Department of State Revenue v. Crown Development Co., 28880

• Decision Date: 16 December 1952
• Docket Number: No. 28880,28880
• Citation: 231 Ind. 449,109 N.E.2d 426
• Parties: DEPARTMENT OF STATE REVENUE et al. v. CROWN DEVELOPMENT CO., Inc.
• Court: Indiana Supreme Court

Page 426

109 N.E.2d 426

231 Ind. 449

DEPARTMENT OF STATE REVENUE et al. v. CROWN DEVELOPMENT CO., Inc.

No. 28880.

Supreme Court of Indiana.

Dec. 16, 1952.

J. Emmett McManamon, Atty. Gen., and Robert F. Wallace, Deputy Atty. Gen., John J. McShane, Chief Counsel, Indianapolis, Lloyd C. Hutchinson and Joseph E. Nowak, Deputy Attys. Gen., for appellant.

Farabaugh, Chapleau & Roper, by Joseph A. Roper, South Bend, for appellee.

GILKISON, Judge.

This is an action brought by the appellee under §§ 64-2601 to 64-2635 and §§ 63-3001 to 63-3030, Burns' 1951 Replacement. The controversy arose when appellant took steps to tax appellee for certain alleged omissions to report and pay gross income tax, the nature of which will hereafter more fully appear.

Such action was had in the matter that it was thereafter referred to the Hearing Judge of the Indiana Department of State Revenue, Hon. Byron Emswiller, and after a full hearing, the Hearing Judge found in favor of appellee. Thereafter, appellee filed its petition to transfer, and complaint, agreeable with the statutes noted, in the St. Joseph Superior Court No. 1, to which appellant filed its answers in affirmation and denial. After trial that court rendered its judgment for appellee, that defendant (appellant) take nothing by the action and that plaintiff (appellee) recover its costs. A motion for new trial was overruled, and this appeal was perfected.

The controversy relates to appellee's gross income tax returns for the years 1946, 1947 and 1948. During those years appellee was engaged in the business activity of acquiring unimproved real estate, borrowing construction funds with which it had buildings constructed on such real estate, and then selling its equity in the improved real estate. In its brief, among other things, appellant states: 'It seems particularly noteworthy that all funds borrowed by taxpayer were paid to Place and Company, Inc. for construction services rendered, that Place and Company, Inc. paid a Gross Income Tax on these funds, and that taxpayer has already paid a tax upon all equity money realized.'

For convenience the parties have divided appellee's transactions in the sale of such improved real estate into three categories, numbered A, B and C as follows:

A. Within the taxable year, the purchaser procures a new loan and pays off the construction mortgage which purchaser had assumed and agreed to pay.

On these transactions appellant contends that appellee should pay a gross income tax on the gross value of the real estate sold, and not merely on the value of the equity. If the tax is so applied appellee would owe an additional tax on property sold in this category of $3,378.44 for 1946; $5,141.79 for 1947, and $174.00 for 1948, a total of $8,694.23.

B. After the improved property was sold and within the taxable year a novation was effected between the mortgagee, and the purchaser, releasing the mortgagor from liability on the notes and mortgages.

If the tax is applied as contended by appellant, the gross value of the real estate transferred will be taxed to appellee and not merely the value of the equity owned and transferred by appellee.

The amount of additional tax falling within this category would be, nothing for 1946, $2519.21 for 1947 and $1,740.88 for 1948, a total of $4,260.09.

C. Where the purchaser pays the seller for his equity and assumes and agrees to pay the outstanding note secured by mortgage on the real estate sold, and the purchaser continues to pay agreeable with the terms of the mortgage. Appellant contends that appellee is liable for a gross income tax on the gross value of the real estate described in the deed and not merely on the value of its equity therein received from the sale by the mortgagor.

If appellant's contention prevails the additional tax falling in this category would be, for 1946, $336.14, 1947, $328.51, 1948, $39.44, a total of $704.09.

It is appellee's contention that its liability for gross income tax is limited to the actual gross receipts by it from the several transactions involved.

As applicable to each of the categories mentioned, it may be stated that when the owner of real estate borrows money and secures the lender by a mortgage on the real estate, such transaction creates a mortgage interest in the real estate in the mortgagee, and thereby the owner reduces his own interest to the extent and by the amount of the mortgage interest so created. If the owner thereafter sells the real estate and in his deed of conveyance specifies that the grantee assumes and agrees to pay such mortgage indebtedness, the grantee then becomes the principal debtor and the grantor is relegated to the secondary relationship of a surety. Black v. Krauss, 1949, 119 Ind.App. 529, 537, 85 N.E.2d 647. Ellis v. Johnson, Trustee, 1884, 96 Ind. 377, 381 and cases cited. Hill, Adm'r v. Minor, 1881, 79 Ind. 48, 54.

