O'Connell v. State Board of Equalization

• Decision Date: 19 July 1933
• Docket Number: 7151.
• Citation: 25 P.2d 114,95 Mont. 91
• Parties: O'CONNELL v. STATE BOARD OF EQUALIZATION et al.
• Court: Montana Supreme Court

25 P.2d 114

95 Mont. 91

O'CONNELL v. STATE BOARD OF EQUALIZATION et al.

No. 7151.

Supreme Court of Montana

July 19, 1933

Rehearing Denied Sept. 30, 1933.

Original proceeding by Brian D. O'Connell against the State Board of Equalization and others for an injunction restraining the putting into effect of statute taxing incomes.

Injunction denied.

Motion for rehearing denied; CALLOWAY, C.J., and ANGSTMAN, J dissenting.

CALLOWAY C.J., and ANGSTMAN, J., dissenting.

E. G Toomey and Carl McFarland, both of Helena, for plaintiff.

Raymond T. Nagle, Atty. Gen., Jeremiah J. Lynch, Asst. Atty. Gen., and J. J. Greene, of Helena, for defendants.

A. J. Galen, of Helena, amicus curiae.

STEWART Justice.

This is an original proceeding instituted by Brian D. O'Connell, a taxpayer, against the state board of equalization, the members thereof, the Attorney General, county attorney of Lewis and Clark county, and the Governor of the state, as officials charged with the enforcement of chapter 181 of the Laws of the Twenty-Third Legislative Assembly, approved March 16, 1933. The complaint recites the enactment of the law, that defendants are charged with the execution thereof, and that they are about to proceed to put the same into effect, and will do so unless restrained by this court.

Chapter 181 was designed and enacted as an income tax law. In its general provisions it follows closely the context of the federal income tax law and levies upon "every individual" subject thereto a graduated tax measured by net income. The tax base is ascertained after allowing certain enumerated deductions and exemptions from the gross income from all sources.

It is of historical interest to observe that the Legislative Assembly of the state of Montana at its Twenty-Second session in 1931 enacted chapter 190, creating "The Montana Taxation and Consolidation Commission." This commission was charged with the duty of examining the taxation system of the state of Montana and was required to make report and findings to the next succeeding Legislative Assembly. Such examination was made by the commission and report given to the Governor and the Twenty-Third Legislative Assembly. The report recommended the enactment of an income tax law for the state of Montana, and said: "Able lawyers disagree as to the authority of this state to impose such a tax without a constitutional amendment, but we believe after careful analysis of our court decisions and the decisions of courts of other states that such an amendment is not necessary and that the practical thing to do is to go ahead on the assumption that our supreme court will follow the weight of judicial opinion when the issue comes before it and hold that such a tax is not prohibited by our Constitution. The 1931 legislative assembly of the state of Idaho proceeded in this manner and at the same time submitted a constitutional amendment to the people, giving the legislature enlarged powers with reference to tax. The court held a constitutional amendment not necessary. (See Diefendorf v. Gallet, 51 Idaho, 619, 10 P.2d 307.)"

The Governor in his message to the Twenty-Third Legislative Assembly called attention to the taxation situation in the state, and declared that the income tax proposition had passed the experimental stage, and recommended that a sound and carefully drawn income tax law be enacted. In the course of his discussion of the matter, he said: "The supreme court of our sister state, Idaho, has held in a recent case that it was within the power of the legislature to enact an income tax law without submitting the question to a vote of the people, under a Constitution very similar to our own. If, however, in your opinion a constitutional amendment is required in this case, it should be submitted to the present legislative assembly."

In conformity with the Governor's recommendation, chapter 181, now under consideration, was enacted. In further conformity with his recommendation, the Legislature provided for the submission of a constitutional amendment under the terms of chapter 83 of the Laws 1933. The proposed amendment, by the provisions of the act of submission, will be voted upon by the people at the general election to be held in November, 1934. If adopted, the new amendment will add to section 1 of article 12 of our Constitution the following provision: "The Legislative Assembly may levy and collect taxes upon incomes of persons, firms and corporations for the purpose of replacing property taxes. These income taxes may be graduated and progressive and shall be distributed to the public schools and to the state government."

