18 Haw. 530 | Haw. | 1908
OPINION OP THE COURT BY
Ewa Plantation Company returned its gross income for the year 1906 at $1,901,928.11 derived almost entirely from sales of sugar. Against this it claimed a deduction of $1,290,109.7(> under the heading “Amounts expended in the purchase or production of movable property mentioned in Schedule A.” This with other deductions which are not in issue brought its net income, as returned, to $571,929.56, on which the tax at two
The item of depreciation was calculated upon a system adopted by the plantation in 1903, and is admittedly fair as to amount, provided depreciation of property can be allowed either as an amount expended in the production of movable property within E. L. Sec. 1280 or as an expense or a loss actually sustained or actually incurred within E. L. Sec. 1281. In arriving at the amount, the property of the plantation was divided into four classes, with reference to the fact that the plantation is being conducted upon a leasehold, of which thirty-four years of the term remained at the time of the calculation.
Glass A comprises an estimated list of properties which will revert to the lessor and will have no residual value at the end of the lease. It includes such items as mill buildings, roads and bridges, storm ditches, reservoirs, and portions of the mill, railroad and pump machinery. Upon these items the book value of the property at the beginning of each year is divided by the remaining years of the lease and the quotient is the depreciation for the year. Glass E comprises an estimated list of properties which will revert to the lessor and will have no residual value but whose life is estimated at less than the unexpired term of the lease. This class includes, among other
This elaborate and scientific system has been contrasted in argument with what may be called the replacement system, in which net income is computed by deducting from gross income the cash actually expended in running expenses including the replacement of articles actually worn out. It cannot be denied that as a business method the plan adopted by the plantation is superior, but this does not necessarily imply that this is the method prescribed by the legislature for the purposes of taxation.
It will be observed at the outset that the two.systems are mutually exclusive. If depreciation upon a given article is
Enough has been said to show that the deduction as claimed by the plantation should not have been allowed, but we are further satisfied that in the case of more perishable articles, whose replacement would be properly charged to running ex* penses, the statute contemplates the deduction of cash actually expended at the time the expenditure is made, and not a deduction based upon estimated depreciation. Were there no system prescribed for computing the “net profit or income above actual operating and business expenses” taxed by Sec. 1.2Y9 there would be much force in the argument that the net profit should be computed only after the careful provision for the future which a conservative corporation makes in dealing with the question of dividends, although the question is by no means free from doubt. In spite of the definitions of net profits given by standard authorities on accounting, the United States supreme court has said: “The public, when referring to the profits of the business of a merchant, rarely evei take into account the depreciation of the buildings in which the business is carried on, notwithstanding they may have been erected out of the capital invested. Populaidy speaking the net receipts of a business are its profits,” and construed a statute relating to the profits of the Centennial accordingly. Eyster v. Centennial Board of Finance, 94 U. S. 600. In our statute, however, Sec. 1281 (as amended S. L. 1905, Act 81), makes specific provisions regarding deductions, the portions now'material being as follows:
“Section 1281. Income, How Computed. The net profits or income of all corporations shall include the amounts paid*535 or payable to, or distributed or distributable among shareholders from any fund, or used for construction, enlargement of plant, or any other expenditure or investment, paid from the net profits, made or acquired by said corporation, during the taxation period next preceding', whether that period be the first taxation period or any succeeding period.
“In computing incomes the necessary expenses actually incurred in carrying on any business, trade, profession or occupation, or in managing any- property shall be deducted and also all’interest paid by such person or corporation on existing indebtedness. And all government taxes, and license fees, paid within the taxation period next preceding whether that period be the first taxation period or any succeeding taxation period shall be deducted from the gains, profits or income of the person who, or the corporation which, has actually paid the same, whether such person or corporation be owner, tenant' or mortgagor ; also all losses actually sustained during the. taxation period next preceding, whether that period be the first taxation period or any7 succeeding taxation period, incurred in trade, or arising from losses by fire not covered by insurance, or losses otherwise actually incurred.
“Provided, that no deduction shall be made for any amounts paid out for new buildings, permanent improvements or better-ments, made to increase the value, of any property or estate.”
