[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 50 The relator, a corporation organized in New Jersey, manufactures and sells its products here and elsewhere. A tax was assessed against it in 1918 by the tax commission of New York for the privilege of doing business. The validity of the statute which assumes to authorize the tax is the question to be determined.
Article 9A of the Tax Law (Consol. Laws, chap. 60), as adopted in 1917 and amended in 1918, establishes a new scheme of taxation for manufacturing and mercantile corporations, both foreign and domestic (L. 1917, ch. 726; L. 1918, ch. 276; L. 1918, ch. 417). Every domestic manufacturing or mercantile corporation is to pay an annual tax for the privilege of exercising its franchises in *Page 52 this state in a corporate or organized capacity (Tax Law, §209). Every foreign corporation of like nature is to pay an annual tax for the privilege of doing business in this state (sec. 209). In each case the tax is to be computed upon the basis of the net income for the year next preceding, which income is declared to be "presumably the same as the income upon which such corporation is required to pay a tax to the United States" (sec. 209). If the entire business of the corporation is transacted within the state, the tax is to be based upon the entire net income as reported to the United States Treasury department, subject to correction for fraud, evasion or error (sec. 214). If the entire business is not transacted within the state, the tax is to be based upon a proportion of net income to be ascertained by the commission in accordance with prescribed rules (sec. 214). The net income allocated to this state is to bear the same ratio to the entire net income as the aggregate of certain classes of assets within this state bears to the aggregate of certain classes of assets wherever situated. The real property and the tangible personal property here are to be compared with the like property here and elsewhere. The bills and accounts resulting from manufacturing, sales and services here are to be compared with the like bills and accounts here and elsewhere. The shares of stock in other corporations, if found to have a situs here, but not exceeding ten per cent of the value of the local realty and the local tangible personalty, are to be compared with the total shares in other corporations, but not exceeding ten per cent of all the realty and all the tangible personalty. No assets not included in the enumerated classes are to enter into the ratio. The scheme of allocation takes no heed of investments in bonds and like intangible assets (secs. 208, 214). It takes no heed of investments in shares of other corporations, except within the prescribed limit of ten per cent. A foreign corporation, investing in railroad bonds or bonds of foreign governments, must *Page 53 pay a tax upon income which includes the interest on such bonds, but may not include the bonds themselves in estimating the proportion of value within the state and elsewhere. A foreign corporation which runs its business through subsidiaries, receiving the bulk of its income through dividends thus collected, must pay a tax upon income which includes the dividends on the shares, but must disregard the shares themselves (beyond the ten per cent maximum) in the allocation of its assets. I quote for greater certainty in a foot note the statutory formula.*
The relator, engaged in both interstate and local commerce, attacks this scheme of allocation as beyond the power of the state. Included in the relator's investments and held at the home office, are bonds of the value of $658,052.30, which yielded $32,407 in interest during the year covered by the assessment. The interest enters into the income on which the tax has been computed; the principal has been excluded in the allocation of the assets. Included in the relator's investments are shares of stock of the Alpha Portland Cement Company of Pennsylvania *Page 54 of the value of $4,500,000; shares of stock of the Anvil Stone Company of the value of $23,600; and shares of stock of the North American Portland Cement Company of the value of $10,000. The Alpha Portland Cement Company of Pennsylvania holds the title to plants located in that state. The relator, owning the entire stock, has occupied the plants, rent free, and has operated them directly. If it had operated them indirectly through the management of its subsidiary, and had taken the net income, which was nearly $400,000, in the form of dividends on the shares, this scheme of allocation, if valid, would have included the dividends as income and disregarded the shares in fixing the situs of the assets. "The constitutional validity of a law is to be tested, not by what has been done under it, but by what may, by its authority, be done" (Stuart v. Palmer, 74 N.Y. 183, 188;Colon v. Lisk, 153 N.Y. 188, 194; Coe v. Armour FertilizerWorks, 237 U.S. 413, 424). Dividends from other shares, those of the Anvil Stone Company, are *Page 55 included in the income; the shares themselves do not enter into the terms of the proportion.
