federal government in raising
revenue because they are pursued under franchises which are the
creation of the states?
In approaching this subject, we must remember that enactments
levying taxes, as other laws of the federal government when acting
within constitutional authority, are the supreme law of the land.
The Constitution contains only two limitations on the right of
Congress to levy excise taxes: they must be levied for the public
welfare, and are required to be uniform throughout the United
States. As Mr. Chief Justice Chase said, speaking for the Court in
License Tax
Cases, 5 Wall. 462,
72 U. S.
471:
"Congress cannot tax exports, and it must impose direct taxes by
the rule of apportionment, and indirect taxes by the rule of
uniformity. Thus, limited, and thus only, it reaches every
Page 220 U. S. 154
subject and may be exercised at discretion."
The limitations to which the Chief Justice refers were the only
ones imposed in the Constitution upon the taxing power.
In
McCray v. United States, 195 U. S.
27, this Court sustained a federal tax on oleomargarine,
artificially colored, and held that, while the Fifth and Tenth
Amendments qualify, so far as applicable, all the provisions of the
Constitution, nothing in those amendments operates to take away the
power to tax conferred by the Constitution on the Congress. In that
case, it was contended that the subject taxed was within the
exclusive domain of the states, and that the real purpose of
Congress was not to raise revenue, but to tax out of existence a
substance not harmful of itself and one which might be lawfully
manufactured and sold; but the only constitutional limitation which
this Court conceded, in addition to the requirement of uniformity,
and that, for the sake of argument only so far as concerned the
case then under consideration, was that Congress is restrained from
arbitrary impositions or from exceeding its power in seeking to
effect unwarranted ends. The limitation of uniformity was deemed
sufficient by those who framed and adopted the Constitution. The
courts may not add others.
Patton v. Brady, 184 U.
S. 608,
184 U. S. 622.
And see 82 U. S.
Singer, 15 Wall. 111,
82 U. S. 121;
Nicol v. Ames, 173 U.
S. 509,
173 U. S.
515.
We must therefore enter upon the inquiry as to implied
limitations upon the exercise of the federal authority to tax
because of the sovereignty of the states over matters within their
exclusive jurisdiction, having in view the nature and extent of the
power specifically conferred upon Congress by the Constitution of
the United States. We must remember too that the revenues of the
United States must be obtained in the same territory, from the same
people, and excise taxes must be collected from the same
activities, as are also reached by the states in order to support
their local government.
Page 220 U. S. 155
While the tax in this case, as we have construed the statute, is
imposed upon the exercise of the privilege of doing business in a
corporate capacity, as such business is done under authority of
state franchises, it becomes necessary to consider in this
connection the right of the federal government to tax the
activities of private corporations which arise from the exercise of
franchises granted by the state in creating and conferring powers
upon such corporations. We think it is the result of the cases
heretofore decided in this Court that such business activities,
though exercised because of state-created franchises, are not
beyond the taxing power of the United States. Taxes upon rights
exercised under grants of state franchises were sustained by this
Court in
Railroad Co. v. Collector, 100 U.
S. 595;
United States v. Erie R. Co.,
106 U. S. 327;
Spreckels Sugar Refining Co. v. McClain, 192 U.
S. 397.
It is true that in those cases the question does not seem to
have been directly made, but, in sustaining such taxation, the
right of the federal government to reach such agencies was
necessarily involved. The question was raised and decided in the
case of
Veazie Bank v.
Fenno, 8 Wall. 533. In that well known case, a tax
upon the notes of a state bank issued for circulation was
sustained. Mr. Chief Justice Chase, in the course of the opinion,
said:
"Is it, then, a tax on a franchise granted by a state, which
Congress, upon any principle exempting the reserved powers of the
states from impairment by taxation, must be held to have no
authority to lay and collect?"
"We do not say that there may not be such a tax. It may be
admitted that the reserved rights of the states, such as the right
to pass laws, to give effect to laws through executive action, to
administer justice through the courts, and to employ all necessary
agencies for legitimate purposes of state government, are not
proper subjects of the taxing power of Congress. But it cannot be
admitted that
Page 220 U. S. 156
franchises granted by a state are necessarily exempt from
taxation, for franchises are property, often very valuable and
productive property, and when not conferred for the purpose of
giving effect to some reserved power of a state, seem to be as
properly objects of taxation as any other property."
"But, in the case before us, the object of taxation is not the
franchise of the bank, but property created, or contracts made and
issued under the franchise, or power to issue bank bills. A
railroad company, in the exercise of its corporate franchises,
issues freight receipts, bills of lading, and passenger tickets,
and it cannot be doubted that the organization of railroads is
quite as important to the state as the organization of banks. But
it will hardly be questioned that these contracts of the company
are objects of taxation within the powers of Congress, and not
exempted by any relation to the state which granted the charter of
the railroad. And it seems difficult to distinguish the taxation of
notes issued for circulation from the taxation of these railroad
contracts. Both descriptions of contracts are means of profit to
the corporations which issue them, and both, as we think, may
properly be made contributory to the public revenue."
Pp.
75 U. S.
547-548.
