ARti.] WISEMAN V. INTERSTATE PUBLIC SERVICE CO, 255 • WISEMAN V. INTERSTATE PUBLIC SERVICE COMPANY. 4:3878
Opinion delivered July 8, 1935. 1. CONSTITUTIONAL . LAW—DISCRIMINATORY ' . TAX.—The Income Tax Act of 1929; imposing a 2 per cent. tax on- net incomes of domestic corporations, is: not discriminatory in imposing a tax on income derived by defendant, a domestic corporation, from stocks owned by it in other corporations , engaged in business in other States, though a' later act exempts from the income'tax domestic corporations doing business entirely' 'outside the' State, since defendant • is not. engaged in business outside the State. TAXATION—CORPORATE INCOME . TAX.—Under the Income Tax Act of 1829, a domestic corporation operating a water and light plant within the State and receiving income from stock owned by it in corporations operated in another State, held liabfe for the tax on both sources of income. 3. • TAxATION :--INcomE. TAX—PENALTY.—Where a domestic corpora-, tion, acting under advice of counsel and in good faith, failed to file a return of income derived by it from stock owned in corn-• panies operating outside • the State, without concealing income so ,derived, the penalty for delinquency should not be imposed. . -Appeal from Pulaski Chancery 'Court ; Frank H. Dodge, Chancellor ; reversed. Carl . E. Bailey, Attorney General, and Lee Miles, for appellant. House, Moses & Holines and Eugene' R. Warren, for appellee. ' MCHANEY, J. Appellant brought this action against appellee, an Arkansas corporation, to' recover income taxes, penalties and interest for the year 1931, alleging that it had failed 'and refused to ffle a return . and pay the
256 WISEMAN V. INTERSTATE PUBLIC SERVILE CO. [191 tax, although it had received $180,000 net incothe from dividends on stock owned by it in Texas utility companies, and from a water and light plant owned and operated by it in Foreman, Arkansas, the income from the latter being alleged to be approximately $1,400.- The action was instituted under the authority of " The Income Tax Act of 1929," same being act 118 of the Acts of 1929. Appellee denied appellant 's right to recover income tax on its earnings, or dividends from stock owned by it in Texas corporations. It admitted its liability for taxes on income from its water and light plant at Foreman, for .which it filed a return in due time and offered to•pay, but same was refused. It alleged that of a total net income from all sources of $169,693.36, all of it except approximately $1,400, consisted of dividends on stock in Texas utilities owned by it which is not taxable income in Arkansas ; that, in so far as said act 118 of 1929 attempts to tax it upon its income from such source, it is unconstitutional and void. The case was submitted to the court upon an agreed statement of facts as follows : "1. That the plaintiff Is the duly appointed, qualified and acting Commissioner of Revenues for the State of Arkansas. That it is his duty to administer the Income Tax Act of 1929, or act 118 of the Acts of the General Assembly of 1929, approved March 9, 1929. "2. Defendant is a corporation organized under the laws of the State of Arkansas, and the articles of incorporation fixed the corporation's office in the Boyle Building, in the city of Little Hoek, Arkansas, and at such other places as might be named by the board of directors. Its principal business offices are at Madison, Wisconsin, and Bay City, Texas. The company transacts no business in Arkansas except the operation of a light 'and water plant at Foreman, Arkansas. The Arkansas representative named in the articles of incorporation was Carey W. Martin, of Little Rock, Arkansas, and tbe present Arkansas representative designated by the corporation is W. H. Holmes, of Little Rock, Arkansas. "3. The Interstate Public Service Company owns stock in a number of utility concerns in Texas. It also
ARK..] WISEMAN V; INTERSTATE PUBLIC SERVICE Co. 257 owns a water 'and light 'plant at Foreman, Arkansas, which is the only. property it owns or operates-or in which it is interested within the. State of Arkansas._ All of the buSiness of the company is done through its office. in' Bay , City,. Texas, except that . a local representative. loOks 'after the business of the light, and water 'plant •at, Foreman, Arkansas; 'and forWards nil receipts to Bay City; TeXas. All the -bonks and Acconnts and, other financial trAnsactiOns are now performed in Bay CrtY; Texas, or Madison, Wisconsin. "4.. The total income frOm all of the prOperties of this company for the year 1931 was $197;975.35,' atid of this amount $176,000.. consisted of dividends .:received from•stock held by it in Texas utilities. • These dividends, were paid to this corporation at Bay City, Texas, •and Madison, Wisconsin. None' of said dividends4nd income came through •Arkansas:. The , earnings of the Foreman, Arkansas . , plant for the year 1931 amounted to $2,995.02. The net income for •the -defendant company for the year. 1931, • after deducting. exemptions, including all of .its holdings, was $169,693.21.. The net income for the 'Fore.