Amdt5.4.6.2.1 Due Process and Taxation: Doctrine and Practice

Fifth Amendment:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

Taxation

In laying taxes, the Federal Government is less narrowly restricted by the Fifth Amendment than are the states by the Fourteenth. The Federal Government may tax property belonging to its citizens, even if such property is never situated within the jurisdiction of the United States,¹ and it may tax the income of a citizen resident abroad, which is derived from property located at his residence.² The difference is explained by the fact that protection of the Federal Government follows the citizen wherever he goes, whereas the benefits of state government accrue only to persons and property within the state’s borders. The Supreme Court has said that, in the absence of an equal protection clause, a claim of unreasonable classification or inequality in the incidence or application of a tax raises no question under the Fifth Amendment. . . .³ It has sustained, over charges of unfair differentiation between persons, a graduated income tax,⁴ a higher tax on oleomargarine than on butter,⁵ an excise tax on puts but not on call,⁶ a tax on the income of business operated by corporations but not on similar enterprises carried on by individuals,⁷ an income tax on foreign corporations, based on their income from sources within the United States, while domestic corporations were taxed on income from all sources,⁸ a tax on foreign-built but not upon domestic yachts,⁹ a tax on employers of eight or more persons, with exemptions for agricultural labor and domestic service,¹⁰ a gift tax law embodying a plan of graduations and exemptions under which donors of the same amount might be liable for different sums,¹¹ an Alaska statute imposing license taxes only on nonresident fisherman,¹² an act that taxed the manufacture of oil and fertilizer from herring at a higher rate than similar processing of other fish or fish offal,¹³ an excess profits tax that defined invested capital with reference to the original cost of the property rather than to its present value,¹⁴ an undistributed profits tax in the computation of which special credits were allowed to certain taxpayers,¹⁵ an estate tax upon the estate of a deceased spouse in respect of the moiety of the surviving spouse where the effect of the dissolution of the community is to enhance the value of the survivor’s moiety,¹⁶ and a tax on nonprofit mutual insurers, even though such insurers organized before a certain date were exempt, as there was a rational basis for the discrimination.¹⁷

Retroactive Taxes

It has been customary from the beginning for Congress to give some retroactive effect to its tax laws, usually making them effective from the beginning of the tax year or from the date of introduction of the bill that became the law.¹⁸ Application of an income tax statute to the entire calendar year in which enactment took place has never, barring some peculiar circumstance, been deemed to deny due process.¹⁹ Taxation is neither a penalty imposed on the taxpayer nor a liability which he assumes by contract. It is but a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens. Since no citizen enjoys immunity from that burden, its retroactive imposition does not necessarily infringe due process, and to challenge the present tax it is not enough to point out that the taxable event, the receipt of income, antedated the statute.²⁰ A special income tax on profits realized by the sale of silver, retroactive for 35 days, which was approximately the period during which the silver purchase bill was before Congress, was held valid.²¹ An income tax law, made retroactive to the beginning of the calendar year in which it was adopted, was found constitutional as applied to the gain from the sale, shortly before its enactment, of property received as a gift during the year.²² Retroactive assessment of penalties for fraud or negligence,²³ or of an additional tax on the income of a corporation used to avoid a surtax on its shareholder,²⁴ does not deprive the taxpayer of property without due process of law.

An additional excise tax imposed upon property still held for sale, after one excise tax had been paid by a previous owner, does not violate the Due Process Clause.²⁵ Similarly upheld were a transfer tax measured in part by the value of property held jointly by a husband and wife, including that which comes to the joint tenancy as a gift from the decedent spouse²⁶ and the inclusion in the gross income of the settlor of income accruing to a revocable trust during any period when the settlor had power to revoke or modify it.²⁷