We have long held that to authorize the collection of a gross income tax a transaction must come clearly within the statutory provisions providing therefor. In case of doubt the statute will be construed against the state and in favor of the taxpayer. Walgreen Co. v. Gross Income Tax Division, 1947, 225 Ind. 418, 420, 75 N.E.2d 784, 1 A.L.R.2d 1014. Ralph L. Shirmeyer, Inc. v. Indiana Revenue Board, 1951, 229 Ind. 586, 591, 99 N.E.2d 847. Dept. of Treasury v. International Harvester Co., 1943, 221 Ind. 416, 421, 47 N.E.2d 150. Oster v. Department of Treasury, 1941, 219 Ind. 313, 317, 37 N.E.2d 528. Department of Treasury v. Muessel, 1941, 218 Ind. 250, 255, 32 N.E.2d 596. United States v. Merriam, 1923, 263 U.S. 179, 188, 44 S.Ct. 69, 68 L.Ed. 240, 244, and cases cited.

The gross income statute, among other things, provides:

'There is hereby imposed a tax upon the receipt of gross income, measured by the amount or volume of gross income, and in the amount to be determined by the application of rates on such gross income as hereinafter provided. Such tax shall be levied upon the receipt of the entire gross income of all persons resident and/or domiciled in the state of Indiana, except as herein otherwise provided; and upon the receipt of gross income derived from activities or businesses or any other source within the state of Indiana, of all persons who are not residents of the state of Indiana, and shall be in addition to all other taxes now or hereafter imposed with respect to particular privileges, occupations, and/or activities. Said tax shall apply to, and shall be levied and collected upon, the receipt of all gross income received on or after the 1st day of May, 1933, with such exceptions and limitations as may be hereinafter provided.' § 64-2602, Burns' 1951 Replacement.

The first section of the gross income statute, Section 64-2601, Burns' 1951 Replacement contains a large number of definitions of terms used. Clause (h) thereof defines the word 'receipts' as used in the statute thus:

'Except as hereinafter otherwise expressly provided, the term 'receipts,' as applied to a taxpayer, shall mean the gross income in cash, notes, credits and/or other property which is received * * * by a third person for his benefit.'

We shall first give attention to the transactions described in Category A. In so doing we are bound by the statutory definitions of the controlling terms used. ¹ The total gross values of the properties transferred in this category upon which no gross income tax was paid by appellee for the three years involved amount to $869,423.28. This is wholly represented by the outstanding mortgages against the property involved in the transactions and which mortgage indebtedness the purchasers assumed and agreed to pay to the mortgagees as part of the purchase price of the real estate transferred. As before noted it is admitted that appellee, in fact, received only the payment for its equity in such real estate and that it has paid in full the gross income tax on the purchase price of this equity. The only question presented with respect to the transactions in this category, therefore, is: Does appellee owe gross income tax on the outstanding indebtedness against the real estate involved, which indebtedness is represented by outstanding valid notes and mortgages, owned by the mortgagee, which the purchasers have assumed and agreed to pay, and which they have within the year fully paid, from funds received from a new mortgage executed by them? Answering this question agreeable with the facts and the definitions noted we must say that appellee did not receive this sum or any part of it 'in cash, notes, credits and/or other property', nor has it been 'received by a third person for' appellee's benefit. So far as shown by the briefs of the parties the mortgage indebtedness was paid only in the manner above noted and the appellee never at any time owned the outstanding indebtedness noted or any interest therein. On the contrary it owed it. The outstanding indebtedness was never a credit or asset to appellee but as to it, it was a liability. In no event could it ever become an income to appellee, but in certain events it might become an outgo. It cannot be contended that appellee received any income or benefit by the transactions noted over or above that which it received for its equity. By the transactions appellee and the mortgagee also received the contract of the purchasers to pay the outstanding notes and mortgages to the mortgagee. No effort has been made by appellant to place a value upon this contract or to tax it. It would be difficult to place any value upon it, since the total real estate surety may be equal to or in excess of the sums due or to become due on the outstanding mortgages, or the assuming purchaser may be fully able to liquidate the mortgage, in either of which situations no liability against appellee would ever exist in fact. When the outstanding mortgages were paid by the purchasers in the manner noted the payment was for the 'direct benefit' of the mortgagee...