LEHNHAUSEN v. LAKE SHORE AUTO PARTS CO.
Legal provision: Equal Protection
Argument of William J. Scott
Chief Justice Warren E. Burger: -- in two consolidated cases, 71-685, Lehnhausen against Lake Shore Auto Parts, and 71-691 Barrett against Shapiro.
Mr. Scott, you may proceed whenever you are ready.
Mr. William J. Scott: Mr. Chief Justice, may it please the Court.
The cases for the Court this morning involve the legitimate and reasonable attempt of the representatives of the people of the State of Illinois to bring in our cake an unworkable tax structure, into accordance with the problems of our modern day society and bring a taxing system that was based in the time when Illinois was an agricultural State over hundred years ago in the line with the concepts of today when we were one of the largest industrial States in the nation.
The tax under consideration was the Personal Property Tax which is unworkable, unjust and unfair to the people of our State.
Now its administration it varied completely throughout the State.
The bulk of the funds came from the assessments and corporations that were easy to ascertain and easy to enforce due to the fact that we could dissolve the corporation if they failed to file their papers and to pay their taxes.
The tax in individuals was administered variously throughout 102 different counties.
One example of the discrepancy was that the downstate agricultural community, the individuals paid $27 million in 1970, and in the industrial areas of Chicago, it was less than $2 million.
It was virtually impossible to ascertain the intangibles and then some of the means of assessing they took into consideration that to tax it at the full rate would be almost a confiscation of the property.
For that reason, the legislature, the elected officials and the members of the delegation to the new constitutional convention all strived to develop an orderly way of phasing out this tax.
Along with that proposition, the legislatures of the State in 1969 also voted to impose the State income tax in the State for the first time.
That income tax was held constitutional by the Supreme Court of Illinois despite the fact that there was a difference in classification of the tax rate for corporations and individuals.
During that same year, the legislature by a joint resolution of the Senate and the House overwhelmingly placed a referendum before the people of the State, stating that the new order to be adopted by the people would eliminate an ad valorem tax on individuals.
That resolution was adopted overwhelmingly, somewhere between seven and eight out of every person in the State voted for it.
The new Constitution took this into consideration of an orderly phase out of the Personal Property Tax, and they provided that for any tax that was eliminated before January 1, 1971 that there could be no new tax placed on this substitute for it, realizing that this had been the main purpose of our State Income tax and that the budgets of the local school districts and local governments had been determined accordingly.
However, with the desire to completely phase out the Personal Property Tax by 1979, the delegates to the constitutional convention provided that any taxes that were eliminated on personal property after January 1, 1971, or in other words, the day after this constitutional amendment, the 1870 Constitution would have become effective, would have to be replaced by a substitute source of revenue on that same source.
So we are talking about the question of whether or not there is any meaningful tax relief for the individual citizens of Illinois as was designated by the legislature, by their elected officials, by their delegates to the constitutional convention in line with the will of the people of the State.
In the case at hand, the Lake Shore Auto Parts Corporation attacked the constitutionality of the Revenue Article providing for the Personal Property Tax, saying that by virtue of the amendment to the 1870 Constitution, the Revenue Article became unconstitutional, claiming that it violated the Federal Constitution and Equal Protection of law.
Faced with that possibility, that the Revenue Article would be unconstitutional and that over $300 million worth of finances every year would be lost to the School District, resulting in a complete chaos in our local government, the Supreme Court of Illinois ruled that the Revenue Article was not unconstitutional because of the amendment, but went on to rule that the amendment to the Constitution was unconstitutional under the Federal Constitution.
In doing so, they reacted without the consideration of the existing fact that a new Constitution had been adopted by delegates representing people of the State and had been adopted by the people of the State.
Now that Constitution specifically recognized the facts involved in the Article 9 Amendments to the previous Constitution and provided for a complete phasing out of the Personal Property Tax.
As a matter of fact new Constitution also placed on the State for the first time in history, the responsibility for the primary funding of education in the State that there was an attempt to modernize our whole taxing structure and to deal with the responsibilities of government.
That under this reasonable scheme it was designed to remove the tax first from the people that have been treated most unjustly, and then do systematically remove the tax completely and that the responsibility of financing schools and local governments would be met by other form such as our new State Income Tax and based on the constitutional obligation that the primary responsibility for education in the State now became --
Justice William J. Brennan: I am not quite clear with Attorney General.
I gather as to ad valorem taxes against corporations, is there a phasing out timetable?
Mr. William J. Scott: Yes sir.
Justice William J. Brennan: And that in some -- is that in a provision of the an existing Constitution or something that's --
Mr. William J. Scott: Yes, what had happened was that in 1970, the State convened a constitutional convention, and for the first time in a hundred years revised our Constitution completely.
In that Constitution, the delegates specifically took notice of this problem that we had in the Personal Property Tax and provided for a phasing out completely of the Personal Property Tax by 1979.
Justice William J. Brennan: That's actually written in the --
Mr. William J. Scott: That's actually written into the new Constitution.
Justice William J. Brennan: And automatically will become effective unless the constitution was again amended?
Mr. William J. Scott: It will automatically become effective and the provision realizing that a great deal of the financial support of our school system was based on the Personal Property Tax and by far the bulk of it based on the Personal Property Tax and corporations.
Justice William J. Brennan: And did you say earlier if I may interrupt, there is $300 million raised by the property tax against corporations alone?
Mr. William J. Scott: The total tax now is somewhere in the nature of $350 million.
Justice William J. Brennan: Raised by taxes only against corporations?
Mr. William J. Scott: Only by personal property -- of that amount somewhere between $50 and 75 million of it comes from the individuals.
Justice William J. Brennan: Oh.
Mr. William J. Scott: And approximately $300 million of it comes from the corporations.
Justice William J. Brennan: Now the first --
Mr. William J. Scott: Back in 1970, we were talking about $300 million for the total package.
Justice William J. Brennan: But now the first step was to eliminate the property taxes against the individuals.
Mr. William J. Scott: It was against the individuals which is done by an amendment to the old Constitution at the time the State Income Tax went into effect.
