Werner Machine Co. v. Director of Div. of Taxation, Dept. of Treasury, of N. J.

PETITIONER:Werner Machine Co.
RESPONDENT:Director of Div. of Taxation, Dept. of Treasury, of N. J.

DECIDED BY: Warren Court (1955-1956)

ARGUED: Mar 05, 1956 / Mar 06, 1956
DECIDED: Mar 26, 1956

Facts of the case


  • Oral Argument – March 05, 1956
  • Audio Transcription for Oral Argument – March 05, 1956 in Werner Machine Co. v. Director of Div. of Taxation, Dept. of Treasury, of N. J.

    Audio Transcription for Oral Argument – March 06, 1956 in Werner Machine Co. v. Director of Div. of Taxation, Dept. of Treasury, of N. J.

    Earl Warren:

    Number 63, Werner Machine Company versus Director of Division of Taxation, Department of Treasury, State of New Jersey.

    Mr. Goodwin, you may proceed.

    Charles Goodwin, Jr.:

    May it please the Court.

    I would like to reserve about 10 minutes for rebuttal if I may.

    Earl Warren:

    You may.

    Charles Goodwin, Jr.:

    First, this morning I would like to emphasize the two alternatives each mentioned yesterday on which the appellant rests his case.

    In the first place, it is the position of the appellant here that this tax now before this Court is a property tax.

    The legislative history preceding the enactment of this Act, the report on which it is based and particularly within the Act itself, the alternative taxes upon which the tax may be computed based upon gross assets rather than net worth indicate very strongly that this is in fact a property tax.

    Our alternative argument is based upon the practical operation and effect test, which was recently reaffirmed by this Court in the New Jersey Realty case in the following language.

    It matters not whether the tax is as appellant — appellee contends an indirect or excised levy on net worth measured by corporate, capital and surplus or is, as appellant urges, a tax on personal property based on evaluation gauged by capital and surplus.

    Our inquiry is narrowed to whether in practical operation in effect, the tax is in part upon federal bonds.

    We can only conclude that the tax authorized by Section 54-422 whether levied against capital and surplus less liabilities or against entire net worth is imposed on such securities regardless of the accounting label employed in describing it.

    Sherman Minton:

    Suppose New Jersey had just levied — assumed franchise tax in so many dollars.

    That’s invalid, would it?

    Charles Goodwin, Jr.:

    I think perfectly valid.

    Sherman Minton:

    The fact that it happened to own government and securities, would that have change (Voice Overlap) —

    Charles Goodwin, Jr.:

    Not at all, they do have such a tax which we’re not complaining about.

    There are alternative minimum taxes with a flat rate.

    I think it’s only when the government —

    Sherman Minton:

    (Voice Overlap) —

    Charles Goodwin, Jr.:

    — bonds enter into the basis of computation that we run into this burden on the borrowing power.

    Sherman Minton:

    The fact that this dollar tax is measured by the total net worth, will the corporation makes the differences?

    Charles Goodwin, Jr.:

    Very strongly.

    I think it’s most significant that this Court has never upheld any tax measured by net worth against the contention that such a tax has reached federal obligations.

    Section 9 of — of the particular taxing act here under consideration also points directly toward the property nature of this tax.

    Section 9 allows a corporate taxpayer subject to the tax, a deduction in respect of stock of subsidiaries owned if those subsidiaries or the subsidiary pays a New Jersey tax.

    This deduction recognizes that the imposition of a tax measured in part by a corporation already taxed would be double taxation.

    And this double taxation aspect is specifically pointed out in the 1947 report of the New Jersey Commission on state tax policy.

    The same or a similar situation was presented to this Court in Schuylkill Trust case reported in 296 U.S.

    In that case, Pennsylvania imposed a tax on shareholders of banks.

    Charles Goodwin, Jr.:

    It was a tax on the shareholder not the corporation.

