Christopher v. James

• Decision Date: 10 December 1940
• Docket Number: (CC 628)
• Court: West Virginia Supreme Court
• Parties: Frank E. Christopher v. Ernest K. James, Tax Commissioner

122 W.Va. 665

Frank E. Christopher

v.Ernest K. James, Tax Commissioner

(CC 628)

Supreme Court of Appeals of West Virginia.

Submitted September 10, 1940.

Decided December 10, 1940.

Taxation

Section 25, Chapter 89 of the Acts of the Legislature of 1935, Code 1937, 11-13B-25, allowing deduction from gross income of "ordinary and necessary" expenses of business, does not authorize the deduction, as such expenses, of taxes paid by the taxpayer on account of either (1) old age benefits and unemployment compensation under the Social Security Act, (2) the Bituminous Coal Act, (3) State Unemployment Insurance, or (4) Gross Sales.

Case certified from Circuit Court, Monongalia County.

Proceeding by Frank E. Christopher for a release from a deficiency tax assessment laid by Ernest K. James, State Tax Commissioner. A demurrer to the petition was overruled and the order was certified to the Supreme Court of Appeals for review.

Reversed; demurrer sustained; cause dismissed.

Baker & Reeder, for plaintiff.

Clarence W. Meadows, Attorney General, W. Holt Wood-dell, Assistant Attorney General, and John V. Sanders, for defendant.

Maxwell, Judge:

This certification from the Circuit Court of Monongalia County involves the sufficiency of a petition of Frank E. Christopher for release from a deficiency tax assessment laid by Ernest K. James, State Tax Commissioner, against the petitioner on account of his state income tax for the year 1937. The trial court being of opinion that the petition alleges sufficient grounds for the relief prayed, overruled the respondent's demurrer to the petition.

During the year 1937, the taxpayer was a partner in each of two coal mining partnerships, namely, New Byrne Coal Company and Christopher Mining Company. In making his return for 1937, the taxpayer deducted from his gross income his proportionate partnership share of the amounts paid that year by the two partnerships to the Federal Government on account of (1) old age benefits and unemployment compensation under the Social Security Act, and (2) the Bituminous Coal Act of 1937; and to the State of West Virginia on account of (1) unemployment insurance, and (2) gross sales tax. The aggregate of the items thus sought to be deducted is $14,-390.85. The tax commissioner held that the taxpayer was not entitled to deduction respecting any of these items, and notified the taxpayer of a deficiency assessment of $576.46 with interest from March 15, 1938. Thereupon, the taxpayer, in pursuance of the privilege accorded by Code, 11-13B-54, appealed to the circuit court by filing therein the petition herein above mentioned and now under appraisement on this review. The gravamen of the petition lies in the taxpayer's allegations therein that he is entitled to the deductions asserted, and that the tax commissioner erred in disallowing them.

Our applicable statute imposing an income tax allows certain deductions, among which are "(1) Ordinary and necessary expenses * * * if paid for or incurred during the tax year in carrying on a trade or business."; and "(3) Income taxes payable to the United States upon income earned in West Virginia; property taxes upon real and personal property situated in this state * * *." Code 1937, 11-13B-25, (1) and (3).

Frank Christopher, the petitioning taxpayer, alleges that the items of deduction which he claims as above set forth all come within the category of ordinary and necessary expenses in carrying on the business in which he is engaged, and consequently should be allowed under the statutory provision first quoted. The tax commissioner takes the position that the items of deduction thus asserted cannot be considered as business expenses, and that each of them is a tax not deductible under either of the above quoted sub-sections.

Under sub-section (3) only two kinds of taxes may be deducted, namely: federal income, and property taxes. The specific designation of these two operates to exclude all other taxes from deduction under that sub-section. Can it reasonably be held that the Legislature intended that other taxes must be deducted under the classification of necessary business expenses? This query must be answered in the light of the basic rule that deductions from income for taxation purposes are not matters of right, and may not arise through implication. Authorization must be specific. "Every deduction from gross income is allowed as a matter of legislative grace, and 'only as there is clear provision therefor can any particular deduction be allowed. * * * A taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms.' " White v. United States, 305 U. S. 281, 292, 59 S. Ct. 179, 184, 83 L. Ed. 172.

If any one of the four several items of deduction claimed by Christopher represents a mere charge in furtherance only of social legislation or of business regulation, probably the charge should be classified as an expense of doing business deductible as such under sub-section (1), supra. But if, in reality, it is a tax it must be dealt with solely on that basis. Consequently, we have here the pointed inquiry whether the liabilities imposed (1) on account of old age benefits and unemployment compensation under the Social Security Act, (2) under the Bitu- minous Coal Act, (3) under State Unemployment Insurance, and (4) State Gross Sales Act, are or are not taxes.

The Social Security Act of August 14, 1935, imposes monetary exactions on employers of labor. 42 U. S. C. A., sec. 1004. In 1939 this section was amended in respect of rates. 26 U. S. C. A., sec. 1410. In both enactments the Congress has denominated these exactions as taxes. The Supreme Court of the United States has upheld these impositions on employers as excises within the constitutional power of the Congress. Steward Machine Co. v. Davis, Collector, 301 U. S. 548, 57 S. Ct. 883, 81 L. Ed. 1279, 109 A. L. R. 1293; Helvering, Commissioner v. Davis, 301 U. S. 619, 57 S. Ct. 904, 81 L. Ed. 1307, 109 A. L. R. 1319.

The West Virginia Unemployment Compensation Law was enacted in 1936. Code 1937, Chapter 21A. A manifest purpose of this act is to place the state's program of protection...