Opinion
July 2, 1931.
Beekman, Bogue Clark, of New York City (Edward K. Hanlon and Hubert C. Mandeville, both of New York City, of counsel), for plaintiff.
John J. Bennett, Jr. (Wendell P. Brown, of Albany, N.Y., of counsel), for the Attorney General.
Before MACK, Circuit Judge, and FRANK J. COLEMAN and COXE, District Judges.
In Equity. Suit by the S.S. Kresge Company against John J. Bennett, Attorney General of the State of New York, and others. On plaintiff's motion for a preliminary injunction and defendants' motion for an order dismissing the bill of complaint.
Plaintiff's motion denied, and defendants' motion granted.
In Equity. Motion by the plaintiff for a preliminary injunction and by the defendants for an order dismissing the bill of complaint upon the ground that it does not state facts sufficient to constitute a cause of action and for want of equity. Suit to restrain the Attorney General and the tax commission of the state of New York from collecting a corporate franchise tax assessed against the plaintiff upon the ground that it violates the Fourteenth Amendment of the United States Constitution.
The tax was assessed under the New York Tax Law (Consol. Laws, c. 60) article 9-A (sections 208-219- l), which provided (section 209) that a foreign corporation, for the privilege of doing business in the state, must pay a franchise tax to be computed by the state tax commission upon the basis of its entire net income, which is presumed to be the same as that required to be reported to the federal government under the federal income tax laws, and that income derived from any source may be included in the entire net income, subject to a proper apportionment in the computation of the tax. The statute provided (section 214) that in the case of a corporation doing business both within and without the state, the tax be computed upon an apportionment of the entire net income in accordance with the proportion which certain designated classes of tangible and intangible assets held within the state bore to the taxpayer's total assets of those classes; and (section 215) that the rate of taxation be 4½ per cent. on the base so established; but the commission was given authority (section 211) to disregard the prescribed method of apportionment in determining the base if in a particular case it did not properly reflect the corporate activity or business done. The taxpayer was required (section 211) to file a return on or before July 1st of each year showing its income and assets for the preceding calendar year and the tax based upon that return was required (section 209) to be paid in advance for the year beginning the following November 1st; in other words, the tax year began on November 1st and the base upon which the tax was computed was determined by the income and assets during the preceding calendar year. If the taxpayer was dissatisfied with the commission's computation of the tax, he might (section 218) within a year apply to the commission for a revision, and the commission was directed to grant a hearing thereon and, if it appeared at such hearing "by evidence submitted to it or otherwise" that the tax could not lawfully be demanded, to "resettle the same according to law and the facts"; and a remedy was provided (section 219) by certiorari to the state court to review the determination of the commission upon such application for revision.
On September 11, 1927, the plaintiff filed its return for the tax year beginning November 1, 1927, showing its entire net income for the calendar year 1926 and its assets of the classes designated in the statute; and on July 1, 1928, it filed a similar return for the tax year beginning November 1, 1928, showing the data for the calendar year 1927. Upon these returns the commission computed taxes in the sums of $61,013.52 and $63,542.07, respectively. Thereafter, the plaintiff applied to the commission for a revision of both assessments, and on December 20, 1929, a hearing was held upon such application. Thereafter, on January 23, 1931, the commission redetermined the taxes in substantially the same amounts making slight allowances to the taxpayer which need not be considered here. In that revision the commission refused to accept the taxpayer's principal contention, viz., that the method prescribed by the statute for apportioning the entire net income in arriving at the base should not be followed. No certiorari proceeding to review the commission's determination was brought in the state court, but instead this suit was commenced and the present application was made for a preliminary injunction.
To state more in detail the commission's method of computing the taxes on the application for revision, the commission accepted the plaintiff's figures and determined for the calendar year 1926 the plaintiff's entire net income to be $13,879,836.65, its entire assets of the designated classes to be $67,122,837.69, its assets of the same sort within New York State $6,525,273.32, the proportion between these New York assets and the entire assets 9.72139 per cent., the net income attributed to New York $1,349,313.17, upon which the tax was computed at the rate of 4½ per cent., namely, $60,719.09. For the calendar year 1927 the figures determined by the commission were: Entire net income $15,695,221.71; segregable assets in New York $3,850,390.07; segregable assets everywhere $42,927,842.69; percentage in New York 8.969447 per cent.; income attributed to New York $1,407,775; and tax $63,349.88.