    But in computing the value of the stock of the bank subject to the tax, the shareholder was permitted the deduction with respect to securities of corporations owned by the bank if they paid a Pennsylvania tax and very similar to the situation here.

    And this Court struck down that tax and stated as follows.

    The State has exempted certain assets on the theory that to measure the tax in part by their value would in effect be to tax them twice.

    If to measure the shareholders tax by inclusion of these taxed or exempted securities found amongst the company’s assets, it would be to tax the shareholder in virtue of the company’s ownership of those securities.

    It seems clear that to refuse to exempt United States securities from the measure of the tax is to lay a tax reckoned upon their value.

    The New Jersey taxing authorities themselves in the administration of this particular tax also recognized that it’s — by its nature of property tax.

    In the first place, the return itself requires that in the computation of the “net worth”, the assets marketable securities rather owned by the corporate taxpayer must be included at their fair market value rather than their book value.

    Thus, we find that the taxing authorities themselves have gone to the less side or asset side of the balance sheet in computing this tax, had gone and looked specifically at these Government bonds.

    They haven’t confined their attention to the liability side of the balance sheet where we customarily find net worth computed.

    They are going right after the property itself.

    Another instance of the recognition by the taxing authorities of the property nature of this tax followed the decision of this Court in the Spector case.

    Now, in the Spector case, it was held that a Connecticut franchise tax could not reach a foreign corporation doing solely interstate business.

    And in the opinion of this Court, striking down that tax, it was mentioned specifically that the tax there was not a property tax or in lieu of a property tax.

    Thereafter, the question came up as to whether that decision required any difference in the administration of this New Jersey tax here at issue.

    And the supervisor of the New Jersey Corporation Tax Bureau officially ruled that the Spector decision had no application to the New Jersey tax here before this Court.

    And I, “Furthermore, the New Jersey statute expressly provides that the said tax is in lieu of a property tax.

    It is significant that in the Spector case decision, the majority opinion emphasizes the fact that the Connecticut tax was not in lieu of a property tax.”

    In conclusion, the appellant here urges the reversal of the court below, the decision below, on the ground that the tax here in question is either a property tax or is a tax imposed in practical operation and effect on federal obligations.

    In either event, it imposes a — a direct burden on the borrowing power of the Federal Government in violation of revised statute Section 3710.

    Earl Warren:

    Mr. Kolovsky.

    Harold Kolovsky:

    If the Court please.

    New Jersey has had a corporation franchise tax for some 70 years.

    The last substantial revision was in 1906 when a franchise tax was adopted, when the tax measured by the numbers of shares of capital stock issued and outstanding.

    That tax measured by the number of issued and outstanding capital share — shares of capital stock remain in effect until it was repealed in 1945 by the statute now before this Court.

    If in fact the legislature of the State of New Jersey did not, as it expressly said it did, accomplished a franchise tax by the Act before this Court.

    We have no franchise tax in the State of New Jersey applicable to the ordinary domestic corporation.

    I submit that there is no question and there can be no question from a reading of the Act.

    And from a reading of the — and from consideration of the history of the legislation and the background of the legislation that the Act of 1945 is exactly what it purports to be a corporate franchise tax, exactly what the courts of New Jersey have uniformly construed it to be, a franchise tax.

    The Act by its title which is, of course, under our constitution an important — important to legislation is expressly entitled an Act to provide for the imposition of a franchise tax upon certain corporations and for the distribution of the proceeds thereof repealing Sections 54-131 through 54-138 and Chapter 32A of Title 54, the revised statutes in making appropriation of the administration of such Act.

    Harold Kolovsky:

    Now, Sections 54-131 to 54-138 referred to in the title is the preexisting franchise tax on domestic corporations, Chapter 32A is the preexisting franchise tax on foreign corporations which have procured authority to do business in the State.

    The appellant throughout its argument has argued as if the franchise, the privilege being tax is purely and simply the privilege of owning property, but that’s, of course, obviously not so.