Justice William J. Brennan: Now then when does the next step became --?
Mr. William J. Scott: The next step was a convening of a new constitutional convention which provided that any other taxes that hadn't gone into effect as of the effective date of that amendment, January 1, 1971 that any other taxes would be phased out no later than 1979.
Justice William J. Brennan: Well, any other could mean only taxes against corporations -- property tax against corporations, could it?
Mr. William J. Scott: That was our contention.
Any other is against individual, is what they specified and of course, the Supreme Court of Illinois in this case had indicated that the distinction between individuals and corporations which is one of the points under consideration --
Justice William J. Brennan: Well, I’m still puzzled Mr. Attorney General?
Mr. William J. Scott: Yes.
Justice William J. Brennan: I still don’t understand.
Do you have anywhere a reference to the actual language of your constitutional convention?
Mr. William J. Scott: Yes we do.
We have it in our brief.
Justice William J. Brennan: Could you give me just the page --
Mr. William J. Scott: And --
Justice William J. Brennan: Is that at page four of your brief in that footnote?
Mr. William J. Scott: Page four on the footnote.
That on or before January 1, 1979, the General Assembly shall abolish all ad valorem personal property tax and concurrently therewith and thereafter shall replace all revenue lost by units of local government and school districts as a result of the abolition of the ad valorem personal property tax subsequent to January 2, 1971, taking into cognizance since the fact that on January 1 of 1971 under the Article IX-A Amendment to the Old Constitution that the tax in individuals would have been eliminated.
Justice William J. Brennan: But this is not self-operative, it requires a law of the general assembly abolishing?
Mr. William J. Scott: That’s right, the -- it would require that the legislature orderly phase it on and replace it.
Justice William J. Brennan: Suppose the legislature didn’t do what this requires it to do?
Mr. William J. Scott: Well, then we would have complete chaos and then we would have lost the --
Justice William J. Brennan: I am familiar, in my own State of Constitutional provisions which have directed the legislature something back in 1947, and haven’t done it yet?
Mr. William J. Scott: Well, it would have left us in the situation that we would be in today if the arguments in the Lake Shore Auto Parts Corporations upheld that we would have no source of revenue for financing the State, the practical numbers here for example.
For the taxes of 70, 71, 72, that are under consideration is of billion dollars.
And so that its the financing of the school districts of our State.
Justice William J. Brennan: I don't -- or has the general assembly has yet introduced any legislation, pursuant to sub-Section C yet?
Mr. William J. Scott: The most important factor that happened and I think that it should be recognized by this Court and was not involved in the majority of decisions of the Supreme Court is that the State for the first time in history did pass an income tax, to give us a source of revenue.
And that that went into, has gone into effect and that there is the distinction, they are 4% rate on Corporations and a 2.5% rate on individuals.
And what this provision in the Constitution is saying is that, when you do take off the tax as to Corporations, that there has to be some type of compensating state wide tax other than the --
Justice William J. Brennan: Well are you suggesting that the new income tax --
Mr. William J. Scott: Well --
Justice William J. Brennan: -- is that compensating tax?
Mr. William J. Scott: It is the vehicle that now exists for the first time.
For a hundred of years it has withheld that we could not an income tax and we presented the case in 1969 to the Supreme Court and due the fact that the economics and the structure that stated change they reversed themselves and ruled that it was constitutional to have an income tax in Illinois and also, that is was constitutional to make a differential in the classifications between Corporations and individuals, which is the basis that the delegates to the Constitutional Convention we are operating on.
And that the whole program was an orderly and designed one to change our method of financing to even more equitable and realistic one for the state.
Chief Justice Warren E. Burger: As I understood, one of the arguments that you have alluded to, but stressed in your brief is that, in terms of trying to collect this tax from individuals, it was totally uneconomic because the cost was more than the reward and that only was it 2% of the total tax came from individuals, and 98% of that from corporations.
Is it --
Mr. William J. Scott: But it varied throughout the State.
The farmer, of course, was faced with the problem that his tractor was sitting there in the field that was enforceable, the assessor could see it.
The vast bulk of the holdings in the state of course, as far as individuals would come in stocks and then bank accounts that could be shifted out to the state.
And so that the problem that the enforcing officers had was that to go in on a assessment of an individual on his automobile for example, it would cost more in a Court case, they collected than the tax was.
Chief Justice Warren E. Burger: You haven’t addressed yourself to the power of the state to have one tax on corporations which is not inapplicable to anybody else, at least you haven't directly from me?
Mr. William J. Scott: Well, as I mentioned, in our income tax case, our own Supreme Court took cognizance of a number of cases that had existed in the U.S. Supreme Court that said that it is possible to classify as to ownership, that it is possible to do that in a property tax case.
Such as in the Allied Stores case of Ohio which came after the Quaker City Cab case which was in 1959, in the most recent cases, which permitted classification of property tax proposed on the basis of identity of the owner.
At the time that the Illinois Supreme Court upheld the distinction between the corporations and individuals in the income tax, they referred to other cases such as Lawrence versus Mississippi, where Justice Stone who was one of the distinguished dissenting judges in the Quaker City Cab case along with Justice Brandeis and Justice Holmes.
Justice Stone said, “States have unrestricted power to tax those domicile within them, so long as that tax is imposed to put upon property within the State or privileges enjoyed there and that it is not arbitrary or unreasonable.”
In this case, it was the state income tax reliving domestic corporations but not ones from outside the state on income from activities carried on outside of the state and this was held not to violate the Equal Protection Clause.
There have been many cases that permit the state to single out property of corporation and subject it to taxation, to the exclusion of all others.
And I submit to the Court that the Illinois Constitution, the Illinois Statutes, the Illinois Law, the Federal Constitution, the Federal Law, does permit our state to single out property of the corporation and subject it with taxation to the exclusion of all others.
That in doing so, that the legislature reflected the will of the people of the State and I respectfully ask the support to take this into consideration, and reverse the judgment of the Supreme Court of Illinois.