The plaintiff, a Michigan corporation, owned and operated throughout the United States a chain of between 367 and 435 retail stores, of which between 39 and 48 were located in New York State. The business of each store was the selling for cash of low-priced articles of miscellaneous merchandise which had been purchased through the plaintiff's central organization. The plaintiff manufactured no goods, but maintained a well-organized central purchasing department which operated for the entire system. Subsidiary features of the purchasing department were an importing department and a jobbing department, the principal function of the latter being to operate in New York a warehouse for the entire system. The purchasing department and executive offices were located in Detroit.
Its method of bookkeeping was to charge against each individual store the invoice cost of the goods delivered to it by the central organization together with certain percentages estimated as sufficient to pay the expenses of the central organization. On all goods handled by the importing and jobbing departments 2 per cent. and 5 per cent., respectively, were added to the invoice cost; and 2 per cent. of the gross sales of each store was charged against it for general overhead expenses. Against the gross income from each store was charged not only the invoice cost of the goods and the above percentages, but also the operating expenses of the particular store; and the result was entered on the books of the company as the entire net income from that store.
The taxes as determined by the commission were in exact accord with the method tentatively prescribed by the statute for the apportionment of the plaintiff's entire net income. In determining the base the commission accepted the plaintiff's reported net income for its entire system and took such proportion of it as the designated New York assets bore to all such assets in the plaintiff's entire business. This statute, and more specifically this method of apportionment, has already been held constitutional. Bass, Ratcliff Gretton, Ltd., v. State Tax Commission, 266 U.S. 271, 45 S. Ct. 82, 69 L. Ed. 282. The plaintiff contends, however, that the taxes in this instance are unconstitutional because the base determined by the commission is larger than the actual net income derived from plaintiff's property, business, and activities within New York State; in other words, that part of the plaintiff's net income derived from without the state is taxed by the New York authorities.
We think it is a sufficient answer to this contention: (1) That the plaintiff has not, in the record before us, shown the net income from New York State, and (2) that the proceedings before the commission were not sufficient to sustain this action. The defendants concede that the statutory remedy of certiorari to the state court is inadequate and that the plaintiff has no adequate remedy against an erroneous decision of the commission on the application for revision except in this action. See Educational Films Corp. v. Ward, 282 U.S. 379, 51 S. Ct. 170, 75 L. Ed. 400.
1. In attempting to prove its net income derived from New York State, the plaintiff accurately shows its gross income collected here, i.e. the amount of the gross sales within the state, from which are deducted not only the items of cost and expense directly allocable to the individual stores in New York, but also the percentages to defray the expenses of the central organization. These latter charges against the gross income in New York are merely estimated expenses of the business. The plaintiff urges that they are a close estimate because the proceeds from these percentage charges in the entire system one year come within $67,000 of the actual expenses; but they remain nevertheless mere estimates. It might well be that the service rendered to the New York stores by the central organization should be charged for at a different rate from that applicable to other parts of the system; for instance, the services performed by the executive offices and purchasing department are charged for at the rate of 2 per cent. not on the invoice cost of the goods furnished to the stores, but on the gross sales of the stores. If the New York stores were receiving higher prices for the same goods than stores elsewhere, they would be paying a disproportionate part of the expenses of furnishing the goods.
Furthermore, the net income allocated to New York should reflect all the plaintiff's activities within the state. In addition to the operation of the individual stores, the plaintiff operated here a warehouse for the entire system and also purchased goods here for the entire system. Such profit as may have resulted from these activities is not completely reflected in the aggregate net profit of the individual stores within the state, which plaintiff contends is the entire net income attributable to New York.
Since the plaintiff cannot show by the facts before us what was its net income from New York State, but can merely estimate it, we do not think that there is anything before us to sustain the contention that the method of apportionment adopted by the commission was unconstitutional. If the actual net income from the state cannot be demonstrated with reasonable certainty, the commission can properly be intrusted with some discretion in determining what method to use in approximating it. It may possibly be that the plaintiff's figures are a somewhat closer approximation than the commission's, but that would not warrant our holding the tax illegal if the commission's method was a reasonable one. Bass et al. v. Commission, supra; Underwood, etc., v. Chamberlain, 254 U.S. 113, 41 S. Ct. 45, 65 L. Ed. 165; Hans Rees' Sons, Inc., v. North Carolina, 283 U.S. 123, 51 S. Ct. 385, 75 L. Ed. 879. As a matter of fact, the figures arrived at by the commission far more nearly reflect the amount of business done within the state than do the plaintiff's because if the apportionment of the entire net income is made in accordance with gross sales both within and without the state, almost the same figures are reached as by the method used by the commission. More specifically, the gross sales within the state for the two years in question compared with the gross sales of the whole system were 8.40 per cent. and 8.93 per cent., respectively; the percentage of net income attributed to New York by the commission was approximately 9.72 per cent. and 8.97 per cent., respectively; while that claimed by plaintiff was only 6.30 per cent. and 6.31 per cent., respectively.