Although the Court during the 1920s struck down gift taxes imposed retroactively upon gifts that were made and completely vested before the enactment of the taxing statute,²⁸ those decisions have recently been distinguished, and their precedential value limited.²⁹ In United States v. Carlton, the Court declared that [t]he due process standard to be applied to tax statutes with retroactive effect . . . is the same as that generally applicable to retroactive economic legislation—retroactive application of legislation must be shown to be ‘justified by a rational legislative purpose.’³⁰ Applying that principle, the Court upheld retroactive application of a 1987 amendment limiting application of a federal estate tax deduction originally enacted in 1986. Congress’s purpose was neither illegitimate nor arbitrary, the Court noted, since Congress had acted to correct what it reasonably viewed as a mistake in the original 1986 provision that would have created a significant and unanticipated revenue loss. Also, Congress acted promptly and established only a modest period of retroactivity. The fact that the taxpayer had transferred stock in reliance on the original enactment was not dispositive, since [t]ax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code.³¹

Taxing Power

It was not contemplated that the adoption of the Fourteenth Amendment would restrain or cripple the taxing power of the states.³² When the power to tax exists, the extent of the burden is a matter for the discretion of the lawmakers,³³ and the Court will refrain from condemning a tax solely on the ground that it is excessive.³⁴ Nor can the constitutionality of taxation be made to depend upon the taxpayer’s enjoyment of any special benefits from use of the funds raised by taxation.³⁵

Theoretically, public moneys cannot be expended for other than public purposes. Some early cases applied this principle by invalidating taxes judged to be imposed to raise money for purely private rather than public purposes.³⁶ However, modern notions of public purpose have expanded to the point where the limitation has little practical import.³⁷ Whether a use is public or private, although ultimately a judicial question, is a practical question addressed to the law-making department, and it would require a plain case of departure from every public purpose which could reasonably be conceived to justify the intervention of a court.³⁸

The authority of states to tax income is universally recognized.³⁹ Years ago the Court explained that [e]njoyment of the privileges of residence in the state and the attendant right to invoke the protection of its laws are inseparable from responsibility for sharing the costs of government. . . . A tax measured by the net income of residents is an equitable method of distributing the burdens of government among those who are privileged to enjoy its benefits.⁴⁰ Also, a tax on income is not constitutionally suspect because retroactive. The routine practice of making taxes retroactive for the entire year of the legislative session in which the tax is enacted has long been upheld,⁴¹ and there are also situations in which courts have upheld retroactive application to the preceding year or two.⁴²

A state also has broad tax authority over wills and inheritance. A state may apply an inheritance tax to the transmission of property by will or descent, or to the legal privilege of taking property by devise or descent,⁴³ although such tax must be consistent with other due process considerations.⁴⁴ Thus, an inheritance tax law, enacted after the death of a testator but before the distribution of his estate, constitutionally may be imposed on the shares of legatees, notwithstanding that under the law of the state in effect on the date of such enactment, ownership of the property passed to the legatees upon the testator’s death.⁴⁵ Equally consistent with due process is a tax on an inter vivos transfer of property by deed intended to take effect upon the death of the grantor.⁴⁶

The taxation of entities that are franchises within the jurisdiction of the governing body raises few concerns. Thus, a city ordinance imposing annual license taxes on light and power companies does not violate the Due Process Clause merely because the city has entered the power business in competition with such companies.⁴⁷ Nor does a municipal charter authorizing the imposition upon a local telegraph company of a tax upon the lines of the company within its limits at the rate at which other property is taxed but upon an arbitrary valuation per mile, deprive the company of its property without due process of law, inasmuch as the tax is a mere franchise or privilege tax.⁴⁸

States have significant discretion in how to value real property for tax purposes. Thus, assessment of properties for tax purposes over real market value is allowed as merely another way of achieving an increase in the rate of property tax, and does not violate due process.⁴⁹ Likewise, land subject to mortgage may be taxed for its full value without deduction of the mortgage debt from the valuation.⁵⁰

A state also has wide discretion in how to apportion real property tax burdens. Thus, a state may defray the entire expense of creating, developing, and improving a political subdivision either from funds raised by general taxation, by apportioning the burden among the municipalities in which the improvements are made, or by creating (or authorizing the creation of) tax districts to meet sanctioned outlays.⁵¹ Or, where a state statute authorizes municipal authorities to define the district to be benefitted by a street improvement and to assess the cost of the improvement upon the property within the district in proportion to benefits, their action in establishing the district and in fixing the assessments on included property, cannot, if not arbitrary or fraudulent, be reviewed under the Fourteenth Amendment upon the ground that other property benefitted by the improvement was not included.⁵²

On the other hand, when the benefit to be derived by a railroad from the construction of a highway will be largely offset by the loss of local freight and passenger traffic, an assessment upon such railroad violates due process,⁵³ whereas any gains from increased traffic reasonably expected to result from a road improvement will suffice to sustain an assessment thereon.⁵⁴ Also the fact that the only use made of a lot abutting on a street improvement is for a railway right of way does not make invalid, for lack of benefits, an assessment thereon for grading, curbing, and paving.⁵⁵ However, when a high and dry island was included within the boundaries of a drainage district from which it could not be benefitted directly or indirectly, a tax imposed on the island land by the district was held to be a deprivation of property without due process of law.⁵⁶ Finally, a state may levy an assessment for special benefits resulting from an improvement already made⁵⁷ and may validate an assessment previously held void for want of authority.⁵⁸

Jurisdiction to Tax

The operation of the Due Process Clause as a jurisdictional limitation on the taxing power of the states has been an issue in a variety of different contexts, but most involve one of two basic questions. First, is there a sufficient relationship between the state exercising taxing power and the object of the exercise of that power? Second, is the degree of contact sufficient to justify the state’s imposition of a particular obligation? Illustrative of the factual settings in which such issues arise are 1) determining the scope of the business activity of a multi-jurisdictional entity that is subject to a state’s taxing power; 2) application of wealth transfer taxes to gifts or bequests of nonresidents; 3) allocation of the income of multi-jurisdictional entities for tax purposes; 4) the scope of state authority to tax income of nonresidents; and 5) collection of state use taxes.

The Court’s opinions in these cases have often discussed due process and dormant commerce clause issues as if they were indistinguishable.⁵⁹ A later decision, Quill Corp. v. North Dakota,⁶⁰ however, used a two-tier analysis that found sufficient contact to satisfy due process but not dormant commerce clause requirements. In Quill,⁶¹ the Court struck down a state statute requiring an out-of-state mail order company with neither outlets nor sales representatives in the state to collect and transmit use taxes on sales to state residents, but did so based on Commerce Clause rather than due process grounds. In 2018, the Court, however, reversed course in South Dakota v. Wayfair, overturning Quill’s Commerce Clause holding and upholding a South Dakota law that required certain large retailers that lacked a physical presence in the state to collect and remit sales taxes from retail sales to South Dakota residents.⁶² In so holding, the Wayfair Court concluded that while the Due Process and Commerce Clause standards may not be identical or coterminous, they are closely related, and there are significant parallels between the two standards.⁶³

Real Property

Even prior to the ratification of the Fourteenth Amendment, it was a settled principle that a state could not tax land situated beyond its limits. Subsequently elaborating upon that principle, the Court has said that, we know of no case where a legislature has assumed to impose a tax upon land within the jurisdiction of another State, much less where such action has been defended by a court.⁶⁴ Insofar as a tax payment may be viewed as an exaction for the maintenance of government in consideration of protection afforded, the logic sustaining this rule is self-evident.

Tangible Personalty

A state may tax tangible property located within its borders (either directly through an ad valorem tax or indirectly through death taxes) irrespective of the residence of the owner.⁶⁵ By the same token, if tangible personal property makes only occasional incursions into other states, its permanent situs remains in the state of origin, and, subject to certain exceptions, is taxable only by the latter.⁶⁶ The ancient maxim, mobilia sequuntur personam, which originated when personal property consisted in the main of articles appertaining to the person of the owner, yielded in modern times to the law of the place where the property is kept and used. The tendency has been to treat tangible personal property as having a situs of its own for the purpose of taxation, and correlatively to . . . exempt [it] at the domicile of its owner.⁶⁷

Thus, when rolling stock is permanently located and used in a business outside the boundaries of a domiciliary state, the latter has no jurisdiction to tax it.⁶⁸ Further, vessels that merely touch briefly at numerous ports never acquire a taxable situs at any one of them, and are taxable in the domicile of their owners or not at all.⁶⁹ Thus, where airplanes are continually in and out of a state during the course of a tax year, the entire fleet may be taxed by the domicile state.⁷⁰

Conversely, a nondomiciliary state, although it may not tax property belonging to a foreign corporation that has never come within its borders, may levy a tax on movables that are regularly and habitually used and employed in that state. Thus, although the fact that cars are loaded and reloaded at a refinery in a state outside the owner’s domicile does not fix the situs of the entire fleet in that state, the state may nevertheless tax the number of cars that on the average are found to be present within its borders.⁷¹ But no property of an interstate carrier can be taken into account unless it can be seen in some plain and fairly intelligible way that it adds to the value of the road and the rights exercised in the state.⁷² Or, a state property tax on railroads, which is measured by gross earnings apportioned to mileage, is constitutional unless it exceeds what would be legitimate as an ordinary tax on the property valued as part of a going concern or is relatively higher than taxes on other kinds of property.⁷³

Intangible Personalty

To determine whether a state may tax intangible personal property, the Court has applied the fiction mobilia sequuntur personam (movable property follows the person) and has also recognized that such property may acquire, for tax purposes, a permanent business or commercial situs. The Court, however, has never clearly disposed of the issue whether multiple personal property taxation of intangibles is consistent with due process. In the case of corporate stock, however, the Court has obliquely acknowledged that the owner thereof may be taxed at his own domicile, at the commercial situs of the issuing corporation, and at the latter’s domicile. Constitutional lawyers speculated whether the Court would sustain a tax by all three jurisdictions, or by only two of them. If the latter, the question would be which two—the state of the commercial situs and of the issuing corporation’s domicile, or the state of the owner’s domicile and that of the commercial situs.⁷⁴

Thus far, the Court has sustained the following personal property taxes on intangibles: (1) a debt held by a resident against a nonresident, evidenced by a bond of the debtor and secured by a mortgage on real estate in the state of the debtor’s residence;⁷⁵ (2) a mortgage owned and kept outside the state by a nonresident but on land within the state;⁷⁶ (3) investments, in the form of loans to a resident, made by a resident agent of a nonresident creditor;⁷⁷ (4) deposits of a resident in a bank in another state, where he carries on a business and from which these deposits are derived, but belonging absolutely to him and not used in the business ;⁷⁸ (5) membership owned by a nonresident in a domestic exchange, known as a chamber of commerce;⁷⁹ (6) membership by a resident in a stock exchange located in another state;⁸⁰ (7) stock held by a resident in a foreign corporation that does no business and has no property within the taxing state;⁸¹ (8) stock in a foreign corporation owned by another foreign corporation transacting its business within the taxing state;⁸² (9) shares owned by nonresident shareholders in a domestic corporation, the tax being assessed on the basis of corporate assets and payable by the corporation either out of its general fund or by collection from the shareholder;⁸³(10) dividends of a corporation distributed ratably among stockholders regardless of their residence outside the state;⁸⁴ (11) the transfer within the taxing state by one nonresident to another of stock certificates issued by a foreign corporation;⁸⁵ and (12) promissory notes executed by a domestic corporation, although payable to banks in other states.⁸⁶

The following personal property taxes on intangibles have been invalidated:(1) debts evidenced by notes in safekeeping within the taxing state, but made and payable and secured by property in a second state and owned by a resident of a third state;⁸⁷ (2) a tax, measured by income, levied on trust certificates held by a resident, representing interests in various parcels of land (some inside the state and some outside), the holder of the certificates, though without a voice in the management of the property, being entitled to a share in the net income and, upon sale of the property, to the proceeds of the sale.⁸⁸

The Court also invalidated a property tax sought to be collected from a life beneficiary on the corpus of a trust composed of property located in another state and as to which the beneficiary had neither control nor possession, apart from the receipt of income therefrom.⁸⁹ However, a personal property tax may be collected on one-half of the value of the corpus of a trust from a resident who is one of the two trustees thereof, not withstanding that the trust was created by the will of a resident of another state in respect of intangible property located in the latter state, at least where it does not appear that the trustee is exposed to the danger of other ad valorem taxes in another state.⁹⁰ The first case, Brooke v. Norfolk,⁹¹ is distinguishable by virtue of the fact that the property tax therein voided was levied upon a resident beneficiary rather than upon a resident trustee in control of nonresident intangibles. Also different is Safe Deposit & Trust Co. v. Virginia,⁹² where a property tax was unsuccessfully demanded of a nonresident trustee with respect to nonresident intangibles under its control. Likewise, the more recent case of North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust, which saw the Court invalidating a state tax imposed on trust income of an in-state beneficiary, appears to be limited to its facts, where the beneficiaries (1) had not received any trust income, (2) had no right to demand that income, and (3) were uncertain to ever receive that income.⁹³

A state in which a foreign corporation has acquired a commercial domicile and in which it maintains its general business offices may tax the corporation’s bank deposits and accounts receivable even though the deposits are outside the state and the accounts receivable arise from manufacturing activities in another state. Similarly, a nondomiciliary state in which a foreign corporation did business can tax the corporate excess arising from property employed and business done in the taxing state.⁹⁴ On the other hand, when the foreign corporation transacts only interstate commerce within a state, any excise tax on such excess is void, irrespective of the amount of the tax.⁹⁵

Also a domiciliary state that imposes no franchise tax on a stock fire insurance corporation may assess a tax on the full amount of paid-in capital stock and surplus, less deductions for liabilities, notwithstanding that such domestic corporation concentrates its executive, accounting, and other business offices in New York, and maintains in the domiciliary state only a required registered office at which local claims are handled. Despite the vicissitudes which the so-called ‘jurisdiction-to-tax’ doctrine has encountered, the presumption persists that intangible property is taxable by the state of origin.⁹⁶

A property tax on the capital stock of a domestic company, however, the appraisal of which includes the value of coal mined in the taxing state but located in another state awaiting sale, deprives the corporation of its property without due process of law.⁹⁷ Also void for the same reason is a state tax on the franchise of a domestic ferry company that includes in the valuation of the tax the worth of a franchise granted to the company by another state.⁹⁸

Transfer (Inheritance, Estate, Gift) Taxes

As a state has authority to regulate transfer of property by wills or inheritance, it may base its succession taxes upon either the transmission or receipt of property by will or by descent.⁹⁹ But whatever may be the justification of their power to levy such taxes, since 1905 the states have consistently found themselves restricted by the rule in Union Transit Co. v. Kentucky,¹⁰⁰ which precludes imposition of transfer taxes upon tangible which are permanently located or have an actual situs outside the state.

In the case of intangibles, however, the Court has oscillated in upholding, then rejecting, and again sustaining the levy by more than one state of death taxes upon intangibles. Until 1930, transfer taxes upon intangibles by either the domiciliary or the situs (but nondomiciliary) state, were with rare exceptions approved. Thus, in Bullen v. Wisconsin,¹⁰¹ the domiciliary state of the creator of a trust was held competent to levy an inheritance tax on an out-of-state trust fund consisting of stocks, bonds, and notes, as the settlor reserved the right to control disposition and to direct payment of income for life. The Court reasoned that such reserved powers were the equivalent to a fee in the property. It took cognizance of the fact that the state in which these intangibles had their situs had also taxed the trust.¹⁰²

On the other hand, the mere ownership by a foreign corporation of property in a nondomiciliary state was held insufficient to support a tax by that state on the succession to shares of stock in that corporation owned by a nonresident decedent.¹⁰³ Also against the trend was Blodgett v. Silberman,¹⁰⁴ in which the Court defeated collection of a transfer tax by the domiciliary state by treating coins and bank notes deposited by a decedent in a safe deposit box in another state as tangible property.¹⁰⁵

In the course of about two years following the Depression, the Court handed down a group of four decisions that placed the stamp of disapproval upon multiple transfer taxes and—by inference—other multiple taxation of intangibles.¹⁰⁶ The Court found that practical considerations of wisdom, convenience and justice alike dictate the desirability of a uniform rule confining the jurisdiction to impose death transfer taxes as to intangibles to the State of the [owner’s] domicile.¹⁰⁷ Thus, the Court proceeded to deny the right of nondomiciliary states to tax intangibles, rejecting jurisdictional claims founded upon such bases as control, benefit, protection or situs. During this interval, 1930-1932, multiple transfer taxation of intangibles came to be viewed, not merely as undesirable, but as so arbitrary and unreasonable as to be prohibited by the Due Process Clause.

The Court has expressly overruled only one of these four decisions condemning multiple succession taxation of intangibles. In 1939, in Curry v. McCanless, the Court announced a departure from [t]he doctrine, of recent origin, that the Fourteenth Amendment precludes the taxation of any interest in the same intangible in more than one state . . . .¹⁰⁸ Taking cognizance of the fact that this doctrine had never been extended to the field of income taxation or consistently applied in the field of property taxation, the Court declared that a correct interpretation of constitutional requirements would dictate the following conclusions: From the beginning of our constitutional system control over the person at the place of his domicile and his duty there, common to all citizens, to contribute to the support of government have been deemed to afford an adequate constitutional basis for imposing on him a tax on the use and enjoyment of rights in intangibles measured by their value. . . . But when the taxpayer extends his activities with respect to his intangibles, so as to avail himself of the protection and benefit of the laws of another state, in such a way as to bring his person or property within the reach of the tax gatherer there, the reason for a single place of taxation no longer obtains . . . . [However], the state of domicile is not deprived, by the taxpayer’s activities elsewhere, of its constitutional jurisdiction to tax . . . .¹⁰⁹

In accordance with this line of reasoning, the domicile of a decedent (Tennessee) and the state where a trust received securities conveyed from the decedent by will (Alabama) were both allowed to impose a tax on the transfer of these securities. In effecting her purposes, the testatrix brought some of the legal interests which she created within the control of one state by selecting a trustee there and others within the control of the other state by making her domicile there. She necessarily invoked the aid of the law of both states, and her legatees, before they can secure and enjoy the benefits of succession, must invoke the law of both.¹¹⁰

On the authority of Curry v. McCanless, the Court, in Pearson v. McGraw,¹¹¹ sustained the application of an Oregon transfer tax to intangibles handled by an Illinois trust company, although the property was never physically present in Oregon. Jurisdiction to tax was viewed as dependent, not on the location of the property in the state, but on the fact that the owner was a resident of Oregon. In Graves v. Elliott,¹¹² the Court upheld the power of New York, in computing its estate tax, to include in the gross estate of a domiciled decedent the value of a trust of bonds managed in Colorado by a Colorado trust company and already taxed on its transfer by Colorado, which trust the decedent had established while in Colorado and concerning which he had never exercised any of his reserved powers of revocation or change of beneficiaries. It was observed that the power of disposition of property is the equivalent of ownership. It is a potential source of wealth and its exercise in the case of intangibles is the appropriate subject of taxation at the place of the domicile of the owner of the power. The relinquishment at death, in consequence of the non-exercise in life, of a power to revoke a trust created by a decedent is likewise an appropriate subject of taxation.¹¹³

The costliness of multiple taxation of estates comprising intangibles can be appreciably aggravated if one or more states find that the decedent died domiciled within its borders. In such cases, contesting states may discover that the assets of the estate are insufficient to satisfy their claims. Thus, in Texas v. Florida,¹¹⁴ the State of Texas filed an original petition in the Supreme Court against three other states who claimed to be the domicile of the decedent, noting that the portion of the estate within Texas alone would not suffice to discharge its own tax, and that its efforts to collect its tax might be defeated by adjudications of domicile by the other states. The Supreme Court disposed of this controversy by sustaining a finding that the decedent had been domiciled in Massachusetts, but intimated that thereafter it would take jurisdiction in like situations only in the event that an estate was valued less than the total of the demands of the several states, so that the latter were confronted with a prospective inability to collect.

Corporate Privilege Taxes

A domestic corporation may be subjected to a privilege tax graduated according to paid-up capital stock, even though the stock represents capital not subject to the taxing power of the state, because the tax is levied not on property but on the privilege of doing business in corporate form.¹¹⁵ However, a state cannot tax property beyond its borders under the guise of taxing the privilege of doing an intrastate business. Therefore, a license tax based on the authorized capital stock of an out-of-state corporation is void,¹¹⁶ even though there is a maximum fee,¹¹⁷ unless the tax is apportioned based on property interests in the taxing state.¹¹⁸ On the other hand, a fee collected only once as the price of admission to do intrastate business is distinguishable from a tax and accordingly may be levied on an out-of-state corporation based on the amount of its authorized capital stock.¹¹⁹

A municipal license tax imposed on a foreign corporation for goods sold within and without the state, but manufactured in the city, is not a tax on business transactions or property outside the city and therefore does not violate the Due Process Clause.¹²⁰ But a state lacks jurisdiction to extend its privilege tax to the gross receipts of a foreign contracting corporation for fabricating equipment outside the taxing state, even if the equipment is later installed in the taxing state. Unless the activities that are the subject of the tax are carried on within its territorial limits, a state is not competent to impose such a privilege tax.¹²¹

Individual Income Taxes

A state may tax annually the entire net income of resident individuals from whatever source received,¹²² as jurisdiction is founded upon the rights and privileges incident to domicile. A state may also tax the portion of a nonresident’s net income that derives from property owned by him within its borders, and from any business, trade, or profession carried on by him within its borders.¹²³ This state power is based upon the state’s dominion over the property he owns, or over activity from which the income derives, and from the obligation to contribute to the support of a government that secures the collection of such income. Accordingly, a state may tax residents on income from rents of land located outside the state; from interest on bonds physically outside the state and secured by mortgage upon lands physically outside the state;¹²⁴ and from a trust created and administered in another state and not directly taxable to the trustee.¹²⁵ Further, the fact that another state has lawfully taxed identical income in the hands of trustees operating in that state does not necessarily destroy a domiciliary state’s right to tax the receipt of income by a resident beneficiary.¹²⁶

Corporate Income Taxes: Foreign Corporations

A tax based on the income of a foreign corporation may be determined by allocating to the state a proportion of the total,¹²⁷ unless the income attributed to the state is out of all appropriate proportion to the business transacted in the state.¹²⁸ Thus, a franchise tax on a foreign corporation may be measured by income, not just from business within the state, but also on net income from interstate and foreign business.¹²⁹ Because the privilege granted by a state to a foreign corporation of carrying on business supports a tax by that state, it followed that a Wisconsin privilege dividend tax could be applied to a Delaware corporation despite its having its principal offices in New York, holding its meetings and voting its dividends in New York, and drawing its dividend checks on New York bank accounts. The tax could be imposed on the privilege of declaring and receiving dividends out of income derived from property located and business transacted in Wisconsin, equal to a specified percentage of such dividends, the corporation being required to deduct the tax from dividends payable to resident and nonresident shareholders.¹³⁰

Insurance Company Taxes

A privilege tax on the gross premiums received by a foreign life insurance company at its home office for business written in the state does not deprive the company of property without due process,¹³¹ but such a tax is invalid if the company has withdrawn all its agents from the state and has ceased to do business there, merely continuing to receive the renewal premiums at its home office.¹³² Also violating due process is a state insurance premium tax imposed on a nonresident firm doing business in the taxing jurisdiction, where the firm obtained the coverage of property within the state from an unlicenced out-of-state insurer that consummated the contract, serviced the policy, and collected the premiums outside that taxing jurisdiction.¹³³ However, a tax may be imposed upon the privilege of entering and engaging in business in a state, even if the tax is a percentage of the annual premiums to be paid throughout the life of the policies issued. Under this kind of tax, a state may continue to collect even after the company’s withdrawal from the state.¹³⁴

A state may lawfully extend a tax to a foreign insurance company that contracts with an automobile sales corporation in a third state to insure customers of the automobile sales corporation against loss of cars purchased through the automobile sales corporation, insofar as the cars go into the possession of a purchaser within the taxing state.¹³⁵ On the other hand, a foreign corporation admitted to do a local business, which insures its property with insurers in other states who are not authorized to do business in the taxing state, cannot constitutionally be subjected to a 5% tax on the amount of premiums paid for such coverage.¹³⁶ Likewise a Connecticut life insurance corporation, licensed to do business in California, which negotiated reinsurance contracts in Connecticut, received payment of premiums on such contracts in Connecticut, and was liable in Connecticut for payment of losses claimed under such contracts, cannot be subjected by California to a privilege tax measured by gross premiums derived from such contracts, notwithstanding that the contracts reinsured other insurers authorized to do business in California and protected policies effected in California on the lives of California residents. The tax cannot be sustained whether as laid on property, business done, or transactions carried on, within California, or as a tax on a privilege granted by that state.¹³⁷