Justice William H. Rehnquist: Mr. Scott, let me ask you a question about the Constitutional provision that Justice Brennan inquired about, which is on the footnote on page 4 of your brief.
Supposing that the legislature of Illinois does nothing more than it’s already done between now and 1979 and this Constitutional Provision remains as it is.
Would the ad valorem tax be automatically unconstitutional as of 1979?
Mr. William J. Scott: Yes.
Justice William H. Rehnquist: Even though the legislature does nothing more about it?
Mr. William J. Scott: That’s right and so that the incentive of course, on the legislature is that we would have no way of replacing this tremendous volume of revenue for our school district.
So it’s inconceivable that having gone through the anguish of placing the income tax on the State that the legislature would do nothing to finance the schools.
Certainly, the whole attempt here is to have a responsible and reasonable approach to this tremendous problem of financing local government and specifically the schools of our State.
Justice William J. Brennan: Do I understand Mr. Attorney General that your answer to Justice Rehnquist is that automatically even if your legislature does nothing under Section C, on January 1, 1979, the ad valorem personal property tax, even as against corporations, would this abolish?
Mr. William J. Scott: It would violate the Illinois Constitution.
Justice William J. Brennan: No, but if your legislature does nothing --
Mr. William J. Scott: Yes sir.
Justice William J. Brennan: -- as this requires them to do, nevertheless are you saying that the --
Mr. William J. Scott: That’s my interpretation --
Justice William J. Brennan: Alright.
Justice Harry A. Blackmun: Mr. Scott, do you know whether other States draw the same distinction between corporations and individuals, whether there doing so has been upheld against the Constitution attack?
Mr. William J. Scott: Well, I think one of the important factors of this case is that all of the States like Illinois are going through this transition.
48 out of 50 States do have some type of a personal property tax.
Ours of course --
Justice Harry A. Blackmun: Are you trying to suggest that Illinois is on the way up the end of the line in getting to this point?
Mr. William J. Scott: We had a very real problem.
Remember amending our Constitution took us a 100 years to get it done?
Justice Harry A. Blackmun: That’s why I made my statement and I think you are way behind the tax, but coming to my question, do you know of any other State which draws of the same distinction between corporations and individuals in which distinction has been upheld against Constitutional attack?
Mr. William J. Scott: No, I don’t.
Generally speaking, the --
Justice Harry A. Blackmun: I’ll suggest that there are some.
It might well be worth investigating.
Mr. William J. Scott: Thank you.
The chief of our appellate division died of a heart attack.
He had been the person who had been handling this case and that without the benefit of his consultation, it may well be that we are overlooking.
Chief Justice Warren E. Burger: Thank you Mr. Attorney General.
Argument of Aubrey F. Kaplan
Mr. Aubrey F. Kaplan: Mr. Chief Justice, may it please the Court.
The issue in this case as we see it, is whether or not a State’s highest Court can disregard a Constitution of that State and its own prior decisions in determining whether or not a classification for tax purpose is valid.
Justice William O. Douglas: That wouldn't be a federal question, would it?
Mr. Aubrey F. Kaplan: Well, I believe that the determination of the validity of a classification as whether or not it’s offensive to the Fourteenth Amendment would be.
Justice William O. Douglas: But not in respect to what to the State Constitution means and requires?
Mr. Aubrey F. Kaplan: I believe that whether a State Court determines -- resolves a case in accordance with its own law or completely disregards its own law, it own case law and its own Constitution in deciding a case, is a federal question.
It seems to me that litigants who present pleadings, arguments, all the way through in the case and may I call Your Honor’s attention to the appendix and I think it's, page 1 where you -- relevant docket entries.
There is only one relevant docket entry which antedates the approval by the elector in Illinois of the 1970 Constitution.
And throughout the litigation, the State's Attorney of Cook county, and the Attorney General as well have relied on --
Justice William O. Douglas: Your trial Court in this case could have invalidated both under the State and the federal question, but Justice Schaefer as I read his opinion, relied only on the Fourteenth Amendment?
Mr. Aubrey F. Kaplan: Justice Schaefer, no Your Honor.
Justice Schaefer relied on the superseded Illinois Constitution of 1870 to invalidate IX-A.
Justice William O. Douglas: Then we don’t have the federal question?
Mr. Aubrey F. Kaplan: Well, I think the federal question is, must our litigants deprived of a fair trial and due process of law when a State Court refuses to observe its own case law and its own Constitution which was in effect at the time of the decision.
You see, the 1970 Constitution came into effect on July 1, 1971.
The opinion handed down by Justice Schaefer appeared about 10 days later.
Now the case law in Illinois as a matter of fact with opinions written by Justice Schaefer say that the Illinois reviewing Courts must decide cases in terms of the law as it exists at the time of the decision and not at some prior time.
Not only that, Justice Shafer in an opinion, written shortly before this in a case called, in the Hammer case, which appears in --
Justice William H. Rehnquist: Mr. Kaplan?
Mr. Aubrey F. Kaplan: I am sorry.
Justice William H. Rehnquist: At the page A-15 of the petition for writ of certiorari, I think it must be at the last page of Justice Schaefer’s majority opinion, he says, “we hold therefore that the discrimination produced by Article IX-A violates the Equal Protection Clause of the Fourteenth Amendment.
Apart from that, discrimination the validity of the Revenue Act is not challenged.”
Now, that sounds to me like a holding under the federal Constitution?
Mr. Aubrey F. Kaplan: Yes.
Justice William O. Douglas: Yes but it is not a ruling on the due process question that you now you presenting?
Mr. Aubrey F. Kaplan: Well we are raising it because Justice Schaefer limited his examination of the governing law to Illinois' 1870 Constitution.
The Illinois' 1870 Constitution said that you could not -- that the personal property tax must be uniform and it must be applied to everyone.
The 1970 Constitution provides specifically for classification, and it provides that the classes maybe relieved of the tax in series, if you -- at page 7 of our brief, personal property tax which is Section 5 of the Illinois Constitution of 1970.
It says that the General Assembly may classify personal property for purposes of taxation by evaluation, abolished such taxes on any or all classes and authorized the levy of taxes in lieu of the taxation of personal property by valuation.
