Indiana Dept. of State Revenue Gross Income Tax Division v. Nebeker

• Decision Date: 15 December 1953
• Docket Number: No. 29004,29004
• Citation: 116 N.E.2d 104,233 Ind. 58
• Parties: INDIANA DEPARTMENT OF STATE REVENUE, GROSS INCOME TAX DIVISION v. NEBEKER.
• Court: Indiana Supreme Court

Page 104

116 N.E.2d 104

233 Ind. 58

INDIANA DEPARTMENT OF STATE REVENUE, GROSS INCOME TAX DIVISION v. NEBEKER.

No. 29004.

Supreme Court of Indiana.

Dec. 15, 1953.

J. Emmett McManamon, Atty. Gen., Edwin K. Steers, Atty. Gen., John J. McShane, Lloyd C. Hutchinson, Earl E. Schmadel, George B. Hall, John D. Reed, Deputies Atty. Gen., for appellant.

Raymond O. Evans, Crawfordsville, for appellee.

FLANAGAN, Judge.

In the case of Freeman v. Hewit, 1947, 329 U.S. 249, 67 S.Ct. 274, 91 L.Ed. 265, the Supreme Court of the United States decided that an Indiana citizen who bought stock on the New York Stock Exchange was engaged in interstate commerce, and therefore was not subject to tax on those transactions under the Gross Income Tax Law of the State of Indiana. In that case the Indiana citizen actually bought and paid for the stock.

The question here presented is whether that decision governs buying on margin.

The factual difference, as we understand it, is that when stock is bought on margin the broker advances a percentage of the purchase price, holds a lien on the stock for his advancement, and does not permit the stock certificate to be put in the name of the customer unless the customer pays in full, which rarely happens.

This factual difference merely relates to the method of financing.

However, the State of Indiana contends that transactions of this kind are only matters of bookkeeping; that, since the stock certificates themselves do not cross state lines, no question of interstate commerce is involved.

We cannot agree. Importance cannot attach to whether a piece of paper goes over state boundaries. Importance must attach to whether the transaction itself was a part of interstate commerce.

As the Supreme Court of the United States pointed out in the case of Freeman v. Hewit, supra, the vital question in each case is whether the sale itself was in the field of interstate commerce. The evidence of the transaction may float around the world or stay safely buried in a gilded vault on Wall Street. It seems to us to make no decisive difference.

The trial court held that the facts in this case bring it within the rule laid down in the Freeman case. We think the trial court was correct.

Judgment affirmed.

EMMERT, Judge (dissenting).

The net effect of the majority opinion is a decision that a net income tax assessed against a resident of Indiana upon his capital gains realized from sales of common stock on the New York Stock Exchange, when the certificates remained in New York, violates the Commerce Clause of the Federal Constitution. This contravenes the ruling precedents of the Supreme Court of the United States, which are binding on this court, on the right of the states to impose taxes which are not in violation of the Commerce Clause.

The appellee, hereafter referred to as the taxpayer, was a resident of and domiciled in Indiana and in the years 1944, 1945 and 1946, through two brokerage firms who has branch offices in Indiana, bought and sold corporate stocks on the New York Stock Exchange. The stocks here involved were bought and sold on a margin account, the certificates being taken in a street name, and held by the brokers in New York as agents for the plaintiff. The certificates were pledged to the brokers as security for any indebtedness that might be owing from the taxpayer to his brokers under the stipulation made in the trial court by the appellant, hereinafter referred to as Indiana, and the taxpayer, the difference between the sale price, and the purchase price paid by the taxpayer at the time of acquisition, resulted in a gain in each transaction in the total sums as follows:

                        Number   Shares
                Years  of Sales   Sold     Gains
                -----  --------  ------  ----------
                1944      32     3,310   $ 8,839.74
                1945      31     3,200    14,699.82
                1946      13     1,250     7,425.44
                

No losses sustained by the taxpayer from the sale of any corporate stock were deducted from these gains. The taxpayer allocated his $1,000 deduction under § 64-2605(b), Burns' 1951 Replacement, to other transactions, and asserted in the trial court he was entitled to a refund for taxes paid as follows:

                1944   claimed refund  $ 88.39
                1945   claimed refund  $146.99
                1946   claimed refund  $ 76.63
                Total  claimed refund  $311.51
                

We are not concerned in this appeal with the validity of Regulation 1005 since the taxpayer paid the taxes in dispute under the assumption that it applied to him, and Indiana asserts that this regulation furnishes the basis for computing the taxes owed for the respective years.

We should not let the decision in this case be influenced by the name given the Act by the General Assembly. ¹

'In passing on the constitutionality of a tax law 'we are concerned only with its practical operation, not its definition or the precise form of descriptive words which may be applied to it.' Lawrence v. State Tax Comm., 286 U.S. 276, 280, 52 S.Ct. 556, 557, 76 L.Ed. 1102; Southern Pacific Co. v. Gallagher, 306 U.S. 167, 177, 59 S.Ct. 389, 393, 83 L.Ed. 586; State of Wisconsin v. J. C. Penney Co., 311 U.S. 435, 61 S.Ct. 246, 250, 85 L.Ed. 267.' Nelson v. Sears, Roebuck & Co., 1941, 312 U.S. 359, 363, 61 S.Ct. 586, 588, 85 L.Ed. 888, 132 A.L.R. 475. ²

In considering the validity of the various provisions of the Indiana Act, the Supreme Court of the United States has held that the provisions then before it substantially imposed a tax on gross receipts, and was therefore analogous to a sales tax. J. D. Adams Mfg. Co. v. Storen, 1938, 304 U.S. 307, 311, 58 S.Ct. 913, 82 L.Ed. 1365, 117 A.L.R. 429; International Harvester Co. v. Department of Treasury, 1944, 322 U.S. 340, 64 S.Ct. 1019, 88 L.Ed. 1313; Freeman v. Hewit, 1946, 329 U.S. 249, 67 S.Ct. 274, 91 L.Ed. 265.

However, under the law and the facts in this appeal the tax asserted by Indiana is not a gross receipts tax under any possible definition of the term. It is a tax upon the capital gain in each transaction, with no deduction permitted for transactions in which the taxpayer may have sustained a capital loss by sale of corporate stock at less than the purchase price. Therefore the decisions in J. D. Adams Mfg. Co. v. Storen, 1938, 304 U.S. 307, 311, 58 S.Ct. 913, 82 L.Ed. 1365, 117 A.L.R. 429, supra, and Freeman v. Hewit, 1946, 329 U.S. 249, 67 S.Ct. 274, 91 L.Ed. 265, supra, established no basis for holding...