    It’s not so by the expressed language of the statute.

    The statute provides that every domestic or foreign corporation, which is not hereafter exempted, hereinafter exempted, shall pay an annual franchise tax for the year 1946 and each — each year thereafter, is here and after provided for the privilege of having or exercising its corporate franchise in the State or for the privilege of doing business employing or owning capital or property or maintaining an office in the State.

    We all recognized and I think the cases have uniformly recognized that the privilege of being a corporation, the privilege of exercising corporate franchises is a valuable and substantial right.

    I need to refer no further than the opinion of this Court in Flint against the Stone Tracy Company, where the Court pointed out in upholding the validity of a Franchise Tax Act measured by net income, which necessarily included net income from federal securities as well.

    But this Court pointed out that the continuity of the business without interruption by death or dissolution, the transfer of property interest by the disposition of shares of stock, the advantages of business controlled and managed by corporate directors, the general absence of individual liability, these and other things inhere and the advantages of business thus conducted which do no exist when the same business is conducted by private individuals or partnerships.

    It is this distinctive privilege which is the subject of taxation, not the mere buying or selling or handling of goods, which may be the same whether done by corporations or individuals.

    So that — I submit that it is clear that what we have is a valuable right which is tax and a right which the State has the right to tax.

    That has been settled for more than hundred years in this Court and almost as long by the lower cases by the courts of the State of New Jersey.

    Stanley Reed:

    Am — am I correct in understanding that this is the only tax levied against the property of the corporation?

    Harold Kolovsky:

    No, sir, no, sir.

    The property of the corporation is subject to exactly the same taxes, any individual is subject to and that appears expressly in the property tax sections of a statute.

    That appears in Chapter 4 of Title 54 and specifically RS54:4-2, expressly provides, and I’m paraphrasing — or I can give you the exact language now, 54:4-2.

    Stanley Reed:

    Is that put in to your brief?

    Harold Kolovsky:

    I don’t know whether there’s a reference to it in the brief.

    I believe not, sir.

    And expressly provides except as otherwise provided as to particular corporations or property real and personal of a corporation shall be taxed the same as the real and personal property of an individual, so that as far as property taxes are concerned —

    William O. Douglas:

    What were they attacking?

    Harold Kolovsky:


    Stanley Reed:

    Well, that says except as otherwise provided.

    Harold Kolovsky:

    With respect to specific corporations.

    That refers, sir, to certain utilities which are taxed and the property which is taxed in a different way.

    Railroads are now taxed in somewhat different way and — but that —

    Stanley Reed:

    Well, the reason —

    Harold Kolovsky:

    — that is —

    Stanley Reed:

    — the reason I asked was on account of the quotation to 54:10A-2 that the appellant has here, which — which says, as I read it, such franchise tax will be in lieu of all of the state county or local taxation upon or measured by intangible personal property.

    Harold Kolovsky:

    That refers, if the Court please, to intangible personal property.

    And for that if I may —

    Stanley Reed:

    And that this —

    Harold Kolovsky:

    — just give a brief —

    Hugo L. Black:

    That’s this property.

    Harold Kolovsky:

    That’s right, but we have no intangible personal property tax in New Jersey at all now.

    And if I may just give a slight background of that to show, and I think it perhaps might clear some of the reference to the Commission report that the appellant referred to.

    Historically, New Jersey is an agrarian state.

    The basic taxation is local property taxation.

    It wasn’t an agrarian state at one time.

    And so for many years, the statute in New Jersey provided for that all property, real or personal, should be assessed by local assessing districts.

    And that included not only real property, not only tangible personal property but also intangible personal property.

    It included it, I’m afraid in theory more than in practice, because for many years, and — and bear in mind that that — that provided — that applied both to individuals and to corporations, but for many years, the assessors of, I should say most of the local assessing districts in the State, did not assess intangible property with very few exceptions and there was no pattern and it was just hit or miss.

