Colgate v. Harvey
| Decision Date | 14 November 1934 |
| Citation | 175 A. 352 |
| Court | Vermont Supreme Court |
| Parties | COLGATE v. HARVEY. |
Exceptions from Washington County Court; Fred G. Bicknell, Judge.
Proceeding by James C. Colgate against Erwin M. Harvey. Judgment was rendered for defendant, and the case transferred on plaintiff's exceptions.
Judgment affirmed.
Argued before POWERS, C. J., and SLACK, MOULTON, THOMPSON, and SHERBURNE, JJ.
Theriault & Hunt, of Montpelier (E. J. Dimmock, of New York City, of counsel), for plaintiff.
Lawrence C. Jones, Atty. Gen. (Guy M. Page, of Burlington, and Seymour P. Edgerton, of Rutland, of counsel), for petitionee.
The petitioner, a resident and taxpayer of Bennington, Vt., brings this proceeding under section 27, pt. 1, of No. 17, Laws 1931, known as the Income and Franchise Tax Law, seeking relief from the rulings of the tax commissioner fixing the amount of his income tax for the year 1931. The real basis of the petition is the alleged unconstitutionality of the act referred to. The case was heard by the county court within and for the county of Washington, Bicknell, J., presiding, and judgment was rendered for the defendant. The case is here on a bill of exceptions signed by Buttles, J., under the authority of P. L. 2071.
The grounds upon which the constitutionality of the act is challenged may be stated as follows:
(1) That it contravenes section 2 of article 4 of the Federal Constitution, which provides that the citizens of each state shall be entitled to all the privileges and immunities of the citizens in the several states.
(2) That it infringes the Fourteenth Amendment to that Constitution, which provides that no state shall deprive any person of life, liberty, or property without due process of law or deny to any person within its jurisdiction the equal protection of the laws.
(3) That it violates articles 1 and 7 of our Bill of Rights, which, speaking broadly, provide for the equality of individuals before the law.
(4) That it results in an unwarranted interference with interstate commerce.
(5) That it attempts to tax the income from dividends on stock in foreign corporations which is tantamount to a tax on the stock itself which has a taxable situs beyond the jurisdiction of this state.
In their practical application, these several provisions have much in common; and, as applied to the case in hand, simply mean that the act and the taxes raised thereunder must be, in a legal sense, uniform and equal. This requirement affects both persons and things; but is met when the law in question imposes no greater burden on one person or species of property than on another similarly situated or of like character.
So far as supposable cases in which a tax law bears more or less unfairly upon an individual taxpayer are concerned, it is quite enough to say, as we did say in Clark v. City of Burlington, 101 Vt 391, 410, 143 A. 677, 685, on the strength of Dane v. Jackson, 256 U. S. 589, 41 S. Ct 566, 65 L. Ed. 1107, that a tax law is not in conflict with the Fourteenth Amendment, unless it "proposes, or clearly results in, such flagrant and palpable inequality between the burden imposed and the benefit received as to amount to the arbitrary taking of property without compensation—to spoliation under the guise of exerting the power of taxing.'" This is so, because a system of taxation has not yet been devised that bears with exact equality and justice upon each and every taxpayer or class of taxpayers, and it lies not in the power of the court or any other authority except the Legislature to correct such inequalities unless they contravene federal authority or are of the serious quality above indicated.
So, in the matter of exemptions and deductions, the Legislature is vested with the widest latitude of discretion, and it is only in very exceptional cases that the courts can interfere. Thus, express constitutional restrictions aside, it may exempt an income not exceeding a certain amount In re Opinion of the Justices, 82 N. H. 561, 138 A. 284, 289. It may make different exemptions as to earned income and income from intangibles. In re Opinion of the Justices, 84 N. H. 557, 149 A. 321, 327; McPherson v. Fisher, 143 Or. 615, 23 P. (2d) 913; In re Opinion of the Justices, 270 Mass. 593, 170 N. E. 800, 803. It may allow reasonable deductions of business expenditures from business income. In re Opinion of the Justices, 85 N. H. 570, 154 A. 632, 633; State v. Wisconsin Tax Commission, 185 Wis. 525, 201 N. W. 764, 766. It may provide for a graduated progressive rate. Bacon v. Ransom, 331 Mo. 985, 56 S.W. (2d) 786. It may allow a reasonable personal exemption and a reasonable deduction for dependents. In re Opinion of the Justices, 84 N. H. 557, 149 A. 321, 327; In re Opinion of the Justices, 270 Mass. 593, 170 N. E. 800, 803. It may exempt money loaned on local real estate at a rate of interest not exceeding 5 per cent. In re Opinion of the Justices, 76 N. H. 609, 85 A. 757, 758; In re Opinion of the Justices, 82 N. H. 561, 138 A. 284, 291.
