South Central Bell Telephone v. Alabama

Summary

        The U.S. Supreme Court has ruled that the Alabama Supreme Court deprived taxpayers of the due process of law by barring them from presenting a federal constitutional challenge to Alabama's franchise tax by finding their claim barred by a prior state-court judgment in a case to which that were not parties to the suit.

        Alabama imposed a franchise tax on domestic and foreign corporations. Alabama empowers domestic corporations to reduce their franchise tax burden to a bare minimum simply by adjusting the par or stated value of their stock. The result was that foreign corporations beared a disproportionate franchise tax burden because they were organized under laws of other States. Reynolds Metals Company and General Motors Corporation brought suit against the State of Alabama alleging that the foreign franchise tax scheme discriminated against out-of-state corporations, violating the Commerce and Equal Protection Clauses. Reynolds Metals and General Motors successfully moved for summary judgment. The Court of Appeals affirmed. The Alabama Supreme Court reversed. While the Reynolds case was pending, South Central Bell Telephone Company and CSX brought action challenging the franchise tax. The Court of Appeals concluded that their claims were barred by state-law res judicata principles. South Central Bell Telephone and CSX petitioned for writ of certiorari.

        The U.S. Supreme Court granted the petition. The dissent in Reynold's observed that the res judicata doctrine does not apply where the court was dealing with different tax years and different taxpayers. Also, "the doctrine of res judicata does not apply when the judgment pleaded as an estoppel is based upon controlling decisions subsequently repudiated by supervening decisions." The dissent explained that the principle was applicable to the facts of this case because the court "has rendered intervening decisions that repudiated the Reynolds Metals rationale." It was inescapable that Alabama's franchise tax violated the Commerce Clause, no longer passing legal muster. Yet, Alabama continues to enforce and collect the franchise tax, even though it has been concluded by judges addressing the question that the tax was plainly unconstitutional. Review of the case must be done to bring recalcitrance to an end.

— Brian Cardile