Lowden v. State Corporation Commission , 42 N.M. 254 ( 1938 )

I concur in the result reached by Mr. Justice BRICE, whose opinion will be hereinafter referred to as the main opinion. However, I prefer to rest my conclusion that the trustees are liable upon the fact that they are trustees of a public utility corporation, a railroad company, and, in carrying on the intrastate business of the corporation in New Mexico, necessarily exercise the corporate franchise for the privilege of doing which the tax in question is imposed.

A true distinction, recognized in the decisions, exists between the status of the receiver of the ordinary private business or mercantile corporation and the receiver of a public utility corporation. The former conducts a business not affected with a public interest. As to him, it very well may be said that he requires no grant of a privilege from the state to conduct a business upon which any person or corporation may embark without a franchise. But this is not true of the public utility corporation. Certain powers exercised by it must come from the state. They are the subject of legislative delegation only. When such a corporation is in the hands of a receiver or trustee, with or without title, who conducts the ordinary business of the corporation as a going concern, the receiver necessarily draws upon the corporate franchise for the exercise of those powers which the court appointing him is powerless to bestow.

In an article appearing in 30 Mich.Law Review (part 2) 1094, entitled, "Liability for Corporate Franchise Taxes Accruing After Appointment," the author states:

"Another group of cases in which the general principle of receiver's liability for franchise taxes is laid down is one involving the public utility receivership. A distinction has been drawn here by some cases which, on the other hand, has been repudiated by other courts. Those who contend that the receiver of the ordinary mercantile corporation does not exercise the corporate franchise but is acting solely under the powers of the court are often willing to concede that a different situation exists with regard to the public utility. The utility possesses certain powers which can be wielded under sanction of the sovereign. Such powers cannot be conferred upon a receiver by a court; they are the subject of legislative delegation. Consequently, the receiver who operates a railroad or power company is acting, not only under the aegis of the court, but is employing the corporate franchise. The public utility cases seem capable of differentiation on this basis."

See, also, a subsequent article by the same author in 30 Mich.Law Review (part 2) 1346, following decision in the case of Michigan v. Michigan Trust Co., 286 U.S. 334, 52 S. Ct. 512,76 L. Ed. 1136.

The distinction mentioned was recognized by the Circuit Court of Appeals for the Sixth circuit in the case just cited when it was before that court. See Michigan Trust Co. v. People of State of Michigan, 52 F.2d 842, 843. While the decision of the Circuit Court of Appeals was reversed by the United States Supreme Court, in the case cited supra, the reversal was upon grounds not affecting the soundness of its observations upon this distinction. The Circuit Court of Appeals, citing authority, said:

"The suggested distinction is well enough in the case of a public utility. `No private person can establish a public highway, or a public ferry, or railroad, or charge tolls for the use of the same, without authority from the legislature, direct or derived.' California v. Pacific R. Co., 127 U.S. 1, 40,8 S. Ct. 1073, 1081, 32 L. Ed. 150. Such a franchise is not included in the simple grant under general laws of the right to be a corporation. It is separate and apart from the franchise `to be.' Thus, when a receiver is appointed for such public utility, and such receiver proceeds to operate the business, in a very accurate sense he is using the franchise `to do' formerly exercised by the corporation. This is quite plainly suggested by some of the decisions involving railroad or other public utility receiverships. Collector of Taxes v. Bay State St. Ry.,234 Mass. 336, 125 N.E. 614; N.Y. Terminal Co. v. Gaus, 204 N.Y. 512, 516,98 N.E. 11; Armstrong, Receiver, v. Emmerson, Sec. of State,300 Ill. 54, 132 N.E. 768, 18 A.L.R. 693; Philadelphia R.R. Co. v. Commonwealth, 104 Pa. 80. It is the proper ground we think, upon which other similar cases should have been decided, although both groups are often rather loosely cited as authority for the proposition that a franchise tax is payable wherever the receiver continues to operate the business, regardless of its nature. Compare Bright v. Arkansas, 249 F. 950 (C.C.A.8); State v. Bradley, 207 Ala. 677, 93 So. 595, 26 A.L.R. 421; Central Trust Co. v. New York, C. N.R. Co., 110 N.Y. 250, 18 N.E. 92, 1 L.R.A. 260."

