220 U.S. 107, 31 S.Ct. 342
The Corporation Tax law was enacted as section 38 of the act of Congress approved August 5, 1909. 36 Stat. c. 6, 11, 112-117.1 The statute applied to every corporation, joint stock company or association organized for profit and having a capital stock represented by shares.2 It also applied to every insurance company organized under the laws of the United States or any State or Territory or under the acts of Congress applicable to Alaska or the District of Columbia.3 Foreign corporations engaged in business in the United States were included as well.4
The tax required payment annually of a special excise tax equivalent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year.5 Amounts received as dividends upon stock of other corporations subject to the tax were excluded.6 For organizations under the laws of foreign countries, the tax applied to the amount of net income over and above five thousand dollars received from business transacted and capital invested within the United States and its Territories, Alaska and the District of Columbia.7
The tariff bill containing the corporation tax originated in the House of Representatives as a general bill for the collection of revenue that initially included a plan of inheritance taxation.8 In the Senate the proposed inheritance tax was removed and the corporation tax substituted.9 The bill was passed by both houses, signed by the presiding officers, approved by the President, and deposited with the State Department.10
Multiple corporations brought challenges to the tax, including real estate companies such as the Park Realty Company.11 The Park Realty Company was organized to work, develop, sell, convey, mortgage or otherwise dispose of real estate.12 It was engaged in the management and leasing of the Hotel Leonori at the time the bill was filed.13 The Broadway Realty Company was formed to own, hold and manage real estate.14 It owned an office building let to tenants with light, heat, and janitor service furnished.15 The Fifty Associates operated under a charter to own real estate with power to build, improve, alter, pull down and rebuild.16 The Clark Iron Company was organized under Minnesota law and owned and leased ore lands for mining operations in exchange for royalties.17 The Boston Wharf Company was authorized to acquire lands and flats and to lease, manage and improve its property while receiving dockage and wharfage.18 Additional challengers included the Motor Taximeter Cab Company, which owned and leased taxicabs and collected rents.19 The Corn Exchange Bank occupied part of a building and rented a large part to tenants.20
Public service corporations such as the Coney Island and Brooklyn Railroad Company and the Interborough Rapid Transit Company also challenged the tax.21
Whether section 38 of the act of Congress approved August 5, 1909, originated in the Senate in violation of Article I, Section 7 of the Constitution?22
Article I, Section 7 requires that all bills for raising revenue originate in the House of Representatives, but permits the Senate to propose or concur with amendments as on other bills.23 When a revenue bill originates in the House, the Senate may amend it by substituting a different revenue measure provided the amendment remains germane to the subject matter of the bill.24
No. The tariff bill originated in the House of Representatives as a general bill for the collection of revenue that initially contained a plan of inheritance taxation.25 The Senate removed the inheritance tax and substituted the corporation tax.26 This amendment was germane to the subject matter.27 The bill was passed by both houses, signed by the presiding officers of the House and Senate, approved by the President, and duly deposited with the State Department.28
The corporation tax did not originate in the Senate in violation of Article I, Section 7.29
Whether the tax imposed by section 38 is a direct tax requiring apportionment among the states according to population?30
Direct taxes must be apportioned among the states according to population under Article I, Section 2, Clause 3 and Article I, Section 9, Clause 4.31 Excise taxes, by contrast, are indirect taxes that Congress may lay uniformly throughout the United States under Article I, Section 8, Clause 1 without apportionment.32 A tax is direct when imposed upon property solely because of its ownership; a tax upon the privilege of doing business in corporate form, measured by net income, is an excise.33
No. The statute imposes a special excise tax with respect to the carrying on or doing business by corporations, joint stock companies, associations, and insurance companies.34 The tax is not payable unless business is conducted in the designated corporate capacity, and the measure of the tax is the entire net income over five thousand dollars from all sources.35 This differs from a direct tax on property ownership alone, as the Pollock decision addressed taxes on income derived from real estate and invested personal property without regard to business activity.36
The tax is an excise rather than a direct tax and need not be apportioned.37
Whether the tax improperly reaches franchises created by the states?38
The federal taxing power extends to business activities conducted under state-created franchises when those activities are not essential governmental functions of the state.39 Private corporations exercising state-granted privileges remain subject to federal excise taxation on the privilege of doing business in corporate form.40
No. The tax reaches the exercise of the privilege of doing business in a corporate capacity, not the franchise itself as an instrumentality of state government.41 Corporations such as the Park Realty Company, Broadway Realty Company, and Clark Iron Company conduct leasing, management, and royalty collection activities under state charters, yet these private business operations fall within the federal power to tax excises uniformly.42
The tax does not improperly reach state-created franchises.43
Whether the tax is invalid because it applies to corporations but exempts partnerships and individuals conducting similar business?44
No. The tax applies uniformly across the United States to all corporations meeting the statutory criteria.47 The distinction between corporate and non-corporate forms rests on substantial differences in continuity, transferability of interests, limited liability, and centralized management that inhere in the corporate privilege.48 Such classification lies within Congress's acknowledged power to select objects of excise taxation.49
The tax's application to corporations alone does not render it invalid.50
Whether measuring the tax by net income from all sources, including income from non-taxable securities and real estate, renders the tax unconstitutional?51
When Congress lawfully imposes an excise upon a privilege within its taxing power, the measure of the tax may include income derived in part from property that would be exempt if taxed directly.52 The distinction lies between taxing the property itself and using its income as a measure of the privilege tax.53
No. The tax is measured by net income from all sources because that measure reflects the full advantage of conducting business in corporate form, including access to credit and prestige from large assets.54 Real estate companies such as the Fifty Associates and the Boston Wharf Company, as well as the Corn Exchange Bank, derive income from property management and rentals, yet the tax remains an excise on the corporate privilege rather than a direct tax on the underlying assets.
Use of net income from all sources as the measure does not invalidate the tax.55
Whether public service corporations such as railroads are exempt from the tax?56
Public service corporations organized for private profit remain subject to federal excise taxation even when their operations serve the public and are regulated by the state.57 Only activities essential to the execution of strictly governmental functions of a state are exempt from federal taxation.58
No. The Coney Island and Brooklyn Railroad Company and the Interborough Rapid Transit Company operate for private emolument under state authority.59 Providing transportation is not an essential governmental function that only the state itself may perform.60 These corporations therefore stand on the same footing as other private entities subject to the tax.61
Public service corporations are not exempt from the tax.62
Whether the tax's exemptions for labor, agricultural, fraternal, and charitable organizations invalidate the statute?63
Congress may select the objects of excise taxation and create exemptions without violating uniformity or due process, provided the tax remains geographically uniform throughout the United States.64
No. The exemptions for labor, agricultural, horticultural, fraternal, benevolent, and charitable organizations fall within Congress's established discretion to choose some subjects for taxation and omit others.65 The statute operates uniformly on a geographic basis wherever the taxed entities are found.66 This selection of objects for taxation has been repeatedly upheld as within the power of Congress to lay excises.67
The exemptions do not invalidate the tax.68