General Motors Corporation v. District of Columbia

PETITIONER:General Motors Corporation
RESPONDENT:District of Columbia
LOCATION:United States Post Office and Courthouse

DOCKET NO.: 352
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the District of Columbia Circuit

CITATION: 380 US 553 (1965)
ARGUED: Mar 10, 1965
DECIDED: Apr 27, 1965

Facts of the case

Question

Audio Transcription for Oral Argument – March 10, 1965 in General Motors Corporation v. District of Columbia

Earl Warren:

Number 352, General Motors Corporation, Petitioner, versus District of Columbia.

Mr. Barnes, you may proceed with your argument.

Donald K. Barnes:

Mr. Chief Justice and may it please the Court.

My associates are Thomas J. Hughes of Michigan and William T. Plumb of the District of Columbia.

The problem involved in this case is the geographical attribution or apportionment of net income for tax purposes.

The District of Columbia Income and Franchise Tax Act imposes on corporations carrying on business within and without the districts a franchise tax measures by net income daily attributable to that portion of the business which is carried on within the District and then the Act directs the District Commissioners to prescribe by regulation formulas for properly determining such portion.

And the questions which that Act and the regulations under it raise with respect to the assessments made against the petitioner for 1957 and 1958 are whether that statute authorizes the Commissioners to use for this apportionment purpose, a single factor of sales formula that is attributing to the District that portion of petitioner’s entire business net income from all sources which the gross receipts received from sales to customers within the District thereto total gross receipts from sales throughout the world.

And do you argue this (Inaudible)

Donald K. Barnes:

Mr. Justice Harlan, I can’t escape it.

We have constitutional questions but I have to go through the — the statutory question first.

We find — we believe that the statute was violated by the regulations and that the — even if that were not so, then the regulations produced an unconstitutional result.

Arthur J. Goldberg:

You don’t quarrel and do you agree with the statute itself?

Donald K. Barnes:

Not at all.

The statute is imminently reasonable except for —

Arthur J. Goldberg:

Fairly attributable.

Donald K. Barnes:

Fairly attributable but it probably should have itself determined what was fairly attributable instead of leaving it to regulations.

That’s the only quarrel of the statute and that’s not a constitutional point.

You’re not arguing that on the point of allegation?

Donald K. Barnes:

No sir.

If so, that is if the statute does permit that then the next question is whether such formula is here applied as unconstitutional and that’s the two reasons, one is for attributing to the District net income out of all reasonable proportion to income derived from District activities.

As a matter of fact, the figure shows there’s 11 times as much quite beyond the limits of due process and furthermore taxing values and reaching activities of someone which are not within the territorial jurisdiction of the District.

And second, discriminating against interstate commerce by double taxation, by the result in double taxation and by imposing it by bargains which business entirely confines the District did not have to bear.

The facts in the record are voluminously set forth in great detail but the essential ones to the issues which we raise here are these but the petitioner’s business is primarily the manufacture of motor vehicles, 95% of the income which was attributed to the District by which these assessments were based is derived from the manufacturer in the sale of vehicles and parts which are manufactured wholly outside of the District and in general sold outside the District to customers located in the district, so I shall not pay attention to the evidence weighing the other 5% for the purpose of this argument.

The pertinent products are Cadillac automobiles, GMC trucks and GMC coaches all of which are manufactured entirely in Michigan, Chevrolet automobiles and trucks which are assembled in Maryland and Buick automobiles and Pontiac automobiles which are assembled in Delaware.

These were all sold through offices outside the District insofar as we’re here concerned to customers within the District generally independent retail dealers.

They set all the manufacturing and most of the selling activity occurred outside the District but they were related in District activities.

And they were permins — principally sales promotion work by traveling representatives having both their offices and their residences outside the District.

In 1957, one of the two years here, the payroll for the time spent by these people in the District was $65,000 for which the District attributes income for $5,166,000, its net income and the tax of $258,000.

The figures are the same order for the next year.

There are offices in the District which are not directly related to the sales of these automobiles and their presence in the District had no bearing on the assessments.

Donald K. Barnes:

It wasn’t considered in any way by the finance officer in making his computations.

William J. Brennan, Jr.:

But is this a straight-out Fifth Amendment due process question?

Donald K. Barnes:

Yes sir.

William J. Brennan, Jr.:

That involved any statutory — underlying statutory construction?

Donald K. Barnes:

The statute as I told Mr. Justice Harlan —

William J. Brennan, Jr.:

I know — I know there is a statute —

Donald K. Barnes:

Yes, I can’t escape the statutory question because it leads up to the constitutional questions.

William J. Brennan, Jr.:

But they’re all one of the — one of the — one of the same thing.

Donald K. Barnes:

The same thing which causes the assessments to violate the Constitution is in the first instance, a violation of the statute.

William J. Brennan, Jr.:

Yes.

Donald K. Barnes:

As I said, this is unrelated offices in the District had no bearing at all on the assessments made by the finance officer but they were considered by the tax court in its computations and their activities are reflected in those.

