Crescent Mfg. Co. v. Tax Com'n

• Decision Date: 10 October 1924
• Docket Number: 11575.
• Parties: CRESCENT MFG. CO. v. TAX COMMISSION.
• Court: South Carolina Supreme Court

124 S.E. 761

129 S.C. 480

CRESCENT MFG. CO. v. TAX COMMISSION.

No. 11575.

Supreme Court of South Carolina

October 10, 1924

Appeal from Common Pleas Circuit Court of Spartanburg County; J Henry Johnson, Judge.

Action by the Crescent Manufacturing Company against the Tax Commission. From an order overruling a demurrer to the complaint, defendant appeals. Reversed.

Watts J., dissenting.

S. M Wolfe, Atty. Gen., and J. Fraser Lyon, of Columbia, for appellant.

Lanham & Lanham and Lyles, Daniel & Drummond, all of Spartanburg for respondent.

MARION J.

Action to enjoin the collection of an income tax levied by the defendants under the act of 1922 (32 St. at Large, 896). A temporary restraining order and a rule to show cause were issued by his honor, Judge Johnson. At the hearing of the rule, the defendant interposed a demurrer to the complaint, which was overruled. From this order the defendants have appealed. The facts admitted by the demurrer are as follows:

"The plaintiff is a South Carolina corporation, engaged principally in manufacture of cotton hosiery, having its main office and principal place of business at Spartanburg. During the year 1921, it also owned and operated a similar plant at Canton, N. C., of about half the capacity of the Spartanburg plant. It made its income tax returns for the year 1921 to the Internal Revenue Department of the federal government, showing a net taxable income derived from all sources of $76,795.61, on which it paid an income tax to the federal government of $25,629.04. It also made return to the South Carolina tax commission, as required by the Act of 1922, showing a net income accruing to it from business conducted and carried on within the state of South Carolina of $46,851.53, upon which it paid to the state treasurer an income tax of $3,964.53. Pursuant to the provisions of the act of the state of North Carolina, levying a tax on income derived from business carried on in that state, it made its return to the state Department of Revenue for North Carolina, showing a net income derived from its business conducted in that state of $29,944.08, upon which it paid to the state of North Carolina an income tax of $898.32. The South Carolina tax commission has checked over the respondent's return to the federal government and to the South Carolina tax commission and found them to be correct in all respects, and has made no contention that there was any erroneous calculation, impropor deduction, failure to disclose, or attempted concealment of income. The South Carolina tax commission, nevertheless, asserts that the income derived from business carried on wholly in North Carolina is subject to taxation, under the provisions of the South Carolina Income Tax Act, and demanded of respondent the payment of an additional tax of $3,680.16, with approximately $200 penalties."

The demurrer questions the sufficiency of the complaint on two grounds: (1) That it appears from the face of the complaint that the respondent has an adequate remedy at law, to pay the taxes under protest and sue for its recovery; and (2), that the complaint shows on its face that the respondent is liable for the payment of the contested demand.

Upon the second of the foregoing grounds, we are of the opinion that the demurrer should have been sustained. That ground, in substance, is that it appears upon the face of the complaint that the plaintiff is liable, under the provision of the act, for the payment of the tax, the collection of which is here sought to be enjoined.

The precise question raised is whether a domestic corporation is liable under the state Income Tax Act of 1922 (32 Stat. at Large, 896) for the payment of the income tax upon such proportion of its net income as is derived from business operations outside the state of South Carolina. The contention of the respondent, sustained by the circuit court, is that the question should be resolved in the negative, and that the tax imposed by the act should be held to apply only to such proportion of the entire net income of a domestic corporation as arises or accrues from property and business operations within the state. Since, however, the provisions of the act upon which that proposition is predicated apply alike to persons, firms, and corporations, and since, if the tax collectible from a domestic corporation is thus limited, so likewise is the tax collectible from all natural persons, firms, etc., subject to the provisions of the act, it is apparent that the real question presented is whether the tax imposed by this so-called Income Tax Act is limited, as to all persons and corporations subject thereto, to apply only to such proportion of the recipient's entire net income as is derived from sources and operations within the state of South Carolina. The question, manifestly, is one of serious import, notwithstanding the fact that the act has been amended, since this case arose, by striking therefrom the expression upon which the respondent's contentions in this case are mainly rested. We think the act, as originally enacted and as it stands for construction in the case at bar, may not soundly be construed and interpreted to limit the tax imposed upon residents and citizens of the state, natural and corporate, to income derived exclusively from sources and operations within the state.

