Jensen v. Henneford

• Decision Date: 14 January 1936
• Docket Number: 25855.,25854
• Citation: 53 P.2d 607,185 Wash. 209
• Parties: JENSEN et al. v. HENNEFORD et al. BRONSON v. HENNEFORD et al. (NELSON, Intervener.
• Court: Washington Supreme Court

53 P.2d 607

185 Wash. 209

JENSEN et al. v. HENNEFORD et al.

BRONSON v. HENNEFORD et al. (NELSON, Intervener.

Nos. 25854, 25855.

Supreme Court of Washington, En Banc.

January 14, 1936

Appeal from Superior Court, Thurston County; John M. Wilson, Judge.

Action by George A. Jensen and others against H. H. Henneford and others, as the State Tax Commission, and action by Philip Bronson against H. H. Hennefordand others, as the State Tax Commission, wherein E. Loyd Nelson intervened. Decree for plaintiffs in each case, and defendants appeal.

Affirmed.

(Ed Note.--For other definitions of 'Excise,' 'Property' and 'Property Tax,' see Words &amp Phrases.)

G. W Hamilton and R. G. Sharpe, both of Olympia, for appellants.

Tanner & Garvin, of Seattle, for respondents Jensen and others.

Green & Burnett, or Seattle, for respondent Bronson.

Allen, Froude & Hilen, of Seattle, for intervener respondent.

STEINERT Justice.

These two actions were brought in the superior court of Thurston county to test the constitutionality of the Personal Net Income Tax Act of 1935. The two cases were argued, heard, and disposed of by the court at the same time. The defendants demurred to each of the complaints, and, upon the overruling of their demurrers, declined to plead further. The court thereupon entered a decree in each case, declaring the act unconstitutional and enjoining the tax commission from enforcing, or attempting to enforce, it. The defendants appealed in both cases. In this court the two appeals were likewise heard at the same time. Inasmuch as the complaints, taken together, illustrate the effect of the act upon different individuals, dissimilarly situated, we deem it advisable to treat the whole matter in one opinion as applicable to both cases.

The Legislature at its 1935 session enacted chapter 178, Laws 1935, pp. 660-704, Rem. 1935 Supp. § 11200-1 et seq., relating to personal net income tax. The act comprises 72 sections. We shall refer only to those sections which are material to these cases.

Section 1 (page 660) defines various terms used in the act. The term 'resident' is declared to apply only to individuals and, for the purpose of determining liability for the tax imposed thereby, to include any individual domiciled in the state of Washington and any other individual who maintains a permanent place of abode within the state or spends in the aggregate more than six months of the income year therein.

Section 2 (page 661), which is the heart of the act, provides:

'There shall be levied, collected and paid to the state for each income year by every resident of the State of Washington for the privilege of receiving income therein while enjoying the protections of its laws----

'(a) A normal tax with respect to his income at the rate of three per cent of the amount of the net income in excess of the credits against net income as provided in sections 9 and 10;

'(b) A surtax with respect to his income at the rate of four per cent of all surtax net income in excess of $4,000.' (Italics ours.)

Section 3 (page 662) defines 'surtax net income' as the amount of the net income in excess of the credits against net income provided in section 10.

Section 5 (page 662) defines 'net income' as the gross income computed under section 6, less the deductions allowed by section 7.

Under section 6 (page 662), 'gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal services of whatever kind, or from professions, vocations, trades, businesses, or dealings in property, whether real or personal, growing out of the ownership, use of, or interest in such property, or from interest, rent, dividends, securities, or transactions of business carried on for profit, and from gains or profits and income derived from any source whatever. The following items are excluded as exempt from taxation: Amounts received from various kinds of insurance contracts, property acquired by gift, bequest, devise, or inheritance, interest upon obligations of the United States, the rental value of any dwelling house furnished to a minister of the gospel as a part of his compensation, the salaries, pensions, and other compensation received by officials, employees, and veterans of the United States, and stock dividends of a corporation distributed to its own stockholders.

