Barraclough v. State Tax Commission

• Decision Date: 14 January 1954
• Docket Number: No. 7981,7981
• Citation: 266 P.2d 371,75 Idaho 4
• Parties: BARRACLOUGH et ux. v. STATE TAX COMMISSION et al.
• Court: Idaho Supreme Court

Page 371

266 P.2d 371

75 Idaho 4

BARRACLOUGH et ux. v. STATE TAX COMMISSION et al.

No. 7981.

Supreme Court of Idaho.

Jan. 14, 1954.

Rehearing Denied Feb. 10, 1954.

Robert E. Smylie, Atty. Gen., J. N. Leggat, Asst. Atty. Gen., for appellants.

Carver, McClenahan & Greenfield, Boise, for respondents.

PORTER, Chief Justice.

Respondents filed their state income tax returns for the years 1947, 1948 and 1949, and paid the taxes due thereon as shown by such returns. The State Tax Collector upon an examination of such returns determined that there was a deficiency as defined by Section 63-3051, I.C., in the tax shown on each of such returns; and gave the taxpayers notice of such deficiencies under the provisions of Section 63-3052, I.C.

Respondents protested the assessment of such deficiencies and filed their protest with the State Tax Commission. The State Tax Commission held a hearing on such protest as provided by Section 63-3403(c), I.C.; and by its order affirmed the determination of the income tax deficiencies as made by the tax collector.

This action was commenced in the District Court of Ada County for review of the order of the State Tax Commission as provided by Section 63-3075, I.C. Trial of the cause resulted in findings of fact, conclusions of law and judgment in favor of respondents. This appeal is from such judgment.

Respondents are husband and wife. They are residents of the State of Idaho. Their income consists of the earnings of the husband. He is an insurance examiner, employed from time to time to make examinations of both domestic and foreign insurance companies doing business or seeking to do business within the State of Idaho. Such examinations are made both within the state and at the home offices of foreign insurance companies.

The State Tax Collector in correcting the income tax returns of respondents added thereto as alleged income certain unreported items paid to respondents by domestic insurance companies in connection with the examinations of their affairs; and also added thereto portions of certain sums collected by respondent husband for expenses in making examinations outside of the state, on the theory that the sums so collected exceeded the reasonable expenses of such respondent. The tax collector also assessed a fifty per cent penalty for fraud and a five per cent penalty for negligence under the provisions of Section 63-3053, I.C.

By their complaint, respondents admit receipt of some of such additional items of income and challenge others assessed against them by the tax collector. They further allege that in their said income tax returns they erroneously returned as taxable income the sums paid to them by foreign insurance companies as compensation for personal services in making examinations at the home offices of such companies when in fact such income is exempt from taxation in the State of Idaho; and that the sums so erroneously returned as taxable income exceed the amount of the items erroneously not reported as income. The complaint alleges that, therefore, there is no tax due the state.

The answer of appellants is, in effect, a general denial of the allegations of the complaint.

At the conclusion of the trial the court found that the amounts received by respondents from foreign companies for the examinations of such companies at their home offices outside the State of Idaho and returned as taxable income exceeded the deficiencies added by the tax collector for unreported income. The trial court concluded that the income so received from foreign insurance companies was exempt from taxation under the provisions of Section 63-3013(b), par. 7, I.C. The court, therefore, concluded there was no tax due from respondents. The trial court did not make findings of fact on the alleged items of deficiency added by the tax collector and challenged by respondents. Neither did the court find on the questions of fraud or negligence and the addition of penalties therefor. Under the court's findings and conclusion that there was no tax due in any event, such additional findings were not necessary for a determination of the cause.

On this appeal appellants challenge the holding of the trial court that the monies received by respondents for examinations of foreign companies at their home offices outside the State of Idaho are not income taxable in this state. The trial court based this holding upon the provisions of Section 63-3013, I.C., the material parts of which are as follows:

'(a) The term 'gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including personal services as an officer or employee of the state of Idaho or any political subdivision thereof, or any municipality or any agency or instrument or either of the foregoing * * *).

