Reprinted from THE AMERICAN POLITICAL SCIENCE REVIEW, Vol. XIV, No. 1, February, 1920

CONSTITUTIONAL LAW IN 1918-1919. II

THE CONSTITUTIONAL DECISIONS OF THE SUPREME COURT OF THE UNITED STATES IN THE OCTOBER TERM, 1918

THOMAS REED POWELL

Columbia University

VI. TAXATION

Several of the cases already considered under the commerce clause involved further questions under the Fourteenth Amendment. Georgia's misuse of the mileage ratio in applying the unit rule to the taxation of wandering cars was found so arbitrary as to violate the requirement of due process. 75 The minority insisted that "the case. presents no question of taxing a foreign corporation with respect to personal property that never has come within the borders of the state." This was not specifically denied by the majority who seem to base their decision on excessive valuation of property within the jurisdiction rather than on taxation of property outside the jurisdiction. Yet in substance the case is one of taxing extra-state values though not extrastate tangible objects.

Missouri's excessive fee for certificates authorizing the issue of bonds secured by railroad property within the state, which was held an unconstitutional regulation of interstate commerce,76 was alleged by complainant to be a violation of the Fourteenth Amendment as well. The opinion of the court did not pass on the due-process question, but the cases cited under the commerce clause relied also on the Fourteenth Amendment. The St. Louis tax on manufacturers, measured by the amounts received for the sale of goods produced within the city, wherever such sales occurred, was held to be a tax on manufacturing within the city and not on property or business transactions without the state and therefore not obnoxious to the Fourteenth Amendment.77 75 Union Tank Line v. Wright, (1919) 249 U. S. 275, 39 Sup. Ct. 276, 13 American Political Science Review 614.

76 Union Pacific R. Co. v. Public Service Commission, (1918) 248 U. S. 67, 39 Sup. Ct. 24, 13 American Political Science Review 611.

77 American Mfg. Co. v. St. Louis, (1919) 250 U. S. 459, 39 Sup. Ct. 522, 13 American Political Science Review 612.

In Mackay Telegraph & Cable Co. v. Little Rock78 a company which was subjected to a license tax on poles located on a private right of way thought it was denied the equal protection of the laws because some of its competitors had not been similarly hit. But the court thought that for all that appeared the alleged discrimination might be fortuitous or temporary, and denied relief in the absence of offers "to show an arbitrary and intentionally unfair discrimination in the administration of the ordinance" or that the circumstances of the several companies and their telegraph lines were so much alike as to render any discrimination in the application of the pole tax equivalent to a denial of the equal protection of the laws."

The due-process claim advanced in Wells Fargo & Co. v. Nevada" was founded on an allegation that the assessment complained of was made without giving the taxpayer notice and an opportunity to be heard. It appeared, however, that under the Nevada procedure payment of the tax could not be enforced until after a judgment obtained in judicial proceedings "wherein process issues and an opportunity is afforded for a full hearing." In accordance with established precedents, this was held to satisfy the requirements of due process.

Absence of notice and hearing was also complained of unsuccessfully in three cases upholding special assessments. All were declared by the court to be governed by the principle that "where the Legislature fixes by law the area of a sewer district or the property which is to be assessed, no advance notice to the property owner of such legislative action is necessary in order to constitute due process of law." In each case the municipality was found to possess legislative authority in the premises so that the cases came within the general rule. This conclusiveness of the legislative authority was limited to the determination of the district benefited by the improvement. It was recognized that "the question of distributing or apportioning the burden of the cost among the particular property owners is another matter." Complaints directed against the apportionment require separate notice.

Withnell v. Ruecking Construction Co.80 involved the St. Louis combination of foot-frontage and area rule which in an earlier cases had 78 (1919) 250 U. S. 94, 39 Sup. Ct. 428, 13 American Political Science Review 613. 7 (1918) 248 U. S. 165, 39 Sup. Ct. 62, 13 American Political Science Review 613. 80 (1919) 249 U. S. 63, 39 Sup. Ct. 200.

81 Gast Realty Co. v. Schneider Granite Co., (1916) 240 U. S. 55, 36 Sup. Ct. 254, 12 American Political Science Review 451. See the later case between the same parties in Schneider Granite Co. v. Gast Realty Co., (1917) 245 U. S. 288, 38 Sup.

been held inapplicable to the particular situation before the court. The earlier case had, however, sustained the one-fourth part of the assessment levied by the foot-frontage rule, and inasmuch as the evidence showed that the assessment in the principal case reached by applying the combination rule was less than what it would have been if the total cost had been apportioned according to frontage, the Supreme Court found itself unable to say that there had been any abuse of power. The court declared that where the assessment is in accordance with a legislative rule, "no previous notice or preliminary hearing as to the nature and extent of benefits" is necessary, and that an attack on a method so prescribed "can only succeed if it has produced results . palpably arbitrary or grossly unreasonable."

