Duluth-Superior Dredging Co. v. Com'R of Taxation

• Decision Date: 05 May 1944
• Docket Number: No. 33743.,33743.
• Parties: DULUTH-SUPERIOR DREDGING CO. v. COMMISSIONER OF TAXATION.
• Court: Minnesota Supreme Court

14 N.W.2d 439

217 Minn. 346

DULUTH-SUPERIOR DREDGING CO. v. COMMISSIONER OF TAXATION.

No. 33743.

Supreme Court of Minnesota.

May 5, 1944.

Certiorari to Board of Tax Appeals.

Certiorari proceeding by the Duluth-Superior Dredging Company against the Commissioner of Taxation to review a decision of the Board of Tax Appeals affirming an order of the Commissioner of

Taxation assessing against relator a deficiency in income tax.

Decision affirmed.

Holmes, Mayall, Reavill & Neimeyer, of Duluth, for relator.

J. A. A. Burnquist, Atty. Gen., and P. F. Sherman, Asst. Atty. Gen., for respondent.

YOUNGDAHL, Justice.

Certiorari upon the relation of Duluth-Superior Dredging Company to review a decision of the board of tax appeals affirming an order of the commissioner of taxation assessing against relator a deficiency in income tax of $832.21, plus interest thereon, for the year 1939.

A stipulation by the parties embodies the following pertinent facts: Relator, a Minnesota corporation engaged in the business of dredging, received during the calendar year 1939 income properly assignable to Minnesota of $28,981.22. In the same year it received under a dredging contract performed wholly within the state of Pennsylvania the sum of $257,322.67, for which it expended directly for work, labor, and materials in the performance thereof a total sum of $193,977.81. It also received $1,102.22 for gas tax refunds and sales of scrap. During the taxable year it expended the further sum of $68,821.42, which constituted deductions not connected with or allocable against the production or receipt of gross income assignable to the state of Minnesota, nor connected with or allocable against the production or receipt of gross income assignable to other states and not entering into the computation of any net income assignable to the state of Minnesota under § 25 of the Minnesota Income Tax Act (L.1933, c. 405) and which in consequence are to be allowed as deductions from Minnesota income in the proportion which relator's gross income from sources within the state bears to its gross income from all sources, as provided in § 24(b) of said act.

In attempting to arrive at the proper percentage of these expenditures which may be thus deducted, the parties are in agreement that the gross income from sources within the state is $28,981.22, but they disagree as to what constitutes gross income from all sources. Relator contends that the sum of $257,322.67 received for the performance of the dredging contract in Pennsylvania does not constitute gross income within the meaning of the act until the direct expenses of $193,977.81 incurred in the execution of the contract have been deducted. It claims that these expenditures were an investment of capital assets and as such properly deductible in determining gross income. Such a deduction would reduce the amount of gross income received from all sources to $93,428.30, thereby resulting in a deduction of 31.02 percent of such expenses in the computation to determine the taxable net income in Minnesota. The commissioner of taxation takes the position that gross income from all sources contemplates the total sum of $258,424.89, receipts under the Pennsylvania contract and gas tax refunds and sales of scrap, plus the agreed Minnesota gross income of $28,981.22, resulting in a total gross income of $287,406.11 with a resulting allocation of 10.8 percent of the expenses.

The sole issue before the board of tax appeals and before this court for review is the meaning of the term "gross income" as used in § 24(b) of the Minnesota Income Tax Act, and whether it contemplates the inclusion or exclusion of those direct expenditures entailed in the performance of the Pennsylvania contract.

1. Our review of a decision of the board of tax appeals is limited by the provisions of Minn.St.1941, § 271.10, Mason St.1940 Supp. § 2362-19. Similar limitations are imposed upon the Circuit Court of Appeals when reviewing decisions of the United States Board of Tax Appeals (now the Tax Court) which restrict the scope of review to a reversal or modification only if the decision is not in accordance with law. 26 U.S.C.A. Int.Rev.Code, § 1141(c) (1). Whether there is merit in relator's contentions or whether the issue might have been decided in its favor are questions not before us. We are concerned with the sole proposition of whether there is any legal basis under the statute for the board's decision. Village of Aurora v. Com'r of Taxation, Minn., 14 N.W.2d 292, filed March 31, 1944; Dobson v. Com'r of Int. Rev., 320 U.S. 489, 64 S. Ct. 239. In Equitable L. Assur. Society v. Com'r of Int. Rev., 64 S.Ct. 722, 724, filed March 27, 1944, the United States Supreme Court, in its most recent expression on the finality of an administrative determination on reviewing a decision of the Tax Court, said: "We may modify or reverse the decision of the Tax Court only if it is `not in accordance with law.'" In the Oliver case, supra, we cited with approval this expression of the court in the Dobson case, supra, 320 U.S. 501, 64 S.Ct. 246: "* * * However, all that we have said of the finality of administrative determination in other fields is applicable to determinations of the Tax Court. Its decision, of course, must have `warrant in the record' and a reasonable basis in the law. But `the judicial function is exhausted when there is found to be a rational basis for the conclusions approved by the administrative body.'"