- man plant in 1931 was $1,313.36. • "5: Defendant •lias' made its tax returns .: for the year involved, and has offered to pay income tax oh.its• net earnings for its light and water plant at Foreman, Arkansas, and has refused to pay income tax On- any other of. its revenues.. '6. That; in the filing: nf its franchise . tax report, for 1931, the defendant listed -its Foreman, ArkanSas, plant at a valuation of $22,227.29; and the balanee holding's 'at a. valuation. of $422,021.60. "7.' That out of the total of net taXable incoMe of $169,693.21, all of it was earned' on stobk held 'in utilities, and utilitieS • owned • outside . of . the State - of Arkansas, except the net 'taxable' income arising froth the Foreman,. Arkansas, plant, amounting to . - - 'Froth the comPlaint, the answOr. and the 'stip-Lila:lion the 'Court found in favor Of appellant for . $26.27, the tak on the net . inconan of . .-the' Foi-ethan' piOperty, Withont penalty, 'and. entered a decree liccordingly. 'The case is - here nn• appeal. •
258 WISEMAN V. INTERSTATE PUBLIC SERVICE CO. [191 "The Income Tax Act of 1929" provides in § 3, subsection (b) that : "On Corporations.—Every corporation organized under the laws of this State shall pay annually an income tax with respect to carrying on or doing business equivalent to two (2%) per cent. of the. entire net income of such corporation a-s defined herein, yeceived by such corporation during the income year ; and every foreign corporation doing business within the jurisdictioh of this State shall pay annually an income tax equivalent to two (2%) per cent. of a proportion of its entire net income to be determined as hereinafter provided in this act." Section 8 defines "Gross Income" as follows : " The words 'gross income' include gUins, profits and income derived from salaries, wages or compensation for personal service, of whatever kind and in whatever form paid, or from profeSsions, vocations, trades, business, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property ; also from interest, rent, royal. ties, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from . any source whatever. The amount of all such items shall be included in the gross income of the taxable year in which received by the taxpayer ; provided, property sold upon what is known as the installment plan when the initial payment is twenty-five per centum or less, the income may be included for taxation in that portion of any installment payment representing gain or profit in the year in which payment is received, unless under the methods of accounting permitted under this act any such amounts are to be properly accounted for as of a different period." Section 13 sets out the deductions allowable, and the difference constitutes net income on which a tax of 2 per cent. is payable. Section 20 requires corporations subject to taxation under the act to make. a return under oath stating specifically the items of its gross income and the deductions and credits allowed by the act. . Under these provisions, appellee, a. domestic corporation, was required to report all its income annually from
ARK.] WISEMAN V. INTERSTATE PUBLIC SERVICE C . 259 all sources, whether , earned from property owned and operated in this State, or whether from. dividends on stock owned by it in corporations Whose properties are outside this State. .Section 8 of said act so provides in defining " . Gross Income." One clause specifically : says : AlsO from interest, rent, royalties, dividends, securitieS, or the transaction of• any buSiness carried on for gain or profit, : or gains or profits and income derived from any source whatever." This applies to individuals and corporations: Of course the tax iS based on the net income; which is determined.by taking from the gross income, the allowable deductions 'and credits. "Under the: agreed statement of facts appellee "owns StOck 'hi a number of : utility cOncerns in Texas. It also owns a water and light plant at Foreman, Arkansas;" which it operates : from its Bay- City, Texas, office. It iS simPly a holding company for the stock owned by it in the Texas corporations. We do not find from the stipulation that it does any business in Texas, except to receive its dividends on the stock owned by it, keep its books of account there, and operate its Foreman, Arkansas, plant from its Texas office.. It is not stipulated that it owns or operates any of the corporations hi which it owns stock in Texas, but that it simply receives its dividends, therefrom, and keeps its books in Texas. It is further stipulated that $176,000 . of itS income out of, a' total gross income from all source8 of $197,975.35, is from dividends on its corporate holdings: It had gross income from Foreman of $2,995.02. It is not shown from what sourco the difference in gross income came. 'We therefore con: chide that appellant is not carrying on any business outside'. tbe State' of Arkansas for gain or profit, except it operates the Foreman, Arkansas, plant from its Texas office. • This brings' us to a. diScussion of appellee's contention that "The Incorae Tax •Act of 1929" is unconstitutional, in so far as it attempts to :tax its: income from sources outside this State. This .contention is based on the fact that act 220 of the Acts of 1931, page 695, exempts corporations organized under .the laws of this State to do business outside this : State, but • no intra-
