27 So. 2d 268 | La. | 1946
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *430 This case involves two questions, (1) whether Article 107 of the Rules and Regulations Concerning Income Taxes, promulgated by the Collector of Revenue, State of Louisiana, in November of 1938, *431 is valid, and (2), if valid, whether it is applicable retroactively to income tax returns for the calendar year 1937.
The Standard Oil Company of Louisiana (now Standard Oil Company of New Jersey), hereinafter called the "taxpayer," instituted a proceeding before the Board of Tax Appeals of the State of Louisiana, styled "Standard Oil Company of Louisiana v. Collector of Revenue", for the purpose of having that board redetermine a deficiency of income tax of the taxpayer for the calendar year 1937 claimed to be due by the Collector of Revenue.
The Board of Tax Appeals, after a consideration of an agreed statement of facts, oral testimony, and documentary evidence, decided in an opinion promulgated on March 12, 1943, that Article 107 of the Rules and Regulations was valid prospectively but could not be applied retroactively to income tax returns for the year 1937. The Collector of Revenue then petitioned the Nineteenth Judicial District Court for the Parish of East Baton Rouge for review of the decision of the Board of Tax Appeals. That court, after trial, on July 27, 1945, rendered judgment affirming the decision of the Board of Tax Appeals insofar as it refused the claim of the Collector of Revenue for deficiency in income taxes of the taxpayer for the year 1937, but reversing said decision insofar as it held Article 107 of the Rules and Regulations Concerning Income Taxes to be valid prospectively and decreeing said article to be *432 null, void and of no force and effect. From this judgment the Collector of Revenue has appealed to this court.
The income tax law of the State of Louisiana is found in Act No.
Although the state income tax law was first enacted in 1934, the Collector of Revenue did not promulgate any rules or regulations until the month of November, 1938, in which rules and regulations we find Article 107. This article with reference to oil and gas wells provides, as stated in brief filed by counsel for the Collector, "that all amounts paid for labor, fuel, repairs, supplies, hauling, and other services which are used in drilling a well or the preparation for such drilling, commonly known as `intangible costs', must be capitalized, that is to say, treated as part of the capital investment and not treated as a deductible business expense" for the year in which incurred.
Prior to the adoption of Act No.
Subsections (a) and (m) of Section 9, Act No. 21 of the Louisiana Legislature for the year 1934, read as follows:
"Section 9. Deductions from Gross Income. — In computing net income there shall be allowed as deductions:
"(a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodgings) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
These provisions in the Louisiana act are identical with corresponding provisions in the Federal Revenue Acts of 1932 and 1934, § 23, 26 U.S.C.A. Int.Rev. Acts, pages 489, 671, and were copied therefrom.
The taxpayer in this case contends that Article 107 is an invalid attempt on the part of the Collector to deprive taxpayers of a deduction allowed then by the Louisiana income tax law, and, in the alternative, that, if this article is held valid, it nevertheless cannot be applied retroactively to income tax returnes for the year 1937.
The Honorable G. Caldwell Herget, the district judge before whom the case was tried in the lower court, in a well written opinion has correctly stated the issues and the law applicable thereto. We quote the greater portion of his opinion with full approval:
"This matter came before the Court to review a decision of the Board of Tax Appeals of the State of Louisiana.
"The question to be decided is whether or not expenditures by the taxpayer for intangible drilling costs are deductible from its income subject to tax under Act No. 21 *435 of the Legislature of the State of Louisiana for the year 1934, as amended.
"By the agreed statement of facts, intangible drilling costs constitute expenditures for labor, fuel, repairs, supplies and other intangible costs incident to and necessary for the drilling of oil or gas wells and the preparation of said wells for production of oil or gas and have not in themselves any salvage value.