In other words, under the 1970 Constitution, you can make any kind of a reasonable classification that doesn’t offend the Fourteenth Amendment and it will be all right.
And it also says that if you make nine classifications, you can take it off classification one this year.
classification two the next year, and also as well as not to -- and as long as that is not offensive to the Fourteenth Amendment, that is if the classes are drawn properly, that will be valid.
Now, this was impossible under the 1870 Constitution.
Now, I think that it’s clear that the 1970 Constitution of Illinois was in effect at the time of the decision.
The cases which stand for the proposition that the reviewing Court must use the 1970 Constitution in determining this case are also in the brief and I don't think that they require any elaboration.
So it is simply a question of which Illinois Constitution governs and by using the wrong one, and it is wrong in terms of the precedent of that court.
I think that the people of the State of Illinois had been denied a fair trial, particularly since all pleadings, all briefs, every presentation to each and every court, both the Illinois Supreme Court and those before it were predicated on the assumption that the 1970 Constitution was in effect.
And in addition, we have cases from the Illinois Supreme Court which anticipate the effective date of a Constitutional provision.
In the Hammer case, and if this is again an opinion from Mr. Justice Schaefer, the case was disposed off after IX-A had been adopted by the people, but before its effective date.
In that case, the rule was invoked sua sponte by the Court, and that was in December 1970.
We have every reason to expect that the 1971 Constitution would be the controlling law in deciding this case, it should be.
We anticipated that, we relied on it.
And gentleman, the rules were changed after the game was played and this is what we objected.
Chief Justice Warren E. Burger: When you say after, you mean after the Amendment was either adopted or it was so far along with that it couldn't be altered?
Mr. Aubrey F. Kaplan: Well, the 1970 Constitution had been adopted by the people.
Chief Justice Warren E. Burger: And when was the opinion that you spoke of --?
Mr. Aubrey F. Kaplan: Let me give Your Honor the chronology.
The IX-A was approved by the people of Illinois on November the 3rd, 1970.
It was to go into effect on January 1st, 1971.
The new Constitution of Illinois was approved by the electorate December 15th of 1970, and was to go into effect July 1st, 1971.
Now, the only event reflected in the appendix -- relevant docket entries that antedates, the day when the 1970 Constitution was approved by the people of Illinois, was the filing of the first complaint in the Lake Shore case and every subsequent filing came in after December the 15th of 1970.
And based on the precedence set by that court, the court should have, if it was going to follow its own rules and its own declarations, decided this case in terms of the 1970 Constitution.
The 1970 Constitution specifically permits classification and for removal of the personal property tax from some classes and not others.
It compels replacement of that tax in 1979, and the imposition of a tax to replace the revenues lost.
And this is another very important point, because I think Your Honors must appreciate that this decision emasculates the revenue article of the 1970 Constitution, and totally perverts the intent of the people and their expectation.
To paraphrase what was to happen, and there has been some dispute about what -- the definition of the term individuals.
The Attorney General has emphasized the approach that says, individuals are everyone except corporations.
The State's attorney has emphasized an approach which says, individuals are -- it means only the non-business property of natural persons.
Now, our approach is based on custom and usage in the nomenclature of property tax administration of Illinois.
For example, the law requires everyone in Illinois to file a schedule with his assessor.
There are basically three classes of schedules.
One of them is titled individuals, the other is businesses, and the third is corporations.
Every lawyer in Illinois who deals in tax matters, if asked what individuals means?
He says, “That is the non-business property of natural persons, because that is all what is left” if you separate unincorporated businesses and corporations from the entire pie of those subject to the personal property tax.
Alright, now that is the kind of a definition argument that we were fighting about before and our position is that by either definition it's valid.
Now, what was intended is this.
The individuals were to be excused from the tax on January 1, 1970.
Between January 2 and I beg your pardon 1971, January 2, 1971 to January 1, 1979, the tax was to remain on non-individuals.
Now, on January 1, 1979 or before, that tax was to be replaced by another tax or the revenue was to be replaced by another tax, I beg your pardon and that tax, if it was to be an income tax, would be an exception to the eight to five differential provided in the income tax provisions of the Illinois 1970 Constitution.
What happens – and so the result of that what actually be, to preserve the status quo with respect to who pays the personal property tax in Illinois, because as everyone concedes corporations or businesses pay about over 90% of it.
Chief Justice Warren E. Burger: Do you agree with your colleague Attorney General that this is an automatic phase out whether the legislature acts or does not act at the -- before 1979?
Mr. Aubrey F. Kaplan: Your Honor, I confess, I do not have the answer to that question but I would anticipate that we maybe here in 1971.
Chief Justice Warren E. Burger: 1979?
Mr. Aubrey F. Kaplan: I beg your pardon, 1981 I think is -- about the timing.
Chief Justice Warren E. Burger: On the 1979 problem?
Mr. Aubrey F. Kaplan: Yes.
I do not know really.
I think that I am confident that if the legislature refuses to act every effort will be made to compel them to do so.
How that will come about that, I do not know.
But, the point that I am trying to make is this that if you invalidate the exoneration of individuals, then everyone is subject to that tax after January 1, 1971.
Therefore, everyone is subject to the replacement tax.
If the replacement tax is in exception to the eight to five ratio, then it would be uniform.
The effect of this is to shift the burden of the personal property tax from businesses and corporations back to the wage earner.
This is what happens under Justice Schaefer’s decision.
This is what we object to, and this is the reason we feel that it is so important, that the decision of the Illinois Supreme Court be reversed and we think we are on right grounds.
This Court did ignore its own Constitution, it did ignore its own prior decisions, it did enter a decision which in effect nullified the revenue article of the New Constitution, and we urge that they would be reversed.
Chief Justice Warren E. Burger: Very well Mr. Kaplan.
Mr. Aubrey F. Kaplan: Thank you Your Honor.
Chief Justice Warren E. Burger: Mr. Flamm.
Argument of Arnold M. Flamm
Mr. Arnold M. Flamm: Mr. Chief Justice, may it please the Court.
