193 S.W.2d 749 | Ky. Ct. App. | 1946
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *38 Reversing.
The judgment is for $2,358,332 against the appellant, Atlantic Coast Line Railroad Company, for income taxes for eight years, 1936 to 1943. Penalties and interest to the amount of $1,212,668 are included in the judgment, the tax itself being $1,145,664.
The section of the statutes upon which the judgment principally rests, and on the construction of which our decision depends, is Section 4281b-14(3), Kentucky Statutes, and, since 1942, Kentucky Revised Statutes
"Every corporation organized under the laws of this state and every foreign corporation doing business in this state * * * shall pay for each taxable year a tax to be computed by the Department of Revenue upon the entire net income of the corporation derived from *39 business done, property located or sources in this state. This tax shall be at the rate of four percent of the entire net income of the corporation, or the portion thereof taxable within this state, determined as provided in this chapter."
The appellant is a Virginia corporation, but has its principal place of business in North Carolina. Solely as an investment it owned (subject to a trust indenture) during the taxable period 596,700 shares of the capital stock of the Louisville Nashville Railroad Company, a Kentucky corporation, with its principal place of business in Louisville. The investment was originally made in 1902 and the number of shares owned has increased proportionately as the capital stock of the company was increased, the proportion of the holding always being 51% of the whole. The certificates have been in New York and pledged to secure bonds issued initially for the purchase of the stock. The dividends have been paid to the Atlantic Coast Line Railroad Company. The aggregate is $28,641,600 for the period covered by the suit. The stock has been held solely as an investment, apart from the appellant's regular business as a common carrier, and the dividends thereon were not received in connection with the transaction of the railroad business.
We are not concerned with any question of constitutional power, but only with one of statutory construction.
The adjudged liability is predicated upon the ruling of the trial court that (I) the appellant, a foreign corporation, was "doing business in this state"; and (II) the dividends were derived from "sources in this state."
I. In the year 1924 all of the property of a line of railroad of 276 miles, extending from a point 2.8 miles in Kentucky to Spartanburg, S.C., where connection is made with a line to the seaboard, was leased to the Atlantic Coast Line Railroad Company and the Louisville Nashville Railroad Company, jointly, for 999 years. These two companies were not permitted to operate the line as a part of the Atlantic Coast Line system, but were required to establish a separate operating organization, known as the Clinchfield Railroad Company, which is not incorporated. This is a "separate operating unit, having a responsible management directly in charge of the operations of such properties." 90 I.C.C. 113, Finance Docket 3131. It is a "neutral line not operated *40
in conjunction or under common management or control" with the Atlantic Coast Line Railroad Company. Georgia Florida Railroad v. Atlantic Coast Line Railroad Company, 191 I.C.C. 489; Rates on Chert, Clay, Sand and Gravel in Georgia, 197 I. C. C. 215; Atlantic Coast Line R. Co. v. United States,
Returns for the computation of franchise taxes were duly made by the operating entity, the Clinchfield Railroad, and they were specifically accepted by the Department of Revenue of the State as being in fact the returns of the Atlantic Coast Line Railroad Company covering the operation of the leased properties. Although having full information of the status, it appears that the Department has not heretofore regarded the Atlantic Coast Line Railroad Company as otherwise doing business in Kentucky within the income tax statutes. It has not required the company to render a report of its payments of dividends to residents of this state as is required by KRS
Apparently in anticipation of being permitted to operate the Clinchfield line, the appellant, in 1924, filed with the Secretary of State of Kentucky, in conformity with section 841, Kentucky Statutes (now KRS
It is doubtful whether the status of the appellant constitutes doing business in Kentucky. It might be said, however, that it is doing so through the unincorporated Clinchfield Railroad as a mere operating agency. Commonwealth v. Southern R. Co.,
II. The income subject to the tax is that "derived from business done, property located or sources in this state." KRS
Since the obligation to pay taxes rests solely on legislation, the legislative intent to tax must clearly appear. It is an established rule that, except as respects exemption, tax laws are to be strictly construed against the state and in favor of the taxpayer, especially with respect to penalties or harsh enforcement. Kentucky Tax Commission v. Fourth Avenue Amusement Co.,
1. Is the word "sources" to be set apart to itself as independent and as having no relationship to the preceding clauses "business done" and "property located"? If it is, then for what use were those clauses intended? The word "sources" standing alone is all inclusive; and standing alone would cover income from business done and property located in the state. This creates ambiguity. The broadness of the language does not permit us to tear these clauses out of the context, nor to isolate the word "sources." Left in and given effect, under the doctrine of ejusdem generis and the related rule of noscitur a sociis, the generic word "sources" must be presumed to be restricted in some degree, at least, by those specific clauses, or to embrace origins of similar character or of a nature analogous to those *42
expressly enumerated. It cannot be said that the two clauses exhaust the classes of income so that there is nothing ejusdem generis left for the rule to operate on so that a meaning must be given to the general word different from that indicated by them. Burke v. Oates,
The conclusion does not rest alone upon this rationalization or the mere application of these general rules of construction. It is supported, we think, by several reasons, some of which are very specific and cogent. Other provisions, of the income tax statute have made objective footprints in the trail leading to the discovery of the legislative intent.