    Periodically, we’ve had studies made of the tax structure in New Jersey and periodically, the reports will says something should be done.

    It was brought to ahead, however again, in the late 1930s when some of our cities, particularly Jersey City up in the northern end of the State, proceeded to assess intangible personal property for the first time and that had — this impact.

    Jersey City is, the Court may know, is the registered office of a great many nationally operating corporations which happened to be New Jersey corporations, so that the situs of the intangibles for the purpose of taxation at that time was considered in Jersey City.

    Well, lo and behold when the city started to move, these corporations were faced where the taxation on their tremendous intangibles at the local tax rate which ran somewhere around $70 a 1000, so that — we then had a situation where some of them had to pay.

    They made a settlement at some nominal amount which was contrary, of course, to the law as far as the local assessor is concerned because all property was to be assessed at the same rate.

    Other corporations did something else.

    Many of them moved to a little town called Flemington in Hunterdon County.

    It’s a foreign community.

    And one lawyer, I think basically one lawyer, former Judge Lodge, became in the — his office became the registered office a great number of these national corporations.

    The impact on the tax rate in Flemington was considerable from a tax rate which have gone I think about $35 or $40 a 1000.

    In a couple of years, the tax rate in Flemington came down about $0.48 a 1000.

    The State realized that it was a situation which couldn’t continue, so a Commission was appointed.

    It was an eminent Commission headed by Professor Sly of Princeton and they made a study of the entire tax structure of New Jersey.

    I have left with the clerk of the court for the convenience of the court copies of the Commission’s report, enough copies for distribution to each member of the Court.

    The Commission studied the problem and then discussed a series of possible proposals for changing the tax structure of New Jersey, particularly as it concerned intangible property.

    And so in — it recommended that all taxation of intangible property, property taxation of intangible property be eliminated and that was done by an amendment in — an Act also passed in 1945, which is the Act which the appellant in its footnote on page 5 of its brief refers to.

    And refers to I submit in — in language to which suggest that we there eliminated the exemption of federal securities in order to reach him under this franchise tax.

    That’s not so at all.

    Our intangible franchise tax law had some 70 exemptions including not only federal securities but bonds secured by mortgages in a great variety with intangible personal property being eliminated completely, of course, all the exemptions were eliminated.

    So that as far as property taxation is concerned, the taxation of intangibles was eliminated completely except for, I think, insurance company.

    Harold Kolovsky:

    As far — now, the reference in the statute, in the sentence in Section 2 is, I submit nothing more than a legislative declaration that as of this time or as of the time of the introduction of the Act and as a matter of fact it’s continued to date, that no intangibles owned by corporation should be assessed.

    Now, Justice Burling for the New Jersey Supreme Court referred to that section, specifically at the end of his opinion and pointed out that that particular sentence recognized the legislative policy at that time not to tax intangibles of corporations.

    The fact is that we haven’t attempted to tax the intangibles of individuals yet, but that, I submit, would be within the power of the legislature.

    However, the — the — that statement by the legislature does not at all I submit affect the fact that the Act itself expressly levies the tax not on property but on the corporate privilege, the very mechanics to the Act is we pointed out in our brief, the fact that the penalties available, the penalties to be incurred for failure to pay the tax are the termination of — or this enjoining of corporate existence, everything in the Act, the fact that the Act is the only substitute that we have for corporate franchise taxes in New Jersey.

    All that I submit is additional evidence of the fact that the Act is exactly what it purports to be and what the statute and what the court — our courts of our State have found — have held indeed.

    Stanley Reed:

    Now, 10A-2 and 10A-4 I suppose were passed at the same time.

    Harold Kolovsky:


    Stanley Reed:

    10A-2 and 10A-4 were passed at the same time.

    Harold Kolovsky:

    That’s part of the same Act.