Now, the petitioner paid the tax under protest and sued for refund in the Tax Court and then the Tax Court expert economic testimony was brought in to show the geographical sources of income that is whether the activities occur and the property exist which are in the income and expert economy testimony to show how to measure the contribution of each of those productive sources on the interstate, on the double taxation question returns were introduced which showed the amounts and the bases for taxes paid to the states where the cars were manufactured.

Now, the Tax Court based on all of that found those facts and I’m reading from the appendix to our brief, page 3A where the Tax Court’s opinion is reproduced.

The segment of the petitioner’s business which was conducted both within and without the District of Columbia consisted of a manufacture of a certain number of automobiles and kindred products without the District and the sale thereof to customers within the District.

That net income from this segment of petitioner’s business was earned by a series of transactions beginning with the manufacturer products in several states and ending with sale to the customers in the District.

While the net income was not realized until sale, it was earned in part by manufacturer of the product sold including in addition to actual manufacture, procurement of material, financing, use of property and administration.

In continuing, the method used by the assessing authority of the District attributed to the District 100% of the net income derived by the petitioner from that segment of his business which consisted the manufacturer without and the sale of products within the District.

The percentage as determined was out of all reasonable proportion to the trade or business carried on or engaged in by a petitioner with the — within the District.

And one more, finding three covers the amounts of tax paid to Maryland, Delaware and Michigan and then continues apportionment of net income of petitioner derived from the segment of the petitioner’s business consisting of the manufacture of products without and sale within the District of Columbia was taxed by the above mentioned states pursuant to apportionment formulas with factors or property, payroll and sales as provided by their laws.

The Tax Court then reach this conclusion of law which was that the assessments were not authorized by the statute because it’s not complying with the requirement that — of the statute.

The income from the business conducted within and without the District be deemed to be from sources within and without the District and apportioned accordingly.

Having thus found that the single factor sales formula was invalid and that being the only one supplied in the regulations, the Tax Court then as it is permitted to do being an administrative party applied a — its own formula which was the familiar three-factor property — formula of property, payroll and sales as used in so many states.

The effect was to reduce the tax for 1957 from $258,000 to a $101,000 and — or refund was ordered to the difference in the figures $258,000 with the same order.

The Tax Court did not consider the constitutional questions.

A division of the Court of Appeals, the District of Columbia Circuit affirmed two to one on the opinion below.

In rehearing en banc, the Court of Appeals reversed five to four so we have an even split among the judges who so far heard the case, five upholding the assessments and five declaring them and the regulations invalid.

Now, the majority of the Court of Appeals said that since the assessments did not include income from business conducted entirely outside the District having no connection with it, the income of the petitioner was apportioned which was all that the statute require.

And though they suggest that the Tax Court’s formula might be better, they said that it wouldn’t be forced on the Commission.

The Court of Appeals said that the finding that a 100% of the income from business done within and without the District had been attributed to the District was irrelevant.

And hence the finding that such attribution was out of all reasonable proportion had no factual basis and that double taxation has not been proved.

Donald K. Barnes:

Now, the central error in the Court of Appeals’ reasoning here is holding irrelevant the fact that the application of these gross receipts fraction miss — segregates the amount of income which is derived from the only business with which the District has any connection that is that part of the total business which is conducted partly within and partly without the District and having recognized that as the amount of income to that sec — of the segment, taxing a 100% of it.

They say that the Court of Appeals held that was irrelevant not that it didn’t happen but it was irrelevant.

That fact though is the fact or those facts which establish that the formula as used by the District and the assessments made by the District did not comply with the statute requiring income to be deemed to be from sources within and without and apportioned accordingly.

And those facts are the ones which established that there was taxation of a much greater share of the petitioner’s income and arose within the District.

And also those facts are the ones which established double taxation and that the fault of double taxation was of the District and not the other states.

Identifying the segment income does not apportion anything.

The experts pointed this out without dissent.

They said that the district’s formula finds 100% of the income from all business culminating in sales to District customers.

The formula deems all such income to be from District sources and does not as required by statute, deem it to be from sources within and without.

Now, that this kind of a calculation reaches a 100% of such income as obvious and it’s well illustrated in the Tax Court’s opinion by the hypothetical case of a manufacturer — manufacturing entirely of Maryland and selling entirely to customers in the district, obviously would be taxed under this formula on a 100% of it’s entire income from all the world and that is not apportionment.

It makes no difference that in the case of this petitioner, there was a great deal of business consisting of the manufacture of automobiles in Michigan and selling them to the customers in California is completely beyond the concern, that the District is concerned only with the cars which are manufactured somewhere Maryland, Delaware, Michigan and sold to customers within the District.

The fact that it may not tax those California transactions, there’s no authority for it to tax a 100% of apportions, which is related in a small way to the District of Columbia.

Paraphrasing Underwood Typewriter Company against Chamberlain which was the first case in which this Court considered an income tax apportionment formula, the Tax Court found that the income here involved was earned by a series of transactions beginning with manufacturing and procurement and management all of which occurred in other states and ending with a sale with the customers in the District.

Alright, the finding was correct, in fact as established by the experts we brought that income has its source in capital and labor and it’s correct in law as established by this Court and often repeated that income is again derived from capital, labor or both combined.