In approaching the construction of the act with the foregoing question in view, the essential nature and raison d'être of an income tax are properly borne in mind. The income tax is primarily a subjective tax imposing personal liability upon the recipient of the income. It proceeds fundamentally upon the theory that all residents and citizens of the state, whether natural persons or domestic corporations, should contribute to the public treasury in proportion to ability to pay, measured by the amount of net income from all sources. The state's jurisdiction to levy the tax is not referable to and dependent upon jurisdiction of the property or of the business operations from which the income is derived. The state has jurisdiction, for taxing purposes, of property and of business operations conducted within its borders, regardless of whether it has jurisdiction of persons who own the property or operate the business. It can tax the property in the form of a direct ad valorem property tax or otherwise; it can tax the business operations in the form of a license tax or otherwise. If, therefore, an income tax is to reach a source of taxable ability, not already subject to taxation, through the property tax and the business tax (taxable resources of which the state usually avails itself fully), it must necessarily apply to income derived from sources beyond the state's jurisdiction to reach otherwise than through its jurisdiction of the person of the recipient. Further, if the basic theory of the income tax is valid--that the residents and citizens of the state, natural and corporate, of whom the state has personal jurisdiction should contribute to the public treasury in proportion to ability to pay, and that net income is a sound measure of such ability to pay--it would seem entirely clear that the resident or citizen of the state who gathers his income from beyond the state's borders is just as able to pay as the resident or citizen who derives his income from sources within the state. And, indeed, as will be hereinafter pointed out, from the standpoint of an equitable distribution of the state's tax burden, it is of more importance that the tax should apply to income derived from sources outside the state than that it should apply to income derived from sources and operations within the state. Necessarily, therefore, the genuine income tax, such as the federal income tax in force at the time of the passage of this act, is a general personal income tax, applicable to the net income of the recipient from all sources.

Was it the intent of the Legislature, in passing the act here under review, to enact a genuine income tax law, or merely to impose a tax upon property and business operations within the state, to be measured by the net income therefrom? The question of Legislative intent is, of course, the pivotal question with which we are here concerned. It is the contention of the respondent, upheld by the circuit court, that it "was not the intention of the General Assembly to impose any income tax upon income derived from operations in another state"; that, while the Federal Income Tax Act (U. S. Comp. St. Ann. Supp. 1923, §§ 6336 1/8a-6336 1/8zzz), which imposes a general personal income tax upon the recipient's entire income from whatever source derived, is "re-enacted totidem verbis twice" in the state act, it is so enacted only in so far as it is "not in conflict with any other provisions" of the act, and "subject to the exemptions and limitations" thereinafter set out; and that there is a conflicting provision and a limitation thereinafter set out, which, in consonance with the rule that a tax statute should be strictly construed against the government, must be construed and interpreted to evince a legislative intention to limit the tax imposed to income derived exclusively from sources and operations within the state. The conflicting provision or limitation relied on to establish that intent is section 13 of the act, which is as follows:

"Sec. 13. Income from Operations or Property in This State Liable to Tax.--Where any person, firm or corporation operates and does business and receives income in South Carolina and another, or other states, such person, firm or corporation shall pay to the tax commission an income upon all net earnings accrued and received from operations or other sources in this state."

It will be observed that this section, which, with the...