292 P. 813 | Or. | 1930
Lead Opinion
In Banc. Plaintiffs are five individuals residing within this state who are engaged in the investment banking business, that is they purchase and sell bonds, stocks, notes and other intangible property of the kind described in General Laws of Oregon, 1929, ch. 429, § 1. Three of the defendants comprise the Tax Commission of this state; another is the Governor, and the fifth the Attorney General of this state. The purpose of this suit is to obtain a decree declaring invalid the above mentioned act which levies a tax of 5 per cent upon the gross income received from such property, and to enjoin its enforcement.
From a decree in favor of the defendants, based upon an order sustaining a general demurrer to the complaint, the plaintiffs have appealed. The complaint, after describing the plaintiffs and the defendants as above, together with the business in which the plaintiffs are engaged, recites the following matters: Each of the plaintiffs, during the year 1929 owned bonds, notes, shares of stock in private corporations and other intangible property of the type described in General Laws of Oregon, 1929, ch. 429, § 1, subd. (e). None of the intangibles owned by the plaintiffs were issued by the Federal Government and none of them are exempted from taxation by the laws of this state. Two of the plaintiffs, who are engaged in business as copartners under the firm name of Redfield Wood, owned intangible property in the year 1929 employed in the ordinary course of their business, from which each received in that year *183 more than $500 by way of interest and dividends. These two individuals, during the same year paid interest in the sum of $200 upon capital borrowed by them for the purchase of intangibles. Each of the other three defendants in 1929 received as interest and dividends more than $500; and each paid during that year sums in excess of $200 on account of moneys borrowed to finance the purchase of intangibles. After the complaint had been filed counsel on behalf of the plaintiffs and the defendants subscribed to a stipulation which recited, among other matters, the following facts, and agreed that they should be deemed a part of the complaint. The plaintiffs, in order promptly to supply the demands of their trade, purchase quantities of securities and carry them in stock until sold to buyers. As a matter of common practice the value of the securities owned by the dealer to meet the requirements of his trade exceeds in a substantial sum the amount of his capital. The excess represents borrowed money upon which he is compelled to pay interest at the rate of not less than 6 per cent per annum. Each of the plaintiffs maintains an office in the city of Portland, wherein he conducts his business, and is subjected to all of the expenses incident to such a venture. There are many corporations engaged in the same line of business in competition with the plaintiffs and they pursue substantially the same practices employed by the plaintiffs. We quote from the stipulation the following:
"Persons residents and domiciled in the state of Washington are and in the year 1929 were engaged at Portland, Oregon, in conducting in Oregon the business of buying, owning and investing in notes made by Oregon residents and secured by mortgages on lands in Oregon." *184
The complaint recites various sections of the above mentioned act, also sections of the federal and Oregon constitutions; it charges that the act is invalid on account of its alleged conflict with these constitutional limitations in several respects. We shall mention them later.
General Laws of Oregon, 1929, ch. 429, is applicable only to individuals resident within this state. It imposes a tax of 5 per cent per annum "upon income from money and credits." It defines "money and credits" as intangible properties; that is, "money at interest, bonds, notes, claims and demands, secured or unsecured (not including open accounts) all shares of stock in corporations and any and all other evidences of indebtedness." In computing the amount of income subject to the tax each individual is granted an exemption of $200. The act specifies that the tax shall become a personal debt from the taxpayer to the state. If the tax is not paid within the time specified by the act severe penalties are added to the sum payable, and an expeditious method is provided whereby the tax payers' common property becomes subjected to liability for the delinquent tax and the accumulated penalties. Enforcement of the act is intrusted to the State Tax Commission. Since the other provisions of this enactment are not material to the issues before us we shall omit mention of them. It will be observed that, succinctly stated, the act imposes a tax of 5 per cent upon the gross income from intangibles received by all individuals residing within the state; the tax is exacted only from individuals. General Laws of Oregon, 1929, ch. 427, is applicable to corporations. The validity of the latter has not been challenged but due to the fact that both appellants and respondents have made *185 frequent reference to it we deem it advisable at this point to make a resume of its material provisions. It limits its scope to national and state banks, building, savings and loan associations, financial, manufacturing, mercantile and business corporations. This act requires every national bank within the state to pay annually "an excise tax according to or measured by its net income * * * at the rate of 5 per cent upon the basis of its net income;" further "every bank, other than a national banking association, and every financial corporation, building and loan association, savings and loan association and mutual savings bank, located within the limits of this state, shall annually pay to the state, for the privilege of carrying on or doing of business by it within this state, an excise tax according to or measured by its net income, to be computed in the manner hereinafter provided, at the rate of 5 per cent upon the basis of its net income." The act declares that the taxes exacted of banking institutions "shall be in lieu of all other state, county and municipal taxes upon the corporations and associations therein mentioned, except taxes upon their real property." Chapter 427 next provides:
