315 U.S.

649
62 S.Ct. 857
86 L.Ed. 1090

MEMPHIS NATURAL GAS CO.

v.
BEELER, Attorney General of State of Tennessee, et al.
No. 499.
Argued March 6, 1942.
Decided March 30, 1942.

Messrs. Walter P. Armstrong, of Memphis, Tenn., and Thomas A.

McEachern, Jr., of New York City, for appellant.
Messrs. Whitworth Stokes and Lewis S. Pope, both of Nashville, Tenn.,
for appellees.
Mr. Chief Justice STONE delivered the opinion of the Court.

The question for decision is whether a tax laid pursuant to 13161318 of

the Tennessee Code of 1932 upon the Memphis Natural Gas Company's net
income derived from sales of natural gas in Tennessee, during the years 1932 to
1935, violates the commerce clause, Const. U.S. art. 1, 8, cl. 3.

The case comes here by appeal from a judgment of the Supreme Court of
Tennessee, which sustained the tax and reversed a decree of the Tennessee
chancery court enjoining its collection. Appellant contends that the case is
properly an appeal, under section 237(a) of the Judicial Code as amended, 28
U.S.C. 344(a), 28 U.S.C.A. 344(a), because the validity of the Tennessee
statute as applied to the facts of this case has been drawn in question. Cf.
Dahnke-Walker Milling Co. v. Bondurant, 257 U.S. 282, 42 S.Ct. 106, 66
L.Ed. 239. But appellant's bill of complaint, filed in the chancery court, alleged
only that the assessment of the tax and the threatened levy violated its rights
under the commerce clause. Our decisions have long since established that an
attack upon a tax assessment or levy, on the ground that it infringes a taxpayer's
federal rights, privileges or immunities, will not sustain an appeal under section
237(a). Jett Bros. Distilling Co. v. City of Carrollton, 252 U.S. 1, 40 S.Ct. 255,

64 L.Ed. 421; Miller v. Board of Com'rs of City and County of Denver, 290
U.S. 586, 54 S.Ct. 78, 78 L.Ed. 518; Baltimore National Bank v. State Tax
Commission of Maryland, 296 U.S. 538, 56 S.Ct. 125, 80 L.Ed. 382; Irvine v.
Spaeth, 314 U.S. 575, 62 S.Ct. 117, 86 L.Ed. - decided October 13, 1941. It
is not enough that an appellant could have launched his attack upon the validity
of the statute itself as applied; if he has failed to do so we are without
jurisdiction over the appeal. The Judicial Code was intended to restrict our
obligatory appellate jurisdiction to a narrow class of cases, and to foreclose an
appeal as of right whenever the prescribed conditions have not been rigorously
fulfilled.
3

It is true that when this case reached the Supreme Court of Tennessee the
appellant included in its brief, which has been certified as part of the record
here, a statement of its legal position which might serve as a challenge to the
validity of the statute. But appellant has failed to establish that under Tennessee
practice such a contention can be availed of if advanced for the first time in the
appellate court, cf. Pennsylvania R. Co. v. Illinois Brick Co., 297 U.S. 447,
462, 463, 56 S.Ct. 556, 561, 80 L.Ed. 796; Jacobi v. Alabama, 187 U.S. 133,
135, 136, 23 S.Ct. 48, 49, 47 L.Ed. 106; Mutual Life Ins. Co. v. McGrew, 188
U.S. 291, 23 S.Ct. 375, 47 L.Ed. 480, 63 L.R.A. 33, and appellant's burden is to
show affirmatively that we have jurisdiction. Chicago, Indianapolis, etc., Ry.
Co. v. McGuire, 196 U.S. 128, 132, 25 S.Ct. 200, 201, 49 L.Ed. 413; cf. Lynch
v. People of New York, 293 U.S. 52, 54, 55, 55 S.Ct. 16, 17, 79 L.Ed. 191;
Enriquez v. Enriquez (No. 2), 222 U.S. 127, 130, 32 S.Ct. 64, 65, 56 L.Ed. 124;
Brady v. Terminal Railroad Ass'n, 302 U.S. 678, 58 S.Ct. 134, 82 L.Ed. 523.

The first opinion rendered by the Supreme Court of Tennessee made no

mention of any federal question, and in a supplemental opinion, the court stated
only that 'the claim of federally protected right was decided adversely to
complainant'. Since it does not appear that the validity of the statute was either
drawn in question or passed upon in the trial court or deemed by the state
supreme court to be in issue, we must dismiss the appeal for want of
jurisdiction. Treating the papers on which the appeal was allowed as a petition
for writ of certiorari, as required by section 237(c) of the Judicial Code as
amended, 28 U.S.C. 344(c), 28 U.S.C.A. 344(c), certiorari is granted and
we proceed to consider the merits of the case.

Taxpayer, a Delaware corporation, was engaged during the period in question

in the business of purchasing natural gas in Louisiana and transporting it
through its pipeline to points in Tennessee where it delivered the gas into the
pipelines of two distributing companiesMemphis Power & Light Co. and
West Tennessee Power & Light Co.which sold the gas to local consumers.