It is true that the decision in the
Veazie Bank case
was also placed, in a measure, upon the authority of the United
States to control the circulating medium of the country, but the
force of the reasoning which we have quoted has not been denied or
departed from.
In
Thomas v. United States, 192 U.
S. 363, a federal tax on the transfer of corporate
shares in state corporations was upheld as a tax upon business
transacted in the exercise of privileges afforded by the state laws
in respect to corporations.
In
Nicol v. Ames, 173 U. S. 509, a
federal tax was sustained upon the enjoyment of privileges afforded
by a board of trade incorporated by the State of Illinois.
Page 220 U. S. 157
When the Constitution was framed, the right to lay excise taxes
was broadly conferred upon the Congress. At that time, very few
corporations existed. If the mere fact of state incorporation,
extending now to nearly all branches of trade and industry, could
withdraw the legitimate objects of federal taxation from the
exercise of the power conferred, the result would be to exclude the
national government from many objects upon which indirect taxes
could be constitutionally imposed. Let it be supposed that a group
of individuals, as partners, were carrying on a business upon which
Congress concluded to lay an excise tax. If it be true that the
forming of a state corporation would defeat this purpose, by taking
the necessary steps required by the state law to create a
corporation and carrying on the business under rights granted by a
state statute, the federal tax would become invalid and that source
of national revenue be destroyed, except as to the business in the
hands of individuals or partnerships. It cannot be supposed that it
was intended that it should be within the power of individuals
acting under state authority to thus impair and limit the exertion
of authority which may be essential to national existence.
In this connection,
South Carolina v. United States,
199 U. S. 437, is
important. In that case, it was held that the agents of the state
government, carrying on the business of selling liquor under state
authority, were liable to pay the internal revenue tax imposed by
the federal government. In the opinion, previous cases in this
Court were reviewed, and the rule to be deduced therefrom stated to
be that the exemption of state agencies and instrumentalities from
national taxation was limited to those of a strictly governmental
character, and did not extend to those used by the state in
carrying on business of a private character. 199 U.S.
199 U. S.
461.
The cases unite in exempting from federal taxation the means and
instrumentalities employed in carrying on the
Page 220 U. S. 158
governmental operations of the state. The exercise of such
rights as the establishment of a judiciary, the employment of
officers to administer and execute the laws, and similar
governmental functions, cannot be taxed by the federal government.
The Collector v.
Day, 11 Wall. 113;
United
States v. Railroad Co., 17 Wall. 322;
Ambrosini
v. United States, 187 U. S. 1.
But this limitation has never been extended to the exclusion of
the activities of a merely private business from the federal taxing
power, although the power to exercise them is derived from an act
of incorporation by one of the states. We therefore reach the
conclusion that the mere fact that the business taxed is done in
pursuance of authority granted by a state in the creation of
private corporations does not exempt it from the exercise of
federal authority to levy excise taxes upon such privileges.
But, it is insisted, this taxation is so unequal and arbitrary
in the fact that it taxes a business when carried on by a
corporation, and exempts a similar business when carried on by a
partnership or private individual, as to place it beyond the
authority conferred upon Congress. As we have seen, the only
limitation upon the authority conferred is uniformity in laying the
tax, and uniformity does not require the equal application of the
tax to all persons or corporations who may come within its
operation, but is limited to geographical uniformity throughout the
United States. This subject was fully discussed and set at rest in
Knowlton v. Moore, 178 U. S. 41, and
we can add nothing to the discussion contained in that case.
In levying excise taxes, the most ample authority has been
recognized from the beginning to select some and omit other
possible subjects of taxation, to select one calling and omit
another, to tax one class of property and to forbear to tax
another. For examples of such taxation see
Page 220 U. S. 159
cases in the margin, decided in this Court, upholding the
power.{1}
Many instances might be given where this Court has sustained the
right of a state to select subjects of taxation, although as to
them the Fourteenth Amendment imposes a limitation upon state
legislatures, requiring that no person
Page 220 U. S. 160
shall be denied the equal protection of the laws.
See
some of them noted in the margin.{2}
In
Bell's Gap R. Co. v. Pennsylvania, 134 U.
S. 232, dealing with the Fourteenth Amendment, which in
this respect imposes limitations only on state authority, this
Court said:
"The provision in the Fourteenth Amendment, that no state shall
deny to any person within its jurisdiction the equal protection of
the laws, was not intended to prevent a state from adjusting its
system of taxation in all proper and reasonable ways. It may, if it
chooses, exempt certain classes of property from any taxation at
all, such as churches, libraries, and the property of charitable
institutions. It may impose different specific taxes upon different
trades and professions, and may vary the rates of excise upon
various products; it may tax real estate and personal property in a
different manner; it may tax visible property only, and not tax
securities for payment of money; it may allow deductions for
indebtedness, or not
Page 220 U. S. 161
allow them. All such regulations, and those of like character,
so long as they proceed within reasonable limits and general usage,
are within the discretion of the state legislature, or the people
of the state in framing their Constitution."