260 WISEMAN V. INTERSTATE PUBLIC SERVICE COI [191 state business, from the payment of -all income and intangible property taxes on the filing of an:annual report and -the payment of an annual fee of $5. Said . act was approved March 26, .1931, -but did not beconie effective until' 90 days -later, because of lack of an emerkency clause. It is said 'that this' is. an unlawful diserimina-tion against- appellee and other . domestic corporations having- taxable income, from sonrces- both. •within and without the State; and the case OfT. S. Rogsfer Guano Co. v. Commonwealth of Virginia, 253 U. S. 412, 64L. ed. 989, 40 Sup. Ct. Rep. 560, is Cited to' support its Contention. There the Royster Company owned and operated a plant in Virginia. and several plants other. States, and it was sought to collect an- income tax from it on income derived from all sources, as here, under . its act of 1916. Another act- of Virginia of-1916 exempted domestic corporations doing no business within the,-State.'from • the income . tax: It was . held by. the .Supreme Court of "the United States, that two acts must be constrned.together as parts of one and the same law, and that, while the equal protection of the laws clause . of , the :Constitution does not prevent.the States from resorting to . classification for legislative- purposes, such classification must be reasonable " and not, arbitrary; and, must rest .upon some ground of difference having a fair .and substantial relation to the object of the legislation, so that all-persons similarly.situatedshall.be treated alike. And the State!s right to collect the tax-' on income* outside .the, State was denied, the Supreme Court of Virginia, being reversed, on the ground -that there was an arbitrary discrimination against the .Royster . Company amounting to a denial to it of the equal protection of the laws .within the meanhig of the Fourteenth Amendment.' We, of course, assent to this doctrine, but are of the opinion that appellee is in no situation to invoke it • First, because- it is . engaged in no occupation for gain or profit outside of Arkansas'; and, second, the discriminatory act, if it be. disCriminatory, No. 220 of -the Acts' of 1931, did not bedome effectiVe until more than one-half the taxable year had elapsed, the year for which the tax is sought to- be collected, and it is not* shown that there are any
ARK.] WISEMAN V. INTERSTATE PUBLIC SERVICE Co. 261 corporations organized under the laws of this State to do business wholly outside this State. Moreover, it may be that act 220 of 1931 is unconstitutional and may be so held in a proper case, a questiOn . we do not now decide, although appellant earnestly insists, that it is. The courts generally hold-that 'a State'has the power to tax a citizen or a domestic corporation . on income either within or Without the State. . .§'2323, p. 1575 ; Lawrence v. State .Tax Com. of Miss., 162 Miss 338, 137 So: 503;. affirmed by Supreme C.Ourt of United States in 286 U. S. 287, 76 L. ed. 1102, 87 A. L. R. 374, 52 Snpreme Court Rep. 556 ; Franklin v..Carter,. 51 Fed.. (2d) 3 , 45. We therefore conelude that apPellee shaild iiave filed a return for . the taxable year of 1931 ernbracing all itS income froth all sources. It is 'stiPulated that its net income for that year is the stun of $169,693.21. Two per cent. of this amount is $3393.86: ApPellant insis, hoWever, that this amount should be deubled, bY ivky of a penalty, and also an 'additional penalty Of . 1 per cent, per month for a time beginning July 15,1932, or a total'taX and penalty of :$9,027.66 due. We' cannot* agree with appellant in this contention. No retUrn covering the' diVidends from TeXas companies Was made because apPellee was advised by 'learned counsel that it waS not required to 'do so. , It:defended this actiOn in gciod faith. The act authorizes the ConimisSioner to make an aSsessment,_ under certain conditions set 'out in SubsectiOn 10 of § 30, at • not to exceed double the amount of tax found to be dire, which waS not done. It made what it conceived to be' ' a correct return, and did IDEA fraudulently conceal its other income.. Under these Conditions we think it wOuld be ineqUitable and unjtiSt to impose the extreme . penaltie s. •Pi-ovided in the act, for we conceive them to be inapplicable to the *facts- and circumstances of this case. The decree will be reversed,' and ' judgment will -be entered here against appellee for 'the amciunt of , the tax with interest at 6 per cent. per annum from July 15, 1932. Costs will 'also .be adjudged-against . it. It is so ordered.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.