1. I think the statute is invalid, in its application to the relator, in so far as it lays upon income a burden that is irrespective of the situs of the assets by which income is produced. The power of a state to attach conditions to the transaction of intrastate business by foreign corporations is not unlimited to-day, whatever under earlier decisions it may once have seemed to be. The field of law is one where new rules are in the making. Only the Supreme Court of the nation can definitively fix their content. The judgment of a state court can hardly fail, in the meantime, to be tentative and groping. We must shape our path and our progress by such light as we have. No doubt in the earlier cases there was much said, if not decided, that would seem to emancipate the state from all restrictions in conditioning the local business (Horn Silver Mining Co., v.New York, 143 U.S. 305; Maine v. Grand Trunk Ry. Co.,142 U.S. 217; Home Ins. Co. v. N.Y., 134 U.S. 594; Ashley v.Ryan, 153 U.S. 436). Later cases have explained and qualified these judgments, and, to the extent of conflict, overruled them (International Paper Co. v. Mass., 246 U.S. 135; Looney v.Crane Co., 245 U.S. 178; Western Union Telegraph Co. v.Kansas, 216 U.S. 1; Meyer, Auditor of Oklahoma v. WellsFargo Co,, 223 U.S. 298; Wallace v. Hines, 253 U.S. 66;40 Sup. Ct. 435; Powell, Indirect Encroachment on Federal Authority, 31 Harvard Law Review, 721, 774, 932, 942; Powell, The Changing Law of Foreign Corporations, 33 Political Science Quarterly, 569; Henderson, Foreign Corporations in American Constitutional Law, Harvard University Press, pp. 131, 134, 151, 161). The rule now is that a foreign corporation may not be required to purchase relief from ouster at the price of a surrender of constitutional immunities. The state may not say that the right to conduct the local business shall be lost if the corporation exercises the privilege of resorting to *Page 56 the federal courts (Donald v. Phila. Reading Coal IronCo., 241 U.S. 329; Harrison v. St. Louis, etc., Ry. Co.,232 U.S. 318; Henderson, Foreign Corporations in American Constitutional Law, p. 141). The state may not say that the right to conduct the local business shall be lost if the corporation will not pay a tax upon property which, by reason of its situs elsewhere, is immune from taxation here (Int. Paper Co. v.Mass.; Looney v. Crane Co.; W.U.T. Co. v. Kansas; Meyer,Auditor of Oklahoma v. Wells Fargo Co.; Wallace v. Hines,supra; N.Y. Life Ins. Co. v. Head, 234 U.S. 149, 164). This is certainly the law when the business of the corporation embraces interstate as well as local commerce. We are not now required to decide whether it is not equally the law when the business is restricted to local commerce only (Henderson, supra).International Paper Co. v. Mass. (supra) puts the modern doctrine in a sentence: "That a foreign corporation is partly, or even chiefly, engaged in interstate commerce does not prevent a state in which it has property and is doing a local business from taxing that property and imposing a license fee or excise in respect of that business, but the state cannot require the corporation as the condition of the right to do a local business therein to submit to a tax on its interstate business or on its property outside the state." (p. 141.) In determining whether the tax is in truth a tax on property, we are to consider, not its form or label, but its practical operation (Int. Paper Co. v.Mass., supra; Am. Mfg. Co. v. St. Louis, 250 U.S. 459). Thus, a tax, denominated a license, is in fact a tax on property if measured by the entire capital of a manufacturing corporation irrespective of the situs (Looney v. Crane; Int. Paper Co. v.Mass., supra). So a tax assessed against a railroad, though classified as an excise, will be invalid, like a tax on property, if values which are extraterritorial are unreasonably made the measure of values which are local (Wallace v. Hines,253 U.S. 66; Cf. Union Tank Line *Page 57 Co. v. Wright, 249 U.S. 275). In one case (Wallace v.Hines, supra) the test of mileage was rejected when values in sparsely settled plains were thereby put upon a par with those in populous communities. In another (Union Tank Line Co. v.Wright, supra) the value of local cars was held to be unrelated to mileage in the state and out of it. A burden, arbitrarily swollen by resort to foreign assets, is not saved by the label which identifies it as a tax upon a local privilege.