'(b) The term 'gross income' does not include the following items, which shall be exempt from taxation under this chapter:

* * *

* * *

'7. Income of resident persons and domestic corporations of the state of Idaho, from salaries, wages or compensation for personal service, or from the conducting and carrying on of their professions, vocations, trades or businesses, when derived from sources outside of the state of Idaho.'

Appellants first contend respondent husband is an employee of the State of Idaho and that the source of the income in question is the Department of Insurance of the State of Idaho. Respondents counter with the contention respondent husband is not an employee of the State of Idaho, but is an independent contractor and that the sources of the questioned income were outside this state.

Section 41-107, I.C., reads as follows:

'The commissioner of insurance may appoint qualified persons to make examinations of the conditions and affairs of any domestic insurance company, association, interinsurance exchange, reciprocal or other organization subject to regulation under the insurance laws of this state, and shall also select qualified examiners to represent this state in examination of foreign or alien insurance companies licensed to do an insurance business in this state.'

Section 41-702, I.C., provides that the Department of Insurance shall, as often as it deems expedient, and, at least once in three years, examine into the affairs of a domestic life insurance company; and for such purpose the commissioner may appoint as examiners one or more competent persons not officers of nor connected with any insurance corporation.

Section 41-703, I.C., provides that upon such examination, the commissioner or his deputy or any examiner authorized by him may examine under oath the officers and agents of such corporation. And makes it the duty of the corporation to cause its books and papers to be available for the inspection of the examiners.

Section 41-704, I.C., provides that every such examiner shall make a full and true report to the Insurance Department of every examination made by him, verified by his oath.

Section 41-705, I.C., reads as follows:

'The cost of such examinations shall be paid by the company examined and shall include the reasonable expenses of the department of insurance and the compensation and reasonable expenses of its assistants, or person or persons employed therein. Duplicate receipts showing the entire cost of the examination, authorized by the department, shall be taken and certified to by the company examined, one copy to be retained by the company and the duplicate filed in the office of the department of insurance, as a part of the public records. No company, corporation, partnership or individual so examined shall, directly or indirectly, pay by way of gift, gratuity or otherwise any further sum to said commissioner of finance, his deputy, assistants, or other person or persons making said examination, either for services rendered, for extra services, for the purpose of legislation, or for any other pretense whatsoever.'

Section 41-708, I.C., provides for the same supervision and examination of foreign companies as of domestic companies. Section 41-709, I.C., provides for the examination of foreign companies at their general offices and reads as follows:

'The department of insurance may, whenever it deems it necessary, either by an official of the department or by a proper person appointed by the department, repair to the general office of such foreign corporation, wherever the same may be, and make an investigation and examination of its affairs and conditions. The department may cancel and revoke the certificate of any such foreign corporation refusing or unreasonably neglecting to comply with the provisions of this section, or to allow the examinations herein provided for to be made, and prevent such corporation from further continuance in business in this state.'

Respondent husband was acting under Section 41-709, I.C., in his examinations made at the general offices of foreign companies; and was paid the sums in question as compensation by the insurance companies under the provisions of Section 41-705, I.C.

From the foregoing statutes it would appear that respondent husband must be considered an employee of the State of Idaho in order to be qualified to make the examinations in question and to charge the insurance companies therefor. State ex rel. Dunn v. Ayers, 112 Mont. 120, 113 P.2d 785. However, it does not follow from such fact alone that the income involved is not exempt from taxation under Section 63-3013(b), par. 7, I.C. Such statute does not make any distinction between the earnings of an officer or employee of the state and the earnings of private individuals so far as the exemption is concerned. The comparable federal statute is Title 26 U.S.C.A. § 116, as amended. In defining earned income from sources without the United States which is to be excluded from the gross income of a resident, the federal statute specifically excepts from the exemption the amounts paid by the United States or any agency thereof. Ou...