Similar principles were repeated in Hancock v. Muskogee where the cost of a sewer was assessed according to the area of the abutting lots, Mr. Justice Pitney declaring that it is settled that "whether the entire amount or a part only of the cost of a local improvement shall be imposed as a special tax upon the property benefited, and whether the tax shall be distributed upon a consideration of the particular benefit to particular lots or apportioned according to their frontage upon the streets, their values, or their area, is a matter of legislative discretion, subject, of course, to judicial relief in cases of actual abuse of power or of substantial error in executing it, neither of which is here asserted." The objection pressed most strongly in Mt. St. Mary's Cemetery Association v. Mullins 83 was that a cemetery was not benefited by a sewer and therefore could not be included in a sewer district. The association had litigated the issue unsuccessfully in the state courts, and had been there given the hearings deemed sufficient to satisfy the procedural requirements of due process. The only benefit referred to by the Supreme Court in sustaining the assessment was the fact that the sewer served to carry away surface water. It was remarked also that there was nothing to show that "the cemetery would not have been benefited as to sanitation as a result of the construction of the sewers." Without discussion it was asserted that the case was not within the principle of an earlier decision which excluded high land from a drainage district on the ground that it could not be benefited by the enterprise. The association contended further that the assessment

*2 (1919) 250 U. S. 454, 39 Sup. Ct. 528.

** (1919) 248 U. S. 501, 39 Sup. Ct. 173.

"Myles Salt Co. v. Drainage District, (1916) 239 U. S. 478, 36 Sup. Ct. 204, 12 American Political Science Review 451.

should be reduced because half of its tract had been conveyed for burial lots. The state court had held that only an easement and not the fee had been conveyed and the Supreme Court held that the qualified interest remaining in the association was sufficient to support the assessment. The objection that complainant had been denied the equal protection of the laws because not placed in a district by itself, as some other cemeteries were, was rejected on the ground that "the record fails to show similarity of situation and conditions."

The remaining decision on the subject of state taxation had to do with an Alabama statute which imposed an occupation tax on persons and corporations engaged in construction work within the state, and made the tax on those whose chief office was without the state four times as large as that on those whose chief office was within the state. In reply to the claim that this discriminated against citizens of other states, the state court had said that such citizens might have their chief office within the state and that citizens of the state might have their chief office without the state. A similar position, it will be recalled, had been taken by the Supreme Court during the 1918 term in sustaining a statute restricting licenses for insurance brokers to residents of the state.85 In Chalker v. Birmingham & N. W. Ry. Co., 86 however, the case now under consideration, Mr. Justice McReynolds said that, as the chief office of an individual is commonly in the state of which he is a citizen, the statute would practically discriminate against citizens of other states. The decision declaring the tax invalid was predicated on the privileges and immunities clause of article 4, section 2, and not on the due-process clause of the Fourteenth Amendment, so the case does not shake the rule that permits discrimination against foreign corporations not engaged in interstate commerce or in work for the national government. There are indications, however. that the rule is no longer regarded with favor, and it would not be surprising if before long the Supreme Court materially modifies it.

In view of the increasing number of state income taxes, the interpretation of the federal income tax law reached in De Ganay v. Lederer is important for state as well as national taxation. In this case the Supreme Court answered in the affirmative the following question certified by the Circuit Court of Appeals:

85 La Tourette v. McMaster, (1919) 248 U. S. 465, 39 Sup. Ct. 160, 13 American Political Science Review 627.

86 (1919) 249 U. S. 522, 39 Sup. Ct. 366. See 28 Yale Law Journal 824.

"If an alien non-resident owns stock, bonds, and mortgages secured upon property in the United States or payable by persons or corporations there domiciled, and if the income therefrom is collected for and remitted to such non-resident by an agent domiciled in the United States, and if the agent has physical possession of the certificates of stock, the bonds and the mortgages, is such income subject to an income tax under the Act of October 3, 1913?"

After reviewing the facts of the case, including the power possessed by the agent to sell, assign, or transfer the securities and reinvest the proceeds of sales, Mr. Justice Day declared: "It is difficult to conceive how property could be more completely localized in the United States. There can be no question of the power of Congress to tax the income from such securities." The case on its facts does not go beyond those in which intangibles have been regarded as having what is called a "business situs" in the place where an agent does an investment business for his principal, and therefore warrants no inference that the Supreme Court means to allow a state to tax income paid to nonresidents except where it can tax to him the sources of that income. The opinion, too, is careful to mention "the authority given to the local agent" as an important element in the case, but it may be worth noting that there is no declaration that such element is indispensable. The so-called Harrison Narcotic Drug Act, passed by Congress on December 17, 1914, came before the court in United States v. Doremus88 and was sustained by a vote of five to four. The act required all dispensers of drugs to register with the collector of internal revenue and to pay a tax of one dollar a year. Doremus had registered and paid the tax but he had violated the further provision forbidding the sale of drugs except in pursuance of a written order on a form issued by the commissioner of internal revenue. Under the statute the person filling the order was required to file it for the inspection of treasury agents. There were exceptions in favor of physicians, but Doremus, though a physician, did not bring himself within the exception. He contended that the provisions which he violated had no fiscal purpose but were purely police measures and as such were beyond the powers delegated to Congress and an encroachment on the reserved powers of the states. The district court and Chief Justice White together with Justices. McKenna, Van Devanter and McReynolds agreed with him; but

88 (1919) 240 U. S. 86, 39 Sup. Ct. 214. See 4 Cornell Law Quarterly 196, 32 Harvard Law Review 846, and 28 Yale Law Journal 599. For a note on the decision in the court below see 18 Columbia Law Review 459.