At the risk of running out of time, in my prepared argument, I would like to begin by addressing myself to few of the questions that have come from the bench.
I am well aware that it is not the function or the obligation of this Court to construe Section 5-C of the New Illinois Constitution with regard to the supposed ultimate abolition of personal property taxation in Illinois.
I must strongly disagree with the Attorney General’s opinion.
I think that it is not self-executing and furthermore as we have suggested in our brief, and refer to a very important article on the subject, it could not be executed by the legislature even if it wanted to.
So that I think personal property taxation in Illinois on whatever category is permissible, is going to be with us until the Constitution is again amended.
Some reference was made to the relative or supposed relative difficulty of collecting the tax from individuals as compared from collecting it from corporations.
Apparently, 90 some percent is collected from corporations, but that I can assure the Court has nothing to do with any administrative ease.
It has to do with one fact only and that fact is, that individuals vote at elections and may vote for or against tax collectors, whereas corporations do not have the privilege of voting.
It is --
Chief Justice Warren E. Burger: Well, as the practical matter there is much – isn't there something to that argument, that it is much easier because corporations for the most part have got to keep the inventories.
They’ve got federal tax records which are open to the examination (Voice Overlap)
Mr. Arnold M. Flamm: Well, it is quite true Your Honor, that as a general rule I have mentioned this in our brief that corporate property tends to be more visible and is therefore more easily assessed.
But certainly, automobiles for example of individuals, there is not the slightest problem with assessing that, and yet as pointed out by the legislature and its argument, the City of Chicago, in the City of Chicago, no attempt at all has made to assess automobiles at any figure.
I am suggesting that it is not -- to some extent, there is a visibility factor which differentially discriminates against corporations.
But essentially, the problem is not an administrative problem, it is a problem of the will to collect taxes and as terms of the arbitrariness of the whole taxing system, it is far more arbitrary with respect to corporations than it is with respect to individuals.
Individuals, no matter where they live --
Justice William H. Rehnquist: Mr. Flamm, if that difference which the Attorney General put between downstate and Chicago is correct, that would suggest that it is very largely a matter of visibility rather than corporate versus individual?
Mr. Arnold M. Flamm: Well, it is certainly downstate where there are farm property which is relatively visible.
They do get a significant proportion of their revenue from farmers.
The biggest proportion throughout the State comes from public utilities which of course as Chief Justice mentioned obviously file personal property schedules and they cannot hide their property.
But, in terms -- and quite apart from who pays most, in terms of the intra-class differentials which is the most arbitrary assessment among corporations, it is far greater than among individuals, because individuals, no matter where they live pay a relatively small tax which bears no relation to any property they own, but there is a politically adjusted or determined matter, maybe it is a percentage of their real estate tax bill or a percentage of their, depending on kind of the car they have, but at least there is a small amount.
I do not need to make too much of an issue over this.
I do not think it is directly relevant.
As to Justice Blackman's inquiry, I am confident, I know for a fact that there is no other state which has anything comparable or even purports to discriminate against corporations for purposes of property taxation.
In terms of alternative revenue sources the argument has been made that Article IX (a) was a means of relieving the wage earner or creating a more equitable tax system.
Well, perhaps so, but certainly there are alternatives, in fact since the decision of this case by the State Court, the legislature has adopted an alternative, a flat $5,000 exemption from personal property taxes for corporations and individuals which no doubt will have substantially the same effect as this proposed amendment without creating any federal constitutional problem.
It may create some serious state problems, but no federal problem I think.
Chief Justice Warren E. Burger: Do you see any parallel in this situation and the statutes in quite a number of States that exempt the first five or 10 or $15,000 of value of own or occupied property?
Mr. Arnold M. Flamm: Well the fact is the first x number of dollars, I don't see any particular problem where I think the Fourteenth Amendment does not prohibit to that exemption.
Chief Justice Warren E. Burger: (Voice Overlap) Certainly it discriminates against apartment owner, apartment building owners, does it not?
Mr. Arnold M. Flamm: Well, I think that another example might be that many states that have for exemptions for persons over 65 years of age and there is a – I certainly would concede that there is some parallel there, but I think the difference is that the exemption for homeowners or for aged homeowners can be justified on the basis, in the case of aged ones that they have no longer a source of income, but it's not simply based on ownership in such but it's based on the fact that older people presumably no longer have a regular source of income yet their tax bills keep going up year after year.
Chief Justice Warren E. Burger: Go back to the homestead exemption.
There is a direct discrimination between corporate owners of big apartment building as against the individual who owns and lives in his own house.
Mr. Arnold M. Flamm: Well, if there was a discrimination, of course you say discrimination against corporate ownership of apartment buildings but they would be as I understand it in the same category as an individual owner of an apartment building, the discrimination certainly is against apartment buildings as compared to single family homes but that there is no -- we see no constitutional problem with that.
That was based on a kind of property rather than the nature of the ownership.
Chief Justice Warren E. Burger: And also there is difference or treatment between people who rent houses and who own houses for a rental and those who own houses to live in?
Mr. Arnold M. Flamm: Well I think that is a valid -- that was base on a nature or use of the property and even in the back in the California Railroad tax case 90 years ago, Justice Field specifically recognized that a classification based on the nature or use of the property is a valid one.
It is only the classification based on the nature of the ownerships, at least particularly a corporate ownership as against non-corporate ownership that was offending a violation in his view.
Well, if I may return my prepared (Voice Overlap)
Chief Justice Warren E. Burger: We'll enlarge your time by three minutes to compensate and we remind your friend's, your colleague's time two minutes.
Mr. Arnold M. Flamm: Well, I must stay that I appreciate the Court's time, I am not a colleague of the Weil & Company because we are opposed on a very important issue over here Your Honor.
Chief Justice Warren E. Burger: This has been in term in a broad sense.
Mr. Arnold M. Flamm: Thank you.[Laughter]
In the some ways I suppose this is a very old fashioned sort of a law suit.
At a central issue the facts are essentially identical to those which were before this Court 90 years ago in the Santa Clara County versus the Southern Pacific.