That any scheme of taxation must stand this test of uniformity and equality is too well established to be now disputed. It is not here disputed.
That this requirement does not forbid classification of persons or property for purposes of taxation is equally well established, and is not here questioned.
So the vital question is one of classification. That the power of the Legislature in these matters is very broad is everywhere admitted; and that it is limited only by the requirements (1) that the classification must be based upon a rational ground, some difference that bears a just relation to the purpose to be served; and (2) that the members of the several classes shall be treated alike is the unquestioned law of this state. State v. Hoyt, 71 Vt. 59, 42 A. 973; Village of Hardwick v. Town of Wolcott, 98 Vt 348, 129 A. 159, 39 A. L. R. 1222; State v. Caplan, 100 Vt. 140, 135 A. 705; Clark v. City of Burlington, 101 Vt. 391, 143 A. 677; Hartland v. Damon's Estate, 103 Vt. 519, 525, 156 A. 518; Montpelier v. Gates, 106 Vt. 116, 124, 170 A. 473. That this is the rule of the United States Supreme Court appears from a long line of cases extending from Bell's Gap R. Co. v. Pennsylvania, 134 U. S. 232, 10 S. Ct. 533, 33 L. Ed. 892, to Lawrence v. State Tax Commission, 286 U. S. 276, 52 S. Ct. 556, 76 L. Ed. 1102, 87 A. L. R. 374, most of which are cited in our cases, above.
The Income and Franchise Tax Law (Laws 1931, No. 17) divides taxable income into two classes: A. Business income, so denominated in the return called for by the act which includes salaries, wages, rents, fees, etc., from the aggregate of which the taxpayer may deduct certain items of interest paid, contributions, bad debts incurred, etc. B. Intangible income including interest, except interest on money loaned in this state at a rate of interest not exceeding 5 per cent., dividends on stock in domestic and foreign corporations, not including stock of corporations subject to a franchise tax under part 2 of the act etc., subject to certain exemptions not here important, and subject also to a certain personal exemption and a specified dependency exemption, if the income is derived wholly from such intangibles.
The petitioner was not taxable on account of class A income, as his allowable deductions exceeded the amount received. But, by the act, he was taxable for a large sum on account of class B income, which came very largely from dividends on foreign corporations doing little or no business in this state. His claim here is that he is prejudiced by a discriminatory tax on such stock, and that the law is unconstitutional, in that it attempts to tax income earned outside the state of Vermont, and because the exemption of 5 per cent. loans applies only to loans in this state.
It may be granted at the outset that a classification for taxing purposes based solely upon residence would be unlawful. A state cannot discriminate against a nonresident simply because he is a nonresident. Sprague v. Fletcher, 69 Vt 69, 75, 37 A. 239, 37 L. R, A. 840; State v. Caplan, 100 Vt. 140, 154, 135 A. 705; Howe Machine Co. v. Gage 100 U. S. 676, 25 L. Ed. 754. But this proposition by no means impinges upon the power of a state to make reasonable classifications for taxing purposes. It simply condemns one basis of classification. It points out a single limitation of the power of classification. It only illustrates the inability of a state, under the guise and form of classification, to enforce a tax law which in its practical application abridges the equality of privilege secured to the citizenry of the whole country by the Federal Constitution, unless that classification is based upon reasonable grounds according to the rule hereinbefore referred to. Then, too, as has been pointed out in some of the cases, the principle of this limitation must not be pressed too far. As Mr. Justice Holmes says in Noble State Bank v. Haskell et al., 219 U. S. 104, 31 S. Ct. 186, 187, 55 L. Ed. 112, 116, 32 L. R. A. (N. S.) 1062, Ann. Cas. 1912A, 487, "Many laws which it would be vain to ask the court to overthrow could be shown, easily enough, to transgress a scholastic interpretation of one or another of the great guaranties in the Bill of Rights."
It is not necessary that the basis of the classification should be deducible from the nature of the things classified. It is enough if the classification is reasonably founded in "the purposes and policy of taxation." Clark v. City of Burlington, 101 Vt. 391, 406, 143 A. 677, 683; Watson v. State Comptroller of New York, 254 U. S. 122, 41 S. Ct. 43, 65. L. Ed. 170, 175; Stebbins v. Riley, 268 U. S. 137, 45 S. Ct 424, 69 L. Ed. 884, 889, 44 A. L. R. 1454. Not only this, but in the Clark Case we expressly approved the proposition that the basis of tax classification is not open to objection unless it precludes the assumption that the classification was made in the exercise of...
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