"Every mercantile, manufacturing and business corporation doing business within this state, * * * shall annually pay to this state, for the privilege of carrying on or doing of business by it within this state, an excise tax according to or measured by its net income, to be computed in the manner hereinafter provided, at the rate of 5 per cent upon the basis of its net income * * * each corporation mentioned in this section 6 shall be entitled to an offset against said tax in the amount of taxes paid by it upon its personal property located in this state, but the offset shall not exceed 90 per cent of the said tax." *186
The act provides that if the gross income of a corporation is derived from business done both within and without the state the net income shall be determined only upon the portion done within the state. In computing net income corporations are permitted to deduct, among other items, interest payments, losses sustained during the year, and debts found to be worthless. The interest deduction "shall not exceed up to and including 5 per cent upon deposits or withdrawable shares in banks, building and loan associations, savings and loan associations and mutual savings banks, and shall not include the income on nonwithdrawable shares, nor on amounts credited to undivided profits or surplus." The act provides for credits in the event the taxpayer has become liable to a similar tax levied by another state upon the net income of his business. The remaining portions of the act are not sufficiently material to the issues before us to warrant mention.
By way of brief resume it will be observed that chapter 427 exacts a tax of 5 per cent upon the net income of corporations from all sources, and that chapter 429 imposes a tax of 5 per cent upon the gross income from intangibles owned by individuals only. The latter act makes no provision whereby an owner of securities who has made purchases by the use of borrowed capital can make deductions from his gross income for interest paid. In the event that some of his intangibles proves to be either totally or partially worthless he is entitled to no deductions on those accounts. Likewise operating expenses incurred by him incidental to his investment must be borne by him without deduction. A corporation, however, engaged in the same kind of business is permitted by chapter 427 to make all of these deductions in computing net *187 income. The plaintiffs insist that these circumstances establish their charges of discrimination. However, it is to be observed that chapter 427 requires corporations to include all gains received by them in computing net income; thus commissions earned in the sale of securities enter into the income upon which the tax is payable. The individual escapes taxation from all income except that received from interest and dividends.
Proceeding further with a review of these two acts we shall mention their titles and their purposes as expressed in the acts themselves. The title of chapter 429 is in part as follows: "To provide for the taxation of the income derived from money, bonds, * * *." Section 2 of chapter 429 is as follows: "A tax is hereby imposed on every resident taxpayer, which tax shall be levied, collected and paid annually at the rate of 5 per cent upon income from money and credits as herein defined." The title of chapter 427 is in part as follows: "To provide for an excise tax upon national banking associations * * *." Section 1 of this act states: "This act shall be known and cited as the excise tax of 1929." A subsequent provision of this act states: "The term `excise tax,' as herein used, means a tax measured by or according to net income imposed upon national banking associations, * * * and business corporations for the privilege of carrying on or doing business in this state."
Before setting forth our consideration of the validity of chapter 429 we shall mention chapter 317, General Laws of Oregon, 1927. The defendants contend that, by reason of the act just mentioned, chapter 429 levies a tax in lieu of the personal property tax which otherwise would be imposed upon intangibles. General *188 Laws of Oregon, 1927, chapter 317, makes provision: "All stocks, bonds, notes and all moneys or debts due or to become due to any person, the dividends, interest or other income from which is taxable under the income tax law or laws which may hereafter be enacted, are hereby exempted from taxation as property."
The plaintiffs contend that chapter 429 is in conflict with section 32 of article I and section 1 of article IX of the Oregon Constitution and also in conflict with the portion of the 14th amendment to the Federal Constitution which restrains the states from denying to any person the equal protection of the laws.
