Hale v. Iowa State Bd. of Assessment and Review

Decision Date19 January 1937
Docket Number43610.
Citation271 N.W. 168,223 Iowa 321
PartiesHALE et ux. v. IOWA STATE BOARD OF ASSESSMENT AND REVIEW.
CourtIowa Supreme Court

Appeal from District Court, Webster County; T. G. Garfield, Judge.

Suit in equity to annul an Iowa income tax assessment against the plaintiffs, the income consisting solely of interest received on tax exempt municipal securities. It is the claim of plaintiffs that the assessment is in reality upon the bonds themselves and therefore impairs the contractual immunity from taxation which inheres in the bonds and is violative of article I, section 10, of the Federal Constitution, and further that the Iowa Income Tax Act does not authorize assessing such interest as taxable income. By way of defense it is alleged and claimed by the appellee that the Iowa Income Tax Act (Code 1935, § 6943-f1 et seq.) is a general income tax law and includes all income not specifically exempted by the act itself, and that interest on tax-exempt municipal securities such as those owned by the plaintiff are not exempted by the provisions of the Income Tax Act, and therefore such interest, along with all other taxable income is subject to the tax, and that this is not a property tax but an excise tax and not a tax on the bonds themselves, and that the general tax exemption statutes have reference to direct property tax and not to an excise tax, and that therefore the Income Tax Act does authorize the imposition of said tax upon the interest received by the plaintiffs from the municipal securities owned by them, and that the tax is a valid exercise of the taxing power of the state and does not violate any constitutional provision, and the imposition of said tax does not impair any contractual immunity under the Constitution. The trial court denied the plaintiffs' petition and upheld the tax, and plaintiffs have appealed.

Affirmed.

Alan Loth, of Fort Dodge, and William L. Hassett, of Des Moines for appellants.

Clair E. Hamilton, Sp. Asst. Atty. Gen., for appellee.

HAMILTON, Justice.

The facts are not in dispute and briefly stated are as follows:

During the month of January, 1936, plaintiffs, who were husband and wife, filed with the Iowa State Board of Assessment and Review a joint income tax return, in which they reported that they were engaged in no business but were farm owners and investors. They reported interest from all sources, including exempt interest in the sum of $1,322.69. In the report they state that, in addition to the interest reported, they held bonds during 1935 and received interest therefrom as follows:

Principal Interest
State of Iowa, Soldiers Bonus bonds $ 1,000.00 $ 45.00
Iowa School District bonds 666,900.00 32,648.75
Road Bonds of Iowa Counties 82,000.00 4,072.50
County Bonds 3,000.00 127.50
Totals $752,900.00 $36,893.75

Under the heading of " Income from rents and royalties" they report a deficit of $5,031.16. From this they deduct the $1,322.69, leaving a deficit or loss in taxable income of $3,708.47. They also report deductions for interest, taxes contributions to charities, etc., of $3,120.50, or a net income deficit of $6,828.97. They decline to pay the tax on the $36,893.75 interest received from the municipal securities above listed, claiming that this interest was received on tax-exempt bonds, and that the Iowa Income Tax Act does not impose a tax on said items of interest, and that, if it did, it would as to the bonds issued prior to its passage be unconstitutional, and they accordingly refuse to pay any tax upon said items of interest. The Iowa State Board of Assessment and Review corrected said return by charging the plaintiffs with an additional income tax because of the interest received on said bonds, making the amount of the net income $30,064.78 (after allowing the deficit of $6,828.97 as disclosed by the plaintiff's tax report), tax upon which would be $1,403.24, less personal exemption and credit for dependents of $16, leaving a total tax imposed as corrected of $1,384.24, and under date of February 8, 1936, gave the plaintiffs notice of assessment in accordance with the statute. In due time the plaintiffs made application for abatement of said tax and appealed for revision of the tax to the board, setting up in said application the same specifications as are contained in their petition in this action. There was a hearing before the board, affirming the tax as corrected and overruling the application of the plaintiffs for a revision and abatement of the tax. In due time and in accordance with the statutory provisions plaintiff appealed from said order to the district court, and it is conceded that in all respects the statutory procedure has been complied with, both in imposing the tax and in raising the legal questions presented to this court.