It is insisted in some of the briefs assailing the validity of
this tax that these cases have been modified by
Southern R. Co.
v. Greene, 216 U. S. 400. In
that case, a corporation organized in a state other than Alabama
came into that state in compliance with its laws, paid the license
tax and property tax imposed upon other corporations doing business
in the state, and acquired, under direct sanction of the laws of
the state, a large amount of property therein, and when it was
attempted to subject it to a further tax, on the ground that it was
for the privilege of doing business as a foreign corporation, when
the same tax was not imposed upon state corporations doing
precisely the same business, in the same way, it was held that the
attempted taxation was merely arbitrary classification, and void
under the Fourteenth Amendment. In that case, the foreign
corporation was doing business under the sanction of the state laws
no less than the local corporation; it had acquired its property
under sanction of those laws; it had paid all direct and indirect
taxes levied against it, and there was no practical distinction
between it and a state corporation doing the same business in the
same way.
In the case at bar, we have already discussed the limitations
which the Constitution imposes upon the right to levy excise taxes,
and it could not be said, even if the principles of the Fourteenth
Amendment were applicable to the present case, that there is no
substantial difference between the carrying on of business by the
corporations taxed, and the same business when conducted by a
private firm or individual. The thing taxed is not the mere dealing
in merchandise, in which the actual transactions may be the same,
whether conducted by individuals or corporations,
Page 220 U. S. 162
but the tax is laid upon the privileges which exist in
conducting business with the advantages which inhere in the
corporate capacity of those taxed, and which are not enjoyed by
private firms or individuals. These advantages are obvious, and
have led to the formation of such companies in nearly all branches
of trade. The continuity of the business, without interruption by
death or dissolution, the transfer of property interests by the
disposition of shares of stock, the advantages of business
controlled and managed by corporate directors, the general absence
of individual liability, these and other things inhere in the
advantages of business thus conducted, which do not exist when the
same business is conducted by private individuals or partnerships.
It is this distinctive privilege which is the subject of taxation,
not the mere buying or selling or handling of goods, which may be
the same, whether done by corporations or individuals.
It is further contended that some of the corporations, notably
insurance companies, have large investments in municipal bonds and
other nontaxable securities, and in real estate and personal
property not used in the business; that therefore the selection of
the measure of the income from all sources is void, because it
reaches property which is not the subject of taxation, upon the
authority of the
Pollock case,
supra. But this
argument confuses the measure of the tax upon the privilege with
direct taxation of the state or thing taxed. In the
Pollock case, as we have seen, the tax was held
unconstitutional because it was in effect a direct tax on the
property solely because of its ownership.
Nor does the adoption of this measure of the amount of the tax
do violence to the rule laid down in
Galveston, Harrisburg
& San Antonio Ry. Co. v. Texas, 210 U.
S. 217, nor
Western Union Telegraph Co. v.
Kansas, 216 U. S. 1. In the
Galveston case, it was held that a tax imposed by the
State of Texas, equal to one percent upon the gross
Page 220 U. S. 163
receipts "from every source whatever" of lines of railroad lying
wholly within the state, was invalid as an attempt to tax gross
receipts derived from the carriage of passengers and freight in
interstate commerce, which in some instances was much the larger
part of the gross receipts taxed. This Court held that this act was
an attempt to burden commerce among the states, and the fact that
it was declared to be "equal to" one percent made no difference, as
it was merely an effort to reach gross receipts by a tax not even
disguised as an occupation tax, and in nowise helped by the words
"equal to." In other words, the tax was held void, as its substance
and manifest intent was to tax interstate commerce as such.
In the
Western Union Telegraph cases, the state
undertook to levy a graded charter fee upon the entire capital
stock of one hundred millions of dollars of the Western Union
Telegraph Company, a foreign corporation, and engaged in commerce
among the states, as a condition of doing local business within the
State of Kansas. This Court held, looking through forms and
reaching the substance of the thing, that the tax thus imposed was
in reality a tax upon the right to do interstate commerce within
the state, and an undertaking to tax property beyond the limits of
the state; that whatever the declared purpose, when reasonably
interpreted, the necessary operation and effect of the act in
question was to burden interstate commerce and to tax property
beyond the jurisdiction of the state, and it was therefore
invalid.
There is nothing in these cases contrary, as we shall have
occasion to see, to the former rulings of this Court which hold
that, where a tax is lawfully imposed upon the exercise of
privileges within the taxing power of the state or nation, the
measure of such tax may be the income from the property of the
corporation, although a part of such income is derived from
property, in itself, nontaxable. The distinction lies between the
attempt to tax the property
Page 220 U. S. 164
as such and to measure a legitimate tax upon the privileges
involved in the use of such property.
In
Home Ins. Co. v. New York, 134 U.
S. 594, a tax was sustained upon the right or privilege
of the Home Insurance Company to be a corporation, and to do
business within the state in a corporate capacity, the tax being
measured by the extent of the dividends of the corporation in the
current year upon the capital stock. Although a very large amount,
nearly two of three millions of capital stock, was invested in
bonds of the United States, expressly exempted from taxation by a
statute of the United States, the tax was sustained as a mode of
measurement of a privilege tax which it was within the lawful
authority of the state to impose. Mr. Justice Field, who delivered
the opinion of the Court, reviewed the previous cases in this
Court, holding that the state could not tax or burden the operation
of the Constitution and of laws enacted by the Congress to carry
into execution the powers vested in the general government.
