Tax Commissioner v. Putnam
| Decision Date | 27 June 1917 |
| Citation | 227 Mass. 522 |
| Parties | TAX COMMISSIONER v. ELIOT T. PUTNAM. SAME v. SUSAN E. GARFIELD. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
April 13 1917.
Present: RUGG, C J., LORING, BRALEY, DE COURCY, CROSBY, PIERCE, & CARROLL JJ.
Tax, On income. Constitutional Law, Income tax. Words, "Income," "Accumulated profits," "Distribution of capital."
A tax under St 1916, c. 269, Section 5 (c), Section 7, upon the excess of the gains over the losses arising from sales of intangible personal property during the year 1916 is a tax on income and is valid under the
Forty-fourth Amendment of the Constitution. The circumstances under which the Forty-fourth Amendment of the
Constitution was adopted, especially the fact that the United States income tax of October 3, 1913, with its broad and inclusive terms as contained in 38 U.S. Sts. at Large, c. 16, which was passed under the
Sixteenth Amendment of the Constitution of the United States authorizing a tax on incomes, was in force, require the conclusion that it was the purpose of the people of the Commonwealth to include within the scope of the word "income" everything that by reasonable intendment can be said to be income.
Gains derived from the sale of rights to subscribe to new shares of a corporation issued in the year 1916 to a taxpayer who was a stockholder previous to that year are taxable as income under the provisions of the same statute.
In making the decision stated above it was said, that upon the record it was not necessary to decide, whether rights to subscribe for shares of capital stock, when exercised by such a subscription, are taxable as income.
Under the same statute a stock dividend declared and paid after the statute took effect out of profits earned before the statute took effect lawfully is taxable as income of the same class as a cash dividend; and this is so even when the stock dividend was declared out of accumulations of earnings that before 1916 had been invested in permanent additions to the plant of the corporation declaring the dividend.
Under the same statute an extra cash dividend of thirty-three and one third per cent on shares of corporate stock owned by the taxpayer before the year 1916, declared and paid after the statute took effect out of undistributed earnings that accrued before March, 1913, lawfully is taxable as income.
TWO PETITIONS, filed respectively on March 12 and March 22, 1917, by the Tax Commissioner, each for a writ of mandamus ordering the respective respondents to file a return of his and her taxable income for the year 1916 as required by law.
Each of the cases came on to be heard by Loring, J., upon the petition, the answer and agreed facts. In each case the single justice found the facts to be as stated in the agreed facts and at the requests of the parties reported all questions of law for determination by the full court.
The cases were argued together at a special sitting of this court on April 13, 1917, before Rugg, C. J., Loring, Braley, De Courcy, & Pierce, JJ., and afterwards were submitted on briefs to all the justices.
W. H. Hitchcock, Assistant Attorney General, for the petitioner. R. Walcott, for the respondent Putnam.
C. R. Lamson, for the respondent Garfield.
The Forty-fourth Amendment to the Constitution of this Commonwealth, approved and ratified by the people in November, 1915, is in these words: The inquiry raised on this record chiefly concerns the meaning of "income" as that word is used in the grant of power to the General Court to "impose and levy a tax on income."
The Constitution of Massachusetts is a frame of government for a sovereign power. It was designed by its framers and accepted by the people as an enduring instrument, so comprehensive and general in its terms that a free, intelligent and moral body of citizens might govern themselves under its beneficent provisions through radical changes in social, economic and industrial conditions. It declares only fundamental principles as to the form of government and the mode in which it shall be exercised. Certain great powers are conferred and some limitations as to their exercise are established. The original Constitution and all its Amendments together form one instrument. It is to be interpreted in the light of the conditions under which it and its several parts were framed, the ends which it was designed to accomplish, the benefits which it was expected to confer, and the evils which it was hoped to remedy. It is a grant from the sovereign people and not the exercise of a delegated power. It is a statement of general principles and not a specification of details. Amendments to such a charter of government ought to be construed in the same spirit and according to the same rules as the original. It is to be interpreted as the Constitution of a State and not as a statute or an ordinary piece of legislation. Its words must be given a construction adapted to carry into effect its purpose.
The cases at bar raise four main questions: (1) Are excesses of gains over losses in the purchase and sale of intangible personal property by one not engaged in the business of dealing in such property taxable as income?
(2) Are gains derived from the sale of rights to subscribe for new shares of stock to be issued by an existing corporation taxable as income?
(3) Is a stock dividend, declared and issued by a corporation after the statute went into effect, out of an accumulation of profits earned and invested in its business before the statute was enacted, taxable as income?
(4) Is a cash dividend declared and paid after the statute went into effect out of profits earned before the statute took effect, taxable as income?
1. We proceed to the discussion of the first main question. Pursuant to the grant of power given by the Forty-fourth Amendment, the income tax law, St. 1916, c. 269, was enacted. It is provided by Section 5 that "Income of the following classes received by any inhabitant of this Commonwealth, during the calendar year prior to the assessment of the tax, shall be taxed as follows: . . . (c) The excess of the gains over the losses received by the taxpayer from the purchases or sales of intangible personal property, whether or not the said taxpayer is engaged in the business of dealing in such property, shall be taxed at the rate of three per cent per annum. . . ." The act took effect so as to include the income of the calendar year 1916. The tax commissioner issued a bulletin to be used in the preparation of income tax returns, giving the "Approved Valuation" of stocks on January 1, 1916. No question has been raised as to the accuracy of this valuation. By the express terms of Section 7 of the income tax act the value of the intangible personal property on January 1, 1916, if owned by the taxpayer on that date, and its value on the date acquired in the event of purchase after that date, is made the basis of computation for determining gains and losses.
The defendant Putnam on January 1, 1916, owned certain shares of stock in corporations, which he sold during the calendar year 1916 at sums in excess of the prices given in the "Approved Valuation" bulletin, so that the net profits realized exceeded his total losses. He also bought certain stocks during the year 1916 and sold them during the same year at a profit. It is contended on his behalf that these gains do not constitute "income" within the meaning of that word in the Forty-fourth Amendment.
The Forty-fourth Amendment was adopted by the General Court and by it proposed to the people after prolonged study and at the end of various efforts under the grant of power to tax contained in c. 1 Section 1, art. 4 of the Constitution to establish a general and extensive income tax. Numerous resolves of the Legislature have been passed from time to time extending over many years, providing for the investigation of the subject of taxation by special commissions and committees. The reports from these sources were voluminous and most, if not all of them, suggested some form of tax on incomes from investments. Advisory opinions to the General Court or one of its branches by the justices of this court touching particular phases of the matter are to be found in Opinions of the Justices, 195 Mass. 607, 208 Mass. 616 , 220 Mass. 613 . All the schemes thus proposed either were not acceptable to the Legislature or appeared to be in conflict with the grant of the power to tax contained in the Constitution. It became necessary to declare unconstitutional one statute of this general nature. Perkins v. Westwood, 226 Mass. 268 . The adoption and ratification of the Forty-fourth Amendment under these circumstances renders imperative the inference that the word "income" was there used with the purpose of setting at rest any doubt about the full and complete power of the Legislature to deal with "in...
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