See, also, In re George Mather's Sons Co., 52 N.J. Eq. 607,30 A. 321; People ex rel. Joline v. Williams, 200 N.Y. 528,94 N.E. 1097; State ex rel. Dawson v. Sessions, 95 Kan. 272, 147 P. 789; and case notes, L.R.A. 1915E, 211, 220; 18 A.L.R. 700.

Apparently, only a few states have corporation franchise tax acts specifying as to liability or nonliability of corporate receivers. As to the meaning of statutes silent on the subject, the author of the article in 30 Mich.Law Rev. (part 2) 1094, says:

"Statutes imposing the franchise tax on corporations have generally failed to include or exempt corporate receivers specifically, raising a perplexing problem as to legislative intent. Logically, if a receiver, in the course of his duties,can be said to be exercising the corporate franchise, he shouldbe liable for the tax imposed upon its exercise. That is the test generally adopted by the courts, but its application has resulted in a wide divergence of views as to whether a receiver exercises the corporate franchise at any time and if so, under what circumstances. It is conceded that, as to all franchise taxes accruing prior to appointment, the assets in the receiver's hands are charged with their payment. * * *" (Italics supplied.)

"Ohio and Arkansas have statutes specifically holding the receiver responsible if he continues the corporate business, although decisions in these states have proceeded to find liability or its absence on general principles, without reference to the particular wording of the statutes."

The true test of liability seems to be whether the receiver in conducting the affairs of the corporation is compelled to draw upon the corporate franchise. If so, he is liable; otherwise not. In the case of a purely private corporation, the receiver may ignore the corporate franchise and operate independently of it. But how he may do so in the case of a public utility corporation possessing certain essential powers which may be delegated by the Legislature alone, I am unable to see. The business of a common carrier is inherently of a public nature. A franchise to conduct it must come from the Legislature. As I view it, the trustees in the case at bar, as to the intrastate business of the corporation, necessarily conduct it by virtue of the corporate franchise, or they are without legislative authority to conduct it at all.

This conclusion satisfies me of the trustees' liability. If, as trustees in bankruptcy, they would possess immunity under this view of their liability, such immunity is lifted by section 124a of title 28 U.S.C.A., Act June 18, 1934, quoted in the main opinion. Construing section 124a as removing any immunity, gives it, in my opinion all the force to which it is entitled. The question of liability to the tax depends solely upon a construction of our own statute.

"The tax, if there was any, could have no origin independent of the provisions of the statute, and any decision upholding or annulling it is one involving inescapably a construction of the statute." Michigan v. Michigan Trust Co., 286 U.S. 334,52 S. Ct. 512, 515, 76 L. Ed. 1136.

I am unable to give to the federal statute, section 124a of title 28 U.S.C.A., Act June 18, 1934, the effect accorded it in the main opinion. If I could not read liability of the trustees to this tax from our own statute, I should be compelled to conclude there was none. For I see in the federal statute no command or direction to the trustees to pay a tax not imposed by the state or local jurisdiction. It merely lifts the bar to enforcement of a tax otherwise applicable to the business (or the conduct thereof) of the individual or corporation for whom the trustees are appointed.

In the instant case, I find applicable a franchise tax for doing the intrastate business of a common carrier. The trustees, in carrying on that business, exercise the corporate franchise. In doing the very thing taxed, they become liable for the tax. The federal statute renders them "subject to" the tax thus imposed by the state. It can do no more because Congress is without power to lay a tax in New Mexico or to declare the conditions under which the taxpayer by his own acts will incur liability therefor.