Yielding full assent to those cases, Mr. Justice Field said of the
tax then under consideration:
"It is not a tax in terms upon the capital stock of the company,
nor upon any bonds of the United States composing a part of that
stock. The statute designates it a tax upon the 'corporate
franchise or business' of the company, and reference is only made
to its capital stock and dividends for the purpose of determining
the amount of the tax to be exacted each year."
In that case, in the course of the opinion, previous cases of
this Court were cited, with approval.
Society
for Savings v. Coite, 6 Wall. 594;
Provident
Institution v. Massachusetts, 6 Wall. 611.
In the
Coite case, a privilege tax upon the total
amount of deposits in a savings bank was sustained, although
$500,000 of the deposits had been invested in securities of the
United States, and declared by act of Congress to be exempt from
taxation by state authority. In that case, the Court said:
"Nothing can be more certain in legal
Page 220 U. S. 165
decision than that the privileges and franchises of a private
corporation, and all trades and avocations by which the citizens
acquire a livelihood, may be taxed by a state for the support of
the state government. Authority to that effect resides in the state
independent of the federal government, and is wholly unaffected by
the fact that the corporation or individual has or has not made
investment in federal securities."
In
Provident Institution v. Massachusetts, supra, a
like tax was sustained.
It is therefore well settled by the decisions of this Court
that, when the sovereign authority has exercised the right to tax a
legitimate subject of taxation as an exercise of a franchise or
privilege, it is no objection that the measure of taxation is found
in the income produced in part from property which of itself
considered is nontaxable. Applying that doctrine to this case, the
measure of taxation being the income of the corporation from all
sources, as that is but the measure of a privilege tax within the
lawful authority of Congress to impose, it is no valid objection
that this measure includes, in part at least, property which, as
such, could not be directly taxed.
See, in this
connection,
Maine v. Grand Trunk Ry. Co., 142 U.
S. 217, as interpreted in
Galveston, Harrisburg
& San Antonio Ry. Co. v. Texas, 210 U.
S. 217,
210 U. S.
226.
It is contended that measurement of the tax by the net income of
the corporation or company received by it from all sources is not
only unequal, but so arbitrary and baseless as to fall outside of
the authority of the taxing power. But is this so? Conceding the
power of Congress to tax the business activities of private
corporations, including, as in this case, the privilege of carrying
on business in a corporate capacity, the tax must be measured by
some standard, and none can be chosen which will operate with
absolute justice and equality upon all corporations. Some
corporations do a large business upon a small amount of capital;
others with a small business may have a large
Page 220 U. S. 166
capital. A tax upon the amount of business done might operate as
unequally as a measure of excise as it is alleged the measure of
income from all sources does. Nor can it be justly said that
investments have no real relation to the business transacted by a
corporation. The possession of large assets is a business advantage
of great value; it may give credit which will result in more
economical business methods; it may give a standing which shall
facilitate purchases; it may enable the corporation to enlarge the
field of its activities and in many ways give it business standing
and prestige.
It is true that in the
Spreckels case, 192 U.S.,
supra, the excise tax, for the privilege of doing
business, was based upon the business assets in use by the company,
but this was because of the express terms of the statute which thus
limited the measure of the excise. The statute now under
consideration bears internal evidence that its draftsman had in
mind language used in the opinion in the
Spreckels case,
and the measure of taxation, the income from all sources, was
doubtless inserted to prevent the limitation of the measurement of
the tax to the income from business assets alone. There is no rule
which permits a court to say that the measure of a tax for the
privilege of doing business, where income from property is the
basis, must be limited to that derived from property which may be
strictly said to be actively used in the business. Departures from
that rule, sustained in this Court, are not wanting. In
United States v.
Singer, 15 Wall. 111, an excise tax was sustained
upon the liquor business, which was fixed by the payment of an
amount not less than 80 percent of the total capacity of the
distillery. Whether such capacity was used in the business was a
matter of indifference, and this Court said of such a measure:
"Everyone is advised in advance of the amount he will be
required to pay if he enters into the business of distilling
spirits, and every distiller must know the producing
Page 220 U. S. 167
capacity of his distillery. If he fail under these circumstances
to produce the amount for which, by the law, he will, in any event,
be taxed if he undertakes to distill at all, he is not entitled to
much consideration."
In
Society for Savings v. Coite, 6 Wall.,
supra, and
Provident Institution v.
Massachusetts, 6 Wall.,
supra, as we have seen, the
amount of excise was measured by the amount of bank deposits. It
made no difference that the deposits were not used actively in the
business.
In
Hamilton Company v.
Massachusetts, 6 Wall. 632, the tax was measured by
the excess of the market value of the corporation's capital stock
above the value of its real estate and machinery, and in this
connection
see Home Ins. Co. v. New York, 134 U.S.
supra, where the excise was computed upon the entire
capital stock, measured by the extent of the dividends thereon.
We must not forget that the right to select the measure and
objects of taxation devolves upon the Congress, and not upon the
courts, and such selections are valid unless constitutional
limitations are overstepped.