Section 7 (page 664) provides that in computing net income various deductions are to be allowed, including (a) certain specified business expenses; (b) interest paid on indebtedness; (c) taxes paid or accrued within the income year and imposed by the authority of the United States or of any state; and (d) to (m), inclusive, other deductions not necessary to be detailed here.

Section 9 (page 670) (which must be read as a part of section 2(a), above), provides that for the purpose of the normal tax, but not for the surtax, certain credits against the net income shall be allowed. These include (a) the amounts received as dividends from corporations subject to taxation under a statute imposing a tax upon corporations according to or measured by the net income thereof; (b) the amounts received as interest upon obligations of the state of Washington or of any political subdivision thereof, which is included in the gross income under section 6; and (c) 'ten per cent of the amount of the earned net income, but not in excess of ten per cent of the amount of the net income.' In no case is the earned net income to be considered to be more than $14,000.

Section 10 (page 671) (which must also be read as a part of section 2(a), above), so far as it is material here, provides as follows:

'There shall be allowed for the purposes of the normal tax and the surtax the following credits against net income:

'(a) In the case of a single person, a personal exemption of $1,000; or in the case of the head of a family or a married person living with husband or wife, a personal exemption of $2,500. * * *

'(b) $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective.'

Section 70 (page 704) provides: 'If any section, clause or part of this act shall for any reason be adjudged invalid or unconstitutional, such adjudication shall not affect the remaining portions of the act.'

We shall now refer briefly to the respective complaints as indicating the grounds upon which the act is alleged to be unconstitutional as to each complainant, according to the argument to be considered later.

Respondent Jensen alleges in his complaint that under the terms of the act he will be subject to both a normal tax and a surtax. Respondent Hoffman alleges that, as the owner of real estate, he will receive net income in the form of rents; that he will be subject to both normal tax and surtax; and that his real estate has been assessed for taxation purposes for 1935. Respondent Maples alleges that he owns and operates certain automotive trucks from which he derives a net income, and is in competition with corporations doing a similar business; that during 1935 he paid property taxes on such trucks and also a state license fee for the privilege of hauling for hire; that he is subject to both normal tax and surtax; and that the corporations who are in competition with him are not subject to taxation under the act. Respondent Williams alleges that he is unmarried and an attorney; that tor 1935 his net income will exceed $2,000, but will be less than $2,500; that many attorneys who are married receive as much net income as he, or more, but will not be subject to the act; and that other attorneys, unmarried and whose incomes are less than $1,000 a year, will not be subject to the act. Respondent Bronson alleges that he is a single man, a resident of, and domiciled in, the state of Washington, and that he is subject to the act. Intervener Nelson alleges that he is a resident of, and domiciled in, the state of Washington, and is engaged in business therein; that his income is derived from various sources, including interest on bonds, dividends on corporate stock, and salary for personal services; that he is subject to both normal tax and surtax; that by the act corporations are not subject to the tax; and that he will be taxed upon a different basis than individuals having an income of less than $3,000 a year. Taken together, the various complaints allege that the act violates the Fourteenth Amendment of the United States Constitution and also article 1, §§ 3 and 12, article 12, and the Fourteenth Amendment of the Constitution of the state of Washington.

At the very threshold of the case is the question whether an income tax is, under the provisions of the Fourteenth Amendment of the State Constitution, a property tax, as the respondents contend, or whether it is an excise tax, as appellants contend. That question has recently been squarely presented to this court and has been definitely determined by it. Culliton v. Chase, 174 Wash. 363, 25 P.2d 81. In that case it was held that the State Income Tax Law of 1932 (Initiative Measure 69, chapter 5, Laws 1933, p. 49, Rem. 1933 Sup., § 11200-1 et seq.) was unconstitutional and void. The headnotes to the reported decision in that case reveal that the question was exhaustively briefed and discussed by an array of eminent counsel, and the various opinions in the case reflect the views of the respective members of this court. Although four members of the court dissented, it was held by the majority that, under our Constitution, income is property, and that an income tax is a property tax, and not an excise tax.

In the very able brief of the Attorney...