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Argument for Plaintiff in Error.

cally out of the State. Any transfer of the certificates must have been effected out of the State. There is no contention, we assume, that the State could have exercised any control over the transfer of the stock from one owner to the other. Nor have we heard it contended that the stock, prior to the decedent's death, was subject to an ad valorem tax in North Carolina. In other words, that State had no jurisdiction over the property itself or the transition thereof. Even if North Carolina, through its legislature and courts, could thus sweep aside the corporate entity in dealing with the relationship of stockholders to the property of a domestic corporation, it could not do so when dealing with the relationship of stockholders in a foreign corporation.

The tobacco company is a corporation of New Jersey. Hence the relation of the stockholders to the corporate property is determined by the law of that State and can not be changed by the State of North Carolina. Supreme Council v. Green, 237 U. S. 531; Canada, etc. R. R. v. Gebhard, 109 U. S. 529. In the absence of evidence to the contrary, it is presumed that the relation of a stockholder to the corporate property is fixed by the State of New Jersey in accordance with the rules of the common law, unaffected by statute. Miller v. Railroad, 154 N. C. 441; Roberts v. Pratt, 152 N. C. 731.

From the admitted facts it is seen that the taxing State had no jurisdiction over the owner, or the property, or the transfer of the property. Frick v. Commonwealth of Pennsylvania, 268 U. S. 473. It is elementary that the power of a State to tax is limited to persons, property and business within its domain. State Tax on ForeignHeld Bonds, 15 Wall. 300; Coe v. Errol, 116 U. S. 517; Dewey v. Des Moines, 173 U. S. 192; Bristol v. Washington County, 177 U. S. 133; Tyler v. Dane County, 289 Fed. 843; Shepard v. State, 184 Wis. 88; Welch v. Burrell, 223 Mass. 87.

Argument for Plaintiff in Error.

270 U.S.

The fact that the tobacco company complied with the state statutes in order to do business therein conferred no authority on the State to impose the tax in question. Section 1181 of the Consolidated Statutes so complied with, contains no provision to the effect that a corporation, upon complying with its requirements, becomes, in any respect, a North Carolina corporation. On the contrary the section expressly provides that a corporation which has complied with its provisions may thereafter "withdraw" from the State in a prescribed manner. Formerly there were two sorts of statutes in the case of admission of foreign corporations to do business in a State-one making it a domestic corporation, and the other merely giving the foreign corporation, as such, permission to do business in the State. Chapter 62 of the Public Laws of the North Carolina Assembly of 1899 was an example of the first kind of statute mentioned. This statute was considered in the case of Southern Railway Co. v. Allison, 190 U. S. 326, wherein it was decided that a foreign corporation, which had complied with the statute, did not thereby lose its right to remove to the federal court an action brought against it by a resident of North Carolina.

In Pennsylvania Railroad Co. v. Railroad, 118 U. S. 290, the Court said: "It does not seem to admit of question that a corporation of one State, owning property and doing business in another State by permission of the latter, does not thereby become a citizen of this State also." It will be noted that the North Carolina statute (C. S. 1181) does not purport to deal with the stockholders or their liabilities, nor to change the common law relation of a stockholder to the corporate property. Its provisions operate directly upon the corporation itsolf, without attempting to reach beyond it. It is true that a State may impose valid conditions upon a foreign corporation seeking to enter its borders to transact business. But we submit that, even if it attempted to do so, it could not impose the

69

Argument for Defendant in Error.

condition that stock in such corporation, held outside the State by a non-resident, should be subject to its inheritance tax. Shephard v. State, 184 Wis. 88; Tyler v. Dane County, 249 Fed. 843.

It is true that, in exceptional cases, the court will disregard the corporate entity. This, however, is resorted to in order to prevent injustice or to circumvent manifest fraud. But our research has failed to disclose a single case wherein the corporate entity has been disregarded in order to support a tax for which the corporation admittedly is not liable. If a State may utterly disregard the entity of a foreign corporation, owning property within its borders, solely for the purpose of collecting taxes out of non-resident stockholders of the corporation, it may disregard that entity for any and all purposes. The fact that North Carolina has the power to punish the tobacco company for transferring the stock before payment of the tax, by taking property of the company located in the State, does not confer jurisdiction. The vital fact in the case is that Briggs owned no property there.

The economic policy pursued by North Carolina cannot deprive the plaintiff in error of its federal rights. Neither Briggs nor the plaintiff ever took any benefit under the North Carolina way of levying ad valorem taxes. In Person v. Watts, 184 N. C. 499, no rights under the federal Constitution were involved.