And there, it is the contrast between this case and General Motors Corporation against Washington where we were be talking about a gross receipts tax which was related to activities carried on within the District and had nothing to do with the sources of net income which is the problem here.

There the — it was a question of relating activities to sales.

Here, the question is relating activities to net income.

There are some activities in the district, the Tax Court well measured them but the great majority of the activities were outside the District throughout.

Now, when the income is apportioned on the basis of the employment of capital and labor within and without the district, the amount of such income, this is gross and of net income would be $466,000 in the District for 1957 and $254,000 for 1958 and that’s about one-eleventh of the amount that was assessed.

It has to reach —

Byron R. White:

Mr. Barnes, how would — how would General Motors be fair here if the District had a gross receipts tax like Washington did?

Donald K. Barnes:

They would be tax born of the Washington decision.

Byron R. White:

Was it on — on the gross receipts from wholesales in the district?

Donald K. Barnes:

Yes sir.

Byron R. White:

And why — why does the net income — why does putting a tax in all of the net income received from these sales — why is that unconstitutional and the gross receipts tax wouldn’t be?

Donald K. Barnes:

The gross receipts tax — remember the General Motors Corporation against Washington didn’t change any constitutional principles.

What it did was to extend the definition of activities which are sufficient to the service of measure for that kind of tax.

But the constitutional distinction between our gross receipts tax levied with respect to activities in the taxing jurisdiction and what the measure must be on the one hand and the sources of net income which is all that the net income — which is the governing requirement for net income tax were constitutionally very different things.

In that case, we’re looking for an activity which was sufficient to allow the tax to be imposed and the measure was irrelevant.

Here, we are looking for the sources of the net income, the net income which — and this constitutional as well as statutory, which is fairly attributable to the activities carried on within the District or the statute says the business done or the commercial activity.

Donald K. Barnes:

So that all the cases which I have considered apportionment or have or even indirectly there had been only three or four that are directly considered have recognized that the income — net income now must be apportioned to its sources.

That is the fundamental difference between this type of tax and the gross receipts tax.

Byron R. White:

You don’t see any — you don’t see it — fundamentally, you don’t see any inconsistency at all between your position here and in the Washington case.

Donald K. Barnes:

Any connection between them?

Byron R. White:

Any inconsistency in your position?

Donald K. Barnes:

Oh no, I — I don’t see any inconsistencies —

Byron R. White:

It is because that’s a gross receipts tax?

Donald K. Barnes:

That’s right.

And it’s — it has a — that type of tax has a different constitutional history.

It depends upon different test.

The test there —

Potter Stewart:

But at least here you get your deductions before you get the net income and what happened if you didn’t —

Donald K. Barnes:

That —

Potter Stewart:

That was gross receipt.

Donald K. Barnes:

That just goes to rates, this is 5% and —

Potter Stewart:

What was that in less than 2%?

Donald K. Barnes:

No, it was three-tenths of 1%.

Potter Stewart:

On gross?

Donald K. Barnes:

That’s right.

Arthur J. Goldberg:

Mr. Barnes, there is another distinction between this case and the Washington case outside of the nature of the tax.

Is there not here — there is a double taxation problem involved which supported Washington and you said it was not present, isn’t that correct?

Donald K. Barnes:

That’s correct.

I thought there was one there but I’m sure there’s one here.

Arthur J. Goldberg:

So did I but the Court said otherwise.

Donald K. Barnes:

I’m sure there’s one here.

Now, as I mentioned, the amount of income that was attributed by the District to the District was 11 times or would have been attributed if you measured the activities on the District.

Now, Hans Rees’, a North California case of some time ago, this Court found that four-and-a-half times that is attributing to the State, four-and-a-half times the income which Hans Rees’ showed had a reason there, was out of all reasonable portion to what it should have been and the State was told they couldn’t tax that much.

Now, this case is more than twice as bad as that one.

On the point of double taxation, the Court of Appeals said it hadn’t been proved because we use a hypothetical illustration in our brief.

The dissent in the Court of Appeals said that the evidence overwhelmingly sustained the findings of the Tax Court one in which was that a portion of the same income which was taxed 100% by the District had been properly taxed by Michigan, Maryland, and Delaware.

Donald K. Barnes:

Now, it’s obvious that the double taxation occurred in fact because if the state of manufacture basis their tax on manufacturing activities as Michigan, Maryland and Delaware do, the state and the stay to the situs of the customer attributes all income arising from those activities to the situs of the customer as the District does.

The same income inevitably is being taxed twice and this is not a mere minor overlap that occurs because of the differences of opinion as to exactly how detail should be worked up where but is a fundamental conflict.

The evidence considered by the Tax Court on that point was the statutes of the involved states, the tax returns, receipt showing payment and there is — and the tax return showed also the exact basis on which the tax was computed for each of those states and showed that a portion of the income from every car made in those states and sold to the customers in the District was taxing those states.

Arthur J. Goldberg:

Well, what are two-thirds for?

Donald K. Barnes:

The — each — each of those three states equally weighs the fractions of property payroll and sales within the state but it doesn’t workout to exactly two-thirds in anyone case because the factors within the state vary.

Thus, we might have a higher percentage of property than we do of sales in a given state.

They’re not completely uniform.