Taxpayer sells some of its gas in other states, but in Tennessee it sells from 1 to
2% of its output to the West Tennessee Power & Light Co. and delivers 80% or
more to the Memphis company. That company distributes it to consumers under
a contract with taxpayer which the Supreme Court of Tennessee has found to be
a joint undertaking of the two companies whereby taxpayer furnishes gas from
its pipeline, the Memphis company furnishes facilities and service for
distribution and sale to consumers, and the proceeds of the sale, after deduction
of specified costs and expenses, are divided between the two companies.
6

Taxpayer is licensed by the State of Tennessee to do business there. It

maintains a statutory office in Delaware and a stock transfer office in New York
City, but conducts no business at either. It manages its business from its office
in Memphis, Tennessee, where it keeps its accounts, provides for the payroll of
employees on its line in Tennessee and other states, and prepares and sends out
bills for gas delivered in Tennessee and other states. It has thus established a
commercial domicile in Tennessee by virtue of which it is subject to taxation
there upon its intangibles, unless such taxation infringes the commerce clause.
Wheeling Steel Corp. v. Fox, 298 U.S. 193, 56 S.Ct. 773, 80 L.Ed. 1143.

Section 1316 of the Tennessee Code of 1932 imposes on all foreign and
domestic corporations doing business for profit in the state an annual excise tax
of 'three per cent. of the net earnings for their preceding fiscal year * * * arising
from business done wholly within the state, excluding earnings arising from
interstate commerce.' The Supreme Court of Tennessee sustained the tax on the
ground that it was laid on appellant's net earnings from the distribution of gas
under its contract with the Memphis company, which distribution it held not to
be interstate commerce within the meaning of the statute. It decided that by
virtue of their contract the companies became in effect partners or joint
enterprisers in the distribution and sale of the gas to Tennessee consumers, the
net earnings from which are taxable under the statute.

On petition for rehearing, taxpayer asked a modification of the decree on the

ground that included in the measure of the tax were profits derived from sales
of gas to the West Tennessee Power & Light Co. and from certain other sales to
the Memphis company, not under the joint adventure agreement, which it was
insisted were concededly sales in interstate commerce. The court rejected this
contention upon the adequate state ground, not challenged here, that taxpayer
had failed to show what portion, if any, of the taxed profits was derived from
such sales and consequently had laid no basis for an injunction restraining
collection of that part of the tax.

This Court has often had occasion to rule that the retail sale of gas at the burner

tips by one who pipes the gas into the state or by a local distributor acquiring
the gas from another who has similarly brought it into the state is subject to
state taxation and regulation. Public Utilities Comm. v. Landon, 249 U.S. 236,
39 S.Ct. 268, 63 L.Ed. 577; East Ohio Gas Co. v. Tax Comm., 283 U.S. 465,
51 S.Ct. 499, 75 L.Ed. 1171; Southern Natural Gas Corp. v. Alabama, 301 U.S.
148, 154, 57 S.Ct. 696, 698, 81 L.Ed. 970; cf. Missouri v. Kansas Natural Gas
Co., 265 U.S. 298, 309, 44 S.Ct. 544, 546, 68 L.Ed. 1027; Illinois Natural Gas
Co. v. Central Illinois Public Service Co., 314 U.S. 498, 62 S.Ct. 384, 86 L.Ed.
-. It follows that if the Supreme Court of Tennessee correctly construed
taxpayer's contract with the Memphis company as establishing a profit-sharing
joint adventure in the distribution of gas to Tennessee consumers, the taxpayer's
net earnings under the contract were subject to local taxation.
10

The meaning and effect of the contract, so far as they establish taxpayer's
participation in and ownership of profits derived from the retail sale of the gas,
are local questions conclusively settled by the decision of the state court save
only as this Court, in the performance of its duty to safeguard an asserted
constitutional right, may inquire whether the decision of the state question rests
upon a fair or substantial basis. See Board River Power Co. v. South Carolina,
281 U.S. 537, 50 S.Ct. 401, 74 L.Ed. 1023, and cases cited. We examine the
contract only to make certain that the non-federal ground of decision is not so
colorable or unsubstantial as to be in effect an evasion of the constitutional
issue.

11

The contract was entered into as a preliminary to the award by the City of
Memphis to the Memphis company of its franchise to distribute gas to
consumers, and execution of the contract was a condition of the grant of the
franchise. By the contract the Memphis company undertook to establish its
distribution system. Taxpayer undertook to construct its pipeline with facilities,
including measuring stations at a delivery point, for supplying the Memphis
company with a varying flow of gas into the service pipes as and when required
by the Memphis company for consumer needs. The amount so furnished, less
certain deductions covered by a separate contract not now material, was to be
divided into five classes, according to the use made of the gas by consumers,
and was to be billed by taxpayer to the Memphis company at five different
specified rates. The amount of gas allocated to each class was to be in
proportion to the amount of that class of gas sold by the Memphis company for
like use during the preceding month.