Chapter 181 very closely approximates the Idaho act (Laws Idaho 1931 [Ex. Sess.] c. 2) mentioned in the report of the commission and in the message of the Governor. There is one important difference in the two laws. The Idaho act imposes the tax directly upon corporations by defining the term "person" (section 2) as including a corporation, and the term "taxpayer" as meaning any person subject to a tax imposed by the law (section 2). The Montana act levies the tax upon "every individual" subject thereto (section 2), and defines the word "taxpayer" as not including corporations (section 1). The Idaho act requires taxpayers to list dividends received from corporations, but authorizes the deduction thereof in the computation of the tax. The Montana act requires the inclusion of corporate dividends and makes no provision for a corresponding deduction in the computation of the tax. There are some other variations or differences in the two laws, but, generally speaking, they are either characteristic of all income tax laws or unimportant, and are not controlling in the matter now before the court.

The plaintiff attacks the law on the ground that it is unconstitutional because in conflict with sections 1, 9, and 17 of article 12 of our State Constitution, which are as follows:

Article 12, § 1: "The necessary revenue for the support and maintenance of the state shall be provided by the legislative assembly, which shall levy a uniform rate of assessment and taxation *** of all property. ***"

Article 12, § 17: "The word property as used in this article is hereby declared to include moneys, credits, bonds, stocks, franchises and all matters and things (real, personal and mixed) capable of private ownership, but this shall not be construed so as to authorize the taxation of the stocks of any company or corporation when the property of such company or corporation represented by such stocks is within the state and has been taxed."

Article 12, § 9: "The rate of taxation on real and personal property for state purposes *** shall never exceed two (2) mills on each dollar of valuation, unless the proposition to increase such rate *** shall have been submitted to the people at the general election. ***"

The amended complaint filed subsequent to the argument in this case attacks the constitutionality of the law on the ground "that it seeks to impose an income tax upon individuals, firms, and partnerships and not upon corporations or artificial persons exercising the same function and within the same class of persons and businesses or occupations."

The complaint asserts that chapter 181 assumes to change the system of taxation heretofore and now authorized, established, and limited by section 1 of article 12 of the Constitution, and it is argued in support of this contention that for forty years last past and prior to the enactment of the chapter the revenues for state purposes were limited to ad valorem taxes and license taxes upon persons and corporations doing business in the state. The Attorney General argues that such an allegation is not correct, in fact or in law, and cites the fact that for at least thirty-six years we have had an inheritance tax law in the state of Montana, and that article 12 of the Constitution does not assume to create or design any system of taxation.

Before entering upon a discussion of the questions here involved, it is important to call attention to the fact that our Constitution is not a grant but a limitation of the powers of the Legislature. This court has often noted the fundamental distinction between the Constitution of a state and the Constitution of the United States. The following language is most expressive: "A state legislature is not acting under enumerated or granted powers but rather under inherent powers restricted only by the provisions of the sovereign Constitution. In the matter of legislation, the people through the legislature have plenary power, except in so far as inhibited by the Constitution, and the person who denies the authority in any given instance must be able to point out distinctly the particular provision of the Constitution which limits or prohibits the power exercised." State ex rel. Sam Toi v. French, 17 Mont. 54, 41 P. 1078, 30 L. R. A. 415; State v. Camp Sing, 18 Mont. 128, 44 P. 516, 32 L. R. A. 635, 56 Am. St. Rep. 551; Missouri River Power Co. v. Steele, 32 Mont. 433, 80 P. 1093; Hilger v. Moore, 56 Mont. 146, 182 P. 477, 481.

This court has long indulged every possible presumption in favor of the constitutionality of a legislative act. In a per curiam opinion in the test case involving the validity of state highway debentures it was said: "At the threshold we bear in mind that every presumption must be indulged in favor of the constitutionality of the act; every reasonable doubt must be resolved in favor of legislative action. The question for the court's determination is not whether it is possible to condemn but whether it is possible to uphold the act. When two constructions are possible, one which will result in declaring the statute constitutional and the other unconstitutional, the court...