The case, In re Messenger's Merchants Lunch Rooms, Inc., 7 Cir., 85 F.2d 1002, while mentioning section 124a of title 28 U.S.C.A., Act of June 18, 1934, makes no attempt to construe the same for the simple reason that the court was not called upon to do so. Liability after June 18, 1934, for the Illinois privilege tax involved was accepted below by the trustees as appears from copies of the transcript and briefs in the Messenger Case furnished us on rehearing by the appellees here. The state appealed, protesting disallowance of the tax for a certain period antedating June 18, 1934. The trustees in bankruptcy who alone might have objected to allowance of the tax after June 18, 1934, effective date of said section 124a, took no cross-appeal. In fact, the allowance of the tax after June 18, 1934, seems to have been acquiesced in by the trustees throughout the proceeding. Hence, the court was not called upon to determine a matter not presented to it. The carrying forward into the decree of something not objected to by the trustees reflects no view of the court upon the effect of the statute.

Whether the analogy between proceedings under sections 77 and 77B of the Bankruptcy Act, as amended, 11 U.S.C.A. §§ 205, 207, and equity receiverships is strong enough to support liability of the trustees to the tax is debatable. I express no opinion. In equity receiverships, title remains in the corporation and liability of the receiver seems to be predicated on the theory of agency. In the case at bar title is divested out of the corporation and vested in the trustees. Agency is unessential to my theory of liability to the tax for at bottom it is not so much a tax on a particular kind of person, natural or artificial, as it is a tax upon either or both for the doing of the thing taxed, viz., exercising the corporate franchise.

In order to confine application of this tax to a corporation, we must impute paramountcy in the legislative mind to the type ofperson, whether corporate or natural, doing the thing taxed, rather than to the thing done. When we recognize that it is only the doing of the thing taxed that creates a liability and produces revenue, it is not difficult to answer which was predominant in the legislative mind, viz., the type of person exercising the corporate franchise or its exercise.

We ask ourselves the question: Is it a tax on corporations? This calls for a yes and no answer. Yes, when they do the thing taxed; i.e., enjoy the privilege taxed. No, when they do not. They are taxed only provisionally. So, it is not a tax on corporations as such. Neither is it a tax on trustees. Nevertheless, when they supersede the corporation in an exercise of the corporate franchise, they incur the tax in spite of the fact they are not a corporation, just as the corporation escapes the tax by refraining from doing the thing taxed, even though it is a corporation.

It is contended by appellees that the failure of the framers of the act specifically to relate it to trustees and receivers is decisive of a legislative intent to exclude them. They are able to draw high authority to their support. United States v. Whitridge, 231 U.S. 144, 34 S. Ct. 24, 58 L. Ed. 159; Reinecke, Collector, v. Gardner, 277 U.S. 239, 48 S. Ct. 472, 72 L. Ed. 866. However, in the latter case the court was dealing with an income tax rather than a tax levied upon the exercise of a privilege "to do." But when the true nature of the tax is perceived as one levied upon the exercise of a corporate franchise, rather than solely one upon the corporate exercise of a corporate franchise, the mere omission of trustees or receivers in name is not decisive of intent.

Indeed, this omission is quite understandable if we take a practical view of the matter. In laying the tax upon an exercise of the corporate franchise, it was perfectly natural that the Legislature should think of its exercise by the corporation itself. Almost invariably, it is so exercised. Fundamentally, however, being a tax upon the exercise of a corporate franchise, are we justified in declaring it the legislative intent that one enjoying the privilege of its exercise should go untaxed in the rare instances when, as in the case at bar, it is exercised by another than the corporation itself? I do not think so. Those found doing the thing taxed must pay the tax. Such, in my opinion, was the intention of the Legislature. It affords no proof that a given application of a tax measure is beyond legislative intent because perchance unforeseen, if intent gleaned from the act as a whole fairly points to its inclusion.

Referring, undoubtedly, to the Whitridge Case, supra, mentioned later in his note, the author of the annotation in 18 A.L.R. 700, said:

"The United States Supreme Court, while stating that the statute involved did not impose a tax upon corporate franchises as such, takes the view that a corporation carried on by receivers is not itself operating anything, while the courts of New York and of several other jurisdictions, in effect, consider that the operation by the receiver is a use of the franchise."

