Middlekauff v. Galloway

• Decision Date: 20 February 1940
• Parties: MIDDLEKAUFF ET AL. <I>v.</I> GALLOWAY ET AL.
• Court: Oregon Supreme Court

163 Or. 671

99 P.2d 24

MIDDLEKAUFF ET AL.

v. GALLOWAY ET AL.

Supreme Court of Oregon.

Argued December 13, 1939.

Reversed February 20, 1940.

Courts — Taxation — Statutes

1. Decision construing intangibles Tax Act as not intended to reach certain income from a nonresident trust was not authority in subsequent case involving same trust and taxpayers with respect to tax for years governed by amended act clearly manifesting intent that such income be taxed.

Taxation — Income tax

2. The tax on net income from intangible personalty is an "income tax" and not a tax on the intangibles which produce the income.

Taxation — Income tax — Domicile

3. Domicile itself affords a basis for state's jurisdiction to impose an income tax.

Taxation — Jurisdiction to tax

4. Oregon's jurisdiction to tax net income from intangibles held in testamentary trust administered in Iowa rested upon beneficiary's residence in Oregon and protection afforded by Oregon Laws in the right to receive, the receipt, and the enjoyment of the income.

Taxation — Income — Legacy

5. Net income received periodically from intangibles held in a nonresident testamentary trust in which beneficiary had no other estate or interest was "income" under Intangibles Tax Act and not a "legacy" under the inheritance tax law.

Taxation — Double taxation

6. Mere duplication does not make taxation invalid.

Taxation — Double taxation

7. If discrimination or want of uniformity results from double taxation, the tax law is invalid, not because the tax is double, but because, being so, it contravenes some constitutional guaranty.

Taxation — Double taxation

8. Tax on net income to Oregon beneficiary from intangibles held in testamentary trust administered in Iowa and taxed there on an ad valorem basis, in which trust the beneficiary had no estate or interest other than to receive the income, imposed no unconstitutional "double taxation" and did not violate constitutional uniformity requirement or guaranties of "equal protection of law".

Taxation — Failure to make return

9. Where taxpayer fails to make return of income, Tax Commission's determination of such income made, pursuant to statute, in good faith on the basis of the best information obtainable, and without assistance from taxpayer, is presumed to be correct, notwithstanding part of the determination is an estimate, and taxpayer has burden of proving that the commission erred.

Taxation — Fixing tax

10. Where Tax Commission pursuant to statute, in good faith and on the basis of the best information obtainable, made a determination of income received by taxpayer from intangibles held in nonresident testamentary trust, of which income taxpayer failed to make a return, and taxpayer seeking to enjoin collection of the tax introduced no evidence as to the amount of the controverted income, the commission's determination must be accepted as correct.

                  Income tax as property tax or excise tax, note, 103 A.L.R. 93
                  61 C.J. Taxation, § 2306
                

In Banc.

Appeal from Circuit Court, Benton County.

CARL E. WIMBERLY, Judge.

Suit by Alice H. Middlekauff and O. Middlekauff against Charles V. Galloway and others, as the State Tax Commission of the State of Oregon, to enjoin the collection of additional taxes assessed by the commission under the Intangibles Tax Act. From a decree for plaintiffs, the commission appeals.

REVERSED.

Ralph R. Bailey and Carl E. Davidson, Assistant Attorneys General (I.H. Van Winkle, Attorney General, on the brief), for appellants.

C.M. Huddleston, of Corvallis (O. Middlekauff, of Corvallis, on the brief), for respondents.

LUSK, J.

The question presented on this appeal is whether net income, received in 1934 and 1935 by a resident of this state from intangibles held in a testamentary trust administered in the state of Iowa, is liable to a tax under the Intangibles Tax Act of 1931, Oregon Laws 1931, Ch. 335, as amended by Oregon Laws 1933, Ch. 394, and Oregon Laws 1933, Second Special Session, Ch. 32, codified in title LXIX, Ch. XIV, Oregon Code Supp. 1935. The beneficiary of the trust is the plaintiff Alice H. Middlekauff, who, with her husband, the plaintiff O. Middlekauff, filed joint income tax returns from which the income in question was omitted. The State Tax Commission assessed additional taxes on account of such income; the plaintiffs sued to enjoin their collection, and the circuit court entered a decree in their favor from which the Commission has prosecuted this appeal.

