Indiana Dept. of State Revenue, Ind. Revenue Bd., Ind. Gross Income Tax Division v. Colpaert Realty Corp.

• Decision Date: 16 December 1952
• Docket Number: No. 28852,28852
• Citation: 231 Ind. 463,109 N.E.2d 415
• Court: Indiana Supreme Court
• Parties: INDIANA DEPT. OF STATE REVENUE, INDIANA REVENUE BOARD, INDIANA GROSS INCOME TAX DIVISION v. COLPAERT REALTY CORP. et al.

Page 415

109 N.E.2d 415

231 Ind. 463

INDIANA DEPT. OF STATE REVENUE, INDIANA REVENUE BOARD, INDIANA GROSS INCOME TAX DIVISION v. COLPAERT REALTY CORP. et al.

No. 28852.

Supreme Court of Indiana.

Dec. 16, 1952.

J. Emmett McManamon, Atty. Gen., John J. McShane, Lloyd C. Hutchinson, Joseph E. Nowak and Robert F. Wallace, Deputy Atty. Gen., for appellant.

Jones, Obenchain & Butler, South Bend, for appellees.

DRAPER, Judge.

The appellees are Indiana corporations having their offices in the same building in South Bend, Indiana. They are affiliates, but each keeps separate books and records. They are engaged in the business of buying real estate and subdividing, improving, leasing, mortgaging and selling the same.

The transactions in which they were engaged, and which are involved in this case, fall into three categories which have been designated as B, C, and D. Class B transactions are those in which one of the appellees would erect a home on an unencumbered lot owned by it, and would then execute a note payable to a mortgage loan company in monthly installments secured by a mortgage on the real estate. It would then convey said real estate to a purchaser by warranty deed, in which it was recited that the purchaser assumed and agreed to pay said mortgage. Immediately thereafter the appellee, the purchaser and the mortgagee would execute an 'Agreement for Substitution of Liability' whereby the purchaser agreed to pay said mortgage note and to be bound by all of the terms and provisions of the mortgage, and the mortgagee agreed to look to the purchaser for payment of the mortgage, and released the appellee from all personal liability for the payment thereof.

Class C transactions are those in which the purchaser by the terms of the warranty deed would assume and agree to pay the mortgage, but in which no agreement for substitution of liability was executed. In this class the mortgages were not paid or released during the year in which the property was deeded to the purchaser.

Class D transactions are like Class C transactions except that in this class the mortgages, which the purchaser assumed and agreed to pay, were paid and released during the year in which the property was deeded to the purchaser.

The tax years involved are 1946, 1947 and 1948. No transactions in which the properties were deeded prior to April 27, 1946, are involved in this case.

The trial court held that the amounts represented by these transactions, over and above the initial payments actually made by the purchaser to the appellee (taxes upon which had already been paid) are not subject to gross income tax. We are asked to review that decision. The appellants will be hereafter referred to as the 'department.'

The department contends, with respect to Class B, that appellee constructively received the various amounts represented by said agreements of substitution, in that said agreements were equivalent to the payment of the debt of the appellee by a third party for its direct benefit, as covered by and provided for in the definition of the term 'receipt' and 'received,' all as found in Sec. 1(h) and (i) of the Indiana Gross Income Tax Act of 1933, as amended.

With respect to categories C and D it is the department's position, as we understand it, that the appellee constructively received income under the Act when the purchaser assumed and agreed to pay the mortgage which had been executed by the appellee, or in any event constructively received income when the payments called for by the mortgage note were actually paid to the mortgage loan company by the purchaser of the real estate.

Subdivisions (h), (i) and (m) of the Acts of 1947, ch. 370, § 1, being Burns Stat., § 64-2601, provide in part as follows:

'(h) Except as hereinafter otherwise expressly provided, the term 'receipts,' as applied to a taxpayer, shall mean the gross income in cash, notes, credits and/or other property which is received by the taxpayer or is received by a third person for his benfit.

'(i) Except as hereinafter expressly provided, the terms 'receive' or 'received,' or other forms thereof, as applied to a taxpayer, shall mean the actual coming into possession of, or the crediting to, the taxpayer of gross income as hereinafter defined, or the payment of his expenses, debts, or other obligations by a third party for his direct benefit.

* * *

* * *

'(m) The term 'gross income,' except as hereinafter otherwise expressly provided, means the gross receipts of the taxpayer received as compensation for personal services, including but not in limitation thereof, * * * the gross receipts received from the sale, transfer, or exchange, of property, tangible or intangible, real or personal, including the sale of capital assets, * * * and all other receipts of any kind or character received from any source whatsoever, and without any deductions on account of the return of capital invested, the cost of the property sold, the cost of materials used, labor cost, interest, discount, or commissions paid or credited, or any other expense whatsoever paid or credited and without any deductions on account of losses, and without any other deductions of any kind or character * * *'.