The above mentioned provisions of our state constitution are as follows:
"Art. I, § 32. No tax or duty shall be imposed without the consent of the people or their representatives in the legislative assembly; and all taxation shall be uniform on the same class of subjects within the territorial limits of the authority levying the tax."
"Art. IX, § 1. The legislative assembly shall, and the people through the initiative may, provide by law uniform rules of assessment and taxation. All taxes shall be levied and collected under general laws operating uniformly throughout the state."
Specifically the plaintiffs contend that chapter 429 conflicts with the above constitutional provisions in the following: (1) the act makes an arbitrary classification between corporations and natural persons, taxing the latter 5 per cent upon their gross income from intangibles and exempting the former, (2) it makes an arbitrary classification between Oregon residents and residents of other states doing an investment banking business in this state, taxing the former and exempting the latter. *189
We deem it necessary at the outset to determine the nature of the tax which chapter 429 proposes to impose, that is whether it is an ad valorem tax imposed upon intangibles or is one assessed upon income as an excise. In the differences between these two kinds of taxes, as pointed out by Mr. Justice HARRIS in the following language quoted from Portland v. Portland Ry. L. P.Co.,
"A property tax must be on an ad valorem basis, because it is a direct tax on property; but there is no constitutional requirement that a business or occupation tax shall be so measured: Ellis v. Frazier,
The plaintiffs contend that the tax imposed by chapter 429 is a tax upon property; that is upon the intangibles themselves; the defendants insist that chapter 429 levies an income tax measured by the gross receipts which the owners of the intangibles derive from those investments. It is evident that if this tax *190 is unpaid upon the property itself then intangibles are taxed only when they are owned by individuals because the tax of 5 per cent levied upon the net income of corporations by chapter 427 is not a tax upon the intangibles, but is an excise levied upon the privilege of doing business in corporate form. The latter conclusion is warranted not only by the fact that counsel for both parties have so described the nature of chapter 427 but also by its plain phraseology and manifest purpose.
Many carefully reasoned cases can be readily assembled which held, under the circumstances present in them, that a tax on income from property is a tax upon the property which produced the income. One of the most notable of these decisions is found in Pollock v. Farmers' Loan Trust Co.,
"A tax upon income from money on deposit or at interest, from bonds, notes or other debts due, and as dividends from stocks, coupled with exemption from all other taxation of the principal from which such income flows, is in substance and effect a tax upon the property from which it is derived. A tax upon the income of property is in reality a tax upon the property itself. Income derived from property is also property. Property by income produces its kind, that is, it produces property and not something different. It does not matter what name is employed. The character of the tax cannot be changed by calling it an excise and not a property tax. In its essence a tax upon income derived from property is a tax upon the property. This was decided after most elaborate consideration, with affluent citation of authorities, in Pollock v. Farmers' Loan TrustCo.,
In fact the courts have so many times announced the conclusion that a tax upon income is a tax upon the property which produced the income that the editor of Ruling Case Law thus expresses the rule: "It is probably now generally conceded that a tax laid directly upon the income of property is a tax upon the property itself": 26 R.C.L., Taxation, § 116, p. 141. Credits, the right to receive money of the debtor, are always held taxable as a species of property: Re Opinion of the Justices,
Much well-reasoned authority may also be found to support the proposition that income is itself property, especially when it is the product of property as distinguished from personal effort. The much-cited case of Waring v. Savannah,
"* * * Investing, or depositing or locking up what is received as income, changes not its character, but merely its use; and the notion that a tree is property, while its fruit is not, cannot be sustained upon any principle of logic or common sense."
Before announcing its conclusion the Alabama court reviewed a large number of decisions by the courts of other states holding that income is property. See also Hattiesburg Grocery Co. v.Robertson,
Having concluded that a tax imposed by the legislature upon the gross income of property may be considered as a tax upon the property which produced the income, and also that a tax upon gross income from property may well be held a tax upon property, we come now to the problem whether a legislative intent is expressed in chapter 429 to tax property, or to levy an income tax in an amount measured by 5 per cent of the gross receipts from intangibles. In other words, is the purpose of this act to impose a tax upon intangible property, or to take from the recipient of income from intangibles a portion thereof as remuneration to the state for the privileges bestowed by it which enabled the taxpayer to produce, receive, accumulate and enjoy his properties? In determining this problem we notice that the same session of the legislature which enacted chapter 429 also made provision for an income tax, and clearly expressed its purpose in that regard: General Laws of Oregon, 1929, chapter 448, p. 678. (The enforcement of this statute has been withheld due to the referendum laws of this state). If chapter 429 was intended to tax income it is difficult to understand why it was not included as a part of chapter 448, which also taxes the income of individuals only. Further, it will be observed that the tax imposed by chapter 429 *195
operates upon gross income and not upon net income. While it may be possible to write an income tax statute which operates on gross income yet the present departure from the general practice is somewhat persuasive that the tax was not intended as one imposed upon income. Moreover, a tax upon gross income finds but little support in the economic reasons which sustain income taxes. It is the theory of such taxes that they cast the burden of governmental-maintenance upon those best able to bear it. But gross income does not necessarily indicate the possession of available surplus. When gross receipts can be regarded as reliable evidence of the value of the property which produced them, taxes upon gross receipts are frequently regarded, not as excise taxes but as taxes upon property; the cases will be found cited in Cooley on Taxation, (4th Ed.) §§ 157 and 844. The gross receipts from the intangibles mentioned in this statute, we believe, can be fairly regarded as true representations of the value of the properties which produced them. Income taxes generally do not select as the subject-matter of their levies the income from one source only and neglect all others. This conception of such taxes is given voice in Young v. IllinoisAthletic Club,
Having reached the conclusion that chapter 429 levies a tax upon property it is at once evident that *197
such property is taxed only when it is owned by an individual. Chapter 427 does not endeavor to tax intangibles. The tax imposed by it, as the act itself expressly declared, is upon the corporate franchise which is a type of property not possessed by those who are affected by chapter 429. Payment of the sums exacted by chapter 427 constitutes the corporations' remuneration to the state for the privilege of doing business in corporate form. We have taken the following from Flint v. Stone TracyCo.,
"* * * The thing taxed is not the mere dealing in merchandise, in which the actual transactions may be the same, whether conducted by individuals or corporations, but the tax is laid upon the privileges which exist in conducting business with the advantages which inhere in the corporate capacity of those taxed, and which are not enjoyed by private firms or individuals. These advantages are obvious, and have led to the formation of such companies in nearly all branches of trade. The continuity of the business, without interruption by death or dissolution, the transfer of property interests by the disposition of shares of stock, the advantages of business controlled and managed by corporate directors, the general absence of individual liability, these and other things inhere in the advantages of business thus conducted, which do not exist when the same business is conducted by private individuals or partnerships. It is this distinctive privilege which is the subject of taxation, not the mere buying or selling or handling of goods, which may be the same, whether done by corporations or individuals."
The individual, unlike the corporation, cannot be taxed for the mere privilege of existing. The corporation is an artificial entity which owes its existence and charter powers to the state; but the individual's *198
right to live and own property are natural rights for the enjoyment of which an excise cannot be imposed: 26 R.C.L., Taxation, § 209, p. 236; Cooley, Taxation, (4th Ed.), § 1676;Opinion of the Justices,
Thus we have a situation where the individual is compelled to pay a tax upon his intangibles while the corporation escapes entirely from this tax; yet the tax could be levied as well upon the corporation as upon the individual. Double taxation would not result if the corporation were given credit upon its excise tax for any payments made upon its intangible tax. The legislature cannot grant an exemption from a tax on property by accepting as a substitute an excise tax not based upon the value of the property of the exempted individuals: 26 R.C.L., Taxation, § 223, and Cooley on Taxation (4th Ed.), §§ 662 and 663.
The effect of the fourteenth amendment to the Federal Constitution wherein it guarantees to all the equal protection of the laws, and the provisions of the Oregon Constitution, previously quoted, requiring uniformity and equality in taxation were recently ably expounded by Mr. Justice McCOURT in StandardLmbr. Co. v. Pierce, supra. We quote from Atchison, etc.,Railroad Co. v. Matthews,
"The equal protection guaranteed by the constitution forbids the legislature to select a person, natural or artificial, and imposes upon him or it burdens and *199 liabilities which are not cast upon others similarly situated. It cannot pick out one individual, or one corporation, and enact that whenever he or it is sued the judgment shall be for double damages, or subject to an attorney's fee in favor of the plaintiff, when no other individual or corporation is subjected to the same rule. Neither can it make a classification of individuals or corporations which is purely arbitrary, and impose upon such class special burdens and liabilities. Even where the selection is not obviously unreasonable and arbitrary, if the discrimination is based upon matters which have no relation to the subject sought to be accomplished, the same conclusion of unconstitutionality is affirmed."
In Standard Lmbr. Co. v. Pierce, supra, this court declared that classification must "rest upon some ground of difference having a fair and substantial relation to the object of the legislation so that all persons similarly circumstanced shall be treated alike." In Quaker City Cab Co. v. Pennsylvania,
It must be evident that chapter 429 is invalid unless other circumstances not yet considered by us come to its support. The attorney general believes that the act can be sustained by disregarding the corporate entity, and comparing the situation of a group of individuals engaged in the investment banking business, as a partnership, with another group engaged in the same business who have incorporated their association. He argues that the first group would be taxed only under chapter 429, while the second group would be taxed twice; once by reason of chapter 427, and a second time when the profits of the enterprise are passed from the corporation to the stockholder in the form of dividends. In comparing the conditions of the two groups we must disregard the tax imposed by chapter 427 because that is a sum taken from the second group on account of a special corporate privilege which it enjoys, and which the first group evidently felt it could not afford. But let us now determine whether chapter 429 will operate equally upon both groups. If it were evident that the corporation would distribute to the associates all of its profits like a partnership is bound to do then every dollar of corporate profits would be taxed, and the two groups would be brought into an equal condition. But it is common knowledge that all of the profits of a corporation are rarely distributed to the stockholder. In fact, under the spur of modern taxation laws only the inescapable minimum is thus distributed in cash. In financial corporations, of the type that are in competition with the plaintiffs, reserves, surpluses, and undivided profits are constantly augmented from annual net earnings. These earnings, retained in the corporations' possession, and distributed from time to time *201 by means other than cash dividends, would entirely escape taxation under chapter 429. For instance, section 1, subdivision f, exempts stock dividends from inclusion in compiling individual net income. Hence the tax on dividends would fail as a practical matter from bringing the two groups into substantially the same condition. The burden of taxation borne by the stockholders would be substantially less than that borne by the individual.
It is also contended by the defendants that the combined effect of the act now before us and chapter 317, General Laws of Oregon, 1927, previously quoted, is to relieve the owner of the personal property tax upon his intangibles when he has discharged the tax assessed by chapter 429. In other words the attorney general argues that the tax assessed by chapter 429 is in lieu of the personal property tax and is therefore valid. Disposing of this contention it is or opinion that chapter 317, General Laws of Oregon, 1927, exempted intangibles from the personal property tax only when their owner had been subjected to an income tax, and had reference to the income tax statute before this court inStandard Lmbr. Co. v. Pierce, supra, which is no longer a law at this time. Since we have held that chapter 429 is not an income tax law but is a property tax law, chapter 317, General Laws, 1927, has no application. Moreover, as a practical matter no personal property tax is imposed upon intangibles, and finally since chapter 427 exempts corporations from some of the existing tax burdens upon payment of the excise tax the unfavorable condition of the individual is as burdensome after the exemption from the personal property tax as before.
It follows from the foregoing that in our opinion chapter 429, General Laws of Oregon, 1929, is invalid *202 on account of the fact that it discriminates in an unreasonable manner between the individual and the corporation in the levying of the tax enacted by it and therefore denies to the individual the equal protection of the laws.
So far we have made no mention of Conner v. State,
"The tax upon rent is a direct tax upon the land out of which the rent issues. The tax upon the income of bonds is a direct tax upon the bonds themselves. The tax upon interest is a direct tax upon the money which earns the interest."
In Opinions of the Justices (N.H.)