2. But aside from the question whether the facts proved before us require a different method of computation from that adopted by the commission, the plaintiff cannot succeed in the present action because these facts were neither proved nor offered to be proved before the commission. Concededly a prerequisite to the maintenance of this action was an application to the commission for a revision. Gorham Manufacturing Co. v. Tax Commission, 266 U.S. 265, 45 S. Ct. 80, 69 L. Ed. 279. An application was made and this question of the proper method of computation was mentioned at the hearing before the commission; but there was no evidence either introduced or offered which would have justified the commission in changing its assessment. Even if this court is not restricted to a review of the commission's determination as in a certiorari proceeding, still before the plaintiff can resort to the extraordinary remedy of injunction against the state authorities it must show that the threatened injury is not the result of the plaintiff's own default in failing to present sufficient evidence to the administrative tribunal. The mere making of an application for a revision does not suffice.
Considering more in detail the proceedings before the commission, it appears that the question of the proper method of apportioning the entire net income was first raised in the plaintiff's return for the tax year beginning November 1, 1928, by a short typewritten statement not called for on the form used. The statement set forth the taxpayer's contention as to its income derived from New York State and the percentage which this bore to the entire net income, but of course no proof of the figures was included. At the hearing on the application for revision the matter was again mentioned, and an officer of the company attempted to state his conclusions without proving the figures to support them. The presiding commissioner said in reference to that testimony, "I am objecting to the whole thing unless you establish how you determine it, because the whole thing is susceptible of jugglery," and at another point, "Cut out the speculation and get down to the facts — the things that can be demonstrated rather than argued." In reference to another point the commissioner said: "The whole point about the thing is that this company was stacking up real estate outside the State against leaseholds here and getting deductions for lease rentals, all of which was taken out of the net income of this company. Frankly, so far as 1924 is concerned, there can not be any question of proportion of segregation because that question is not open. As to subsequent years, the question is. We have not the least objection to your putting in anything that tends to show values. I don't think that you would consider that we would be in any position to try to fix a sales tax on the existing law, and that is what you are heading to." This statement was not, and cannot be, considered as excluding the evidence of definite figures necessary to support the plaintiff's contention.
The hearing terminated on the same day, December 20, 1929, without any offer of proof as to the necessary facts and figures. Nearly nine months thereafter the taxpayer, having secured new counsel, a conference was had with the commissioner in charge of the matter at which the contention was again urged without any proof of the facts and finally on January 13, 1931, more than a year after the hearing, a second conference took place, also without any proof of the facts. Prior to this second conference, the taxpayer's new counsel had sent to the commissioner a brief and certain unverified schedules purporting to show the figures sustaining the taxpayer's contention for the calendar years 1927 and 1928. Aside from the fact that the necessary figures for the calendar year 1926 were not shown, these schedules were merely illustrative of the taxpayer's argument and in no sense evidentiary.
At the hearing upon the application for revision the taxpayer had the burden of proving not only that error existed in the original assessment, but also the amount of the error. The New York Court of Appeals has described this burden of a taxpayer making an application for revision under article 9-A of the Tax Law in People ex rel. Kohlman Co. v. Law, 239 N.Y. 346, 146 N.E. 622, 624, as follows: "If upon this record the commission was unable, for lack of data essential to an intelligent revision, to resettle the account for taxes, it did not err in confirming the account and dismissing the application. If it did not err in confirming the account, the Appellate Division had no choice, save to approve the confirmation. Either there was error in the disposition by the taxing officers of the application for revision, or there was not. If there was error, the amount of the account as it should be resettled must appear from the record, unless, indeed, we take the view that the relator sustains its burden by showing that something was improperly included, without showing how much. If there was no error, the statute does not vest the court with the power to approve, and at the same time to reverse. There must be some finality in the determination of the revenues of the state. If taxpayers who have failed to take advantage of a first chance are to be given the benefit of a second, it is from the Legislature rather than from the courts that the privilege must come."
Upon all the evidence offered to the commission the latter could not have determined the taxes in accordance with the method now claimed by the plaintiff. The plaintiff urges in its brief that Gorham Manufacturing Co. v. Tax Commission, supra, in requiring the taxpayer to make an application for revision before bringing a suit in equity went no further than to require that the administrative tribunal be given "the opportunity to avoid the error complained of." Even if this were so, the plaintiff did not comply with the rule by furnishing competent proof which might enable the commission to determine whether the plaintiff's contention had any merit or not.
Accordingly, the motion for a preliminary injunction is denied, and the motion to dismiss the bill of complaint is granted.