In Santa Clara case, Court served to establish the fundamental principle that corporations are persons within the meaning of the Fourteenth Amendment.
And in a very real sense, I suggest it is that doctrine which is under challenge today as a consequence of the ill conceived constitutional amendment proposed by the Illinois legislature.
I represent the Lake Shore Auto Parts Company as you know, a personal property taxpayer in Cook County.
We initiated this litigation of the Circuit Court of Cook County and Lake Shore did so, I will freely admit not because of any desire to vindicate the abstract rights of corporations and even less from any desire to pay homage to the memory of Justice Fields who promulgated the commission of doctrine here.
Our intention obviously was to free ourselves from the yolk of a burdensome tax, a tax which is not merely burdensome but which is at least in Illinois arbitrary, scandalous in a source of disrespect for the Courts and for the judicial process.
I need not labor that point because the Attorney General himself agrees fully with us in this Court and if there is any doubt beyond then it's removed I think by the official explanation of the amendment prepared by the Illinois General Assembly.
That document which is appended as exhibit 8 in our brief as a complete, all inclusive statement of the intention of a legislature, needs no room for summarize as to what might have been intended.
And the interesting I think about that official explanation is that every evil of the personal property tax set forth therein is fully as applicable to corporations as it is to individuals.
One may reread that I think time after time and find no clue in there as to why the General Assembly eliminated the tax only on individuals.
The principle set forth in the Santa Clara case originally announced there and adopted more firmly in the a Quaker City Cab case in 1925, has gone unchallenged in this Court for almost 40 years.
It has been accepted as a matter of doctrine that states may not discriminate for property tax purposes as against corporate ownership as such.
On one occasion admittedly in 1920, this Court departed from that rule in the Fort Smith Lumber Company case.
That's a very brief opinion by Mr. Justice Holmes who upheld a discriminatory statute on the ground that the Arkansas legislature might conceivably have been acting in furtherance of a permissible state policy namely a policy of discouraging ownership of corporate stock by corporations.
It is generally been accepted I think that, that case has been overruled effectively by Quaker City Cab.
At any rate Fort Smith has been hardly ever cited by anyone in the 60 years, 40 years, 50 years since it was decided and passed in the limbo.
As a matter of fact in the Allied Stores Case, this Court refrained I think rather significantly from even citing the Fort Smith Lumber Case.
Now the Allied Stores Case is a difficult case.
I will concede we have discussed it at great length in our brief, I just don't think there is time to try to get into it in the oral argument.
We recognize the problem.
We think the Attorney General has interpreted that case in a manner far more broadly than the language of the case warrants.
The real issue I think here is not what the law has but what the law should be.
Shall the accepted rule be changed so as to permit state legislatures free reign in indulging their natural propensities to tax only those property owners who let the power devote while exonerating from tax those who do not possess that vote -- who do possess that vote, weapon and who are in all other respects identically situated?
Now the State here argues and most specifically in its reply brief that this discriminatory tax is not really a property tax at all.
It's really a franchise tax which masquerades as a property tax.
They say that the legislature imposed it on our corporations as the price for directing corporations that privilege of doing business in Illinois.
That's another interesting argument that was originally raised in the Santa Clara Case 90 years ago.
It was rejected there by Justice Field on the ground that whatever might have been that simply was not the purpose of the tax.
And the legislature in California there and Illinois here did not impose the tax as a franchise tax, did not intend it as a franchise tax and there is not a worried in the official argument or explanation to suggest that it is a franchise tax.
When as and if a state legislature adopts a franchise tax in a form of a property tax, and no one ever has yet to my knowledge, there will be time enough for this Court to consider whether that is a valid form of a taxation.
Certainly traditionally Courts in general and this Court in particular have generally treated the two forms of tax that is a property tax on one hand and an excise tax including a franchise tax as being mutually exclusive.
Maybe they are wrong.
I realize there is nothing God given about that distinction and when Moses came down from Mt. Sinai and looked at his tablet there was nothing said there about preserving the distinction between property taxes and non-property taxes, but I think the distinction is so well embedded in our law, in the constitution of the United States in the constitution of all states in this union in the decisions of this Court, in state court decisions, in economic theory, in legal theory that to now I say it's all a mistake, there really is no inherent difference.
I think that would be to show nothing else disrespect to a great deal of thought that has gone into the subject over the past 200 years and might just full force differences from Illinois Supreme Court decision in Reif versus Barrett decided in 1934 at 355, Illinois where the Court says it was quite typical, I think of judicial thinking in general, “A property tax is levied merely for the purpose of raising revenue and is levied against a property.
It does not seek or in anywise attempt to control the use, operation or regulation of the property.
When the tax is raised, the mission of a property tax has been fulfilled.
The property tax has nothing whatever to do with the question of privilege, license or permission.”
I turn in the time remaining to the second issue which we have raised in our brief that is the propriety of the remedy decreed by the Illinois Supreme Court.
The Court understands, I trust that we agree with the Illinois Supreme Court's holding on the invalidity of the discrimination.
We strongly disagree with its holding on the remedy.
Now the trial court in Lake Shore has sustained our position that the appropriate remedy was to invalidate the tax on all tax payers, the personal property tax on all taxpayers.
In reaching that conclusion the trial judge considered if the question of the appropriate remedy was essentially one of ascertaining, the presumed intention of the people at Illinois, that is whether they would have approved this amendment if they had known that its effect was going to be to abolish personal property taxes in total.
And in an oral opinion rendered from the bench of the trial court said, “There was no doubt in the minds of anyone that it would have passed overwhelmingly even without the words as to individuals.”
It's quoted at page 54 of our brief and page 46 in the record.
Now the Illinois Supreme Court reversed down this issue and in doing so that Court made no pretense of ascertaining anyone’s intention.
Justice William H. Rehnquist: You agree that, that's the question that was upper decision?
What was the intent of the legislature, or the people adopted the amendment (Voice Overlap).
Mr. Arnold M. Flamm: Well, under traditional holdings on this subject I think it is.