The trust and taxpayers are the same as in Middlekauff v. Galloway, 151 Or. 671, 52 P. (2d) 197. The tax years involved in that case were 1931 and 1932, and it was there held that the tax had been unlawfully assessed because the 1931 act, as it then stood, did not provide for the taxation of income from a non-resident trust. The assessments now challenged were, as stated, for the calendar years 1934 and 1935, and the question is governed by the amended legislation which contains a provision not in the original act that gross income shall include "intangibles income derived through resident and nonresident estates and trusts by the beneficiaries thereof." (§ 69-1424, Oregon Code Supp. 1935.) The tax is imposed "upon every resident individual * * * with respect to the taxpayer's net income as herein defined" (§ 69-1420, ibid), and net income means "gross income" minus deductions allowed by the statute (§ 69-1423, ibid).

1. Notwithstanding this language it is urged by the plaintiffs that the former Middlekauff case requires us to hold that the law does not reach the income here in question. We think this contention is without merit. The opinion in that case was concerned only with the intention of the legislature found in the law as originally enacted, and cannot now be invoked as authority to override a different intention clearly manifested.

The plaintiffs assert that the case decides that the act applies only where the state of Oregon has the right to levy an ad valorem tax on intangibles which produce the income. This is true with respect to the meaning of the law before the 1933 amendment. The decision deals with nothing else. The provision of the law that the tax on income from intangibles should be in lieu of general property taxes on intangibles (Oregon Laws 1931, Ch. 335, § 36), along with other provisions mentioned in the opinion, was thought to support that construction. But, whatever may have been said arguendo regarding the legislative intention, the court did not hold that the legislature could not, by appropriate language, give expression to, and enforce, an intention to tax the income from intangibles located elsewhere than in this state. The reference in the opinion to the 1933 amendment (151 Or. 679), which was effective at the time of the decision but not applicable to the tax years involved, demonstrates that the court was aware that, with the amendment to be taken into account, a different question would be presented. And since the legislature has now declared, in language free from uncertainty, that gross income includes income received from a non-resident trust, it is obvious that the provision that the intangibles tax shall be in lieu of an ad valorem tax must be regarded as without application to intangibles located elsewhere which this state has no power to tax or to relieve from taxation.

From the assumption that the act imposes a property tax, and not an income tax, it is argued that the state is without jurisdiction to levy the tax unless the property which produces the income is within its borders. The original Intangibles Tax Act of 1929 was held to impose a property tax in Redfield v. Fisher, 135 Or. 180, 290 P. 813, 295 P. 461, 73 A.L.R. 721; and on that basis the law was declared unconstitutional because corporations were exempted from its provisions. McPherson v. Fisher, 143 Or. 615, 23 P. (2d) 913, sustained the present law before its amendment. It was there assumed, though not decided as plaintiffs assert, that the tax was a property tax. The decision in the Redfield case that the 1929 act imposed a property tax was largely induced, as the opinion on petition for rehearing shows, by the fact that the tax was assessed against gross income. The law now under consideration measures the tax by net income. Whether that is a decisive ground of distinction or not we need not consider. We are concerned only with the practical operation of the tax, not with name by which it may be called.

In the case of Graves v. New York ex rel. O'Keefe, 306 U.S. 466, 480, 83 L.Ed. 927, 59 S.Ct. 595, 120 A.L.R. 1466, decided in 1939, the court said: "The theory which once won a qualified approval that a tax on income is a tax on its source is no longer tenable." Accordingly, the court there sustained an income tax imposed by the state of New York on the salary of an employe of a governmental corporation as against the claim that the tax laid an unconstitutional burden on the federal government. In the earlier case of New York ex rel. Cohn v. Graves, 300 U.S. 308 81 L.Ed. 666, 57 S.Ct. 466, 108 A.L.R. 721, it was held that an income tax upon rents received in New York by a resident thereof from New Jersey property did not violate the 14th Amendment of the Federal Constitution because the tax was not laid upon the land but upon income from the land. The reasons supporting this view are thus admirably stated by Mr. Justice Stone:

"Neither analysis of the two types of taxes, nor consideration of the bases upon which the power to impose them rests, supports the contention that a tax on income is a tax on the land which produces it. The incidence of a tax on income differs from that of a tax on property. Neither tax is dependent upon the possession by the taxpayer of the subject of the other. His income may be taxed, although he owns no property, and his property may be taxed although it produces no income. The two taxes are measured by different standards, the one by the amount of income...