So the principle is two-thirds but the actual figures which are shown on those returns before the Tax Court are not two-thirds.

They vary because of that — of that consideration.

Now, the formulas which were used by these other states, property payroll and sales are valid.

And that they’re sound in fact because they attribute at least two-thirds of the income to its source and they’re signing law because it was repeatedly approved by this Court.

Hence, this double taxation is the exclusive form of the formula employed by the — by the District financial officer.

Byron R. White:

What was the — (Inaudible) whether the gross income, the gross receipts tax here like there was in Washington at that rate, what would have been the tax as compared to this tax?

Donald K. Barnes:

I don’t know.

Byron R. White:

Well, I’m sorry.

Is there —

Donald K. Barnes:

The — the basis — the basis were computing that here is in the record but — but I know what it is.

Byron R. White:

You gave me — you gave some figures a while ago as to — what was the — in 1957, what was the gross here?

$5 million — $5,166,000 I think.

Donald K. Barnes:

$5,166,000 is the total net income derived in —

Byron R. White:

What was that?

Donald K. Barnes:

Net income, derived from the sales of — oh, I remember the figure, it was $37 million, it was the total sales.

Byron R. White:

Thank you.

Donald K. Barnes:

And —

William J. Brennan, Jr.:

Yes.

Donald K. Barnes:

I — I have to — I’m not quick enough to multiply that by three-tenths of 1% to find the answer.

Now, the District in its brief and so on points to single factor formula for apportionment purposes which had been permitted to stand in other cases.

They were all formula which tended in some way to measure local activity as an income source and they all work some apportionment.

The single factor destination sales formula we have here does not apportion at all.

Any of those other formula, if applied here would assign almost no income to the District as the tabulation on page 57A of the appendix to our brief shows.

Donald K. Barnes:

What that means is that the single factor formula not that we contend for those that were upheld in those other cases, can be no authority whatever in support of the single factor formula in this case.

And the question impacted the decision, the finance officer some time ago recommended to the Commissions that they adopt the three-factor formula said that it wouldn’t reduce the District income very much because what they lost were mostly picked up from local business and also because they were seized to drive offices, business offices out of the District.

When we come to other jurisdictions however, the impact can be tremendous.

There’s an enormous temptation that the jurisdiction permitted to do so to arrange its tax so as to fall on the foreigner and not on the voting resident.

An attempt to do that would have very serious consequences in upsetting the now well-established generally used division of income which, while it has a variations in detail works always to apportion something to the sources of income of the manufacturer as the place where it goes to the manufacturing.

May I reserve a few minutes?

Earl Warren:

You may.

Mr. Wixon.

Henry E. Wixon:

Mr. Chief Justice, and may it please the Court.

My associates are Mr. Chester Gray, the Corporation Counsel, Mr. Milton D. Korman, the Principal Assistant Corporation Counsel, and Mr. Robert E. McCally, Assistant Corporation Counsel for the District of Columbia.

This case, since it involves a statute enacted by the Congress, necessarily revolves around the propriety of the Commissioner’s implementing regulation.

It’s conceded that the statute is completely valid and the only contention as I understand it is that General Motors as a consequence of the application of the district’s regulation was overtaxed.

I’m unable to perceive any constitutional involvements here certainly insofar as such an involvement might relate to the Commerce Clause.

The Congress is not inhibited by that Clause within the next legislation for the District of Columbia of this type.

And thus it might, if it shows, interfere with commerce in the sense that the state might not so interfere.

Since the Commerce Clause does not seem to be applicable, I would conceive further that if the Commissioner’s regulations comport with the statute then if the statute itself might impair a commerce in the way that a state might not do it, then the Commissioners have not acted improperly or invalidly in adopting a regulation which comports with the statutory requirements.

It has been stated by counsel and if there’s an element of double taxation involved in this case where the element of double taxation has never been proved certainly on this record.

Hugo L. Black:

What did you say?

Henry E. Wixon:

It has not been proved on this record sir.

It has been argued but double taxation would be dependent upon a showing that elements which the District undertook to tax were in fact taxed by another jurisdiction.

Byron R. White:

Well what if — what if that had been — what if the record was clear in that regard?

That wouldn’t change your —

Henry E. Wixon:

No sir.

Byron R. White:

— position at all.

Henry E. Wixon:

It wouldn’t change my position because of this Mr. Justice White.

If the Congress has required such a tax to be imposed in its position as the overseer of the District of Columbia, then the fact that there’s an element of double taxation I would believe would not invalidate the statute on the one hand or the regulation on the other.

Byron R. White:

And on — on either — on due process or any other ground.

Henry E. Wixon:

I should think not sir because the Congress is enacting a taxing statute for the District of Columbia.

Byron R. White:

Well, don’t you just don’t have to get to this position?

I would think that in the example that the counsel gave, the company with a manufacturing plant in Maryland and making all of its sales in the district, you would tax all of them, you would in — you would take all — tax all their net income.

Henry E. Wixon:

If we use this regulation, that is true sir.

I would —

Byron R. White:

And in that case of course, it would be clear that at least some activities outside the District contributed to that income.

So you would be taxing net income derived from activities outside the District.

