Hale v. Iowa State Board of Assessment and Review

CourtUnited States Supreme Court
Citation58 S.Ct. 102,302 U.S. 95,82 L.Ed. 72
Docket NumberNo. 16,16
Decision Date08 November 1937

Messrs. Alan Loth, of Fort Dodge, Iowa, William L. Hassett, of Des Moines, Iowa, and Denis M. Kelleher, of Fort Dodge, Iowa, for appellants.

[Argument of Counsel from pages 96-97 intentionally omitted] Messrs. Clair E. Hamilton, of Winterset, Iowa, and Leon W. Powers, of Denison, Iowa, for appellee.

[Argument of Counsel from Page 98 intentionally omitted] Mr. Justice CARDOZO delivered the opinion of the Court.

The question is whether interest upon bonds of the state of Iowa or its political subdivisions may be included in the assessment of a tax on the net income of the owners without detracting from earlier exemptions in respect of taxes upon property and without an unconstitutional impairment of the obligation of contract.

Appellants, residents of Iowa, were the owners in 1934 and afterwards of Iowa School District bonds, Iowa Road bonds, Iowa County bonds, and an Iowa Soldiers' Bonus bond, of the face value, aside from interest, of $752,900. The statutes of the state in force when the bonds were issued and when the appellants acquired ownership provide in varying but equivalent terms that such bonds 'are not to be taxed,'1 'shall not be taxed,'2 or 'shall be exempt from taxation.'3 Iowa was without an income tax when these exemptions were declared. A 'Personal Net Income Tax' upon persons resident within the state was imposed for the first time by a statute enacted in 1934. Code 1935, § 6943-f4 et seq. In the assessment of that tax for 1935 interest on appellants' bonds in the sum of $36,893.75 was included by the State Board of Assessment and Review against appellants' protest that the law, if so applied, impaired the obligation of contracts of exemption. Constitution of the United States, art. 1, § 10. By appropriate proceedings the controversy was brought to the Supreme Court of Iowa, where the assessment was upheld. 271 N.W. 168. The court assumed, without deciding, that the statutes of exemption should be treated as giving rise to contracts, and not merely as declarations of a legislative policy subject to revocation at the legislative pleasure. Proceeding on that assumption, the court interpreted the contracts as limited to taxes laid directly upon property in proportion to its value, and not as touching taxes in the nature of an excise upon the net income of an owner. This conclusion was supported by an analysis of the Iowa statutes and a review of Iowa decisions as well as the decisions of this and other courts. The case is here upon appeal. 28 U.S.C. § 344 (28 U.S.C.A. § 344).

We make the same assumption that was made in the state court as to the existence of a contract, without indicating thereby how we would rule upon the point if a ruling were essential. Cf. People of State of New York ex rel. Clyde v. Gilchrist, 262 U.S. 94, 98, 43 S.Ct. 501, 502, 67 L.Ed. 883; Pacific Co. v. Johnson, 285 U.S. 480, 489, 52 S.Ct. 424, 425, 76 L.Ed. 893; Wisconsin & Michigan Ry. Co. v. Powers, 191 U.S. 379, 386, 24 S.Ct. 107, 48 L.Ed. 229; Dodge v. Board of Education of Chicago, 302 U.S. 74, 58 S.Ct. 98, 82 L.Ed. 57. Essential it is not for the decision of this case if the con- tract to be assumed is limited in scope and operation as it was limited below. Whether the limitation should be accepted is thus the pivotal inquiry. The power is ours, when the impairment of an obligation is urged against a law, to determine for ourselves the effect and meaning of the contract as well as its existence. United States Mortgage Co. v. Matthews, 293 U.S. 232, 236, 55 S.Ct. 168, 170, 79 L.Ed. 299; Funkhouser v. Preston Co., 290 U.S. 163, 167, 54 S.Ct. 134, 135, 78 L.Ed. 243. Even so, we lean toward agreement with the courts of the state, and accept their judgment as to such matters unless manifestly wrong. Phelps v. Board of Education, 300 U.S. 319, 322, 323, 57 S.Ct. 483, 484, 485, 81 L.Ed. 674; Violet Trapping Co. v. Grace, 297 U.S. 119, 120, 56 S.Ct. 386, 80 L.Ed. 518; Tampa Waterworks Co. v. Tampa, 199 U.S. 241, 243, 244, 26 S.Ct. 23, 50 L.Ed. 170; Dodge v. Board of Education of Chicago, supra. For reasons to be developed, obvious error is not discernible in the ruling of the highest court of Iowa that the statutory exemptions invoked by the appellants were not intended to include taxes upon the net income derived from business or investments. To the contrary, the decision has support in the statutory system of taxation viewed in its entirety, in state decisions both in the courts of Iowa and elsewhere before the bonds were bought and afterwards, and even indeed in decisions of this court. Our search is for something more than the meaning of a property tax or an excise in the thought of skilled economists or masters of finance. It is for the meaning that at a particular time and place and in the setting of a particular statute might reasonably have acceptance by men of common understanding.

1. The limitation affixed to the contracts of exemption has support, first of all, in the statutory system of taxation considered as a whole.

Of the total interest ($36,893.75) collected on appellants' bonds, the greater portion ($32,776.25) is protected, if at all, by reason of the exemption given to bonds issued by any school district or county within the state. That exemption may best be studied as it stood in the Supple- mental Supplement to 1915 Code.4 It was then subdivision 1 of section 1304. There were other subdivisions exempting other items the grounds and buildings for public libraries; household furniture up to a prescribed value; the farming utensils of any person who makes his livelihood by farming; and many other kinds of property. The section opens with the statement that 'the following classes of property are not to be taxed,' and then enumerates the classes. But the scope of the exemption is likely to be exaggerated unless the next preceding section (1303) is read at the same time. 'The board of supervisors of each county shall, annually, at its September session, levy the following taxes upon the assessed value of the taxable property in the county,' a mandate clearly addressed to the levy of ad valorem taxes only. The inference is a fair one that section 1304 did not exempt the items there enumerated from taxation of every form and for every purpose. It withdrew them from the operation of the levy commanded by the section next preceding.5 True, in later compilations of the statutes, the sections have been rearranged, though with substance unaffected. Cf. Code 1935, § 6953. In the Code of 1935, subdivision 1 of section 1304 is subdivision 5 of section 6944; section 1303 is section 7171. There can be little doubt that the meaning remains what it was before. United States v. Ryder, 110 U.S. 729, 740, 4 S.Ct. 196, 28 L.Ed. 308; United States v. Sischo, 262 U.S. 165, 168, 169, 43 S.Ct. 511, 512, 67 L.Ed. 925; Warner v. Goltra, 293 U.S. 155, 161, 55 S.Ct. 46, 49, 79 L.Ed. 254; Davis v. Davis, 75 N.Y. 221 225, 226; Fifth Avenue Bldg. Co. v. Kernochan, 221 N.Y. 370, 375, 117 N.E. 579; Mitchell v. Simpson, L.R. 25 Q.B.D. 183, 189.

Besides the school and county bonds, appellants were the owners of a Soldiers' Bonus bond in the sum of $1,000, and Road bonds or certificates to the amount of $82,000. The exemption of the Bonus bond was declared by the statute authorizing the issue. Acts 39th G.A. c. 332, § 10, adopted March 23, 1921. The exemption is now subdivision 22 of section 6944 3f the Code of 1935, and should be given the same meaning as the exemption conferred by the other subdivisions. The Road bonds or certificates have their exemption under a different statute (section 4753-a13, Codes of 1931 and 1935), but the bonds are expressly declared to be obligations of the county (section 4753-a14), and, as the court below observed, there is no reason to suppose that the exemption given them was broader than that of county obligations generally.

2. The meaning of the Iowa statutes is clarified, if otherwise uncertain, by the opinions of the Iowa court in this and other cases.

The court in its opinion in this case applied the general principle that contracts of tax exemption must receive a strict construction. The teaching of this court has been always to the same effect. 'Grants of immunity from taxation, in derogation of a sovereign power of the state, are strictly construed.' Pacific Co. v. Johnson, 285 U.S. 480, 491, 52 S.Ct. 424, 426, 76 L.Ed. 893, citing many cases. Adhering to that principle, the Iowa court held that the tax exemption was limited to taxes upon property, and could not be extended to taxes in the nature of an excise. For this restriction it found support in its own earlier decisions, rendered many years before appellants' bonds were purchased. Thus, Sioux City v. Independent School District, 55 Iowa 150, 7 N.W. 488, decided in 1880, and Edwards & Walsh Construction Co. v. Jasper County, 117 Iowa 365, 90 N.W. 1006, 1011, 94 Am.St.Rep. 301, de- cided in 1902, held the exemption inapplicable to special assessments, limiting it at the same time 'to the taxes contemplated in title 6 of the Code.'6 So also Insurance Ass'n v. Gilbertson, 129 Iowa 658, 106 N.W. 153, decided in 1906, interpreting a different subdivision of the exemption statute, but a cognate one, again limited the exemption to taxes upon property, and refused to apply it to an excise or license tax measured by receipts. The ruling was reiterated in State v. City of Des Moines, 221 Iowa 642, 266 N.W. 41, decided in 1936, upon facts not greatly different. Cf. Plummer v. Coler, 178 U.S. 115, 20 S.Ct. 829, 44 L.Ed. 998. From these precedents the Iowa court advanced to the holding, announced in the case at bar, that a tax upon net income was substantially an excise, and hence did not come within the scope of an exemption confined to taxes upon property. The result was conceived to be...

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