2. "Dividend" is defined in the income tax statute, KRS
"Every corporation subject to the jurisdiction of this state, unless excused by the Department of Revenue, shall render a correct report, duly verified under oath, of its payments of dividends to residents of this state, stating the name and address of each shareholder, the number of shares owned by him, and the amount of dividends paid to him."
Paragraph (2) of that section requires "every person subject to the jurisdiction of this state, in whatever capacity acting," to report payments of rents, interest, premiums, profits and the like to other persons "domiciled in this state," giving their names and addresses. Paragraph (3) provides that such reports "may be required" as to payment, of "dividends or interest on bonds," etc. of corporations.
This section reveals the legislative intent to tax dividends received by residents of this state and none other. We cannot avoid the conclusion that by omitting the requirement of a report of dividends paid to nonresidents the Legislature intended not to tax such dividends: Otherwise, there was deliberately left an avenue *43 of escape for non-resident recipients from the payment of such tax. There is no other available method of finding out who receives dividends from either domestic or foreign corporations. There is no convenient way of subjecting the recipients to enforcible payment of the tax.
3. Equality and uniformity are presumed and discrimination and irregularity rejected where a tax statute, or any portion of it, must be construed or applied upon implication. Commonwealth v. Ledman,
We do not overlook the fact that uniformity required of an income tax is uniformity within a reasonable classification. Cooley, Taxation, Secs. 1671, 1752. Nor that sometimes it is permissible to impose different tax burdens as between domestic and foreign corporations operating within the state. Cooley, Taxation, Secs. 342, 359, 906; Henry Fisher Packing Co. v. Mattox,
4. The court cannot ignore the provision in KRS
5. KRS
The distinction is here made between what the statute calls business income and what we may call non-business or investment income. Here it is recognized that dividends and kindred income, such as interest, rents or royalties, having no relation to business done or property located in this state, is not subject to tax in Kentucky, the source being the taxable situs of the intangibles. We have so held with respect to payments for use of patent rights. Commonwealth v. Radio Corporation of America,
It is significant that only business income "reasonably attributable to the trade or business within this state" is made taxable, and gains from the sale of intangible property are taxable only when "connected with the business in this state." Net income and capital gains are treated alike for taxable purposes.
This provision of the statute is in harmony with paragraph (5) of the section (
6. As well said in Toledo Scale Co. v. Hill,
7. While it is beyond the power of the Department of Revenue by regulations to broaden or to narrow the tax base established by the Statutes, it appears to have been the administrative construction of this statute during the years of its existence (being the period for which this tax has been imposed) not to give it extra territorial effect in this connection where there was no fair approximation or relation of the income to the business done or property located in the state. The Department of Revenue issued a revised regulation in 1940 expressly recognizing that the business situs of stock may be in a state other than the residence of the owner, and provided that "dividends received from stock having a situs outside of the state shall be allocated outside of the state." That has not been changed. It is stipulated that the, appellant and other foreign corporations of like status accepted those regulations and paid their taxes in conformity therewith. In April, 1940, the Director of the Income Tax Division of the Department of Revenue wrote a representative of the appellant and the Louisville *47 Nashville Railroad Company with respect to the applicability of the statute and regulations to the particular dividends involved in this case:
"I can assure you that the Department has never and does not intend to undertake to tax income under-such circumstances. The Department's position has consistently been that such income arises by reason of ownership of certain intangible property and is taxable at the situs where such property is field."
