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PACIFIC CO., LTD. V. JOHNSON, 285 U. S. 480 (1932)

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U.S. Supreme Court

Pacific Co., Ltd. v. Johnson, 285 U.S. 480 (1932)

Pacific Co., Ltd. v. Johnson

No. 270

Argued January 8, 1932

Reargued March 17, 1932

Decided April 11, 1932

285 U.S. 480


A California corporation acquired municipal bonds at a time when, by the state constitution, they were declared to be "free and exempt from taxation." Subsequently, pursuant to a change in the constitution, a statute subjected the corporation to a tax on the privilege of doing business in the State, measured by a specified percentage of its net income, in the computation of which the statute directed the inclusion of "all interest received from federal, state, municipal or other bonds." Held (assuming that the exemption was contractual and extended to the income derived from the bonds exempted):

1. That the tax immunity granted was not broad enough to secure freedom from taxation of the corporate franchise measured by the tax exempt income, and therefore the obligation of the bond contracts was not impaired by the tax. Pp. 285 U. S. 489-491.

2. In the absence of applicable state decisions antedating the alleged impairment of contract, the extent of the tax exemption is to be decided by the aid of generally accepted principles of construction. P. 285 U. S. 489.

3. Until the adoption of the constitutional amendment in 1928 (§ 16, Art. XIII), and of the Bank and Corporation Franchise Tax Act (Cal.Stats., 1929, c. 13, p. 19), there was no provision in California for taxing corporate franchises by the method here in question, and, until this case, no decision of any court of the chanroblesvirtualawlibrary

Page 285 U. S. 481

state had determined whether the granted immunity extends to a tax on corporate franchises because tax-free income or property is included in its measure. P. 285 U. S. 489.

4. On the other hand, long before adoption of the constitutional tax exemption, the distinction was well recognized between a tax on the privilege of exercising the corporate franchise and a tax on corporate property or income, even though the former was measured by the latter, and tax immunity of the property or income was not deemed to extend to the franchise. P. 285 U. S. 489.

5. Grants of immunity from taxation are strictly construed. P. 285 U. S. 491.

6. Inasmuch as the tax exemption, as granted, did not extend to immunity from inclusion of the interest in the measure of a corporate franchise tax, and inasmuch a the state had power to use that measure in taxing the franchise, the fact that the legislature saw fit to include the interest on such bonds by express mention when its inclusion would otherwise have been implied in the general term net income does not invalidate the tax, no discrimination being involved. Pp. 285 U. S. 491-495.

212 Cal. 148, 298 P. 489, affirmed.

Appeal from a judgment affirming the dismissal of the complaint in a suit by the appellant corporation to recover from the state treasurer the part of a franchise tax which resulted from including its income from tax-free municipal bonds in the measure of its franchise tax. chanroblesvirtualawlibrary

Page 285 U. S. 487

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