    I —

    Stanley Reed:

    And —

    Harold Kolovsky:

    Except —

    Stanley Reed:

    — in relieving the —

    Harold Kolovsky:

    — except — pardon, sir, except — I think there were couple of amendments which were added but I don’t think they could be anything to judge this.

    Stanley Reed:

    Well, the only —

    Harold Kolovsky:

    — definitions which were added.

    That’s right.

    Stanley Reed:

    10A-(d) — 10A-4 (d) is the only —

    Harold Kolovsky:

    That was part at the same time.

    There had been a slight modification in language but it doesn’t matter.

    Stanley Reed:

    So when they eliminated the tax on the intangibles, they placed the franchise tax based on those intangibles including with other assets of the corporation.

    Harold Kolovsky:

    Well, no, in that — but the net worth is not limited, Justice Reed, to — or the —

    Stanley Reed:

    Not limited to intangibles but necessarily includes intangibles, does it not?

    Harold Kolovsky:

    I think it includes — certainly includes all assets of the corporation and includes all lessor liabilities to the corporation.

    There’s no question of that —

    Stanley Reed:

    So (Voice Overlap) —

    Harold Kolovsky:

    — in — in computing that and using that as the measure of — of the — of the tax.

    I would suggest that any measure based on whether it would be income, net worth or property necessarily reflects in — in computing the measurement, reflects — there is some incident of fact of the underlying asset itself or the underlying income itself, but that does not affect the question as to whether or not the item being taxed is the privilege.

    After all I think it’s been well settled in more than a hundred years of decisions of this Court that where the privilege being taxed is a legitimate subject of taxation that the fact that it happens to be as measured by net income or net property which could not be taxed directly because it included federal income of — or federal bonds does not affect the validity of a tax.

    And I think it necessarily has to be so because then the impact is — is much less.

    Harold Kolovsky:

    Basically — basically, I submit that in the use of formula, the net worth formula, which incidentally is in use, I am told in somewhat over 25% of the States of this country is a — it seems to me a perfectly reasonable legislative determination of a form of measurement of the potential of the corporate franchise.

    As a matter of fact, of course, our Act as does the Acts of other States provides an allocation formula where the corporation act is in more than one state.

    Of course, we must bear in mind that Werner Machine Company, Werner Manufacturing Company is a completely New Jersey corporation.

    There’s no claim here that it has any activity of any kind outside of New Jersey.

    The suggestion was made by counsel for the appellant this morning that this Court has never upheld a measurement based on net worth.

    I submit that that’s hardly accurate.

    The Ford Motor Company against Beauchamp case, which we cited in our brief, the case arising out of the State of Texas, on page 18 of our brief, where there was a corporate franchise tax measured by net worth and the Act was upheld.

    Now, it’s true that the particular objection they urged was not that in the measurement of federal bonds were included, but that it was improper burden on it to state commerce, but that would have nothing to do with the sufficiency or the proprietary of the formula.

    Also, I call to the court’s attention that in the two cases arising out of the State of Pennsylvania, which we refer to at pages 16 and 17 of our brief, Commonwealth against the Ford Motor Company and Commonwealth against Quaker Oats Company in which the appeals were dismissed in this — in this Court.

    In those cases, the — what was used were substantially a net worth formula and I think it’s interesting to know that in — in dismissing the appeal, this Court referred to and cited Flint against Stone Tracy Company and the Educational Films case, both of which together with the Tradesmen Bank against Oklahoma, which we also refer to is about — about the latest reiteration of the rule which I say is settled in this Court.

    As to distinction between a property tax on federal instrumentalities and a tax on a privilege measured by net income or net property, which might include federal income or income from federal securities or federal bonds.

    The gravamen, I submit, of the appellant’s argument seems to be that this case is contrary or it should be governed by New Jersey Realty Company case.

    The New Jersey Realty Company case was a property tax case.

