Fidelity & Columbia Trust Co. v. Reeves

Decision Date16 May 1941
Citation287 Ky. 522,154 S.W.2d 337
PartiesFIDELITY & COLUMBIA TRUST CO. v. REEVES, Commissioner of Revenue.
CourtKentucky Court of Appeals

Rehearing Denied Oct. 24, 1941.

Appeal from Circuit Court, Franklin County; W. B. Ardery, Judge.

Proceeding by the Fidelity & Columbia Trust Company, trustee, etc against H. Clyde Reeves, Commissioner of Revenue, etc., to review an assessment of income taxes. From an adverse judgment, the Fidelity & Columbia Trust Company, trustee etc., appeals.

Affirmed.

REES C.J., and TILFORD and RATLIFF, JJ., dissenting.

Woodward Dawson & Hobson and Franklin P. Hays, all of Louisville, for appellant.

Hubert Meredith, Atty. Gen., and Jesse K. Lewis, Asst. Atty. Gen., for appellee.

MORRIS Commissioner.

Parties stipulated that on April 4, 1935, trustee for Emma Bennett, received from the Axton estate certain described securities of the aggregate value of $8,000. On January 1, 1936, their value had nearly doubled, and when sold in February and May of 1936, this value had increased to some extent.

It was agreed that if the taxing authorities correctly adopted as a basis of assessment of income the plan of taking the difference in value as of April 4, 1935, and the sales price, disregarding exemptions, the taxable gain would be $7,463.12. However, if the proper method, as contended by appellant, was to take the difference in values as of January 1, 1936, and the sales prices as the basis, the taxable gain would be $1,770.55. Trustee had made return and paid the tax based on its method, but upon consideration the Director of Income Tax asserted a balance due of $243.76, certifying his conclusion to the commission, which upheld him and issued a deficiency notice. Upon review the commission declined to alter its ruling.

Appellant sought court review, the petition detailing the facts above stated, and that the law under which the assessment was made was not effective until August, 1936. The income tax act was introduced April 8, and approyed May 8, 1936. Session Acts 3d Ex.Sess.1936, Ch. 7, now 4281b-1 et seq., Ky.Stats. The chancellor held that the application of the commission's method, as provided by the act, did not violate the Federal or State Constitutions. We incorporate such portions of the act (using statute sections) as are pertinent.

Section 4281b-2 includes in gross income "gains, profits and income derived from *** sales or dealings in property ***, real or personal, *** including gains or profits and income derived through estates or trusts by the beneficiaries thereof *** but income realized or loss sustained from the sale of property held two years or more *** shall be ignored in computing income for purposes of this Act. *** The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer."

Section 4281b-39: "The taxes imposed by this Act shall first be collected and paid with respect to the net income received during the calendar year 1936."

Section 4281b-24: "All return of income for the preceding taxable year shall be made on or before the fifteenth day of April in each year," with exceptions as to returns made on the fiscal year basis.

Section 4281b-6: "Gains or losses from the sale or disposition of the property *** shall be treated for purposes of this Act as all other income or loss if such property be disposed of within two (2) years from the time acquired, as provided in Section 2 hereof [4182b-2, K.S.]. The basis for computing such gain or loss shall be the cost or, if acquired by some means other than purchase, the fair market value thereof at the time acquired."

Appellant summarizes its contentions thusly:

"The Commonwealth of Kentucky does not have the power to impose an income tax upon the increase in capital value of assets accruing from April, 1935 to Jan. 1, 1936, when such assets were sold in 1936 prior to the date the first Kentucky Income Tax law became effective, Aug. 7, 1936."

(2) "The Kentucky law does not require as a matter of construction, the taxation of the increase in value of capital assets prior to Jan. 1, 1936."

On this point we express no doubt as to the meaning of the law, or the obvious intention of the legislative body. The grounds stated, it is claimed, involve such provisions of the Federal Constitution as guarantee equal protection of the laws and due process, Amendment 14, and of our Constitution guaranteeing remedy by due course of law, section 14, and providing for uniformity of taxation on like classes of property. Sec. 171.

The latter contention is based on the argument that there is lack of uniformity, because as asserted, when there has been an increase in value of capital assets, the act is complete and the total becomes property subject to the ad valorem rate and cannot be subjected to another tax. Counsel admits that in Reynolds Metal Co. v. Martin, 269 Ky. 378, 107 S.W.2d 251, 257, dismissed in United States Supreme Court for want of substantial federal question, 302 U.S. 646, 58 S.Ct. 146, 82 L.Ed. 502, we held that taxation of income did not constitute a tax on property. We find nothing presented by counsel to conflict with our conclusions in the Metal case, and wherein we held "that the receipt of income *** is a taxable event is universally recognized." As recently as February, 1941, in Superior Bath House Co. v. McCarroll, 61 S.Ct. 503, 506, 85 L.Ed. 721, the United States Supreme Court, in speaking of a state income tax, said: "We have recently held that such a tax is not a tax on the income-producing property in any such sense as to preclude the tax for want of 'jurisdiction' of the state to lay it. *** There is no occasion now to give renewed currency to the notion erroneously attributed to Pollock v. Farmers' Loan & Trust Company, 157 U.S. 429, 15 S.Ct. 673, 39 L.Ed. 759 *** that a tax on income is subject to the limitations of a tax on the property which produces it."