Tested by these precedents, the tax imposed upon this franchise must be held in practical operation to be a tax upon the income. Such, indeed, it would be in form as well as in substance, if the legislature had not stated (sec. 209) that the "privilege of doing business" was the consideration for the payment. Nothing but that recital stands between the statute and conceded invalidity. How the legislature itself looked upon the substance of the burden is indicated by other provisions of the same and later statutes. The tax is to be in lieu of all other taxes on personal property or capital stock (Tax Law, § 219-J). It is to be in lieu of all other taxes upon income (sec. 350, subd. 7). There surely was no intention that all mercantile and manufacturing corporations, foreign and domestic, should in very truth be exempt from taxes upon property so fundamental in importance as capital and the fruits of capital. The reason for the apparent exemption was that, under the form of a tax upon the franchise, the property of such corporations had already been subjected to its share of public burdens.
I think, therefore, that in substance, though not in form, in tendency, though not in name, this tax is equivalent to a tax upon relator's income. The only question then is whether the method of allocation is reasonably adapted to the apportionment of income according to the situs of its origin. The state substantially concedes that a tax on income could not stand if allocated on such a basis. Meyer, Auditor of Oklahoma v. WellsFargo Co. *Page 58 (223 U.S. 298); Shaffer v. Carter (252 U.S. 37), and Travis v. Yale Towne Manufacturing Co. (252 U.S. 60) are sufficient in themselves to justify the concession. In the first case the tax was measured by the entire income. The scheme of allocation limited the assessors to the comparison of the receipts of business done within the state with the receipts of business there and elsewhere. Investments in bonds and lands were disregarded in the apportionment, though the income from such investments was included in the measure. On that ground, as well as on others, the statute was held invalid. There is no distinction between that case and this (so far as the objection just stated is concerned) except in the label of the burden. Here, as there, the statute prescribes a rule of allocation which, as applied to foreign corporations holding bonds and shares in other states, involves an artificial and arbitrary augmentation of the value of the local privilege. It measures the value of the franchise, here and elsewhere, by income from all sources, and excludes some of the same sources when the value is apportioned. To take from assets elsewhere is equivalent to adding to assets here. The statute would be little different in principle if it announced the arbitrary rule that all investments in bonds and stocks should be conclusively presumed to have their situs in New York. The resulting vice in the proportion is not the consequence of adventitious circumstances, of inequalities developing unexpectedly in the practical workings of the statute, but hardly to be avoided by reasonable foresight. The exclusion of bonds and stocks is the result of an explicit mandate. The principle of allocation is not followed to its natural and obvious outcome in accordance with the situs of the assets, but is consciously checked, its normal course is thwarted, by an artificial and designed exception. Something which, in the absence of express exclusion, would be within its operation, is knowingly taken out of it. I am unable to avoid the conclusion that a method of apportionment which purposely ignores *Page 59 realities, which compels an assessor to look to some of the assets only, and close his eyes to all the others, is arbitrary and unreasonable in its increase of the local burden.
It does not help the case to argue that bonds and stock certificates can be moved from state to state, and that frauds upon the tax might become common if possession in another jurisdiction were accepted as the test. That may be a very good reason why such assets and their income should be eliminated altogether from both branches of the proportion. It is no reason why, the income being included, the assets yielding the income should be excluded for the purpose of apportionment. There is no greater difficulty, moreover, in fixing the situs of shares beyond the ten per cent limit than in fixing that of shares below it. Rejected too must be the argument that the plan of apportionment is made valid by the possibility that the excluded assets will sometimes have their situs here, in which event the taxpayer may be helped by their exclusion. That is mere chance. The state does not expect that the chances will preponderate in favor of such an outcome, or it would have used some other formula. The argument, if accepted, would sustain the tax condemned in Meyer, Auditor of Oklahoma v. Wells Fargo Co. (supra), and, indeed, would serve to justify the most obvious vagaries. The legislature in that view might exclude everything but real estate from the scheme of allocation, and justify the restriction upon the plea that profit would result to some one. Such hit or miss methods do not take the place of regularity and system. The taxpayer complaining of the tax is injured. It does not help the statute that another may be benefited.