12

At the end of each year the combined net surplus or deficit of the two
companies was to be divided between them by a cash settlement. The surplus or
deficit of each was to be arrived at by deducting from its gross revenues the

operating costs, costs of property restorations and replacements, taxes,

amortization of investment, and 6% upon investment. After all net deficits of
both parties had been made up and the Memphis company had received from
the combined net surpluses 1 1/2% of its total investment annually, any
additional combined net income was to be paid to or retained by taxpayer.
13

The contract provided for readjustment from time to time of the billing price of
the gas supplied by taxpayer so as to admit of reduction in the rates to
consumers, after first allowing 'a reasonable return' on taxpayer's investment.
The contract contains the usual provisions for inspection of books by the
parties and the city, and a clause requiring all notices to be given to taxpayer at
its Memphis office.

14

The Supreme Court of Tennessee held that the city was a party to the contract
entitled to the benefits of its provisions for rate reductions. It held that the
circumstance that taxpayer and the Memphis company were designated by the
contract as 'seller' and 'buyer' did not alter or obscure the fact that taxpayer was
a participant in the profits derived from the joint undertaking and that the
precise time when the title to the gas passed, if it passed before distribution to
consumers, was immaterial. In any case it thought that the tentative amounts to
be paid by the Memphis company for the gas in the first instance were to be
determined after delivery by the use made of it by consumers.

15

We cannot say that there is not a substantial basis for the state court's
conclusion that in substance the contract called for the contribution of the
services and facilities of the companies to a joint enterprise, the taxpayer's
delivery of gas into the mains of the Memphis company for distribution to
consumers, and a division between the two companies of the operating profits
after providing for certain agreed initial costs and expenses. Nor can we say
that by this participation the taxpayer did not do such a business in the state as
to be taxable there, or that the profits derived from it are not an appropriate
measure of the tax.

16

Taxpayer's contribution to the joint undertaking with the Memphis company for
the distribution of gas to local consumers, and its activities at its Memphis
general office in supplying gas to be distributed for the joint account as required
by the Memphis company and in safeguarding and securing payment of its
share of the profits, went beyond the mere sale, to a distributor, of gas in
interstate commerce. It also constituted participation in the business of
distributing the gas to consumers after its delivery into the service pipes of the
Memphis company. Cheney Bros. Co. v. Massachusetts, 246 U.S. 147, 155,
156, 38 S.Ct. 295, 297, 62 L.Ed. 632; Atlantic Lumber Co. v. Commissioner,

298 U.S. 553, 56 S.Ct. 887, 80 L.Ed. 1328; Southern Natural Gas Corp. v.
Alabama, supra. Since it was competent for the state to tax such business done
within it, it was competent to measure the tax by the net earnings of the
business as well as by the capital employed. See Southern Natural Gas Corp. v.
Alabama, supra, 301 U.S. 156, 157, 57 S.Ct. 699, 700, 81 L.Ed. 970.
17

In any case even if taxpayer's business were wholly interstate commerce, a

nondiscriminatory tax by Tennessee upon the net income of a foreign
corporation having a commercial domicile there, cf. Wheeling Steel Corp. v.
Fox, supra, or upon net income derived from within the state, Shaffer v. Carter,
252 U.S. 37, 57, 40 S.Ct. 221, 227, 64 L.Ed. 445; Wisconsin v. Minnesota
Mining & Mfg. Co. 311 U.S. 452, 61 S.Ct. 253, 85 L.Ed. 274; cf. People of
State of New York ex rel. Cohn v. Graves, 300 U.S. 308, 57 S.Ct. 466, 81 L.Ed.
666, 108 A.L.R. 721, is not prohibited by the commerce clause on which alone
taxpayer relies. United States Glue Co. v. Oak Creek, 247 U.S. 321, 38 S.Ct.
499, 62 L.Ed. 1135, Ann.Cas.1918E, 748; Underwood Typewriter Co. v.
Chamberlain, 254 U.S. 113, 119, 41 S.Ct. 45, 46, 65 L.Ed. 165; cf. Bass, etc.,
Ltd., v. Tax Comm., 266 U.S. 271, 45 S.Ct. 82, 69 L.Ed. 282; Western Live
Stock v. Bureau, 303 U.S. 250, 255, 58 S.Ct. 546, 548, 82 L.Ed. 823, 115
A.L.R. 944. There is no contention or showing here that the tax assessed is not
upon net earnings justly attributable to Tennessee. Underwood Typewriter Co.
v. Chamberlain, supra; cf. Bass, etc., Ltd., v. Tax Comm., supra; Butler Bros. v.
McColgan, 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. -. It does not appear that
upon any theory the tax can be deemed to infringe the commerce clause.

18

Appeal dismissed for want of jurisdiction. Certiorari granted and judgment

affirmed.

19

Mr. Justice ROBERTS took no part in the consideration or decision of this

case.