James C. Colgate v. Erwin M. Harvey

• Decision Date: 14 November 1934
• Parties: JAMES C. COLGATE v. ERWIN M. HARVEY
• Court: Vermont Supreme Court

175 A. 352

107 Vt. 28

JAMES C. COLGATE v. ERWIN M. HARVEY

Supreme Court of Vermont

November 14, 1934

May Term, 1934.

Constitutional Law---Taxation---Application of Requirement that Taxing Statute Must Be Uniform and Equal---What Constitutes Taxation in Violation of Fourteenth Amendment to Federal Constitution---Discretion of Legislature in Mat- ters of Exemptions and Deductions from Taxation---Classification of Persons or Property for Purposes of Taxation---Power of Legislature with Respect to Classifications for Taxation---Classification Based Solely on Residence as Unconstitutional---Sufficiency of Classification Reasonably Founded in Purposes and Policy of Taxation---Sufficiency of Classification Which Does Not Preclude Assumption That It Was Made in Exercise of Legislative Judgment and Discretion---Fourteenth Amendment as Not Preventing Exercise of Legislative Discretion in Taxation Though Involving Certain Discriminations---Exemptions and Diversity of Taxation as to Amount Imposed and Species of Property Selected as Not Inconsistent with Uniformity and Equality---Constitutionality of State Income and Franchise Tax Law---Income Tax Law Resulting in Double Taxation as Not Invalid---Power of Legislature to Prevent Double Taxation---Business Done by Nonresident Taxpayer Outside State in Determining Basis of Income Tax---Exemption of Money Loaned in State at Five Per Cent. as Not Affecting Constitutionality of Income Tax Law---Constitutionality of Provision Not Allowing Personal Exemption as to Income from Intangible Property if Income Also Received from Any Other Source---Construction of Exemption from "Net Income" as Defined in Income Tax Law.

1. Requirement that taxing statute and taxes raised thereunder must be uniform and equal affects both persons and things.

2. Such requirement is met when law in question imposes no greater burden on one person or species of property than on another similarly situated or of like character.

3. Tax law is not in conflict with Fourteenth Amendment to federal Constitution unless it proposes, or clearly results in, such flagrant and palpable inequality between burden imposed and benefit received as to amount to arbitrary taking of property without compensation.

4. Legislature is vested with widest latitude of discretion in matters of exemptions and deductions from taxation, and it is only in very exceptional cases that courts can interfere.

5. Requirement that any scheme of taxation must be uniform and equal does not forbid classification of persons or property for purposes of taxation.

6. Power of Legislature with respect to classification of persons or property for purpose of taxation is very broad and is limited only by requirements that classification must be based upon rational ground and that members of several classes shall be treated alike.

7. Classification for taxing purposes based solely upon residence would be unlawful, since state cannot discriminate against nonresident simply because he is nonresident.

8. Basis of classification for taxation purposes need not be deducible from nature of things classified, but it is enough if classification is reasonably founded in purposes and policy of taxation.

9. Basis of tax classification is not open to objection unless it precludes assumption that classification was made in exercise of legislative judgment and discretion.

10. Fourteenth Amendment to federal Constitution does not preclude exercise of wide legislative discretion in passing tax laws which, though involving reasonable discriminations and material qualifications, are deemed necessary for encouragement of needful and useful industries, and development of its material and economic interests.

11. Exemptions, diversity of taxation, both as to amount imposed and species of property selected, are not inconsistent with uniformity and equality in legal sense of those terms.

12. Income and franchise tax law of Vermont, in taxing income which was very largely from dividends on foreign corporations doing little or no business in State, held not unconstitutional as violating provisions of federal Constitution that citizens of each state shall be entitled to all privileges and immunities of citizens in several states and that no state shall deprive any person of life, liberty or property without due process of law or deny to any person within its jurisdiction, equal protection of laws or as violating Articles I and VII of State Bill of Rights providing for equality of individuals before law.

13. Such income and franchise tax law held not to unlawfully interfere with interstate commerce, since it is not tax against foreign corporation or upon its property, but against individual and his property, and imposes no restrictions upon transportation into State of products of foreign corporation or upon their sale here.