"It is no part of the function of a court to inquire into the
reasonableness of the excise, either as respects the amount or the
property upon which it is imposed."
Patton v. Brady, 184 U. S. 608;
McCray v. United States, 195 U. S. 27,
195 U. S. 58,
and previous cases in this Court there cited.
Nor is that line of cases applicable, such as
Brown v.
Maryland, 12 Wheat. 419, holding that a tax on the
sales of an importer is a tax on the import, and
Cook v.
Pennsylvania, 97 U. S. 566,
holding a tax on auctioneers' sales of goods in original packages a
tax on imports. In these cases, the tax was held invalid, as the
state thereby taxed subjects of taxation within the exclusive power
of Congress.
What we have said as to the power of Congress to lay this excise
tax disposes of the contention that the act is void, as lacking in
due process of law.
Page 220 U. S. 168
It is urged that this power can be so exercised by Congress as
to practically destroy the right of the states to create
corporations, and for that reason it ought not to be sustained, and
reference is made to the declaration of Chief Justice Marshall in
M'Culloch v. Maryland that the power to tax involves to
power to destroy. This argument has not been infrequently addressed
to this Court with respect to the exercise of the powers of
Congress. Of such contention, this Court said in
Knowlton v.
Moore, supra:
"This principle is pertinent only when there is no power to tax
a particular subject, and has no relation to a case where such
right exists. In other words, the power to destroy, which may be
the consequence of taxation, is a reason why the right to tax
should be confined to subjects which may be lawfully embraced
therein, even although it happens that in some particular instance
no great harm may be caused by the exercise of the taxing authority
as to a subject which is beyond its scope. But this reasoning has
no application to a lawful tax, for if it had, there would be an
end of all taxation; that is to say, if a lawful tax can be
defeated because the power which is manifested by its imposition
may, when further exercised, be destructive, it would follow that
every lawful tax would become unlawful, and therefore no taxation
whatever could be levied."
In
Veazie Bank v.
Fenno, 8 Wall. 533,
supra, speaking for
the Court, the Chief Justice said:
"It is insisted, however, that the tax in the case before us is
excessive, and so excessive as to indicate a purpose on the part of
Congress to destroy the franchise of the bank, and is therefore
beyond the constitutional power of Congress."
"The first answer to this is that the judicial cannot prescribe
to the legislative departments of the government limitations upon
the exercise of its acknowledged powers. The power to tax may be
exercised oppressively upon persons,
Page 220 U. S. 169
but the responsibility of the legislature is not to the courts,
but to the people by whom its members are elected. So, if a
particular tax bears heavily upon a corporation, or a class of
corporations, it cannot, for that reason only, be pronounced
contrary to the Constitution."
To the same effect:
McCray v. United States,
195 U. S. 27. In
the latter case, it was said:
". . . no instance is afforded from the foundation of the
government where an act which was within a power conferred was
declared to be repugnant to the Constitution because it appeared to
the judicial mind that the particular exertion of constitutional
power was either unwise or unjust."
And in the same case, this Court said, after reviewing the
previous cases in this Court:
"Since, as pointed out in all the decisions referred to, the
taxing power conferred by the Constitution knows no limits except
those expressly stated in that instrument, it must follow, if a tax
be within the lawful power, the exertion of that power may not be
judicially restrained because of the results to arise from its
exercise."
The argument at last, comes to this: that, because of possible
results, a power lawfully exercised may work disastrously,
therefore the courts must interfere to prevent its exercise,
because of the consequences feared. No such authority has ever been
invested in any court. The remedy for such wrongs, if such in fact
exist, is in the ability of the people to choose their own
representatives, and not in the exertion of unwarranted powers by
courts of justice.
It is especially objected that certain of the corporations whose
stockholders challenge the validity of the tax are so-called real
estate companies, whose business is principally the holding and
management of real estate. These cases are No. 415,
Cedar
Street Company v. Park Realty Company; No. 431,
Percy H.
Brundage v. Broadway Realty
Page 220 U. S. 170
Company; No. 443,
Phillips v. Fifty Associates et
al.; No. 446,
Mitchell v. Clark Iron Company; No.
412,
William H. Miner v. Corn Exchange Bank et al., and
No. 457,
Cook et al. v. Boston Wharf Company.
In No. 412,
Miner v. Corn Exchange Bank et al., the
bank occupies a building in part and rents a large part to
tenants.
Of the realty companies, the Park Realty Company was organized
to
"work, develop, sell, convey, mortgage, or otherwise dispose of
real estate; to lease, exchange, hire, or otherwise acquire
property; to erect, alter, or improve buildings; to conduct,
operate, manage, or lease hotels, apartment houses, etc.; to make
and carry out contracts in the manner specified concerning
buildings . . . and generally to deal in, sell, lease, exchange, or
otherwise deal with lands, buildings, and other property, real or
personal,"
etc.
At the time the bill was filed, the business of the company
related to the Hotel Leonori, and the bill averred that it was
engaged in no other business except the management and leasing of
that hotel.
The Broadway Realty Company was formed for the purpose of
owning, holding, and managing real estate. It owns an office
building and certain securities. The office building is let to
tenants, to whom light and heat are furnished, and for whom janitor
and similar service are performed.
