City Nat. Bank of Clinton v. Iowa State Tax Commission

• Decision Date: 05 April 1960
• Docket Number: No. 49957,49957
• Citation: 102 N.W.2d 381,251 Iowa 603
• Parties: CITY NATIONAL BANK OF CLINTON and Fanny W. Bryant, Trustees of Arthur Peyton Bryant Trust, Appellants, v. IOWA STATE TAX COMMISSION, Leon N. Miller, Emlin Bergeson and Martin Lauterbach, as Members of said Commission, Appellees.
• Court: Iowa Supreme Court

Page 381

102 N.W.2d 381

251 Iowa 603

CITY NATIONAL BANK OF CLINTON and Fanny W. Bryant, Trustees of Arthur Peyton Bryant Trust, Appellants, v. IOWA STATE TAX COMMISSION, Leon N. Miller, Emlin Bergeson and Martin Lauterbach, as Members of said Commission, Appellees.

No. 49957.

Supreme Court of Iowa.

April 5, 1960.

Dickinson, Throckmorton, Parker, Mannheimer & Raife, Des Moines, and Edward C. Halbach, Clinton, for appellants.

Norman A. Erbe, Atty. Gen., of Iowa, and Gary S. Gill, Sp. Asst. Atty. Gen., for appellees.

LARSON, Chief Justice.

The issues presented on this appeal arise by reason of constitutional objections to the provisions of Section 6, Chapter 208, Laws of the 56th General Assembly, I.C.A. § 422.7, which amended Section 422.7, Code of Iowa 1954, to provide as follows: 'The term 'net income' means the adjusted gross income as computed for federal income tax purposes under the Internal Revenue Code of 1954, with the following adjustments: (1. and 2. not applicable here.) 3. Where the adjusted gross income includes capital gains or losses, or gains or losses from property other than capital assets, and such gains or losses have been determined by using a basis established prior to January 1, 1934, an adjustment may be made, under rules and regulations prescribed by the state tax commission, to reflect the difference resulting from the use of a basis of cost of January 1, 1934, fair market value, less depreciation allowed or allowable, whichever is higher. Provided that the basis shall be fair market value as of January 1, 1955, less depreciation allowed or allowable, in the case of property acquired prior to that date if use of a prior basis is declared to be invalid.' These issues are: (a) Is this legislation which attempts to or does permit the taxing of capital gains as income which occurred prior to the effective date of Chapter 208, Laws of the 56th General Assembly, January 1, 1955, an illegal retroactive tax, so unfair, unjust and unreasonable as to be a violation of the due process clause of the Federal and State Constitutions; and (b) Is the legislation which attempts to tax capital gains wholly invalid as being illegally incorporated by reference, in violation of Section 7, Article VII, of the Iowa Constitution, I.C.A.?

The trial court denied appellant relief, holding that 'Section 1 of the 14th Amendment to the Constitution of the United States and Section 9 of Article I of the Constitution of the State of Iowa insuring plaintiffs (taxpayers) due process of law is not violated by taxing income realized by sale although such income or enhanced value was experienced prior to January 1, 1955, because realization of gain is the basis of the tax, not unrealized increase in value', and also that plaintiff had failed to establish any unconstitutional delegation of authority by incorporating by reference the provisions of the Federal Internal Revenue Code of 1954 in the Iowa income tax law. We agree.

In sharp contrast to the law on the first issue, the facts herein are quite simple, clear, and undisputed. Arthur Peyton Bryant, a resident of Clinton County, Iowa, died February 3, 1935. Included among the assets of his estate passing to appellants herein as trustees of the Bryant Trust, were certain shares of corporation capital stock, valued for federal estate tax purposes at $32,495. Through various stock dividends and corporate reorganizations, they became 3139 shares of Clinton Foods, Inc. common stock, which was carried on the New York stock exchange, and as of January 1, 1955, had a total fair market value of $133,407.50.

In 1956 the corporation was liquidated and appellants received the sum of $134,977 for this stock. The appellant taxpayer reported a capital gain as income in the 1956 return of $4,708.50. By an error in computation $130,268.50 had been taken as the fair market value of the stock on January 1, 1955, and the sum reported was the alleged taxable income or gain subject to capital gains tax.

The Iowa State Tax Commission, appellees herein, determined that the capital gain which should have been reported was $103,484, which was the difference between $134,977, the amount received for the stock, and $32,495, the value of that investment when it came into the trust at the death of Bryant February 3, 1935, adjusted for an interim cash distribution during that period of $1,002.00.

Therefore, under the state's computation the sum subject to capital gain tax, as income, was $103,484, and as computed by the taxpayer-appellant, using the base cost as the stock's value on January 1, 1955, the effective date of this Act, the capital gain subject to income taxes was $1,569.50.