The argument that the increase in value constituted non-taxable assets is chiefly based on Bundy v. Nygaard, 163 Wis. 307, 158 N.W. 87, L.R.A.1917E, 563. There the taxpayer purchased stock in 1907 and sold it in 1914 at an advance. January 1, 1911, was the beginning of the year in which Wisconsin's first tax law was enacted, and it appeared there was no substantial difference between values as of January 11, and date of sale in 1914. The Wisconsin law provided: "That of the profits derived from the sale of real estate or other capital assets acquired previous to January 1, 1911, only such proportion shall be taxable as the time between January 1, 1911, and the date of sale bears to the entire time between the date of acquisition and the date of sale." St.Wis.1913, § 1087m--2(d).

The Wisconsin court held that insofar as the section quoted applied, since there had been no advance in the stock during the period covered by the assessment, the increase in value was capital property, and not taxable as income. But see West v. Tax Comm., 207 Wis. 557, 242 N.W. 165.

It is clear from reading our statute that it was so drawn as to constitute all gains as income, if the securities be held no longer than two years from the time acquired. Here the legislature specifically provided that gains from the sale of property of every character "for the purpose of this act shall be treated as income." We find nothing in either Constitution to preclude the legislature from defining taxable gain.

"The capital gain or loss which may be given special treatment for federal income tax purposes, is the gain or loss from the sale or exchange of 'capital assets' and the statutes have defined capital assets as property held by the taxpayer, excluding stock in trade of the taxpayer or other property of a kind which would be properly included in the inventory *** if on hand at the close of the taxable year. And the gain on a sale of trust property was held to be a capital gain taxable at a special rate. *** 27 Am.Jur. 158 and 159. Citing Helvering v. New York Trust Co., 292 U.S. 455, 54 S.Ct. 806, 78 L.Ed. 1361.

We find many cases upholding the federal statute taxing the gain on securities or other properties real and personal, held in trust. In some the debated question was whether or not, as to property acquired from a decedent either through intestacy or inheritance, the gain should be determined by the difference in value at time of death of testator, or at time of acquisition, in none of which was there expressed a doubt as to the right to tax the gain as income. This was discussed at length in McFeely v. Com'r, 296 U.S. 102, 56 S.Ct. 54, 80 L.Ed. 83, 101 A.L.R. 304, in which the court, finding some difference in the Act of 1921, 42 Stat. 227, and acts of succeeding years from which the word "acquired" was omitted, held that the omission did not alter the meaning of assets as defined in the earlier act. Income implies something apart from principal and has been defined as the gain derived from capital, from labor or from both combined. Doyle v. Mitchell Bros., 247 U.S. 179, 38 S.Ct. 467, 62 L.Ed. 1054; United States v. Safety Car Hearting Co., 297 U.S. 88, 56 S.Ct. 353, 80 L.Ed. 500; Tax Com'r v. Putnam, 227 Mass. 522, 116 N.E. 904, L.R.A.1917F, 806.

On the subject of "accretions realized by sale or otherwise," 27 Am.Jur. Sec. 41 "Income Taxes" reads: "Although the contrary result had been reached under the federal income tax law in force during the civil war, it is now well settled that accretions of value, as determined by a sale *** of property are taxable under the 16th Amendment and the legislation enacted pursuant to it. This is likewise true under various state income tax laws. Moreover this principle is not limited to sales by dealers or traders, but the gain on an isolated sale or...

To continue reading

Request your trial
9 cases
  • Thorpe v. Mahin
    • United States
    • Supreme Court of Illinois
    • 14 Agosto 1969
    ...... The rates are 2 1/2% Of the net income of individual, trust or estate taxpayers and 4% Of the net income of corporate taxpayers. Net ...v. Johnson, 2 Cal.2d 162, 39 P.2d 796; but Cf. Fidelity & Columbia Trust Co. v. Reeves, 287 Ky. 522, 154 S.W.2d 337; Norman v. ......
  • Department of Revenue v. Leadership Housing, Inc.
    • United States
    • United States State Supreme Court of Florida
    • 3 Marzo 1977
    ......, it was held that a tax on the right of the beneficiary of a foreign trust to receive the income for life was an unconstitutional tax on income. ...101, 1969.) See Fidelity & Columbia Trust Co. v. Reeves, 287 Ky. 522, 154 S.W.2d 337 (1941); ......
  • Fidelity & Columbia T. Co. v. Com'R of Revenue
    • United States
    • United States State Supreme Court (Kentucky)
    • 16 Mayo 1941
    ... . Page 522 . 287 Ky. 522 . Fidelity & Columbia Trust Co. . v. . Reeves, Commissioner of Revenue. . Court of Appeals of Kentucky. . May 16, 1941. .         1. Taxation. — Under the income ......
  • Mitchell v. Mahin
    • United States
    • Supreme Court of Illinois
    • 17 Abril 1972
    ......Co. (1932), 286 U.S. 244, 52 S.Ct. 538, 76 L.Ed. 1083); Fidelity & Columbia Trust Co. v. Reeves (1941), 287 Ky. 522, 154 S.W.2d 337; and ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT