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decided: March 30, 1936.



Hughes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Stone, Roberts, Cardozo

Author: Cardozo

[ 297 U.S. Page 683]

 MR. JUSTICE CARDOZO delivered the opinion of the Court.

The question is whether a statute of North Carolina laying a tax upon the net income of interstate railway companies has been so applied to the appellant as to violate the prohibitions of the Constitution of the United States.

The Norfolk & Western Railway Company, a Virginia corporation, has lines of railway in North Carolina, Virginia, Maryland, West Virginia, Kentucky and Ohio. Its lines in North Carolina are branches, connecting with the main line at Roanoke, Lynchburg and Abingdon, and running from those points of junction to Winston-Salem, Durham and Elkland. For the years 1927, 1928, and 1929, it made return to the Commissioner of Revenue of North Carolina that it had no taxable income. The Commissioner notified the company that the returns were erroneous, and made reassessments as follows: for 1927, $29,727.04; for 1928, $27,481.57; and for 1929, $29,213.10, in all $86,421.71. The amount so fixed was paid, and this suit was brought in accordance with an applicable statute to recover back the payment. The Superior Court of Wake County, refusing to confirm the report of

[ 297 U.S. Page 684]

     a referee in favor of the taxpayer, gave judgment for the state. The Supreme Court of North Carolina affirmed, 208 N. C. 397; 181 S. E. 248, and the case is here upon appeal. Judicial Code, § 237, 28 U. S. C., § 344.

The net income of interstate railways doing business in North Carolina is taxed in accordance with the following formula (Public Laws of 1927, chapter 80, § 312; Public Laws of 1929, chapter 345, § 312): "And when their business is in part within and in part without the State, their net income within this State shall be ascertained by taking their gross 'operating revenues' within the State, including in their gross 'operating revenues' within this State the equal mileage proportion within this State of their interstate business, and deducting from their gross 'operating revenues' the proportionate average of 'operating expenses' or 'operating ratio' for their whole business, as shown by the Interstate Commerce Commission standard classification of accounts." The formula thus adopted is not void upon its face. Pittsburgh, C., C. & St. Louis R. Co. v. Backus, 154 U.S. 421, 430, 431; State Railroad Tax Cases, 92 U.S. 575, 608, 611; Louisville Board of Trade v. Indianapolis, C. & S. Traction Co., 34 I. C. C. 640, 642; Low Moor Iron Co. v. Chesapeake & Ohio Ry. Co., 42 I. C. C. 221, 227; cf. Atlantic Coast Line R. Co. v. Doughton, 262 U.S. 413. A division of revenues and costs in accordance with state lines can never be made for a unitary business with more than approximate correctness. There is a tendency, none the less, for rates to be so adjusted to expenses over different portions of a system as to produce, when averages are considered, a uniformity of net return, or a fair approach thereto.*fn1

[ 297 U.S. Page 685]

     Thus mileage may have at times a relation to a tax upon net income which it may not bear to a property tax or even to one upon the value of a franchise. Cf. Rowley v. Chicago & N. W. Ry. Co., 293 U.S. 102, 111; Wallace v. Hines, 253 U.S. 66, 69. Taxpayer and state would be swamped with administrative difficulties if left to struggle through every case without the aid of a formula of ready application. In the perplexities besetting the process of assessment the statute is the outcome of a reasonable endeavor to arrive at a proportion of general validity. Pittsburgh, C., C. & St. L. Ry. Co. v. Backus, supra. No contention to the contrary is made by the appellant.*fn2

This is not to say that the tax is valid as imposed. A formula not arbitrary on its face or in its general operation may be unworkable or unfair when applied to a particular railway in particular conditions. Cf. Hans Rees' Sons v. North Carolina, 283 U.S. 123, 129, 132; Southern Ry. Co. v. Kentucky, 274 U.S. 76, 83, 88. A segment of the line may operate under handicaps resulting from the nature of the traffic, the topography of the country, the maladjustment or inadequacy of passenger or freight tariffs in one district or another. As applied to such a segment the average mileage prorate of the entire railway system may be an arbitrary test of the relation between revenue and expenses. Cf. Northern Pacific Ry. Co. v. Department of Public Works, 268 U.S. 39, 44; Low Moor Iron Co. v. Chesapeake & Ohio Ry. Co., supra. If this is made to appear with an ensuing burden on the taxpayer grossly in excess of the results of a more accurate apportionment, the statute to that extent

[ 297 U.S. Page 686]

     is an unconstitutional endeavor to tax the income of a business in another jurisdiction. Hans ...

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