Cook v. Walters Dry Goods Co.
| Decision Date | 08 December 1947 |
| Docket Number | No. 4-8408.,4-8408. |
| Citation | 206 S.W.2d 742 |
| Parties | COOK v. WALTERS DRY GOODS CO. |
| Court | Arkansas Supreme Court |
Bruce T. Bullion, of Little Rock, for appellant.
Catlett & Henderson, of Little Rock, for appellee.
Archer Wheatley, of Jonesboro, Moore, Burrow, Chowning & Hall, Owens, Ehrman & McHaney and E. Chas. Eichenbaum, all of Little Rock, and Burke, Moore & Burke, of Helena, amici curiæ.
The sole question for decision in this case is the constitutionality of Section 2 of Act 135 of 1947, which Act is entitled "An Act to Increase Exemptions Allowed Under Income Tax Laws of Arkansas: To Amend Certain Other Provisions of the Income Tax Law of 1929: to Provide Additional Revenues for Public Services: to Declare an Emergency and for Other Purposes."
Section 2 of said act amends subsection (c) of Section 13 of Article III of Act 118 of 1929, commonly referred to as the Income Tax Act of 1929, by adding a proviso "that the deductions herein allowed for taxes on income paid or accrued within the income year and imposed by the authority of the United States shall not exceed an amount equivalent to fifty per cent (50%) of such Federal income tax so paid or accrued." It was made to apply retroactively to incomes for the year 1946 and prospectively to subsequent years. Section 8 of said Act 135 provides for severability of its provisions, in the event of the invalidity of any part thereof.
Appellee brought the action against appellant to enjoin the enforcement of said Section 2, alleging its invalidity, and that it was entitled to deduct the whole federal income tax paid by it in its fiscal year instead of one-half thereof as provided by the act and determined by appellant.
A general demurrer was interposed by appellant to the complaint, which was overruled, and, he electing to stand on his demurrer, was enjoined from collecting any tax from appellee by virtue of said section 2 of said act. This appeal followed.
In Sims v. Ahrens, 167 Ark. 557, 271 S.W. 720, it was held that a gross income tax law was void, being "in effect a tax upon interstate commerce, and as operating in a discriminatory and arbitrary manner." Syllabus 1. It was also there held that "it is within the discretion of the Legislature to pass a properly classified net income tax law." That decision was rendered in 1925, and in 1929, the legislature passed Act 118, which this Court sustained, as being a properly classified income tax law, in Stanley v. Gates, 179 Ark. 886, 19 S.W.2d 1000, 1005.
Act 118 of 1929, in Section 13, Article III, provided for the allowance of a number of deductions "in computing net income", one of them (c), being taxes paid or accrued within the income year, imposed by authority of the United States — or of any State —; "except inheritance taxes, and except income taxes imposed by this Act and taxes assessed for local benefits, of a kind tending to increase the value of the property assessed."
"Net income" is defined in Section 7 of Article III as "the gross income of a tax payer less the deductions allowed by this Act." What this Court would have done in Stanley v. Gates, supra, had the original act then under consideration allowed as a deduction only one-half of the taxes imposed by authority of the United States, we do not know, but it seems likely that the whole act would not have been declared void because thereof. Federal income taxes at that time were small as compared to what they are now, and what then would have been a very small matter now becomes a matter of much substance. But the language of the late Chief Justice Hart in that case indicates that the decision would have been the same had the federal tax deduction been one-half, or even none at all, for he there said: The holding in that case was by a divided Court, the writer of this opinion voting with the majority in that. The minority dissented on the ground that the act was discriminatory as between individuals and corporations. If, as the majority held, "the states may make exemptions, levy different rates upon different classes, and make such deductions as they choose", then it seems necessarily to follow that the limitation as to the deduction now under consideration is a valid exercise of legislative power. Perhaps the language stressed in the above quotation is a little too broad, since it was conceded in oral argument, and we think correctly, that the ordinary and necessary expenses of doing business, including salaries, rentals, interest, losses, bad debts, etc., as set out in Section 13 of Act 118 of 1929, must be deducted in order to determine net income, and that the legislature could not exclude such items as deductions from gross income. But the matter of taxes paid to the United States and to State, stands on a different basis. These taxes represent the taxpayer's share of the cost of government and are a first charge on his income. They are levied and paid for the protection of his right to engage in business — his right to earn an income — and their deduction from what might be called gross net income, or net income for purposes of taxation, do not render the act one...
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