I recognize that how one goes about ascertaining the intention of the people on the subject that they never voted on.
I don't know the answer to that question, but I think theoretically that's --
Justice William H. Rehnquist: Yeah.
But if it's true, isn't that a question on which the Supreme Court of Illinois has the last words so far as this Court is concerned?
Mr. Arnold M. Flamm: Well, Your Honor in -- that's of course a touchy question because I am aware that we face that problem over here and I cannot say with any great confidence that it's not that we have developed the argument in our brief at considerable length.
I think if you go back to old case of Gwen versus United States, this Court said there that if the state court has not pronounced state law on the subject to the remedy then this Court is free to do so.
Now in subsequent decisions this Court certainly has honored the standpoint decision where the state court has made a finding on the question of intention.
But the problem with the Illinois Supreme Court’s decision here, they made no pretense of finding anything.
They simply, after holding the discrimination of the invalid they said therefore the amendment must fall and there is not a reason given, one could read that opinion I suggest time after time and not know why they reached that result rather than the result reached by the trial court.
Now if this Court is satisfied that, that is a determination, a ruling, a finding by the State Supreme Court then I have to confess I am beaten because the Court, if that is the case it is a state ruling.
We have argued that it is not a state ruling.
We further argue that at least in this case to permit this sort of a result would have a severely chilling effect on the association of Equal Protection Rights at least in the field of taxation because if a taxpayer knows that he can't win, even if he wins, he is still going to end up subject to the tax.
There are very many people going to challenge taxing statutes.
I am aware, this is the first time this argument has been advanced in a property case context as distinguished from a free speech or voting rights case.
I am also aware that this Court quite properly has accorded priority and precedence to personal rights as compared to property rights.
But I think -- at least I hope that property rights are still a matter entitled to protection of the equal protection clause and I think if the Illinois Supreme Court can do this to us.
We can forget about any challenges to any taxing statutes in Illinois at least and I might say that there are now on the books of Illinois to my knowledge two or three taxing statutes enacted in the last year or two which quite obviously are unconstitutional under the state constitution.
Nobody has brought a challenge to them and I dare say nobody is going to because they foresee the kind of result that they are going to get.
We have argued this point that in our brief at some length I kept denying the problem in fact we have at one point thought to withdraw from this case after the Court denied our -- after Court dismissed our appeal, we sought to appeal as the Court recalls directly from the judgment below on the ground that the remedy violated our constitutional rights.
The Court dismissed that appeal for one of jurisdiction and at that point feeling rather discouraged we asked leave to get out entirely.
He wouldn't let us out so we are back in and we are still in and we rethought the matter and I hope that we are still in the ball game on this issue.
I say we are opposed on the question of the remedy most vociferously by the four school districts which are, appear in this Court as amicus.
More disturbingly we are opposed on this issue by M. Weil & Sons, one of the respondents in the Shapiro case and that's disturbing because M. Weil & Sons purports to represent a class of all corporations including Lake Shore, the finding of that effect as we have argued is clearly void, having been entered without semblance of due process of law but nevertheless having reported to represent all corporations, they now fix the position that the Court below is correct, ask this Court to affirm even though the result would be to grant no benefit at all to any corporations including Lake Shore and including M. Weil & Sons but Mr. Biro will address the Court on that subject and perhaps he can explain his position.
Justice Potter Stewart: There is now in effect in Illinois an income tax, isn't there?
Mr. Arnold M. Flamm: There is Your Honor.
Justice Potter Stewart: Or was it's effective date postponed for --
Mr. Arnold M. Flamm: Oh no, the income tax has been effect since prior to the adoption of any of this amendment.
Justice Potter Stewart: That's imposed at varying rates and varying exemptions (Voice Overlap) corporations.
Mr. Arnold M. Flamm: Well, it's supposed to be a flat rate tax.
It's a flat rate tax with a differential rate on corporations and individuals with rather substantial exemptions to it.
Justice Potter Stewart: But that's not presently effective.
Mr. Arnold M. Flamm: At presently not effective You Honor, and it's just two minutes I have remaining, I would address myself to one argument that has been made here and has been made the school districts is that somehow chaos would result if the decision below were affirmed that the school districts would lose $300 million.
Now I am well very much concerned with school districts' financing, my wife happens to be on a School Board as a matter of fact.
So I get both sides of the picture.
There is no shortage of means in Illinois to raise alternative sources of revenue.
My time is up.
I thank the Court for its attention.
Chief Justice Warren E. Burger: Thank you Mr. Flamm.
Argument of Louis L. Biro
Mr. Louis L. Biro: Mr. Chief Justice, and may it please the Court.
At no time in any of the constitutional history of the State of Illinois, in the context of the constitutions of the State of Illinois in either the laws and/or the statutes of the State of Illinois has the state ever recognized a tax on property or an exemption of property predicated on the type of ownership of that property.
Now obviously, I am excluding the eleemosynary corporations etcetera.
The Supreme Court of Illinois in the instant cases that are before this Court now did nothing more and nothing less than follow the same principle that has been annunciated throughout the judicial history of our state during that time and that is that to be valid, the classification of property for the purposes of property tax imposition or exclusion must be based on related to or referred to the differences if any in the property itself or the characteristics of the property itself and in one instance perhaps even the form of the property itself.
And in order to find any support under the law and particularly under the Fourteenth Amendment of the constitution as we see it, the Supreme Court of Illinois I think succinctly touched on this although the other gentlemen who have appeared here beforehand do not seem to agree and if the Court will look at the Attorney General's appendix at page 29, there is a quote in the opinion and if I may although the part is not particularly lengthy, it's a very short section that I have taken out of the Court's opinion.
Chief Justice Warren E. Burger: You are speaking of Justice Schaefer's --
Mr. Louis L. Biro: Justice Schaefer's opinion, yes and if I may the new article classifies --
Justice William J. Brennan: (Voice Overlap)
Mr. Louis L. Biro: I beg your pardon?
Justice William J. Brennan: What page did you --
Mr. Louis L. Biro: Page 29 of the Attorney General’s appendix, I am sorry.