The Fifty Associates are operating under a charter to own real
estate, with power to build, improve, alter, pull down, and
rebuild, and to manage, exchange and dispose of the same.
The Clark Iron Company was organized under the laws of
Minnesota, owns and leases ore lands for the purpose of carrying on
mining operations, and receives a royalty depending upon the
quantity of ore mined.
The Boston Wharf Company is operating under a
Page 220 U. S. 171
charter authorizing it to acquire lands and flats, with their
privileges and appurtenances, and to lease, manage, and improve its
property in whatever manner shall be deemed expedient by it, and to
receive dockage and wharfage for vessels laid at its wharfs.
What we have said as to the character of the corporation tax as
an excise disposes of the contention that it is direct, and
therefore requiring apportionment by the Constitution. It remains
to consider whether these corporations are engaged in business.
"Business" is a very comprehensive term and embraces everything
about which a person can be employed. Black's Law Dict. 158, citing
People ex Rel. Hoyt v. Tax Comm'rs, 23 N.Y. 242, 244.
"That which occupies the time, attention, and labor of men for the
purpose of a livelihood or profit." 1 Bouvier's Law Dict. p.
273.
We think it is clear that corporations organized for the purpose
of doing business, and actually engaged in such activities as
leasing property, collecting rents, managing office buildings,
making investments of profits, or leasing ore lands and collecting
royalties, managing wharves, dividing profits, and in some cases
investing the surplus, are engaged in business within the meaning
of this statute, and in the capacity necessary to make such
organizations subject to the law.
Of the
Motor Taximeter Cab Company case, No. 432, the
company owns and leases taxicabs, and collects rents therefrom. We
think it is also doing business within the meaning of the
statute.
What we have already said disposes of the objections made in
certain cases of life insurance and trust companies, and banks, as
to income derived from United States, state, municipal, or other
nontaxable bonds.
We come to the question is a so-called public service
corporation, such as the Coney Island and Brooklyn Railroad
Company, in case No. 409, and the Interborough
Page 220 U. S. 172
Rapid Transit Company, No. 442, exempted from the operation of
this statute? In the case of
South Carolina v. United
States, 199 U. S. 437,
this Court held that, when a state, acting within its lawful
authority, undertook to carry on the liquor business, it did not
withdraw the agencies of the state, carrying on the traffic, from
the operation of the internal revenue laws of the United States. If
a state may not thus withdraw from the operation of a federal
taxing law a subject matter of such taxation, it is difficult to
see how the incorporation of companies whose service, though of a
public nature, is nevertheless with a view to private profit, can
have the effect of denying the federal right to reach such
properties and activities for the purposes of revenue.
It is no part of the essential governmental functions of a state
to provide means of transportation, supply artificial light, water,
and the like. These objects are often accomplished through the
medium of private corporations, and though the public may derive a
benefit from such operations, the companies carrying on such
enterprises are nevertheless private companies, whose business is
prosecuted for private emolument and advantage. For the purpose of
taxation, they stand upon the same footing as other private
corporations upon which special franchises have been conferred.
The true distinction is between the attempted taxation of those
operations of the states essential to the execution of its
governmental functions, and which the state can only do itself, and
those activities which are of a private character. The former, the
United States may not interfere with by taxing the agencies of the
state in carrying out its purposes; the latter, although regulated
by the state, and exercising delegated authority, such as the right
of eminent domain, are not removed from the field of legitimate
federal taxation.
Applying this principle, we are of opinion that the
Page 220 U. S. 173
so-called public service corporations represented in the cases
at bar are not exempt from the tax in question.
Railroad Co.
v. Peniston, 18 Wall. 5,
85 U. S. 33.
It is again objected that incomes under $5,000 are exempted from
the tax. It is only necessary, in this connection, to refer to
Knowlton v. Moore, 178 U.S.,
supra, in which a
tax upon inheritances in excess of $10,000 was sustained. In
Magoun v. Illinois Trust & Savings Bank, 170 U.
S. 283,
170 U. S. 293,
a graded inheritance tax was sustained.
As to the objections that certain organizations -- labor,
agricultural, and horticultural, fraternal and benevolent
societies, loan and building associations, and those for religious,
charitable, or educational purposes, are excepted from the
operation of the law, we find nothing in them to invalidate the
tax. As we have had frequent occasion to say, the decisions of this
Court from an early date to the present time have emphasized the
right of Congress to select the objects of excise taxation, and
within this power to tax some and leave others untaxed must be
included the right to make exemptions such as are found in this
act.
Again, it is urged that Congress exceeded its power in
permitting a deduction to be made of interest payments only in case
of interest paid by banks and trust companies on deposits, and
interest actually paid within the year on its bonded or other
indebtedness to an amount of such bonded and other indebtedness not
exceeding the paid-up capital stock of the corporation or company.
This provision may have been inserted with a view to prevent
corporations from issuing a large amount of bonds in excess of the
paid-up capital stock, and thereby distributing profits so as to
avoid the tax. In any event, we see no reason why this method of
ascertaining the deductions allowed should invalidate the act. Such
details are not wholly arbitrary, and were deemed essential to
practical operation. Courts cannot substitute their judgment
Page 220 U. S. 174
for that of the legislature. In such matters, a wide range of
discretion is allowed.