2. The question remains whether what is bad may be severed from what is good, and the substance of the scheme preserved. I think the severance is possible. Two defects have been found. The remedy for each will be separately considered.
(a) To remedy the first, all that has to be done is to *Page 60 permit the relator to subtract the interest on its bonds from the income of the year. I think this does not involve the revision in any prohibited sense of the legislative scheme. A particular item, erroneously included, is eliminated, and the tax measured by what is left. Such a situation comes closer to Ratterman v.Western Union Telegraph Co. (127 U.S. 411) and the cases there cited, where a tax imposed generally on the receipts of foreign and domestic commerce, was divided into its valid and invalid elements, than to Meyer, Auditor of Oklahoma v. Wells Fargo Co. (223 U.S. 298), where the invalid was so commingled with the valid, was so large and essential a part of a single scheme, that revision was adjudged impossible (223 U.S. at p. 302). Even there it was recognized that the propriety of severance was a subject upon which the state court would speak with final authority, since in last analysis it was a question of the legislative purpose (Cf. Berea College v. Kentucky, 211 U.S. 45, 55;Loeb v. Columbia Township Trustees, 179 U.S. 472, 490;Huntington v. Worthen, 120 U.S. 97). In this state, we have gone far in subdividing statutes, and sustaining them so far as valid (Dollar Co. v. Canadian C. F. Co., 220 N.Y. 270, 278, and cases there cited; People v. Beakes Dairy Co., 222 N.Y. 416,432; People ex rel. Penn. Gas Co. v. Saxe, 229 N.Y. 446). The tendency is, I think, a wholesome one. Severance does not depend upon the separation of the good from the bad by paragraphs or sentences in the text of the enactment (Loeb v.Columbia Township Trustees, supra). The principle of division is not a principle of form. It is a principle of function. The question is in every case whether the legislature, if partial invalidity had been foreseen, would have wished the statute to be enforced with the invalid part exscinded, or rejected altogether. The answer must be reached pragmatically, by the exercise of good sense and sound judgment, by considering how the statutory rule will function if the knife is laid to the branch instead of at the roots. *Page 61
I think that in this instance the answer is not doubtful. The tax is one on manufacturing and mercantile corporations. The great bulk of the income of such corporations in the vast majority of cases is derived, not from interest on bonds, but from the operations of the business, i.e., from manufacture and from sale (Adams Express Co. v. Ohio State Auditor,165 U.S. 194, 227; 166 U.S. 185, 225). Often bonds do not figure in the assets at all. Seldom, relatively to the total, will they be more than a minor incident. Interest on such investments might be eliminated from the income with little disarrangement of the average results. In exceptional instances, the difference might be important, but legislation looks to probabilities. A very different situation was presented in the federal income tax case (Pollock v. Farmers' Loan Trust Co., 158 U.S. 601). There the point was that to eliminate the items unlawfully included would mean the loss of "by far the largest part of the anticipated revenue" (158 U.S. at pp. 636, 637). Even at that, the conclusion adverse to severance provoked a strong dissent (158 U.S. at pp. 683, 698; 157 U.S. at p. 586). What was the principal in that case, is the incident in this. It would be intolerable to set aside in its entirety a comprehensive scheme of taxation, framed in the main with scrupulous fidelity to constitutional limitations, whenever it appeared that some asset, commonly of minor value, some incident of a varied aggregate, had been included without right in the subject-matter of assessment. Almost every business corporation has a bank account, and sometimes the account bears interest. Let us suppose that the statute made no attempt to impose a tax upon the income from bonds, but did, by virtue of its general language, include interest on deposits in banks. Is it possible that the courts would be powerless to deduct this minor item, and let the statute stand? Such a conclusion is unthinkable. The most that can fairly be asked by the taxpayer in such conditions is that the subject-matter erroneously brought *Page 62 within the range of words of general application, shall be cut out and withdrawn. Unless the conclusion be unavoidable, "a general revenue statute should never be declared inoperative in all its parts because a particular part relating to a distinct subject may be invalid. A different rule might be disastrous to the financial operations of the government, and produce the utmost confusion in the business of the entire country" (Field v. Clark, 143 U.S. 649, 697). Here the main thing that the legislature was trying to reach was the income from a business. The foreign corporation is to pay the tax if it does business and not otherwise. Only the domestic corporation pays for the mere exercise of its franchise in a corporate capacity. In form, the tax is one upon the value of a privilege, and income is nothing but the measure. In substance, as we have seen, it is the same as if imposed directly upon income. If we are to view it according to its substance for the purpose of determining its validity, we must view it in the same way for the purpose of determining the propriety of separating the valid from the invalid.