Justice William J. Brennan: Well that is an order, you must have the wrong page.
Mr. Louis L. Biro: It's in the hand book Mr. Justice – not referred to ?
Justice Potter Stewart: It begins, the new article classifies personal property?
Mr. Louis L. Biro: Yes sir.
The new article classifies personal property for the purpose of imposing a property tax by evaluation upon a basis that does not depended upon any of the characteristics of the property that is tax or upon the use to which it is put, but solely upon the ownership of the property.
If the property is owned by A, it's taxable.
If it's owned by B, it cannot be a taxed.
Of course the equal protection clause of the Fourteenth Amendment does not prohibit classification.
An absolute precision is not required of the states in drawing the lines between classes.
Nevertheless, a state may not under the guise of classification, arbitrarily discriminate against one and in favor of another similarly situated and I respectfully point out that the question was asked before about differences that might appear in other states.
And the question as to has not the question come up before of distinctions that were in here and I think the word guise is probably the most important word in the later part of Mr. Justice Schaefer's words here.
Because of the fact that what has happened here is that there is no doubt, but that the sovereign state has gotten itself into one horrendous morass that it cannot find -- could not find a way to extradite itself from.
I respectfully point out as an attorney, as an officer of the Court that I certainly as the citizen of the state have compassion and have an understanding, as a parent I understand the need for money, but I do not think that it is a judicial approach to say that the ends justify the means and regardless of what the problem is certainly the Courts of this land have to face up to the approach that was taken and if the approach that was taken is not proper then it is incumbent upon the Courts to take the unpopular, if you will, position to say that we must look at it the way it is.
In effect with Article IX did, is to place the property itself on one side and say that the type of ownership is really going to be the criterion and I respectfully submit to you that what they are talking about is a privilege tax.
This is not a property tax if you do it this way.
You are taking a privilege to act and you are putting it in.
Now as I stated, the Illinois constitution of 1870, the Illinois constitution of 1970 contains in its revenue articles no word that has the spelling out of the word individual.
The Illinois Revenue Act of 1939, the word individual does not appear.
That designation appears I respectfully submit for the first time in Article IX (a) which is the article that comes before this and seeks to prohibit a taxation that is nowhere actually imposed because if you read our constitution and you read our Revenue Act there is no place where it says a “Individual shall pay this tax or an individual shall pay that tax.”
With due deference to Mr. Kaplan who pointed that out to this Court that it is accepted among the members of the legal profession that the word individual has a specific meaning.
I stand before this Court and tell you that this is one member of bar who does not know what individual means.
I do not find it in our statute.
I do not find it in our constitution and suddenly for the first time there is language that says that was given to the elector, if you will, that individual shall be exempt.
Now Article IX(a) purports to prohibit the taxation of personal property by evaluation, by as to individuals.
Nowhere in all of Article IX does the word individual appear.
Nowhere in the Revenue Act of 1939 does the word individual appear.
Nowhere does Article IX imposed a tax by evaluation, I am individual and the Illinois constitution does not direct that any tax shall be levied on an individual.
Corporations and M. Weil & Sons, I can't speak obviously you heard, Mr. Flamm, he is not in accord with me, M. Weil & Sons respectfully submit that unless the exclusion of Article IX (a) applies to us also, I am speaking of corporations, I don't what an individual is, I don't know where the distinction comes.
Justice Potter Stewart: Well, now hasn't the Illinois Supreme Court settled that question when it said that the on page A11 of the petitioner for writ of certiorari, it's a copy of the opinion of Justice Schaefer's opinion, “We conclude that the meaning of Article IX (a) is that has ad valorem taxation of personal property owned by a natural person or by two or more natural persons as joint tenants or tenants in common is prohibited.”
Now doesn't that purport to answer the question of what is meant by individual?
Mr. Louis L. Biro: It purports the answer it, it obviously and so far as the Court is concerned.
I am respectfully pointing out that in my brief I point out to this Court that I take issue with the ultimate conclusion that was raised in that.
Justice Potter Stewart: And that's a matter of Illinois law and the meaning of that provision in IX (a) and we must take, we hear that's not a federal question.
It's a matter of definition and that has been settled by the Illinois Supreme Court.
Mr. Louis L. Biro: I unfortunately came here (Voice Overlap) Your honor and for that reason I touched on it in my brief only to the extent that I felt that it should be brought to this Court's attention.
Justice Lewis F. Powell: Mr. Biro would you consider a partnership to be within the definition annunciated by the Illinois Supreme Court, two natural persons, a formal partnership?
Mr. Louis L. Biro: Evidently, evidently.
I am assuming that from what the Illinois Supreme Court has stated in this case that in effect we are back to exactly the same taxing procedure that we were at prior to the time that the question was raised in these cases before that Court.
So that Mr. Flamm states that he doesn't understand why I appeared here.
Unfortunately, we attorneys professionally or maybe as fortunately obviously cannot always see all issues the same way with due respect to this Court.
I notice that there are “split decisions” that come down.
It was my feeling that in the case.
It was brought up initially that my client’s interests were not adequately protected.
It's also my feeling that I hear figures thrown around constantly as to how much money is collected in Cook County and unfortunately in a state such as ours we tend to be two states when people talk about us because we have the same difficulty that the state of New York seems to have up state, down state and a large metropolitan area and the rest of the state and obviously to a great extent, the Southern part of our state is the agricultural basis as a result of that one figures or put out as to what money is collected and what money is not collected.
It's my feeling that if there was an unconstitutional attempt made here and if my client, my corporate entity if you will was going to be put in the position where it was going to be forced to pick up part of the slack that was brought because of improper action regardless of what amount of money that would be saved by it, I felt that I was adequately improperly representing my client in following through on that.
I state only that we get down to a basic question if the Court please that Article IX (a) is constitutionally offensive.
I feel it violates the Fourteenth Amendment of the Federal Constitution and I respectfully submit that this Court should so affirm.
Chief Justice Warren E. Burger: Thank you Mr. Biro.
Thank you gentleman.
The case is submitted.