The argument that different corporations are so differently
circumstanced in different states, and the operation of the law so
unequal as to destroy it, is so fully met in the opinion in
Knowlton v. Moore, 178 U.S.,
supra, that it is
only necessary to make reference thereto. For this purpose, the law
operates uniformly, geographically considered, throughout the
United States, and in the same way wherever the subject matter is
found. A liquor tax is not rendered unlawful as a revenue measure
because it may yield nothing in those states which have prohibited
the liquor traffic. No more is the present law unconstitutional
because of inequality of operation owing to different local
conditions.
Nor is the special objection tenable, made in some of the cases,
that the corporations act as trustees, guardians, etc., under the
authority of the laws or courts of the state. Such trustees are not
the agents of the state government in a sense which exempts them
from taxation because executing the necessary governmental powers
of the state. The trustees receive their compensation from the
interests served, and not from the public revenues of the
state.
It is urged in a number of the cases that in a certain feature
of the statute there is a violation of the Fourth Amendment of the
Constitution, protecting against unreasonable searches and
seizures. This amendment was adopted to protect against abuses in
judicial procedure under the guise of law, which invade the privacy
of persons in their homes, papers, and effects, and applies to
criminal prosecutions and suits for penalties and forfeitures under
the revenue laws.
Boyd v. United States, 116
U. S. 632. It does not prevent the issue of search
warrants for the seizure of gambling paraphernalia and other
illegal matter.
Adams v. New York, 192 U.
S. 585. It does not prevent the issuing of process to
require attendance
Page 220 U. S. 175
and testimony of witnesses, the production of books and papers,
etc.
Interstate Commerce Commission v. Brimson,
154 U. S. 447;
Interstate Commerce Commission v. Baird, 194 U. S.
25. Certainly the amendment was not intended to prevent
the ordinary procedure in use in many, perhaps most, of the states,
of requiring tax returns to be made, often under oath. The
objection in this connection applies, when the substance of the
argument is reached, to the sixth section of § 38 of the act, which
provides:
"Sixth. When the assessment shall be made, as provided in this
section, the returns, together with any corrections thereof which
may have been made by the commissioner, shall be filed in the
office of the Commissioner of Internal Revenue, and shall
constitute public records, and be open to inspection as such."
An amendment was made June 17, 1910, which reads as follows:
"For classifying, indexing, exhibiting, and properly caring for
the returns of all corporations, required by section thirty-eight
of an act entitled, 'An Act to Provide Revenue, Equalize Duties,
Encourage the Industries of the United States, and for Other
Purposes,' approved August fifth, nineteen hundred and nine,
including the employment in the District of Columbia of such
clerical and other personal services and for rent of such quarters
as may be necessary, twenty-five thousand dollars:
Provided, That any and all such returns shall be open to
inspection only upon the order of the President, under rules and
regulations to be prescribed by the Secretary of the Treasury and
approved by the President."
The contention is that the above section as originally framed
and as now amended could have no legitimate connection with the
collection of the tax, and in substance amounts to no more than an
unlawful attempt to exhibit the private affairs of corporations to
public or private inspection, without any substantial connection
with or
Page 220 U. S. 176
legitimate purpose to be subserved in the collection of the tax
under the act now under consideration. But we cannot agree to this
contention. The taxation being, as we have held, within the
legitimate powers of Congress, it is for that body to determine
what means are appropriate and adapted to the purposes of making
the law effectual. In this connection, the often-quoted declaration
of Chief Justice Marshall in
McCulloch v.
Maryland, 4 Wheat. 316,
17 U. S. 421,
is appropriate:
"Let the end be legitimate, let it be within the scope of the
Constitution, and all means which are appropriate, which are
plainly adapted to that end, which are not prohibited, but consist
with the letter and spirit of the Constitution, are
constitutional."
Congress may have deemed the public inspection of such returns a
means of more properly securing the fullness and accuracy thereof.
In many of the states, laws are to be found making tax returns
public documents, and open to inspection.{3}
Page 220 U. S. 177
We cannot say that this feature of the law does violence to the
constitutional protection of the Fourth Amendment, and, this is
equally true of the Fifth Amendment, protecting persons against
compulsory self-incriminating testimony. No question under the
latter Amendment properly arises in these cases, and when
circumstances are presented which invoke the protection of that
Amendment, and raise questions involving rights thereby secured, it
will be time enough to decide them. And so of the argument that the
penalties for the nonpayment of the taxes are so high as to violate
the Constitution. No case is presented involving that question,
and, moreover, the penalties are clearly a separate part of the
act, and whether collectible or not may be determined in a case
involving an attempt to enforce them.
Willcox v. Consolidated
Gas Co., 212 U. S. 19,
212 U. S.
53.
It has been suggested that there is a lack of power to tax
foreign corporations, doing local business in a state, in the
manner proposed in this act, and that the tax upon such
corporations, being unconstitutional, works such inequality against
domestic corporations as to invalidate the law. It is sufficient to
say to this that no such case is presented in the record.