14. Such income and franchise tax law held not to unduly prejudice resident taxpayer, by exemption of dividends of corporations subject to franchise tax or in method of arriving at basis of franchise tax, although his income was largely from dividends on foreign corporations doing little or no business in State, since, throughout act, foreign and domestic corporations are treated alike.

15. Income tax laws are not rendered invalid because resulting in double taxation, but there is no constitutional requirement that such taxes shall be levied without regard to multiple taxation, and Legislature is not precluded from avoiding such result if it can do so without transgressing limits of valid classification.

16. In determining basis of income taxes, even in case of nonresident taxpayer, amount of business done outside State may be used as measure.

17. Income tax law held not unconstitutional by reason of exemption therefrom of money loaned in State at rate not in excess of five per cent., since State may, in interests of thrift and State development, make such reasonable exemption.

18. Legislature having wide discretion in matter of exemptions from taxation and power to make reasonable classifications of income from different sources, provision that married man living with his wife would be entitled to deduction from taxation of income from intangibles to amount of $800, if all income was derived solely from that source, but that no exemption whatever would be allowed on income from intangibles if he received income from any other source in addition thereto, held not subject to constitutional objection that it arbitrarily and unreasonably discriminated against him and others in like circumstances.

19. Where income tax law divided taxable income into two classes, one being business income, and the other intangible income, and act provided for personal exemption of $2,000 from "net income," which latter term was used only with reference to business income, and was defined as gross income from items thereof, less deductions allowed by act, held that, where deductions to which resident taxpayer was entitled from gross income left no "net income," he was not entitled to personal exemption of $2,000, though he had intangible income, and that such fact did not establish unconstitutionality of act.

PETITION to county court, under section 27, Part I, of No. 17 of the Acts of 1931, seeking review by county court of rulings of tax commissioner fixing amount of petitioner's income tax for the year 1931. Trial by court, on agreed statement of facts, after the March Term, 1933, Washington County, Bicknell, J., presiding. Judgment for the defendant. The plaintiff excepted. The opinion states the case. Affirmed.

Judgment affirmed.

Theriault & Hunt (E. J. Dimock of New York City, of counsel) for the plaintiff.

The jurisdiction which a state acquires to impose income or capital taxes upon shares of stock or debts owned by citizens of the United States by reason of the residence of the owner within the taxing state is subject to the constitutional right of citizens of the United States to acquire and hold shares of stock and debts and to receive the income therefrom, without discrimination through prohibition or differential taxation by the state in which he resides. A prohibition or a tax classification based upon territorial boundaries of taxing state is unconstitutional. A state cannot discriminate against citizens of other states by making the principal place of business within the state the determining factor in fixing the amount of tax for exercising privileges within the state. Federal Constitution, Article IV, section 2; Fourteenth Amendment to Federal Constitution; Chalker v. Birmingham & N.W. Ry. Co., 249 U.S. 522, 527, 64 L.Ed. 748, 751; F. S. Royster Co. v. Virginia, 253 U.S. 412, 416, 64 L.Ed. 989, 991.

The discrimination in the Income Tax Law, based upon a classification as between income on money loaned on securities bearing interest at a rate not exceeding 5 per cent. and at a rate exceeding 5 per cent., is clearly unwarranted. Louisville Gas & Elec. Co. v. Coleman, 277 U.S. 32, 37, 72 L.Ed. 770, 773, 774.

The tax on income from dividends or corporations not doing business in the State, as to business done outside the State, is tantamount to a tax on securities not taxable in the State because they have their business situs outside the State and thus come under the principle governing the taxation of said securities as tangible personalty having its situs outside the State.

In so far as tangible personalty is concerned, a tax measured by the use or value of the use of such property in activities outside the State is invalid. Louisville, etc., Ferry Co v. Kentucky, 188 U.S. 385, 397, 47 L.Ed. 513, 518; Delaware, etc., R. R. Co. v. Pennsylvania, 198 U.S. 341, 358, 49 L.Ed. 1077, 1084; Union Refrig. Transit Co. v. Kentucky, 199 U.S. 194, 211, 50...