And you just about have to get to that position I take it and say that well, we do and that there’s nothing unconstitutional about it.

Henry E. Wixon:

Well, I don’t know sir whether the extreme that you mentioned would be supportable or not but if it were not supportable and I would suggest sir that we would be probably required to adopt some other method of determining the amount of income in the case of a corporation to which you refer which would be subject to taxes income derived from District sources.

Byron R. White:

Would that — is that really different from what you’re doing here?

Henry E. Wixon:

Well, I think the Court of Appeals has in its decisions and in its statements on this matter why it clearly indicated that if in the particular circumstances, the district’s regulatory approach is not an adequate approach then another method for determining the amount of incomes of it to be taxed is to be used or devised if you will sir.

Byron R. White:

The question is whether — whether the district’s — what is the — what the — does the statute require this method or does it authorize it?

Is there anything unconstitutional about it?

Henry E. Wixon:

Well —

Byron R. White:

You would say that — you would say that in the example, the single corporation example is that the District could if it wanted to tax 100% of these sales as far as the Constitution is concerned.

Isn’t that your —

Henry E. Wixon:

I would say this sir, in response to your inquiry, unless the statute which calls such a result of this presupposes that the regulation policy statute and therefore is valid of itself unless the statute accomplishing such an action were to be held invalid then the effect to which you allude would not of course be invalid under the constitutional premise.

But I have to assume first that the Congress might achieve such a result constitutionally before I can respond to your question.

Byron R. White:

But really —

Henry E. Wixon:

I don’t know the answer —

Byron R. White:

I will ask you this again.

Do you concede that there’s really any fundamental difference between the example that I gave and what the facts are here?

Certainly — certainly, it would seem that a good many activities outside the District contributed to this net income which you are taxing the District.

Henry E. Wixon:

That sir —

Byron R. White:

You don’t deny that do you?

Henry E. Wixon:

But it depends on how you mean that sir.

Any apportionment formula, none being perfect, is going to in some degree or other affect theoretical income, economic income, however it may be termed, obtained by the taxpayer to activities outside the taxing jurisdiction.

Byron R. White:

You’re taking all the sales the — the — you’re — you’re claiming the credit for the net income from all of these sales within the District.

Henry E. Wixon:

No sir.

Byron R. White:

What are you —

Henry E. Wixon:

Not exactly.

Byron R. White:

— (Voice Overlap) the credit for?

Henry E. Wixon:

Since our tax or our apportionment has been determined upon General Motors’ total net income —

Byron R. White:

Yes.

Henry E. Wixon:

— and I must say that net income exclude or has had excluded from it certain sales to the United States where the statute does not permit us to tax the income from the sale.

It will — that net income was determined on the basis of all gains and losses, no profit or profit and thus, I think it’s somewhat ephemeral to say that we’re taxing 100% of the net income derived from these sales simply because it’s impossible to determine that net income, certainly on this record.

Now, I say first sir that if we did, we’d be doing exactly what the statute requires because we’re required to tax the amount of net income of General Motors which was derived by it from it’s business of — trade of business within the District of Columbia, not part of it but all of it.

I don’t —

Byron R. White:

You are asserting that there’s net income earned in the District of Columbia, aren’t you?

Henry E. Wixon:

Oh yes!

And there’s undoubtedly was.

Byron R. White:

And you’re — and you’re saying it was — it was derived from sales in the District.

Henry E. Wixon:

No sir, not entirely.

Byron R. White:

And where are you saying this derived?

Henry E. Wixon:

We say that it was derived from the totality of the activities of General Motors in the District of Columbia.

We say further that there is northing in this record and the public could be nothing in this record to show definitively exactly how much income was derived by General Motors from its activities.

Not alone on sales but we say that since the trade or business of General Motors basically in the District of Columbia is the merchandising of its products that this is a reasonable method of determining how much of the net income of General Motors was attributable to the District as a consequence of its activities.

Arthur J. Goldberg:

I thought that (Inaudible)

Henry E. Wixon:

I — in response to Mr. Justice White’s question, suggest the possibility, I don’t attempt to answer it unequivocally because I’m not certain of the answer that we would have to devise under such circumstance a different formula and a different approach because carried to its extreme, the number of these apportionment formulas could be demonstrated in some respect in order to be illogical and inapplicable.

An example of that proof, I might suggest sir, could lie in those areas of railroads where formulas based on truck mileage alone without relation to activity as such have caused some problems of putting it a little differently.

And none of these matters being perfect, any one of them may at some point reach an extreme which would require a different formula or different determination or method of determination of net incomes of the tax.

I personally find it impossible to deal with hypothetical extremes because I have no ready answer for hypothetical extreme which may well result in an improper determination of net incomes of the tax.

We don’t have that situation here.

We taxed approximately four-tenths of 1% of a total of General Motor’s net income and I’d like to repeat that that net income did not include sales of personal property to the United States which property was not delivered to the District of Columbia for use here.

So we have fragmented that income.

Did the Tax Court find that (Inaudible)

Henry E. Wixon:

The Tax Court did not find it in precise term sir.

The Tax Court simply said that a portion of the net income unidentified which was taxed by the District of Columbia had in turn been taxed by the States of Michigan, Delaware and Maryland.