Limiting the scope of our review in the manner prescribed, we proceed to determine whether the board's decision as to what constitutes gross income within the meaning of the Minnesota Income Tax Act has reasonable basis in the law.

2. The Minnesota Income Tax Law was enacted in 1933 and the provisions thereof, insofar as are here pertinent, have remained substantially the same. There is no dispute that, since the dredging contract was performed in Pennsylvania and wholly without the state of Minnesota, the revenue received thereunder is by § 23 of the act assignable to the state of Pennsylvania. The pro tanto allocation of relator's expenses of $68,821.42 (mainly salaries and general expense) is provided for by § 24(b) of the act as follows: "That proportion of such deductions, so far as not connected with and allocable against the production or receipt of such gross income assignable to this state and so far as not connected with and allocable against the production or receipt of gross income assignable to other states * * * shall be allowed which the taxpayer's gross income from sources within this state * * * bears to his gross income from all sources * * *."

The necessity for such a provision arises by reason of the fact that in business operations within and without the state expenses are incurred which are not directly connected with either business but which are incurred nevertheless in producing the total income. An illustration of this would be the salaries of officers whose time is devoted to managing the entire business, both within and without the state. Similarly, other expenses would fall in the same classification. Such deductions are required to be apportioned because they are a charge against the entire income and not merely that portion assignable to this state. See article by Professor Henry Rottschaefer, 18 Minn.L.Rev. 93, 156.

Relator contends that "It is only `income' or `gain' which is authorized to be taxed by the 16th Amendment, or which is taxed by the Minnesota law. In either case, whether taxes are based on `gross income' or `net income,' it is still only `income' or `gain' (not gross receipts) which are referred to." Relator then reaches the conclusion that "gross income" means "gross gain," and to arrive at the so-called "gross gain" in the instant case the cost of performing the dredging contract must be deducted. It cites authority to the effect that "gross income" is not synonymous with "gross receipts" and that the term "income" means "gain" derived from capital, from labor, or both combined. The term "gross income" does not convey the same definite and inflexible significance under all circumstances. In the evolution of the Income Tax Law it has come to have varied meanings. It is a term the construction and interpretation of which depend upon the context and subject matter under consideration. It has been defined to mean "gross receipts." Miles v. Dept. of Treasury, 209 Ind. 172, 199 N.E. 372, 101 A.L.R. 1359; Columbia Ry., G. & E. Co. v. Jones, 119 S.C. 480, 112 S.E. 267; German Alliance Ins. Co. v. Van Cleave, 191 Ill. 410, 61 N.E. 94; Davis v. United States, 2 Cir., 87 F.2d 323; Storen v. Jasper County F. B. Co-op. Ass'n, 103 Ind.App. 77, 2 N.E.2d 432. Other courts have held that it is not synonymous in meaning with "gross receipts." Southern Pacific Co. v. Lowe, 247 U.S. 330, 38 S. Ct. 540, 62 L.Ed. 1142, and cases therein cited. Text writers have distinguished the term from "gross receipts." 1 Mertens, Law of Federal Income Taxation, § 5.10. Frequently, accountants have developed or followed bookkeeping systems which lend themselves to a particular business and have labeled mathematical results as "gross receipts," "gross earnings," or "gross income," depending upon the nature of the taxpayer's business. The term "gross income" may not mean the same thing to the courts as it does to the businessman or accountant. Stratton's Independence, Ltd. v. Howbert, 231 U.S. 399, 34 S.Ct. 136, 58 L.Ed. 285; Helvering v. Edison Bros. Stores, Inc., 8 Cir., 133 F.2d 575. Similarly, any attempt to circumscribe the meaning of the term "income" by definition has been unsuccessful. The word is a generic term, broad and comprehensive, and its specific meaning must be determined from its use in the statute rather than by categorical definition. In 1 Mertens, Law of Federal Income Taxation, §§ 5.02 and 5.03, the difficulties surrounding such an attempt at definition are ably discussed. Well...