Hadden v. South Carolina Tax Com'n

• Decision Date: 11 February 1937
• Docket Number: 14437.
• Parties: HADDEN et al. v. SOUTH CAROLINA TAX COMMISSION.
• Court: South Carolina Supreme Court

190 S.E. 249

183 S.C. 38

HADDEN et al. v. SOUTH CAROLINA TAX COMMISSION.

No. 14437.

Supreme Court of South Carolina

February 11, 1937

Appeal from Common Pleas Circuit Court of Williamsburg County Philip H. Stoll, Judge.

Action to recover income tax paid under protest by Howard S. Hadden and Agnes K. Hadden against the South Carolina Tax Commission. From a judgment for plaintiffs, defendant appeals.

Affirmed.

Order of Judge Stoll follows:

This action was brought by the plaintiff against the South Carolina Tax Commission to recover the sum of $714.88 income tax paid under protest. The facts were agreed upon and the case was tried before me without a jury.

The tax so paid and here sought to be recovered was levied under subsection 8, subdivision (e), of Act No. 406, approved on the 31st day of May, 1933 (38 St. at Large, p. 572). The admitted facts are as follows: The plaintiffs established their residence in South Carolina the latter part of 1933, or the early part of 1934. Prior to their taking up their residence in this state, they were residents of the state of New York. By will dated June 6, 1930, one Elizabeth S Hadden, a resident of New York, created a trust whereby the plaintiff Howard S. Hadden was to receive the income therefrom for the period of his natural life, with remainder to certain beneficiaries therein named. The City Bank Farmers Trust Company of New York and Howard S. Hadden are now the trustees of the trust so created.

By proper instrument dated January 22, 1931, Howard S. Hadden created a trust whereby he is to receive the income therefrom for the period of his natural life, with remainder to certain beneficiaries therein named. The Chemical Bank & Trust Company of New York is trustee of this fund. Both trusts are New York trusts and are governed by the laws of the state of New York, and the funds and investments thereof are held and managed by the trustees through their offices in the city of New York; neither have place of business in the state of South Carolina, nor are any of the trust funds invested in this state.

By their income tax return filed for the year 1935, the plaintiff showed the income received from the two trusts above mentioned as "income from fiduciaries," which income was subject to the normal income tax. Subsequently the defendant notified plaintiffs that so much of the income received from the fiduciaries as was derived by the fiduciaries from dividends and interest and paid them was subject to the surtax on intangibles as provided by the act above mentioned, and assessed plaintiffs the sum of $714.88 as surtax thereon, and upon demand being made for payment of the amount so assessed, such amount was paid under protest and thereafter this proceeding brought for the recovery thereof.

Plaintiffs contend that the income from the two trusts is income from fiduciaries only, and not income from dividends and interest and subject to surtax levied on dividends and interest under the act of 1933, and the sole question before the court is whether such income retains its character of dividends and interest in the hands of the beneficiaries and subject to surtax under said act.

By the terms of the act, the surtax is restricted to interest and dividends received by individuals. The act levying a general income tax act (section 2436, code 1932) defines the word "taxpayer" as meaning any individual, fiduciary, or corporation; the word "fiduciary" as meaning a guardian, trustee, executor, etc., and the word "person" as meaning and including individuals, fiduciaries, partnerships, and corporations. From this it is clear that the Legislature used the word "individual" in the act of 1933 advisedly, intending thereby to expressly eliminate from the terms thereof fiduciaries, partnerships, and corporations, and the Supreme Court in the case of Marshall v. South Carolina Tax Commission et al., 178 S.C. 57, 182 S.E. 96, held that fiduciaries, partnerships and corporations were not subject to the terms of such act, so unquestionably, the trustees, even though they were residents of South Carolina, would not be required to pay a surtax on the dividends and interest received from the trust funds invested by them.

Dividends have been defined as "a fund set apart out of the profits to be apportioned among the shareholders." 18 C.J. 1406. "A portion of the principal or profits divided among several owners of a thing." Bouviers' Law Dictionary, Rawle's Third Revision, page 898. The term "dividend" for the purpose of title 1, comprises any distribution in the ordinary course of business, even though extraordinary in amount, made by a domestic or foreign corporation to its shareholders out of its earnings or profits. Federal Revenue Act of 1934, § 115 (26 U.S.C.A. § 115).

Interest has been defined as "the compensation allowed by law or fixed by the parties for the use of money." 33 C.J. 178. "The compensation which is paid by the borrowers of money to the lender for its use, and generally by a debtor to his creditor in recompense for his detention of the debt." Bouviers' Law Dictionary, Rawle's Third Revision, page 1642. "The term 'interest' means any amount received for the use of the borrowed money." Federal Revenue Act 1934 (26 U.S.C.A.).

In their ordinary sense, and from the definitions above cited, dividends are paid to shareholders of a corporation; that is, to those owning the stock of such corporation, and interest is the compensation paid to a creditor for the use of his money, that is, to the owner of the principal; hence, dividends and interest can be received as income only by the legal owner of the stock on which the dividend is paid, and interest can be received only by the legal owner of the principal on which the interest is paid. The legal title to the securities and funds constituting the trusts in question, vests in the trustees, and the trustees alone may receive the dividends and interest paid on account of the investments thereof. The beneficiaries have no right to demand possession of the securities constituting the corpus of the estate; they cannot transfer or sell the same, nor can they vote as stockholders the stock held by the trustees. It cannot be said that two persons (used in the sense whereby it covers individuals, corporations, fiduciaries, etc.), can receive the same dividend or interest as income on the same investment. Only one person may receive the same as dividends and interest, and it necessarily follows that the holder of the legal title to the stock or investment on which the dividend or interest is paid, is the person who receives such as dividends or interest. The beneficiaries only receive income without other classification than "income from fiduciaries." I am satisfied the income received by them cannot fall under both classifications, and as the holders of the legal title to the trust investments are the only ones who can legally receive and collect the dividends and interest on such investments, I hold that the trustees receive dividends and interest, and the income paid by the trustees to the beneficiaries for the purpose of taxation, falls under the head of income from fiduciaries, and it is not "dividends" or "interest."

Having so found, may the act in question be extended so as to include within its terms so much of the income received by the plaintiffs from the trusts as came into the hands of the trustees as dividends and interest?

It is a well-established principle of law that tax statutes cannot be extended by implication beyond the clear import of the language used, and in case of doubt, such doubt must be resolved against the government, and in favor of the taxpayer.

"On behalf of the government it is urged that taxation is a practical matter and concerns itself with the substance of the thing upon which the tax is imposed rather than with legal forms or expressions. But in statutes levying taxes the literal meaning of the word employed is most important for such statutes are not to be extended by implication beyond the clear import of the language used. If the words are doubtful, the doubt must be resolved against the government and in favor of the taxpayer. Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct. 53, 62 L.Ed. 211." United States v. Merriam, 263 U.S. 179, 44 S.Ct. 69, 71, 68 L.Ed. 240, 29 A.L.R. 1547.

Mr Justice Sutherland, in delivering the opinion of the court in the last-mentioned case, quoted from an old case:

"I am not at all sure that in a case of this kind * * * form is not amply sufficient; because, as I understand the principle of all physical legislation, it is this: If the person sought to be taxed comes within the letter of the

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