Appellants contend the increase in value of the stocks or capital gain from February 3, 1935, to January 1, 1955, on the latter date, was accrued value, principal, or capital, and was never classified, recognized or considered income in Iowa until after the enactment of Chapter 208, Acts of the 56th General Assembly; that in fact it had been excluded from the classification of gross income in this jurisdiction so that taxpayers could and did rely upon such accrued increases in value as capital or increased principal; that any attempt to retroactively make this increased value 'income', and as such subject to an income tax for a period of more than 20 years past, would be so unfair, unjust, and arbitrary that it would violate the due process clause of both the Federal and State Constitutions, and be void.

On the other hand, it is the state's contention that we must use the broadly-understood definition of 'income' as any increase or gain in value of property, real or personal, over its cost, and that the state may tax that gain or profit at any time it is realized by conversion or sale; that in so taxing increases in value of capital assets, the term realized may, without violating constitutional law, be used not only to mean the time of payment of a tax on income, but fix the measurement of the tax as well. It further contends that by fixing the cost basis as the value of property when received, or its actual cost, or the fair market value on a date or event in the past, and taxing as income the amount received for that asset in excess of the fixed cost basis, the profit or gain becomes evident and detached from the principal, as realized income, and is taxable at that time, and this in no way constitutes a violation of any constitutional guarantee.

This is the first case of that nature before our court, but the question has been raised in the federal as well as several state courts, with a sharp difference of opinion, not only between different jurisdictions, but even among the members of the courts in those jurisdictions. It is not unusual to find 4 to 4, or 4 to 3, decisions on this question.

I. Although it is the rule generally recognized that revenue laws may be retroactive, it is also true that there is a point of time when such retroactivity is beyond the legislative power. Wheeler v. Commissioner, 9 Cir., 143 F.2d 162; Cooper v. United States, 280 U.S. 409, 411, 50 S.Ct. 164, 74 L.Ed. 516. In the Cooper case it was held that 'recent transactions' to which this tax law may be retroactively applied must be taken to include the receipt of income during the year of the legislative session preceding that of its enactment. United States v. Hudson, 299 U.S. 498, 500, 57 S.Ct. 309, 81 L.Ed. 370. As stated in the Wheeler case, supra , even though the provision shows a clear intent on the part of the legislature, if the Congress has not the power to pass legislation 'which does not come within the rule of permissible retroactivity, the fact that the legislation recites it shall be so retroactive does not cure the defect.'

In Welch v. Henry, 305 U.S. 134, 59 S.Ct. 121, 125, 83 L.Ed. 87, 118 A.L.R. 1142, a leading case on this point, it was held that in determining whether a taxing statute is a denial of due process because of its retroactive operation, it is necessary in each case to consider the nature of the tax and the circumstances in which it is laid, before it can be said that its retroactive application is so harsh and oppressive as to transgress the constitutional limitation. It was therein pointed out that those cases wherein due process was violated 'rested on the ground that the nature or amount of the tax could not reasonably have been anticipated by the taxpayer at the time of the particular voluntary act which the statute later made the taxable event.' Nichols v. Coolidge, 274 U.S. 531, 542, 47 S.Ct. 710, 71 L.Ed. 1184, 52 A.L.R. 1081. In other words, if the taxpayer is reasonably forewarned, it would not be held oppressive. Milliken v. United States, 283 U.S. 15, 51 S.Ct. 324, 75 L.Ed. 809. Recent transactions taxable retroactively to be valid, would seem to be extended no further than two years, or up to the adjournment of the last previous legislative session, so that, as appellants argue, if this attempt to fix the cost basis herein was in fact retroactive taxation during a period of 20 years between 1935 and 1955, it would clearly be unreasonable and a violation of the due process clause of our constitution. People ex rel. Beck v. Graves, 280 N.Y. 405, 21 N.E.2d 371. However, by the clear weight of authority, unless the language of a statute expressly or by necessary implication requires a retroactive construction, the courts will not give it such meaning and thereby find the statute in violation of due process. People ex rel. Beck v. Graves, supra; Welch v. Henry, supra, 305 U.S. 134, 59 S.Ct. 121, 83 L.Ed. 87, 118 A.L.R. 1142. See Cooper v. United States, supra, 280 U.S. 409, 411, 50 S.Ct. 164, 74 L.Ed. 516, as to application of receipts of income in prior years being retroactive. United States v. Hudson, 299 U.S. 498, 57 S.Ct. 309, 81 L.Ed. 370.

II. The nub of this controversy, therefore, seems to be whether or not the fixing of a cost basis as February 3, 1935, when the...