Thus viewing it, I cannot doubt that the exclusion of interest on intangibles will leave the essence of the scheme intact. I find it unbelievable that a legislature willing to impose a tax with those items in, would be unwilling that the tax should stand if those items were out. Undoubtedly it wished them in if it had the legal right to keep them. To say that does not mean that rather than lose them, it would throw the project to the winds. Laws are not to be sacrificed by courts on the assumption that legislation is the play of whim and fancy. A doctrinaire emphasis on the possible rather than the probable would forbid severance at all times. No doubt it is easy, sheltering ourselves behind some implacable tenet of the separation of governmental powers, to insist upon a certainty impossible of attainment. We do small service to the state by so intransigent a pose. Our right to *Page 63 destroy is bounded by the limits of necessity. Our duty is to save unless in saving we pervert. When all the world can see what sensible legislators in such a contingency would wish that we should do, we are not to close our eyes as judges to what we must perceive as men. This need is all the greater in fields where the law is in a stage of transition and readjustment (Henderson,supra). With the line so blurred and vague between the lawful and the unlawful, the most honestly conceived and carefully developed system of assessment may involve some element of value beyond the reach of the taxing power. I will not readily impute a desire to place the revenues of the state in jeopardy by the sacrifice of the whole whenever there is failure of a part.
(b) I pass now to the shares of stock. Much that has been said about the bonds is again applicable here. Stock investments are more likely, it may be, to represent a substantial factor in the assets, at least when the business is conducted through subsidiaries. None the less there must be many corporations that do not invest in shares at all, and few, where the dividends from shares are important elements of income as compared with earnings of the business. There are, however, special considerations, applicable to shares of stock, but inapplicable to bonds, which reinforce the argument for severance, though they suggest that the remedy in this instance is by addition to the principal rather than by subtraction from the income.
Article 9A of the Tax Law was first placed upon the statute books by Laws of 1917, chapter 726, and was amended by Laws of 1918, chapter 276, and Laws of 1918, chapter 417. As first enacted, it provided for a comparison of the average total value of the shares of other corporations held by the taxpayer within the state with the average total value of the shares in other corporations held within and without the state, the value to be apportioned in and out of the state in accordance with the *Page 64 value of the physical properties in and out of the state representing such share stock (sec. 214, subds. 3 and 6). The amendment of 1918 (Ch. 417) added a proviso that the shares within the state must not exceed ten per cent of the real and tangible personal property within the state, and that the total shares must not exceed ten per cent of the total real and tangible personal property (sec. 214, subds. 3 and 6). Subdivision 3 was made to read: "The proportion of the average value of the stocks of other corporations owned by the corporation, allocated to the state as provided by this section,but not exceeding ten per centum of the real and tangiblepersonal property segregated to this state under this article," the part in italics being new. Subdivision 6 was made to read: "The average total value of the stocks of other corporations owned by the corporation, but not exceeding ten per centum ofthe aggregate real and tangible personal property set up in thisreport," again the part in italics being new. No change other than the addition of these provisos was made in either subdivision.