"It is conceded by the State that the pertinent provisions of the statute of this State involved in the decision of this case were taken from the Federal Revenue Act of 1932 and that under the Federal act the Commissioner of Internal Revenue had promulgated regulations which permitted the taxpayer, at his option, to capitalize the intangible drilling costs or to deduct same as an operating expense. Similar regulations had been in effect since 1917.
"It is further conceded that from the adoption of this act of the State of Louisiana to the promulgation of a regulation, Article 107, by the Collector of Revenue, the Louisiana taxpayer was granted the same option as that given by the Federal government, and taxpayers were permitted to capitalize or deduct as operating expense, intangible drilling costs.
"Learned counsel for the State contend that this option was granted to the taxpayer simply through inaction on the part of the agents of the State and not because of any regulation so providing because *436 Art. 107 adopted in 1938 was the first and only regulation actually adopted providing for the method to be used by taxpayers in reference to intangible drilling costs; further, that Art. 107 is a reasonable regulation in compliance with the act of the Legislature and, despite the lapse of four years, was seasonably adopted.
"The taxpayer, on the other hand, contends that the Legislature of this State having enacted Act No.
"The Board of Tax Appeals determined that Art. 107 of the regulations promulgated by the Collector of Revenue was reasonable and not at variance with the act of the Legislature but held that the Article should not be given any retrospective application.
"Since the provisions of the act in question were taken verbatim from the *437
Federal act, it is proper for this Court to examine the Federal authorities interpreting the Federal act, for it is a well established rule of construction that the adoption of a statute of another state or country includes all of the authoritative interpretations and constructions theretofore placed on such statute. Crawford on, `The Construction of Statutes.' Succession of Hedden, La.App.,
"A review of the decisions of the Federal courts is convincing that the courts uniformly held that the Federal act, together with the regulations promulgated by the Bureau of Internal Revenue, permitted the taxpayer, at his option, to capitalize or deduct as operating expenses, intangible drilling costs.
"Therefore, before the adoption of Act 21 of the Legislature of 1934, in so far as the Federal Government was concerned, the option of the taxpayer to capitalize or deduct as operating expenses intangible drilling costs was apparently well settled. See the regulations promulgated by the Bureau of Internal Revenue and the following cases, some of which, however, were decided subsequent to the passage of Act No.
"In Ramsey v. Commissioner, referred to supra, the Court said [
"`The industry, the Commissioner, the Board of Tax Appeals, and the courts for years have acted upon the assumption that this regulation is valid. It is a fair solution of a debatable question. If it is to be changed at this late date, it should bedone by Congress and not the courts.' (Italics, this Court's.)
"It is therefore the opinion of this Court that when the Legislature of Louisiana adopted Act No.
"In passing, it may be well to note that the power of taxation, in so far as state taxes are concerned, is a matter which is, by the Constitution of this State, vested in the Legislature. See Art. 10, Sec. 1 of the Constitution. This Court is of the opinion that giving the sanction of validity to Art. 107 promulgated by the Collector would result in recognizing the authority of the Collector actually to levy a tax.
"Furthermore, taxes should be levied in such language that the taxpayer is clearly advised of the contribution he will be required to make to the cost of government. The State itself, or through *440 its agencies, should not seek to place the taxpayer in a position in which he must make these involuntary contributions in accordance with regulations depending upon the variable opinions of the Collectors of Revenue.
"This Court is therefore of the opinion that the regulation by the Collector of Revenue, known as Art. 107, is contrary to the intent of Act No. 21 of the Legislature of 1934, and is therefore null and void. It is appropriate to note that the Legislature in 1944 amended the act so as to incorporate in the statute itself the right, at the option of the taxpayer, to capitalize or deduct, as operating expenses, intangible drilling costs.
"The United States Supreme Court with Mr. Justice Roberts as the organ of the Court, so held in the case of Helvering, Commissioner of Internal Revenue, v. R. J. Reynolds Tobacco Company,
"Continuing its opinion, the Court then concluded that it was not then determining the question as to whether `the alteration of the existing rule, even for the future, requires a legislative declaration or may be shown by reenactment of the statutory provision unaltered after a change in the applicable regulation.'