I know nothing about the other states because none of them were mentioned and the General Motors does I think in 38 or 39 jurisdictions.

But again sir, I would say that there’s been no determination if there was double taxation in the sense which would require the district’s apportionment formula to be invalidated, a portion, an unidentified portion of General Motors’ net income subjected to tax by other jurisdiction.

Byron R. White:

Well —

Henry E. Wixon:

It’s hardly sufficient to invalidate the District on that.

Byron R. White:

Didn’t the Tax Court find though that part of the income you were taxing was actually earned outside the district?

Henry E. Wixon:

It’s so said, yes sir, by a series of transactions.

Byron R. White:

I understand that — that if you thought the record really sustain that findings that you might have to arrive at another method of taxing General Motors.

Henry E. Wixon:

No, I don’t think I said that sir.

I said —

Byron R. White:

Well, what was — you said it twice now and I still don’t understand it.

Henry E. Wixon:

Well —

Byron R. White:

Your answer to Mr. Justice Goldberg’s question is —

Henry E. Wixon:

I said that if — that it was difficult for me to deal with hypothetical extremes such as the one which has been —

Byron R. White:

What if — if it were clearly shown that you were — that part of the income you were taxing was earned outside the district, didn’t you answered — say to me a while ago that you might well have to find another way of taxing General Motors?

Henry E. Wixon:

I don’t think so, sir.

I said —

Byron R. White:

Well, then you do say that that you perfectly justified under the statute constitutionally, the tax income, the tax in the district, income whether or not it is earned in the District.

Henry E. Wixon:

No, I don’t think I said that sir.

I have to say simply that since these matters are not perfect if we in some manner or other should perchance reach an element of income which was outside the district, I don’t think it would be possible to determine it nor to ascertain it.

Arthur J. Goldberg:

(Inaudible)

Henry E. Wixon:

I find it none forth to know.

The reason I find them none forth is this.

The record insofar as double taxation is concerned or attempt to demonstrate double taxation is concerned, consists of tax returns.

Correct or incorrect, the record does not show and the tabulation of the taxing provisions of the States of Delaware, Michigan and Maryland.

Now, by combining those two elements or those two matters, the statutory provision of a state for the taxation of General Motors’ income with a return filed by General Motors in the State, it is concluded or at least argued that the District necessarily by its method overtaxed or doubly taxed the same income, and I — I can’t concede that that follows.

Arthur J. Goldberg:

What argument (Inaudible)

If we look at the statute to say, (Inaudible)

Suppose that the statute says this, all items (Inaudible)

Then it will include the restricted (Inaudible) of the District of Columbia (Inaudible) that will be an inevitable conclusion (Inaudible)

Henry E. Wixon:

It is if you assume that the tax return is filed and the determinations of tax liability were as the statute so provide it.

You must have that assumption first.

Arthur J. Goldberg:

Well, perhaps will you assume that Tax Court there was wrong?

Henry E. Wixon:

I don’t think so that they were —

Arthur J. Goldberg:

(Inaudible)

Henry E. Wixon:

Mr. Justice Goldberg, the Tax Court was quite clear in stating that it would not receive the returns as evidence of their correctness or their validity or that they properly represented the amount of taxes involved.

Henry E. Wixon:

There was no proof whatsoever concerning the salient features of the returns insofar as tax liability was concerned.

In the Tax Court the records replete with that sir.

Arthur J. Goldberg:

Yes.

What more do you think this is introduced.

Henry E. Wixon:

I would say that the records of the corporation if we go into a strict proof concept, the methods of the determination of the income to be reported, the amounts to be taxed.

If that — if — if double taxation was to be dependent upon the actions of other states, it would seem that proof, with proof, positive proof of the amount of that double taxation was required.

Mr. Justice Goldberg, may I respond to one matter that you mentioned.

You had devised a formula in the double taxation area and as I recall it, it consisted basically of the imposition of a tax upon all items manufactured within the State.

By that method, I would suppose that this particular jurisdiction could almost foreclose the taxation of other income or income itself because the taxing state to which you refer having first taxed, other jurisdictions would presumably be prohibited from taxing because by so doing, it have introduced the element of double taxation.

Arthur J. Goldberg:

I assume firstly like the last stage, it was subject to the description that it must be fairly apportioned.

Henry E. Wixon:

True.

But when you get to double taxation, I think you’re somewhat on a circular track because by proceeding from state to state, you can select those jurisdictions which may validly impose a tax and interdict all the others from imposing a tax.

And certainly, that’s not the intention of these several decisions which the Court has concerned itself with in these areas.

I might say sir again, it suggest that the three-factor formula is the only proper formula to be used here.

Actually, the petitioner says that the only one which makes economic sense and should be applied is a two-factor formula consisting of property on the one hand and payroll or labor on the other.

I’m not an economist.

I have some difficulty in rationalizing the production of income per se simply by the employment of personnel and I have some difficulty in rationalizing the production of income by the happenstance of having profit.

I’m not trying to say that the three-factor formula or two-factor formula would be wrong.

All I’m simply trying to say that it is not so perfect that the District formula is necessarily invalid or so imperfect that it cannot be applied under a situation such as we have here.