    The — the very section of the act involved was a section of our local property tax law and as this Court pointed out in its opinion neither this Court or neither the state court nor the administrative agencies at anytime considered that that was a franchise tax.

    It wasn’t.

    It was a tax on the capital or the net worth of the corporation.

    The suggestion was made this morning without the slightest support in the proof or in fact that the administrative agencies in New Jersey have treated this present Act, the Act that we have here before us as a property tax law.

    That finds no support anywhere.

    The fact is that the return, the form of the return, the statute itself, everything concerned with it shows that it is treated.

    It’s what in fact it is.

    It’s treated not only by the administrative agencies but by the courts in New Jersey as a franchise tax.

    Reference was also made this morning to the Schuylkill against Pennsylvania case.

    But a reading of that case discloses that what was found wrong with the — in that case was that there was discrimination against income from federal bonds because — but the other income was — in that case as appears from the appellant’s own brief, there was a tax on shares of a state trust company measured by the value of the companies net assets excluding however shares of stock held by it and corporations which pay the Pennsylvania capital stock tax or the tax on shares that were expressly exempted by Pennsylvania from such taxes and federal securities were not so excluded.

    So that there you had a deliberate discrimination against federal, against federal instrumentalities and the income therefrom.

    Now, the suggestion is made or it’s made rather strongly in the appellant’s brief.

    They’ll not press here in oral argument that our franchise tax law was — falls within the doctrine of the McCulloch case as a deliberate attempt to reach federal securities.

    The appellant has apparently withdrawn from that position in his oral argument.

    I submit it has absolutely no justification.

    Of course, the McCulloch case itself has been criticized by this Court whatever its present validity may be.

    The fact is however that in the McCulloch case, there was one isolated change in their franchise tax law to expressly include income from federal securities.

    Harold Kolovsky:

    There can be no basis for that in this case.

    In this case, we had a complete revision of our corporation franchise tax law.

    The substitute for the measurement theretofore based on the number of shares of stock issued and outstanding, the measurement based on net worth is provided in the statute.

    And so I submit that I need not burden this Court by repeating at length the quotations from the opinions of this Court which we’ve set forth in this — in our brief.

    But that fundamentally, we have shown clearly that our 1945 Act is factually and in fact what it purports to be, what our courts have held it to be a Franchise Tax Act and that the fact that it’s measured by net worth does not affect its validity and that under the central law of this Court that the judgment below should be affirmed.

    Earl Warren:

    Mr. Goodwin.

    Charles Goodwin, Jr.:

    Counsel for the appellee indicates that there have been cases of this Court, apparently many of them supporting the measurement of such tax by net worth.

    I would like to state that we’ve been unable to find a single case supporting that proposition where this argument here was raised.

    Interstate Commerce Clause is a different proposition because there it’s been held the burden must be reasonable, no more than reasonable.

    Here, there can be no burden on the federal borrowing power.

    The Flint against Stone Tracy case was mentioned.

    In that case, it was a predecessor to the federal income tax.

    It was in the nature of an income tax, back in 1911 and 1909.

    But it followed the pattern of cases on the interstate commerce in similar cases and the quote in the appellee’s brief on page 15 is most significant when it’s compared with the statute here under consideration because it’s mentioned by this Court that in the present case, that’s Flint against Stone Tracy, the tax is not payable unless there be a carrying on or doing of business in the designated capacity and this has made the occasion for the tax measured by the standard prescribed.

    The difference between the Acts is not merely nominal, but rests upon — upon substantial differences between the mere ownership of property and the actual doing of business in a certain way of the New Jersey statute here in question imposes the tax in the alternative upon the doing of business or standing alone the mere ownership of property.

    The Ford cases, well, Ford and Quaker Oats case in Pennsylvania, there was an alternative there also measured by assets, gross assets.

    It was not strictly a net worth tax and I don’t think that — that the failure of this Court to hear and reverse that is — is in any way controlling.

    Thank you.