Middlekauff v. Galloway

• Decision Date: 03 December 1935
• Citation: 52 P.2d 197,151 Or. 671
• Parties: MIDDLEKAUFF et al. v. GALLOWAY et al.
• Court: Oregon Supreme Court

52 P.2d 197

151 Or. 671

MIDDLEKAUFF et al. v. GALLOWAY et al.

Supreme Court of Oregon

December 3, 1935

In Banc.

Appeal from Circuit Court, Benton County; G. F. Skipworth, Judge.

Suit by O. Middlekauff and another against Charles V. Galloway and others, as the State Tax Commission of the state of Oregon. Decree for defendants, and plaintiffs appeal.

Reversed.

CAMPBELL C.J., and ROSSMAN and BELT, JJ., dissenting.

C. M Huddleston, of Corvallis (Middlekauff & Huddleston, of Corvallis, on the brief), for appellants.

Willis S. Moore, Asst. Atty. Gen. (I. H. Van Winkle, Atty. Gen., on the brief), for respondents.

BAILEY Justice.

The question presented for our determination is whether the amounts received in 1931 and 1932 by Alice H. Middlekauff one of the appellants, from a trust estate located in the state of Iowa and there administered by a trustee, are subject to the tax imposed by the intangible income tax act of 1931 of this state.

According to the admitted facts, the will of Jennie Hornick, which was executed and probated in the state of Iowa, created a trust fund, which upon the settlement of the estate was turned over to the Security National Bank of Sioux City, Iowa. The trust estate consists of both tangible and intangible property, having its situs for taxation in that state. The trustee appointed by the Iowa court has its domicile in that state, and has the sole and exclusive control of the trust estate and its investments, all of which are located in Iowa. Alice H. Middlekauff "has no title or interest in or to the corpus of said trust estate, either present or future." By the terms of the trust, the trustee is required, after paying the taxes against the corpus of the trust and the expenses of administration of the trust, including fees of attorneys and of the trustee, to turn over periodically to Alice H. Middlekauff one-half of the net income of the trust.

Under the laws of the state of Iowa in force during the times herein mentioned, the intangible property of an estate was taxed at the rate of 5 mills on the dollar of its actual valuation. Sections 6984 and 6985, Code of Iowa 1931. The intangible property constituting the corpus of the trust was taxed on that basis in the state of Iowa for the years 1931 and 1932, and the tax was paid by the trustee.

On or about April 1, 1932, and the same date in 1933, the appellants, O. Middlekauff and Alice H. Middlekauff, his wife, filed with the Oregon state tax commission their joint tax returns for the years 1931 and 1932, respectively, which returns purported to include all income received by them during those years, subject both to personal income tax and intangible income tax. They reported having received no net income from intangibles during either of those years, but the amount received by Mrs. Middlekauff under the will of Jennie Hornick was reported for the year 1932 as income subject to the personal income tax, and tax was paid thereon accordingly. Thereafter, on January 29, 1934, the plaintiffs, at the request of the Oregon state tax commission, filed an amended return of their combined income for the year 1931, and included therein as income subject to the personal income tax the amount received by Mrs. Middlekauff from the trust estate in Iowa for that year.

The Oregon state tax commission, dissatisfied with this classification of the amounts received by Mrs. Middlekauff during the years 1931 and 1932 from the Iowa trust estate, assessed against the plaintiffs additional taxes for the years 1931 and 1932 based upon its construction of the law to the effect that the amounts so received by her represented income on intangibles and were therefore subject to a tax of 8 per cent. in Oregon under the intangible income tax act. To these additional assessments were added interest and penalty.