This particular case is fairly close to that Ford Motor Company versus the Beauchamp case.

The tax imposed by Texas in that case was measured by gross receipts.

It did not go to net income.

It went to capital stocks, surplus and undivided profits of the corporation.

But that was simply a selection of elements.

Underwood Typewriter, again, a single factor formula based on property happens to have the two kinds of property, tangible, personal or rather personal property and real property.

But apparently, it was not conceived in either of these two cases that the apportionment of income based on a selection of a factor or if you will in the case of Underwood, the two factors of personal property and real property rendered the apportionment invalid to the contrary that the apportionment was held entirely reasonable, has bearing a relationship to the activities of the company within the taxing jurisdiction.

I believe that an analysis of the district’s taxing statute clearly demonstrates that it was the intention of the Congress to tax income derived from sales of personal property in the District of Columbia.

As a matter of fact, after the Act was passed in 1947, the Congress in 1948 went to particular page to prohibit the District of Columbia from taxing corporations or incorporated businesses engaged in making sales of personal property when those corporations or businesses did not maintain within the District of Columbia an office for the transaction of business.

The Congress was also at a particular page to prohibit the District of Columbia from taxing the income derived from sales of personal property to the United States where the property was delivered from places outside, for use outside or for some sources outside.

Now, in that area, it is quite clear that the Congress was dealing with income derived from sales because it said the District shall not tax that income as income from the District of Columbia sources.

Henry E. Wixon:

It wasn’t talking about manufacturing plans or payroll expenses.

It was talking about income derived from sales of personal tangible property.

Thus, the Congress’ concept of what it was doing here was that it was imposing a tax, there are many businesses which would be subject to tax but in this area, involving sales of tangible personal property that it was imposing a tax upon the income derived from such sale as a consequence of the business activities of a corporation or other business within the District of Columbia.

Now, if that concept that I’ve expressed is a correct one and in the district’s regulations which relate to the taxation or the determination of apportioned net income which is subject to tax in the case of sales of personal property is a reasonable extension of the District statute.

I can’t conceive it that it would be otherwise because of the extreme portion which the Congress took in making determinations concerning what the District should tax in the case of sales of personal property and the income derived from such sales.

Certainly here, where General Motors have 37 millions of dollars of gross sales of products of all kinds within the District where the District of Columbia taxed not 37 millions of dollars but a portion and only four-tenths of 1% of the total net income of the corporation, it is difficult, I think, to establish over taxation on the part of the District of Columbia.

The only way that it could possibly to be done would be upon conjecture and speculation.

I may say also that General Motors does more than simply sell products in the District of Columbia.

It has many, many activities within the District of Columbia which are related to its production facilities and to its sales activities, to the generation of business in futuro, where it maintains offices where which it does not maintain, so far as I’m aware, in other jurisdictions.

Hugo L. Black:

What are the taxes that are imposed on it?

Henry E. Wixon:

On General Motors sir?

Hugo L. Black:

Yes, under this.

Henry E. Wixon:

Personal property taxes, if it has any personal property here.

We have property taxes if it owns any real property and I don’t know that it does.

There would be possibility of sales taxes although not on sales to dealers for resale but if any in the General Motors buys anything here, it would have to pay a sales tax.

Hugo L. Black:

If it buys?

Henry E. Wixon:

If it buys things here sir such as pencils, papers, things of that sort.

Not for resale but for its own consumption or use.

That would pretty much basically be the types of taxes that General Motors would pay, a standard type or types.

Arthur J. Goldberg:

Franchise tax?

Henry E. Wixon:

Well, that’s what we have here sir.

It’s a franchise tax.

Arthur J. Goldberg:

This is franchise tax?

Henry E. Wixon:

Yes sir, yes sir.

Hugo L. Black:

This is substantially the tax, all the trade taxes paid here?

Henry E. Wixon:

Substantially, I’m sorry sir I missed your point.

Hugo L. Black:

Is this substantially that all that’s paid here, you say it is a $37 million dollar business?

Henry E. Wixon:

Well, if it had $37 millions of sales in one of these tax years, all these products to the District costumers.

Now, we do not tax $37 million as I said sir.

We — we taxed a portion of the net income — total net income of General Motors derived from all of its activities with the exception.

Henry E. Wixon:

I wish to emphasize these are sales to the United States which specifically under our statute excluded under — under circumstances such as we have here.

The taxes, so far as I know, the General Motors had paid those that I have referred to and I would surmise that the amount of personal property taxes, the sales taxes, real property taxes if any, I don’t think there are any would be relatively small.

I would surmise it.

I don’t know it.

Hugo L. Black:

Are there companies that do business here subjected to this tax or is it written in such way it’s only to apply to General Motors?

Henry E. Wixon:

Oh no sir.

Hugo L. Black:

Automobile company.

Henry E. Wixon:

No sir, no sir.

This is a general statute and the regulation is a general regulation.

It applies to companies such if I may mention one which would be a typical one Hicks, Woodworks, any company involved generally in selling personal property whether through manufacture or purchase.

General Motors has not been singled out here for any special treatment the application of the regulation, to it was the same as it would be applied to any corporations.