It must be borne in mind, in determining whether taxable gross income resulted from the transactions under consideration, that to constitute gross income the transactions must come clearly within statutory provisions defining such income. In case of doubt the statute will be construed against the state and in favor of the taxpayer. Walgreen Co. v. Gross Income Tax Div., 1947, 225 Ind. 418, 75 N.E.2d 784, 1 A.L.R.2d 1014; Oster v. Department of Treasury, 1941, 219 Ind. 313, 37 N.E.2d 528; Department of Treasury v. Muessel, 1941, 218 Ind. 250, 32 N.E.2d 596. As said in the case last cited, and reiterated in Dept. of Treasury v. International Harvester Co., 1943, 221 Ind. 416, 47 N.E.2d 150, 152;

'Unless the transaction comes clearly within one of the provisions of this definition it cannot be taxed as gross income. It is a settled rule of statutory construction that statutes levying taxes are not to be extended by implications beyond the clear import of the language used, in order to enlarge their operation, so as to embrace transactions not specifically pointed out. In case of doubt such statutes are to be construed more strongly against the state and in favor of the citizen.'

As affecting all categories, the appellee takes the position that the word 'property' as used in subsection (m) of § 1 of the Act refers not to lands and chattels, but to rights or interests therein, including the separate 'actual interests' or 'substantial interests' of mortgagors and mortgagees, and only the proceeds of the sale of such separate 'interests' are taxable to the seller.

In Indiana a mortgage is a lien--a mere security for the debt. The mortgagee has no title to the land mortgaged, Oldham v. Noble, 1946, 117 Ind.App. 68, 66 N.E.2d 614, although for some purposes, such as eminent domain, the mortgage may be considered to confer upon the mortgagee an interest in the land itself. Sherwood, Administrator, v. City of Lafayette, 1887, 109 Ind. 411, 10 N.E. 89, 58 Am.Rep. 414. There are other situations, not relevant here, in which mortgagees have been considered as having some interest in real estate under particular statutes or for certain purposes. And it is true that the legislature may provide that, for purposes of taxation, the amount of a mortgage indebtedness or a part of it may be deducted from the assessed valuation of the mortgaged premises. Burns Stat., § 64-209. State ex rel. v. Smith, 1902, 158 Ind. 543, 63 N.E. 25, 63 N.E. 214, 64 N.E. 18, 63 L.R.A. 116; Savings & Loan Society v. Multnomah County, 1898, 169 U.S. 421, 18 S.Ct. 392, 42 L.Ed. 803. It expressly did so in § 64-209, supra.

But it established no such exemption here. The statute under consideration defines gross income as 'the gross receipts received from the sale * * * of property, tangible or intangible, real or personal * * *.' We can find nothing in the Act which indicates to us that the word 'property' is therein used only in the sense of the taxpayer's interest or rights in and connected with the thing sold, rather than the thing itself. Ralph L. Shirmeyer, Inc. v. Indiana Revenue Board, 1951, 229 Ind. 586, 99 N.E.2d 847, held, in effect, to the contrary.

We first consider category B, in which category the novation agreements were made. In these cases, by agreement of the parties, the purchaser of the real estate was substituted as the mortgage debtor in place of the appellee. The purchaser became the sole debtor, the appellee being released and discharged of any obligation to pay. A tax liability against the appellee could arise out of this transaction only if the transaction itself constituted the 'payment' of the appellee's debt or other obligation by a third party for appellee's direct benefit.

In construing statutes, words and phrases will be taken in their plain or ordinary and usual sense unless a different purpose is clearly manifest by the statute itself, but technical words and phrases having a peculiar and appropriate meaning in law shall be understood according to their technical import. Burns Stat., § 1-201; Ralph L. Shirmeyer, Inc. v. Ind. Revenue Bd., supra.

The statute provides that the payment by a third party of the taxpayer's debts or other obligations for his direct benefit qualifies as the constructive receipt of gross income. The word 'payment' is not a technical term. It is in reality largely a question of intention between the debtor and creditor. Penn. Mut. Life Ins. Co. v. Norcross, 1904, 163 Ind. 379, 72 N.E. 132. "Payment' is not a word of technical legal meaning. It is well understood by the layman and, indeed, was brought into law proceedings from commercial life and not from the law treatises. It has been defined as the discharge of an obligation by the delivery and acceptance of money, or...