Mr. Dennis G. Brummitt, Attorney General of North Carolina, with whom Mr. Frank Nash, Assistant Attorney General of North Carolina, was on the brief, for defendant in error.

An inheritance tax is in no sense a tax upon property but is a levy upon the exercise of a state-granted privilege to dispose of property at one's death or to receive such property by reason of the death of the former holder. The authority to tax this privilege is not restricted by

Argument for Defendant in Error.

270 U.S.

the Fourteenth Amendment unless the statute plainly offends against due process or equal protection. Orr v. Gilman, 183 U. S. 278; Billings v. Illinois, 188 U. S. 97; Campbell v. California, 200 U. S. 87.

The idea of a corporation as a legal entity apart from its members is a mere fiction of law. When this fiction is urged to an extent not within its reason and purpose it should be disregarded and the corporation considered as an aggregation of persons both in equity and law. Baltimore & P. R. Co. v. Fifth Baptist Church, 108 U. S. 317; United States v. Trinidad Coal & C. Co., 137 U. S. 160. See also Hale v. Henkel, 201 U. S. 43; J. J. McCaskill Co. v. United States, 216 U. S. 504. Linn Timber Co. v. United States, 236 U. S. 574; Northern Securities Co. v. United States, 193 U. S. 332; Standard Oil Co. v. United States, 221 U. S. 1; United States v. American Tobacco Co., 221 U. S. 106.

The legislature has authority to modify or abolish fictions, though they may have been judicially created. The State of North Carolina adopted this rule years ago and has adhered to it consistently since in raising revenue by the taxing of corporations and their shareholders. The act of 1919 but extended this salutary principle to inheritance taxes. [Citing numerous statutes.] See Railroad Co. v. Commissioners, 87 N. C. 414; Worth v. Railroad, 89 N. C. 301; Railroad Co. v. Commissioners, 91 N. C. 454; Person v. Watts, 184 N. C. 499; Person v. Doughton, 186 N. C. 723.

The Act does not offend against the Fourteenth Amendment, as the shares of stock held by the decedent in another State are not themselves property, but only evidence of decedent's ownership of an interest in property actually located in North Carolina, the statute being careful to fit the taxable value of the transfer of such shares to the proportion of the property owned and operated by the corporation in the State. While title to cor

69

Argument for Defendant in Error.

porate property is in the corporation, the substantial beneficial ownership is, in equity at least, in the stockholders. Gadsden First Nat. Bank v. Winchester, 119 Ala. 168; Swift v. Smith, 65 Md. 428; Bundy v. Ophir Iron Co., 38 Oh. St. 30; United States v. Wolters, 46 Fed. 509; Warren v. Davenport Fire Ins. Co., 31 Iowa 464; State v. Brinkhop, 238 Mo. 298; Seaman v. Enterprise F. & M. Ins. Co., 21 Fed. 778; Aetna Fire Ins. Co. v. Kennedy, 161 Ala. 600; Riggs v. Commercial Mut. Ins. Co., 125 N. Y. 7. Many of the cases in this Court which recognize a distinct property in the shareholder in his shares of stock, do so in determining the constitutionality of a statute, which was enacted in recognition of this principle. Hawley v. Malden, 232 U. S. 1; Blackstone v. Miller, 188 U. S. 189; Wheeler v. Sohmer, 233 U. S. 434. See Tappan v. Merchants National Bank, 19 Wall. 490; Farrington v. Tenn., 95 U. S. 679; Corry v. Baltimore, 196 U. S. 466; Rogers v. Hennipen County, 240 U. S. 184; Van Allen v. The Assessors, 3 Wall. 598, dissenting opinion. I Morawetz on Corporations, 2d Ed. §§ 227, 232; 3 Cook on Corporations, 8th Ed. §§ 663, 664.

The State has constitutional authority to disregard this fiction, particularly when this is done with no ulterior purpose but with the intent to conform its inheritance tax laws to its consistent policy of disregarding the fiction in all of its revenue acts in relation to the taxation of the property of corporations and of their shareholders. Blackstone v. Miller, 188 U. S. 189. See Adams Express Co. v. Ohio State Auditor, 166 U. S. 185; New Orleans v. Stemple, 175 U. S. 309. There is nothing in the recent case of Frick v. Pennsylvania, 268 U. S. 473, which conflicts with this view.

The State has constitutional authority to levy an inheritance tax upon the transfer of only that part of the stock which is represented by the value of the property located in the State. This is fair and just, because the