Hugo L. Black:

What did you say as the total amount of the tax?

Henry E. Wixon:

Now, I’ll get to those figures.

Now, out of a total net income in 1957, the total net income of $1,312,000,000, the District apportioned for District tax purposes five millions of dollars and that in 1958 out of a total of — total net income subject to apportionment of $653 million, the District apportioned $2,700,000.

The rated tax is 5%, so you’d have roughly a $135,000 in 1958 apportionment.

Hugo L. Black:

Which of it — is there any particular apportionment that it is more challenged than the other apportionments here?

Henry E. Wixon:

No sir.

I —

Hugo L. Black:

It’s not aimed at anyone of the apportionment you have of the total —

Henry E. Wixon:

No sir.

Hugo L. Black:

— income?

Henry E. Wixon:

No sir.

No one disagrees, I think, in respect of the totality of the income subject to apportionment.

No one suggests — so the General Motors does not suggest that its net income was not subject to apportionment.

General Motors only says in effect that it should have been apportioned in such a manner as to achieve what it would be achieve a reduction in tax liability and a substantial one, about 60% using the three-factor formula and using the two-factor formula de minimis, no tax at all.

Hugo L. Black:

The basis has to be, does it not, that a challenger has an unfair apportionment?

Henry E. Wixon:

Demonstrably unfair, so unfair as to be really a complete denial of due process and they get to that since the statute is considered to be valid.

The attack must be upon the regulations.

The attack to be successful upon the regulations only if it’s clearly demonstrated either the regulation is completely out of harmony with the statute, that it is not a proper implementation of it or that it was so applied as to achieve an incorrect or improper result.

I believe my time is up sir.

Earl Warren:

Very well.

Mr. Barnes.

Donald K. Barnes:

Mr. Chief Justice, may it please the Court.

First, I want now to supply the answer to Mr. Justice White’s question.

The arithmetic has been done for me.

The Washington tax, if applied here in the District of Columbia, would produce for 1957 a revenue for the District of a $111,000.

That compares with a $101,000 which is the amount determined by the Tax Court using the three-factor formula, with $258,000 as assessed by the District and with $23,000 if it were computed the way the economist said it should be.

That’s the two-factor formula meeting sales altogether.

We, by the way, asked for the three-factor formula and had no objection to it anytime.

Commerce Clause of course binds the District Commissioners so we’re not concerned what the Congress did.

And the Congress —

Hugo L. Black:

What did you say about the Commerce Clause?

Donald K. Barnes:

I said that the Commerce Clause binds the District Commissioners though not the Congress that is the freedom that the Congress has to deal with interstate commerce, this Court has held it cannot be delegated to the local legislative body within the District.

So —

Hugo L. Black:

But the Congress does have full power to regulate.

Donald K. Barnes:

Yes.

But we’re not quarrelling here what the Congress did.

We’re quarreling only with what the Commissioners did.

As a matter of fact, we think the congressional statute is commendable but is very fully carried out.

The amount of double taxation is irrelevant and as for these unrelated officers in the District about which you inquired Mr. Justice Goldberg, one of the infirmities in this regulations, one of the things we pointed out in our briefs is that while they’re here, we have over a million dollars of payroll within the district and related rented office space and so on, the District assessments don’t take that into consideration in anyway.

The Tax Court’s determination does.

The District’s assessments take into consideration just one thing.

That’s where the customer is located and they make the assessments progressed not to any degree upon activities within or without the District or anywhere else.

And was — in response to questioning, Mr. Wixon was — have expressed difficulty in dealing with an extreme situation, I want to close by submitting again that this situation is just extreme as the one that — that the Tax Court used in illustration in its opinion.

That is our situation is exactly the same as if we’ve manufactured entirely in Maryland, sold entirely in the District and the District taxed to a 100% of the entire net income.

Here, what they have done is to tax 100% of the entire income derived from that segment of the business which consists of manufacturing outside and selling within and the fact that only four-tenths of 1% of our sales are made to District customers has nothing to do with the case.

That comparison is completely insignificant.

The fact is that out of those sales to District customers, the manufacture of the products we derived $5 million worth of income.

That is the income that the District is taxed in both the statute and the Constitution requires some of that as the Tax Court did to be attributed to the manufacturing activities of Maryland, Michigan and elsewhere.

Byron R. White:

Now, Mr. Barnes the Tax Court seemed — it seems to me found that — that some of this income that was taxed here was earned elsewhere.

Donald K. Barnes:

That is correct.

Byron R. White:

If it — do you read the Court of Apples as disturbing that finding?

Donald K. Barnes:

The Court of Appeals said it was irrelevant.

Byron R. White:

But they didn’t disturb it though.

Donald K. Barnes:

No.

Oh, I beg your pardon Mr. Justice White.

The Court of Appeals — that’s on the double taxation point.

The Court of Appeals simply said, the taxpayer has not proved double taxation but relies merely on a hypothetical example —

Byron R. White:

I don’t care — I don’t (Voice Overlap) the same questions as to whether there is double taxation or not.

The question is whether a part of the in — whether it disturbs the finding that part of the income was earned out outside the District.

Donald K. Barnes:

They did not and the — and the finding was never challenged any — at any point.