Appellants emphasize very strongly in their argument that the interest received, being so received solely because of the incident of ownership of the bonds, could not be considered a gain or profit derived from any business or profession, and hence would not fall under the general classification of excise tax known and referred to as a tax on the privilege of transacting a business or occupation, and, since the income was received solely as an incident to ownership and because of their ownership of said bonds, the appellants go one step farther and insist that this assessment was made solely because of the ownership of said bonds and therefore is a tax upon the bonds themselves.

We do not think it can be truthfully said that these plaintiffs were engaged in no business, in the broadest sense of that term. They list themselves as farm owners and investors. Their business, therefore, must be held to be that of looking after their farming interest and investing their capital. The extent of their farm business is only revealed by the deficit in income from rents and royalties listed in their report as $5,031.16. This deficit no doubt is carried over from a separate farm income report, showing this deficit. Their ownership of other securities, in addition to the municipal bonds, interest from which they claim is not taxable, is only shown by the amount of interest from all sources in the sum of $1,322.69. The fact that they had most of their wealth invested in tax-exempt securities in no way detracts from their status as investors of capital. They might be carrying on an investment business of several million dollars and own nothing but tax-exempt securities and still contend that they had no business. Their capital investments in these tax-exempt securities amounted to three-quarters of a million dollars, and they realized a gain or profit by way of interest on their investment of $36,893.75, and, while they were not engaged in the business of farming in the sense that they operated the farm or farms owned by them, but in the sense that the farms represented a part of their investments of their capital, labor, service, and energy expended in an endeavor to make the farms pay or realize returns on such investment, they might well be said to be also engaged in the business of farming.

The case was ably presented by counsel representing the respective parties. The trial court took time to consider the facts and the law presented and rendered his decision in writing, which shows a careful analysis of the entire matter, and which we are incorporating at length in this opinion, and which reads as follows:

" The case presents the question whether income from tax exempt securities is subject to the state income tax.

Plaintiffs argue that the Income Tax Statutes do not authorize the tax sought to be enforced. It seems clear from a reading of the Income Tax law that it is the expressed intent of the Legislature that this income is taxable. Code, § 6943-f7, provides: ‘ The term " net income" means the gross income of the taxpayer less the deductions allowed by this division.’ The following section defines ‘ gross income’ as ‘ gains, profits and incomes derived * * * from interest, rent, dividends, securities, or * * * from any source whatever and in whatever form paid.’ Paragraph 2 of the same section (6943-f8) contains an enumeration of the items exempt from the operation of the income tax, among which is: ‘ d. Interest upon the obligations of the United States or its possessions, agencies, or instrumentalities, which is or shall be exempt from state taxation by federal law.’ The statutory definition of income is clearly broad enough to include the income in question. The statute having exempted several items from the effect of the tax (Including interest on obligations of the Federal government) it must be presumed that the legislature would have included interest from municipal bonds among the exemptions, if such had been its intent. As authority for this conclusion see, Willcuts v. Bunn, 282 U.S. 216, 51 S.Ct. 125, 75 L.Ed. 304, at page 306, 71 A.L.R. 1260, where the Supreme Court places an analogous interpretation on the Federal Act. And, also in point on this question is Appeal of Van Dyke, 217 Wis. 528, 259 N.W. 700, at page 704, 98 A.L.R. 1332.

Does the operation of the tax on the income derived from the bonds involved in this case result in the impairment of any contractual obligation in violation of the State or Federal Constitutions?

The conclusion above reached on the question of construction of the Income Tax Statutes leads to the result that as to the bonds issued after the Income Tax law went into effect (of the face value of $27,000) the interest therefrom is subject to the tax imposed by the defendant.

All of the securities here involved, other than the $27,000 above referred to, were issued before the effective date of the...

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