In brief filed in this court, counsel for the Collector of Revenue admit a general rule of statutory construction to be that, when a lawmaking body passes a law which is a copy of a law theretofore enacted by that lawmaking body or even by some other lawmaking body, administrative interpretation and construction of the original act is adopted as part of the later act. They contend, however, that, even though the legally valid administrative interpretations of identical Federal statutory provisions were applicable to the *442 Louisiana income tax statute, nonetheless there would be nothing to impair the validity of Article 107.
In support of this contention, they state that, even though the Federal regulation permitting the deduction of these intangibles as expenses be a valid interpretation, it is only an interpretation of what the Federal statute permits and not an interpretation of what the statute compels, or that, if Federal administrative authorities have correctly interpreted the Federal statute as permitting them to allow the expensing of these intangibles, they have nowhere interpreted it ascompelling them to grant the option.
Counsel further state that in this case all parties have admitted that there are two recognized accounting methods for the treatment of intangible drilling costs, namely, capitalization and charging to expenses, and that both of these methods are long established and well recognized in the oil and gas industries. They contend that, if the Federal regulation-making authorities had the right to permit the taxpayer to use either method of accounting or to allow to the taxpayer a choice under administrative interpretation of the Federal statute, they were not compelled to continue both of these methods but could restrict the taxpayer to one method. They argue that, if the Federal administrative authorities are not compelled to grant the option, there is no conceivable reason why the state Collector of Revenue, *443 under the power to make reasonable rules and regulations, cannot restrict the taxpayer to one or the other of these methods.
We have set out the contentions of the Collector of Revenue at some length, but, as his counsel say in brief, these contentions can be narrowed to the proposition that "the interpretation given by the Federal revenue officials was that the right to `expense' or the obligation to `capitalize' are [is] a matter for regulations to be made by the Federal Commissioner, and if this interpretation is taken over into the Louisiana law they are a matter for regulations to be made by the Louisiana Collector."
Insofar as the Louisiana income tax law is concerned (Act No.
In our opinion, the rule means that the interpretations of the original act in effect at the time of its subsequent adoption by the same or another lawmaking body are adopted as a part of, and are incorporated into, the new law.
In this case the interpretation was that the taxpayer had the option of treating his intangible drilling costs as business expenses or as a capital investment, and this was the interpretation adopted into our law by the passage of the state income tax act of 1934, the pertinent provisions of which were, as we have stated above, copied verbatim from the corresponding provisions of the Federal Revenue Act.
Since this administrative interpretation was adopted as, and became, a part of our law, the argument of counsel with reference to what the Federal statute permits and compels falls completely, for the Collector of Revenue of this state is compelled to follow the law permitting the option.
Counsel for the Collector further contend that administrative interpretation of the Federal statute, as exhibited by Regulation No. 77 of the United States Treasury Department, Bureau of Internal Revenue, issued under the Federal Revenue Act of *445 1932, to the effect that these regulations constitute an interpretation irrevocably giving the option, is nullified by the regulations themselves, for the reason that, under Article 236(d) of Regulation No. 77, it is provided that the taxpayer in his first return must elect either to capitalize or to expense his intangible drilling costs, and that, when this is done, he is forever bound by that election; or that the taxpayer who has capitalized his intangible costs for one year is denied the right to expense such costs incurred in any later year; or, still further, that a taxpayer who has elected to capitalize his intangible costs can be prevented from ever treating such costs as business expenses in future years. They contend that, if this be true, then the Federal regulations do not interpret the right of the taxpayer to expense intangible costs as an inherent right under the Federal statute, but that it is nothing more than a method of accounting, a matter of regulation so long as the taxpayer is given a method which is a recognized method.
