Commonwealth v. Madden's Ex'r

• Decision Date: 23 June 1936
• Parties: COMMONWEALTH v. MADDEN'S EX'R.
• Court: Kentucky Court of Appeals

97 S.W.2d 561

265 Ky. 684

COMMONWEALTH v. MADDEN'S EX'R.

Court of Appeals of Kentucky

June 23, 1936

Rehearing Denied Nov. 20, 1936.

Appeal from Circuit Court, Fayette County.

Suit by Commonwealth of Kentucky, by etc., against John E Madden's executor. From the judgment, the plaintiff appeals.

Reversed.

Harry D. Kremer and Samuel H. Cole, both of Lexington, for the Commonwealth.

William Marshall Bullitt, Bruce & Bullitt, Leo T. Wolford, Middleton Miller, and William H. Abell, all of Louisville, and William A. Minihan, of Lexington, for appellee.

STITES Justice.

John E Madden died on November 3, 1929, a resident of Fayette county, Ky. Shortly after his death this proceeding was filed for the purpose of taxing certain intangible personal property owned by Mr. Madden and alleged to have been omitted from assessment during the years 1924 to 1929, inclusive. The administrators of Mr. Madden's estate admitted his failure to list some of the property, and it was thereupon retroactively assessed without contest. The only questions presented for our consideration are: (1) The power of the state of Kentucky to tax securities owned by a partnership of which Mr. Madden was a member; and (2) the rate of taxation to be applied to deposits in New York banks to the individual credit of the decedent during the period in question. The trial court held that the partnership securities, all of which were pledged with brokers on margin accounts in New York and were carried principally in "street names," had acquired a business situs in New York and were not taxable in Kentucky. The court likewise held that the deposits in New York banks to Mr. Madden's individual account were subject to a tax of but 10 cents on the $100 (the rate applied to deposits in banks in Kentucky), and that to tax these deposits as other credits generally (at 50 cents on the $100) would be a denial of equal protection. The revenue agent has appealed. We will consider the questions in the order stated above.

For a number of years Mr. Madden was engaged in operations on the New York Stock Exchange as an equal partner with his two sons, one of whom was a resident of Oklahoma and the other a resident of Iowa. Appellant complains of this finding, and urges that certain of the brokerage accounts were operated for Mr. Madden's individual benefit; but we think the evidence amply supported the conclusion that all of these transactions in brokerage accounts were on behalf of the partnership. It was likewise established that the operations of the partnership were conducted exclusively in New York Mr.

Madden spent the greater part of each year in New York City and personally attended to the buying and selling of most of the securities there held.

It is established that the partnership assets were invested and reinvested on the New York Stock Exchange by Mr. Madden and at times by one or the other of his two sons. Clearly, the situs of these assets for ad valorem taxation was in New York. Compare Blodgett v. Silberman, 277 U.S. 1, 48 S.Ct. 410, 72 L.Ed. 749. Whether the situs was likewise in New York for inheritance tax purposes, it is, of course, unnecessary here to decide. See Buck v. Beach, 206 U.S. 392, 27 S.Ct. 712, 51 L.Ed. 1106, 11 Ann. Cas. 732; Wheeler v. Sohmer, 233 U.S. 434, 34 S.Ct. 607, 58 L.Ed. 1030. Any doubt that may have existed by virtue of recent decisions of the Supreme Court of the United States, as to whether or not the maxim of "mobilia sequuntur personam" would be invariably applied to intangible property and "business situs" no longer recognized, has been set at rest by the decision of that court in the case of Wheeling Steel Corp. v. Fox, 56 S.Ct. 773, 776, 80 L.Ed. 1143 (decided May 18, 1936). The court there considered the question of the validity of an ad valorem property tax laid by West Virginia upon the accounts receivable and bank deposits in other states of a Delaware corporation having its principal office in West Virginia. In determining as a matter of fact that the methods of doing business by the corporation were such as to localize its intangible property (not taxed elsewhere), for purposes of taxation, in West Virginia, the court said:

"The tax is not a privilege or occupation tax. It is not a tax on net income. See Hans Rees' Sons v. North Carolina, 283 U.S. 123, 133, 51 S.Ct. 385, 75 L.Ed. 879. It is an ad valorem property tax. We have held that it is essential to the validity of such a tax, under the due process clause, that the property shall be within the territorial jurisdiction of the taxing state. This rule receives its most familiar illustration in the case of land. The rule has been extended to tangible personal property which is thus subject to taxation exclusively in the state where it is permanently located, regardless of the domicile of the owner. Union Refrigerator Transit Co. v. Kentucky, 199 U.S. 194, 204, 206, 26 S.Ct. 36, 50 L.Ed. 150, 4 Ann. Cas. 493; Frick v. Pennsylvania, 268 U.S. 473, 489, 45 S.Ct. 603, 69 L.Ed. 1058, 42 A.L.R. 316. We have said that the application to the states of the rule of due process arises from the fact 'that their spheres of activity are enforced and protected by the Constitution, and therefore it is impossible for one state to reach out and tax property in another without violating the Constitution.' United States v. Bennett, 232 U.S. 299, 306, 34 S.Ct. 433, 437, 58 L.Ed. 612. Compare Burnet v. Brooks, 288 U.S. 378, 401, 53 S.Ct. 457, 77 L.Ed. 844, 86 A.L.R. 747. When we deal with intangible property, such as credits and choses in action generally, we encounter the difficulty that by reason of the absence of physical characteristics they have no situs in the physical sense, but have the situs attributable to them in legal conception. Accordingly we have held that a state may properly apply the rule mobilia sequuntur personam and treat them as localized at the owner's domicile for purposes of taxation. Farmers' Loan & Trust Co. v. Minnesota, 280 U.S. 204, 211, 50 S.Ct. 98, 74 L.Ed. 371, 65 A.L.R. 1000. And having thus determined 'that in general intangibles may be properly taxed at the domicile of their owner,' we have found 'no sufficient reason for saying that they are not entitled to enjoy an immunity against taxation at more than one place similar to that accorded to tangibles.' Id., 280 U.S. 204, at page 212, 50 S.Ct. 98, 100, 74 L.Ed. 371, 65 A.L.R. 1000. The principle thus announced in Farmers' Loan & Trust Co. v. Minnesota, has had progressive application. Baldwin v. Missouri, 281 U.S. 586, 50 S.Ct. 436, 74 L.Ed. 1056, 72 A.L.R. 1303; Beidler v. South Carolina Tax Commission, 282 U.S. 1, 51 S.Ct. 54, 75 L.Ed. 131; First National Bank v. Maine, 284 U.S. 312, 328, 329, 52 S.Ct. 174, 177, 76 L.Ed. 313, 77 A.L.R. 1401. But despite the wide application of the principle, an important exception has been recognized.

"In the case of tangible property, the ancient maxim, which had its origin when personal property consisted in the main of articles appertaining to the person of the owner, yielded in modern times to the 'law of the place where the property is kept and used.' First National Bank v. Maine, supra. It was in view 'of the enormous increase of such property since the introduction of railways and the growth of manufactures' that it came to be regarded as 'having a situs of its own for the purpose of taxation, and correlatively to exempt at the domicile of its owner.' Union Refrigerator Transit Co. v. Kentucky, supra, 199 U.S. 194, at page 207, 26 S.Ct. 36, 39, 50 L.Ed. 150, 4 Ann.Cas. 493. There has been an analogous development in connection with intangible property by reason of the creation of choses in action in the conduct by an owner of his business in a state different from that of his domicile. New Orleans v. Stempel, 175 U.S. 309, 20 S.Ct. 110, 44 L.Ed. 174; Bristol v. Washington County, 177 U.S. 133, 20 S.Ct. 585, 44 L.Ed. 701; State Board of Assessors v. Comptoir National, 191 U.S. 388, 24 S.Ct. 109, 48 L.Ed. 232; Metropolitan Life Insurance Co. v. New Orleans, 205 U.S. 395, 27 S.Ct. 499, 51 L.Ed. 853; Liverpool & L. & G. Insurance Co. v. Board of Assessors for Parish of Orleans, 221 U.S. 346, 31 S.Ct. 550, 55 L.Ed. 762, L.R.A. 1915C, 903.

"These cases, we said in Farmers' Loan & Trust Co. v. Minnesota, supra, 280 U.S. 204, at page 213, 50 S.Ct. 98, 101, 74 L.Ed. 371, 65 A.L.R. 1000, 'recognize the principle that choses in action may acquire a situs for taxation other than at the domicile of their owner, if they have become integral parts of some local business.' We adverted to this

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