"Improvements and betterments upon the corporate estate, or a surplus held in the treasury, would not be passed on to stockholders, and they would thus escape taxation if the business were incorporated, whereas they would be taxable in the case of an individual *204 owner. * * * Such a provision would obviate the defect in the present income tax law, under which dividends, received by local corporations and by them in turn paid out as dividends to nonresident stockholders, go tax free."
For the reasons above pointed out we decline to follow Connorv. State as a precedent. The tax is sustained was imposed under a provision of the New Hampshire constitution which authorized taxes upon "* * * and other classes of property," hence we assume that the court regarded it as a tax upon property although loose expressions in the opinion may indicate that it entertained other views.
We have given earnest consideration to the failure of the act to tax intangibles permanently deposited in this state by nonresidents to facilitate their use in business ventures here conducted by their owners. Such a tax would be valid: Shaffer v.Carter,
It follows from the foregoing that in our opinion chapter 429 is invalid due to its conflict with the provisions of the fourteenth amendment to the federal constitution which guarantees the equal protection of the laws. We have not discussed in the foregoing opinion all of the numerous authorities cited by counsel on both sides although we have read and studied them carefully. The briefs in this case, as well as in the two companion cases of Kiernan v. Norblad et al. and Miller v.Norblad et al., display industry and skill. The cause will be remanded to the circuit court with instructions to enter a decree in harmony with the prayer of the complaint.
KELLY, J., did not participate in this decision. *205
Addendum
The Attorney General seems to remain convinced that chapter 429 of 1929 Session Laws, which is the act under attack, identifies itself as an income tax statute and that our decision fails to pay sufficient heed *206
to these identifying earmarks. However, we notice that tax legislation of other states which presented even more evidence of being income tax statutes, have been held to be in reality property tax statutes. See, for instance, Cudahy Packing Co. v.Minn.,
Concern is expressed in the briefs lest our previous decision was intended to overrule Standard Lmbr. Co. v. Pierce,
Counsel also evidence apprehension lest our quotation fromPortland v. Portland Ry. L. P. Co.,
Next the suggestion is made that we should construe the three statutes, that is, chapters 427, 429 and 448 as three income tax statutes, and that having done so it will be apparent that no improper discrimination had been made between corporations and individuals. Until the petition for rehearing had been filed the Attorney General's brief referred to chapter 427 as a statute, which exacted a tax of corporations for the privilege of carrying on business in corporate form. We quote from his brief the following: "The amount of tax imposed by chapter 427, Laws of 1929, is computed upon the basis of net income, and is to be paid for the privilege of carrying on or doing business in this state. The procedure for determination of the net income upon which said taxes are computed is set forth in detail, and differs very materially from that applying to the tax imposed by chapter 429." Our study and analysis of that act brought us to the same conclusion. We are aware of no reason for changing that opinion. Being of that opinion it is evident that even if we should hold that chapter 429 is an income tax statute, still a discrimination would exist between the individual and the corporation. The former would be taxed at the rate of 5 per cent upon his gross income from intangibles and would also be subject to a further tax upon his net income from all other sources (levied by chapter 448) while the corporation would escape both of these taxes and be subject only to the excise tax. *209 It seems to us that if the Legislature did not intend that these three acts should reach different subjects of taxation it would not have entitled them with different names and would have written them as one act. This circumstance while not conclusive is very significant.
It is also argued that an excise tax upon corporations may be imposed as a substitute for a personal property tax payable by individuals without violating constitutional provisions and that the tax imposed by chapter 427 should be regarded as a substitute for the one imposed by chapter 429. We are willing to subscribe to the proposition of law upon which this argument is founded but do not believe that the tax imposed by chapter 427 was intended as a substitute tax. We remain convinced that it was intended as a charge for the benefits conferred by the corporate franchise. Moreover, while chapter 427 exempts the corporation from the personal property tax upon the payment of the excise tax, chapter 429, contains no such provision. The validity of numerous tax statutes has been sustained which dealt with the individual in a manner different from the corporation, yet in all of those instances the reason for the different treatment was made apparent. In the present statute the discrimination operates to the disadvantage of the individual, but no reason therefor has come to our attention.
Various other matters are argued in the petition for a rehearing. They have all received careful consideration, but we find in them no sufficient reason for departing from our previously announced decision.
The petition is denied.
KELLY and CAMPBELL, JJ., did not participate. *210