Where a tax law has been put into operation and a construction contemporaneously placed upon it by the agency responsible for its administration and enforcement, that construction, especially if followed for a considerable period, is entitled to great respect as being very probably a true expression of the legislative purpose. Sutherland, Statutory Construction, Section 5108, 6709. With us interpretative regulations do not have the force and effect of law, and the construction thus placed upon the statute will not be adopted unless the statute is ambiguous in its terms and its true meaning is difficult to ascertain. Jefferson County ex rel. v. Jefferson County Fiscal Court,
8. The appellant's property in Kentucky as we have described, is a one-half interest in the perpetual leasehold of less than three miles of railroad and the business done (as we have assumed) is the operation of it. The largest proportionate part of income from that *48
business source allocated to Kentucky and accepted by the Commonwealth was in 1941, the amount being $15,538 and the tax $621.54. The intrastate earnings have been negligible, the largest being $16.50 in the year 1943. The ownership of the stock of the L. N. Railroad Company and the receipt of dividends on what is agreed to be a pure investment has no relation to those sources. The fact that both the investor and the company in whose stock it has invested are railroad companies is only an incidence and it is irrelevant to the question of taxability. Yet the imposition of this income tax would have cost the investor an average of $143,208 each year. The virtual confiscation of its entire property indirectly operated in Kentucky, of course, could not be permitted. Martin v. Nocero Ice Cream Co.,
To be sure, if the other factors developing immunity were not present, the relative amount of business done or value of property located here would not be controlling. But that would result in only a fair and reasonable tax being imposed because the allocation would be, as in fact it has been, upon that ownership and commercial activity. There is no hardship or injustice in imposing a tax on a foreign corporation doing business in the state when measured by the amount of its capital and the business ordinarily done, since the corporation has the benefit of the state government. It may be noted that the United States does not subject to income taxation dividends received by non-resident aliens from foreign corporations deriving less than 50 per cent of their gross income from "sources within the United States." 26 U.S.C.A. Int. Rev. Code, sec. 119. And domestic corporations are allowed a credit on account of foreign income taxes in computing their Federal income tax by express provisions. 26 U.S.C.A. Int. Rev. Code, sec. 131(a) (1).
9. To construe "sources in this state" and make the present application contended for by the Commonwealth would pyramid taxes on the original earnings. That is a vice opposed by public policy unless clearly manifested by a statute and is never to be imposed by presumption. Falls City Brewing Co. v. Talbott,
10. We are not advised that any other state attempts to impose a tax on dividends received by Kentucky corporations or individuals on stock owned by them as investments in corporations domiciled in any other state. The Virginia statute allows proportionate credit on income taxes payable there by a non-resident for taxes paid his state of domicile on income having its source within Virginia. Sec. 40, Tax Code, Code 1942 Appendix, sec. 40. Other states recognize the doctrine of reciprocity. Should this court sanction the construction contended for by the Commissioner of Revenue, it would be to violate that principle. It would build an economic barrier around Kentucky, for we apprehend that no outside capital would care to take the risk of being squeezed for an income tax on the investment here, if forsooth, the investor should come into the state and transact business or acquire or use property here even to a negligible extent or value and even though it had no relationship to the investment.
11. Upon a complete survey of the field of precedent we find no case exactly in point although several support the view of non-taxability by analogy.
In Kentucky Tax Commission v. Fourth Avenue Amusement Co.,
The Wisconsin income tax statute imposed a tax on income received by nonresidents of the state "derived from sources within the state or within its jurisdiction." The phrase was not associated with any clause definitely indicating the taxation of income from business done or property located in Wisconsin as does our statute. Nevertheless it was held not to apply to interest on bonds paid by a Wisconsin corporation to nonresidents, the court construing the act as seeking to reach only incomes having a situs within the state or growing out of a privilege exercised or occupation conducted within the state. State ex rel. Manitowoc Gas Co. v. Wisconsin Tax Commission,
In Miller v. McColgan,
The question arose later in Missouri and was considered anew in Union Electric Co.'s Petition,
These cases, the one in California and the other two in Missouri, are respectively relied on by the contending parties here. Neither is altogether "on all fours." The California court was dealing with the construction of a tax exemption under the broad clause of "from sources without this state." St. 1935, p. 1117, sec. 25(a). The Missouri court was dealing with the broad clause of "from all sources within this state." Mo. R. S. A., sec. 11343. Neither was preceded immediately or (as we have said) was qualified by the restrictive clauses "business done" and "property located" in the state, as in our Kentucky statute. Nor was it wrapped up in other influential provisions of the two statutes such as we have referred to.
The California conception of taxability at the domicile of the recipient was the same as that of the Wisconsin court in the cases cited that involved a straightout income tax and not the later statute based upon the "privilege of paying dividends to nonresidents." [
We cannot follow the reasoning of the Missouri Court, that the source of income represented by dividends is where the capital is used and employed. To follow it to its logical conclusion would require the allocation to every state where the Louisville Nashville Railroad Co. operates, for it is quite a "legal fiction" to say it is exclusively used and employed in the state where the corporation's chief or home office is situated.
12. It is an issue long closed that the wisdom or expediency of legislation, whether good or bad, is no concern of the courts; nor the consequences except as a test of validity or measure of intent. In interpreting a doubtful word of controlling importance or in construing an ambiguous taxing statute, it is logical to consider the consequences of one or another conception. If one construction reconciles the ambiguity with other provisions of the law clearly expressed, produces uniformity and equality and results in just and equitable treatment, economic stability, practical administration, and gives recognition to the principle of reciprocity between the states, that is the construction to be adjudged. If another construction threatens unconstitutionality (cf. Shaffer v. Carter,
We are of opinion that "sources in this state," as used in the Kentucky Statutes, Sec. 4281b-14, and KRS
The judgment is reversed.
Judge Dawson not sitting.