Southern Railway Co. v. King, 217
U. S. 525. This is equally true as to the alleged
invalidity of the act as a tax on exports, which is beyond the
power of Congress. No such case is presented in those now before
the court.
We have noticed such objections as are made to the
constitutionality of this law as it is deemed necessary to
consider. Finding the statute to be within the constitutional power
of the Congress, it follows that the judgments in the several cases
must be affirmed.
Affirmed.
Hylton v. United
States, 3 Dall. 171 (a tax on carriages which the
owner kept for private use);
Nicol v. Ames, supra, (a tax
upon sales or exchanges of boards of trade);
Knowlton v. Moore,
supra, (a tax on the transmission of property from the dead to
the living);
Treat v. White, 181 U.
S. 264 (a tax on agreements to sell shares of stock,
denominated "calls" by stockbrokers);
Patton v. Brady,
184 U. S. 608 (a
tax on tobacco manufactured for consumption, and imposed at a
period intermediate the commencement of manufacture and the final
consumption of the article);
Cornell v. Coyne,
192 U. S. 418 (a
tax on "filled cheese" manufactured expressly for export);
McCray v. United States, 195 U. S. 27 (a tax
on oleomargarine not artificially colored, a higher tax on
oleomargarine artificially colored, and no tax on butter
artificially colored);
Thomas v. United States, supra, (a
tax on sales of shares of stock in corporations);
Pacific
Ins. Co. v. Soule, 7 Wall. 433 (a tax upon the
amounts insured, renewed, or continued by insurance companies, upon
the gross amounts of premiums received and assessments made by
them, and also upon dividends, undistributed sums, and incomes);
Veazie Bank v.
Fenno, 8 Wall. 533 (a tax of ten percentum on the
amount of the notes paid out of any state bank, or state banking
association);
Scholey v.
Rew, 23 Wall. 331 (a tax on devolutions of title to
real estate);
Spreckels v. Sugar Refining Co.,
192 U. S. 397 (a
tax on the gross receipts of corporations and companies, in excess
of $250,000, engaged in refining sugar or oil);
Railroad Co. v.
Collector, 100 U. S. 595 (a
tax laid in terms upon the amounts paid by certain public service
corporations as interest on their funded debt, or as dividends to
their stockholders, and also on "all profits, incomes, or gains of
such company, and all profits of such company carried to the
account of any fund, or used for construction." Held to be a tax
upon the company's earnings, and therefore essentially an excise
upon the business of the corporations);
Springer v. United
States, 102 U. S. 586 (a
duty provided by the internal revenue acts to be assessed,
collected, and paid upon gains, profits, and incomes, held to be an
excise or duty, and not a direct tax).
Beers v. Glynn, 211 U. S. 477 (a
state tax on personalty of nonresident decedents who owned realty
in the state);
Hatch v. Reardon, 204 U.
S. 152 (a state tax on the transfers of stock made
within the state);
Armour Packing Co. v. Lacy,
200 U. S. 226 (a
state license tax on meat-packing houses. A foreign corporation
selling its products in the state, but whose packing establishments
are not situated in the state, is not exempt from such license
tax);
Savannah, Thunderbolt & Isle of Hope Railway v.
Savannah, 198 U. S. 392 (a
classification which distinguishes between an ordinary street
railway and a steam railroad, making an extra charge for local
deliveries of freight brought over its road from outside the city,
held not to be such a classification as to make the tax void under
the Fourteenth Amendment);
Cook v. Marshall County,
196 U. S. 261 (a
state tax on cigarette dealers);
Magoun v. Illinois Trust &
Savings Bank, 170 U. S. 283
(upholding the graded inheritance tax law of Illinois);
Bell's
Gap Railroad Co. v. Pennsylvania, 134 U.
S. 232 (state tax upon the nominal face value of bonds,
instead of their actual value, held a valid part of the state
system of taxation).
In Connecticut, the requirement is that the tax lists of the
assessors shall be abstracted and lodged in the town clerk's office
"for public inspection." R.S.Conn., § 2310. In New York, notices of
the completion of the assessment rolls must be conspicuously posted
in three or more public places, and a copy left in a specified
place, "where it may be seen and examined by any person until the
third Tuesday of August next following." Consol.Laws of N.Y. vol.
5, p. 5859; N.Y.Laws 1909, c. 62, § 36. In Maryland, a record of
property assessed is required to be kept, and the valuation
thereof, with alphabetical list of owners, recorded in a book,
"which any person may inspect without fee or reward." Pub.Laws Md.,
vol. 2, p. 1804, § 23. In Pennsylvania, it is provided that from
the time of publishing the assessor's returns until the day
appointed for finally determining whether the assessor's valuations
are too low, "any taxable inhabitant of the county shall have the
right to examine the said return in the commissioner's office."
Pepper & Lewis' Dig.Laws Pa., vol. 2, p. 4591, § 357. In New
Hampshire, the list of taxes assessed are required to be kept in a
book, and also left with the town clerk, and such records "shall be
open to the inspection of all persons." Pub.Stat.N.H., 1901, p.
214, § 5.