We find no merit in this argument. The answer to it is that the question of whether the Federal interpretation is irrevocable or not is not pertinent to the decision of this case; or, in other words, that it is not necessary or proper for this court to decide whether the Federal government can now change its regulations. That regulation, like the Federal regulation permitting the option to capitalize or expense, was administrative interpretation of a provision of the Federal Revenue Act copied into the Louisiana *446 income tax law and was in effect at the time our income tax law was passed, and was therefore adopted into our statute and is now a part of our law.
The Collector of Revenue urges that this court give careful consideration to the fact that broad power was given by the Legislature under the income tax law to the rule-making authority to make and change regulations having practically the effect of law, and that this grant of power has been sanctioned by constitutional amendment. After a careful consideration, it is obvious to us that even under such a broad grant of power the Collector of Revenue did not have the authority to promulgate Article 107, for, under the rule that we adopted into our law the Federal administrative interpretation of provisions of the Federal Revenue Act which were copied into our law, Article 107 is contrary to our law, and the Collector cannot make regulations inconsistent with the act itself.
We concede that the modern trend has been to grant to administrative boards and bureaus legislative as well as judicial powers, all with judicial approval, even though in some instances it has been necessary for the courts in upholding such delegation of powers to give what in our opinion is a strained interpretation of the Constitution. It may be true in some instances that it is necessary to delegate to administrative boards or bureaus broad powers, but these boards or bureaus should not be permitted to contravene the Constitution *447 or statutes under the guise of exercising such broad grants of power. For, if carried too far, the effect of this practice may be to destroy our Democratic form of government, and for this reason careful consideration of such cases should be given not only by this court but by all courts.
Counsel for the Collector cite the case of F. H. E. Oil Co. v. Commissioner of Internal Revenue (Fleming-Kimbell Corporation v. Commissioner),
Counsel's principal argument is based on the assumption that the Federal authorities had the right under the Federal Revenue Act to permit the taxpayer the option of treating intangible costs as expenses or of capitalizing and recovering them by way of depletion, and not that the option itself was invalid, and under this assumption they argue that the Collector of Revenue of this state had the right to permit, but was not compelled to grant, the option to the taxpayer. *448
The question of whether the administrative interpretation of the Federal authorities granting the option is contrary to the provisions of the Federal Revenue Act and therefore incapable of being incorporated into an identical provision of the Louisiana income tax statute is not an issue in this case and need not be decided by us.
It is true, as pointed out by counsel, that the decision in the F. H. E. Oil Co. case, supra, did not require a ruling on the validity of the option of capitalizing or expensing such intangible costs. However, in that decision Judge Sibley, as the organ of the court, points out that under the Federal Revenue Act no deduction shall in any case be allowed for any amount paid for permanent improvements or betterments made to increase the value of any property or estate, and that the exhaustion of investments is to be cared for by depreciation and depletion allowances from year to year, and that Congress especially provided for depletion and depreciation in the case of oil and gas wells, giving the taxpayer a flat depletion allowance of 27 1/2 per cent of the gross income from the property but not less than as computed by the usual formulas. He states that this depletion allowance includes and returns the investment in the well as well as the oil and gas in place, and that, when the percentage allowance is taken, there can be no additional allowance by way of the depreciation of the well. He then concludes that the *449 administrative interpretations, as evidenced by the regulations of the Commissioner of Internal Revenue, granting the option are not permitted by the Federal Revenue Act for the reason that the regulations purport to allow the intangible drilling costs to be deducted as an expense, and that, when oil and gas are produced, the full 27 1/2 per cent allowance may again be taken under the statute, thus giving the driller of a successful gas or oil well a double deduction.
The Legislature of this state by Act No.
Since we have reached the conclusion that Article 107 of the Rules and Regulations Concerning Income Taxes is invalid, plaintiff's alternative plea need not be discussed.
For the reasons assigned, the judgment appealed from is affirmed.
*450O'NIELL, C. J., absent.