It will thus be seen that I disagree with the main opinion in its conclusion that this is a tax on the right to do business whether any business is transacted or not. In my view, the tax is essentially on the enjoyment of the privilege, the exercise of the corporate franchise, rather than upon the mere privilege itself. The correctness of this view is demonstrated by an application of the formula for measuring the tax recognized in Southern Pacific Co. v. State Corporation Commission, 41 N.M. 556, 72 P.2d 15. That formula presupposes the doing of business. In this connection, I understand appellees' position to be that the corporation is not liable because it has done no business and the trustees are exempt because not within the purview of the act. I agree with the first but not the second contention.

It is suggested that under its constitutional power to establish uniform laws on the subject of bankruptcy throughout the United States, Congress has supervening authority over the states; that regardless of state authority otherwise existing to require a legislative grant as a condition to conducting within the state the business of a common carrier or other public utility, here is one instance where it may not do so because Congress is moving under its bankruptcy powers.

There are two answers to the suggestion, either of which is sufficient. If the supremacy of the Congress be conceded; if it could, through the federal bankruptcy courts, clothe the trustees with power to carry on in New Mexico the public business of a common carrier in disregard of the state's requirement of a franchise tax for the privilege of so doing, nevertheless, by section 124a of title 28, U.S.C.A., supra, it has waived in favor of the state the full exercise of such power in the instant matter. We are here concerned not with what Congress could do but with what it has done.

The second answer is that the Congress has no such power as that asserted for it. It may not, under the guise of enacting uniform bankruptcy laws, destroy or weaken the principle of dual sovereignty between the states and the Union, inhering in the Constitution. That such supremacy in Congress does not exist is recognized, in effect, by a recent decision of our highest court. Ashton v. Cameron County Water Dist., 298 U.S. 513, 56 S. Ct. 892,80 L. Ed. 1309. Proceeding under its constitutional power to establish uniform bankruptcy laws, the Congress enacted a statute permitting local governmental units to become voluntary bankrupts. The statute was held to be a violation of state sovereignty, the court's conclusion being epitomized in the syllabus as follows:

"The sovereignty of the state essential to its proper functioning under the Federal Constitution cannot be surrendered; it cannot be taken away by any form of legislation."

State sovereignty is taken away by section 77 of the Bankruptcy Act if such act operates to prevent or restrain the states in the exercise of their police power in regulating public utility corporations. It can have no such effect. Cf. Barbier v. Connolly, 113 U.S. 27, 5 S. Ct. 357, 28 L. Ed. 923; In re Kemmler,136 U.S. 436, 10 S. Ct. 930, 34 L. Ed. 519; Metcalf Eddy v. Mitchell, 269 U.S. 514, 46 S. Ct. 172, 70 L. Ed. 384; Hopkins Federal Savings Loan Ass'n v. Cleary, 296 U.S. 315,56 S. Ct. 235, 80 L. Ed. 251, 100 A.L.R. 1403.

Hence, the right of these trustees (appellees here) to do an intrastate business in New Mexico flows from the corporate franchise of the Chicago, Rock Island Pacific Company or it does not exist. It is not derived from their status as trustees in bankruptcy. The court appointing them was powerless to confer it. The right to conduct the business of a common carrier must come from the Legislature "direct or derived." California v. Central Pacific R. Co., 127 U.S. 1, 8 S. Ct. 1073, 32 L. Ed. 150. The receiver of a corporation, not itself possessed of the right of eminent domain, certainly could not be invested with such a power by the court appointing him. And if a receiver of a corporation possessing the power exercised it, in a very literal sense he would do so by virtue of the corporate franchise. In no less sense do these trustees, by carrying on the intrastate business of a common carrier, do so by virtue of the corporate franchise of the Chicago Rock Island Pacific Company. They thus become liable to the tax.

For the reasons given, I concur in the result announced by Mr. Justice BRICE.

ZINN, J., concurs.