The purpose of the Legislature in enacting the intangible income tax law of 1931 is set forth in the preamble to that act, as follows:

"Whereas it appears that intangible personal property, represented by money and credits in various forms, is held by residents of Oregon in total value comparable to the value of all the real property in the state; and

"Whereas the ownership and possession of intangible personal property represents a benefit under the protection of government which appears not less valuable and secure than that enjoyed in the ownership and possession of property of any other class or kind; and

"Whereas the income consistently derived from intangible personal property represents a distinct taxpaying ability which, in justice and sound reason, should bear a fair share of the cost of government; and

"Whereas the general property tax system, in its pretense of taxing intangible personal property by the same rule and method applying to real estate and tangible personalty, is pitifully ineffectual because of inherent defects in theory and insuperable obstacles in administration; and

"Whereas there is a proper and insistent demand for a fair and efficient method of taxing the income from intangible personal property, in lieu of the archaic and impracticable ad valorem tax on the property itself, to afford a measure of relief to the owners of real estate and tangible personalty who now carry an unjust and distressful tax load, depressing alike to property values and to business enterprises; therefore" then follows the enacting clause. Chapter 335, p. 572, Oregon Laws 1931.

Before the enactment of the intangible income tax law, intangibles owned and controlled by residents of this state and such intangibles as had their situs for taxation purposes in this state were subject to an ad valorem tax in like manner as real property and tangible personal property located in this state. The legal fiction of "mobilia sequuntur personam" was applied in Oregon, as in many other states, to determine the situs of intangible personal property for taxation purposes, in the instance of such intangibles as had not acquired a fixed situs for taxation elsewhere. Attempts to tax intangible personal property on an ad valorem basis proved unsuccessful, due in part to the fact that the tax in many instances if applied according to the mandate of the law would equal or exceed the income received from the intangibles. It was deemed only proper and right that those who received dividends or interest on the property which the Legislature saw fit to define as intangibles should pay to the state a certain percentage of the interest and dividends so received, in those cases in which such property had its situs for taxation in this state.

From the wording of the intangible income tax act of 1931, it is apparent that the tax therein provided for was intended to apply only to those instances in which the state of Oregon had the right to levy an ad valorem tax on such intangibles. And, as already noted, the state had a right to levy an ad valorem tax on intangibles which had acquired a situs for taxation in the state of Oregon, whether owned or controlled by residents or nonresidents of the state, and, in addition, on such intangibles as were owned and controlled by residents of the state and had not acquired a definite situs for taxation elsewhere. The purpose of the state in enacting this law, as previously observed, is borne out by the language of section 36 of the 1931 enactment (page 587), which reads as follows: "The tax on income from intangibles imposed by this act shall be in lieu of general property taxes on all intangibles, as defined in this act, and the same shall not be assessed for taxation as personal property for the year in which the income therefrom is or may become liable to taxation under this act."

It will be necessary to refer further to the act itself, in order to ascertain the intention of the Legislature in this regard. An annual tax at the rate of 8 per cent. is imposed with respect to the taxpayer's net income as defined by the act. Section 3 (page 574). Net income is defined to mean the gross income of the taxpayer from intangibles "less the deductions allowed by this act." Section 7 (page 576). And by section 8 (page 576), "the term 'gross income' includes all interest and dividends derived from intangibles as defined in section 2 of this act." According to subdivision 9 of section 2 (page 573), "the word 'intangibles' means and includes money at interest, bonds, notes, claims, demands and all other evidences of indebtedness, secured or unsecured (not including open accounts), including notes, bonds or certificates secured by mortgages, and all shares of stock in corporations, joint stock companies or associations."

It is to be noted that the only income on which the tax is assessed is that represented by interest or dividends on intangibles as defined by the act. By section 4 (page 574) the intangible income tax is imposed upon all nonresident individuals and corporations "with respect to the taxpayer's net income as herein defined, having a situs for taxation within the state of Oregon during the tax year." Section 6 (page 574) provides that "the tax imposed by this act shall apply to estates and trusts, which tax shall be levied, collected and paid annually on and with respect to the income from intangibles of estates and trusts." Subdivision 1. Subdivision 2 of section 6 makes a fiduciary responsible "for making the return of income for the estate or trust, whether such income be taxable to the estate or trust or to the beneficiaries thereof."

In the instance of a trust administered in Oregon, the beneficiary of which is not a resident of this state, only the income from such intangibles of the trust as have a situs for taxation within the state is subject to the tax: section 6, subd. 4.

Section 14 of the act (page 578) provides,...