In these circumstances the history of the statute defines the lines of cleavage that severance should follow. The amendment, being invalid, is to be exscinded, and the statute in its valid form preserved. A scheme of allocation, lawful in its inception, but made unlawful thereafter by force of an illegitimate proviso, is not for that reason to be abandoned altogether. The amendment falls. The rule which there was an abortive effort to amend survives (Huntington v. Worthen, 120 U.S. 97, 102; General Construction Law, sec. 95).
I have said that the statute, in so far as it deals with shares, is valid as first enacted, when applied to this relator. I do not overlook the provision that "the value of share stock of another corporation owned by a corporation liable hereunder shall for purposes of allocation of assets be apportioned in and out of the state in accordance with the value of the physical property in and out of the state *Page 65 representing such share stock" (sec. 214, sub. 6). Whether this provision might sometimes, even though the limitation of ten per cent were disregarded, work injustice to the taxpayer, we need not now determine. That problem will be solved when it arises. Something, doubtless, may be sacrificed to convenience and certainty of assessment, provided it is not too much. The proportion between values within the jurisdiction and values elsewhere can never, in any system of taxation, be maintained with mathematical precision. Departures from the norm that would be illegitimate in the allocation of the assets of the corporation subject to the tax, may conceivably be legitimate in the allocation of the assets of other corporations in which it happens to be a shareholder; else, the process of appraisement and allocation might lose itself in a wilderness of refinements and complexities, the segregation of A's assets calling for the segregation of those of B, that of D's assets for that of C's, and so on through a series. I do not dwell upon this subject now, for the relator certainly could not be wronged by such a method of allocation, whether others would be aggrieved or not. All the assets of its subsidiaries are located without the state. None, therefore, could be allocated to New York under the scheme of distribution in force under the statute as first enacted. Apportionment of the shares according to the situs of the physical property of the subsidiaries in and out of the state, would safeguard the relator against the possibility of prejudice, if the proviso were eliminated. The elimination of the proviso, therefore, must be the limit of its right.
My conclusion is that the relator should be permitted to subtract from the income the item of interest on the bonds; that it should be permitted to add the value of its shares in other corporations to the value of its assets without the state; and that the order of the Appellate Division, in so far as it sets aside the whole tax, should *Page 66 be reversed, without costs to either party in this court, and the proceeding remitted to the commission for the revision of the assessment in accordance with these views.
* "The proportion of the entire net income of the corporation upon which the tax under this article shall be based, shall be such portion of the entire net income as the aggregate of
"1. The average monthly value of the real property and tangible personal property within the state.
"2. The average monthly value of bills and accounts receivable for (a) personal property sold by the corporation from merchandise manufactured by it within this state; (b) personal property sold by the corporation from merchandise owned by it and located within the state at the time of the acceptance of the order, but not manufactured by it within this state; and (c) services performed within this state, excluding bills and accounts receivable arising from sales made from a stock of merchandise or other property located at a place of business maintained by the reporting corporation without this state.
"3. The proportion of the average value of the stocks of other corporations owned by the corporation, allocated to the state as provided by this section, but not exceeding ten per centum of the real and tangible personal property segregated to this state under this article bears to the aggregate of
"4. The average monthly value of all the real property and personal property of the corporation, wherever located.
"5. The average total value of bills and accounts receivable for (a) personal property sold by the corporation from merchandise manufactured by it within and without this state; (b) personal property sold by the corporation from merchandise owned by it at the time of acceptance of the order but not manufactured by it; and (c) services performed both within and without this state, based on orders received at offices maintained by the corporation, excluding bills and accounts receivable on orders filled from a stock of merchandise or other property maintained by the corporation.
"6. The average total value of stocks of other corporations owned by the corporation, but not exceeding ten per centum of the aggregate real and tangible personal property set up in this report.
"Real property and tangible personal property shall be taken at its actual value where located. The value of share stock of another corporation owned by a corporation liable hereunder shall for purposes of allocation of assets be apportioned in and out of the state in accordance with the value of the physical property in and out of the state representing such share stock." (Section 214.)