The expressions “necessary expenses actually incurred,” “losses actually sustained,” and “losses otherwise actually incurred” clearly indicate the intention of the legislature to confine this class of deductions to the actual losses and expenses of the replacement system as distinguished from the estimated losses and expenses of the depreciation system. These phrases are universally used to describe the replacement system when the two are contrasted. Thus in Collness Iron Company v. Black. L. R. 6 App. Cas. 315, 338, the principal opinion, in discussing a previous case, says: “In Forder v. Handyside the Exchequer Division came to a decision as to repairs, estimated but not advdlly inev-rred, which whether it was right or wrong, is no longer, since 41 Vict. c. 15, s. 12, to apply.” Tn the report of Forder v. Handyside, L. R. 1 Ex. Div. 233,
With regard to the claim that estimated depreciation should be allowed as an “amount - expended” under that portion of section 1280 including as income “the amount of sales of all movable property less the amount expended in the purchase or production of the same” it is apparent that an allowance of this claim would put corporations engaged in the production of movable property at a considerable advantage as -compared with corporations in other lines of business. A corporation engaged in buying and selling movable property suffers the same depreciation as the corporation in this case, but it could hardly be urged that depreciation upon their buildings or office furniture was an amount expended in the purchase of the goods in which they dealt. Corporations not dealing in movable property, as, for example, railroad and street railway companies, would of course have no possible claim under this section. It is sufficient to say that we do not consider that this language can be made to cover depreciation of plant but that the word “depreciation” is more properly contrasted as in the instance in Grant v. Hartford and New Haven Railway, supra,
The language of our statute was largely taken from the federal income tax law of 1894 which was declared unconstitutional before being construed in detail by the courts. The language of other statutes is so dissimilar that decisions under them afford but little aid. By the English income tax act of 1842 it was jnovided that the “duty * * * shall be computed on a sum not less than the full amount of the balance of the profits or gains of such trade, manufacture or adventure or concern upon a fair or just average of three years.” After the case of Forder v. Handyside, L. R. 1 Exch. Div. 233, denying the right to deduct estimated depreciation, the act was amended in 1878 giving specific authority to the assessors to “allow such deduction as they may think just and reasonable as representing the diminished value by reason of wear and tear during the year of any machinery or plant used for the purposes of the concern.” See Cunard Steamship Co. v. Co-ulson, (1899) 1 Q. B. 865.
In Grant v. Hartford and New Haven Railroad Co., 93 U. S. 225, there are also references to depreciation, although the actual decision was to allow the value of an old bridge which liad been replaced as a current expense, which would be inconsistent with a previous allowance of its value by a system of yearly depreciation.
The corresponding section of the income tax law of 1894, however, assesses the tax “on the net profits or income above actual operating and business expenses including expenses for malcriáis purchased for manufacture or bought for resale, losses and interest on bonded and other indebtedness.” Act of August 27, 1894, Sec. 32, 28 Stat. 556. It will be observed that this language is very different from that under which the previous cases were decided and in effect prescribes the replacement system.
In the plantation’s notice of appeal from the assessment of its income to the tax appeal court it is claimed that the assessment and levy is illegal and void and in violation of the Organic Act, Secs. 5, 6, 10, 55, 81, 83; Revised Statutes of the United States, Secs. 1850, 1851 and 1977 as well as the taking of property without due process of law, and a denial of the equal protection of the law in violation of article 5 and section 1 of article 14 of the amendments to the Constitution of the United States. The only points urged in support of these sweeping objections are, first; that there is no authority except under Sec. 1285 to add to the amount of the tax payer’s return, which is so plainly without merit as to require no discussion, (In re Hayes, 16 Haw. 796,) and, second, that the law is unconstitutional iii failing to provide for a notice of an assessment raising the amount of the income from the tax payer’s return, or in the alternative that if such notice is required by the statute it was not given in this case. We are of the opinion.that Sec. 1287 requires notice of an assessment in case of the tax payer’s return to be given on or before April 1 in each year, following
While we cannot sustain the decision appealed from, allowing the item of depreciation as it appears on the books of the corporation, we are nevertheless of the opinion that the plantation should be permitted to show any actual expenditures in the nature of running expenses which would properly be included in its total claim of $1,290,109.IQ expended in the production of its crop. Under its system of bookkeeping some of these items were included in the account of permanent improvements, and- the item of permanent improvements in another part of the return was undoubtedly computed by the inclusion of some of these items. Ordinarily in the absence of mistake or other reasonable excuse a return is binding on the tax payer, but in this case the return was made under the representation of the treasurer of the Territory that estimated depreciation would be allowed as a deduction, which arrangement was rescinded by the latter only some months after the return was made, in view of the decisions of In re Income Taxes Honolulu Rapid Transit & Land Co., 18 Haw. 15, and In re Taxes Laupahoehoe Sugar Co., 18 Haw. 206. We think this sufficient reason for allowing the plantation to show the facts claimed, and that it lost no rights by litigating the matter of depreciation, provided it offered to prove its alternative claim before the tax appeal court, which was done. It may be observed, however, that so far as the year 1906 is concerned the offer to prove that of the sum of $40,502.48 only $4,300.84
The decision of the tax appeal court is reversed, and the case retained on the calendar of this court for the purpose of the motion referred to, in default of which the assessment will be affirmed.
January 20, 1908. Per curiam: No motion to present further evidence having been made in accordance with leave reserved in the opinion filed January 13, the decision of the tax appeal court appealed from is reversed and the assessment made by the tax assessor affirmed.