Miles v. Department of Treasury

• Decision Date: 29 January 1935
• Docket Number: 26354
• Parties: MILES et al. v. DEPARTMENT OF TREASURY et al
• Court: Indiana Supreme Court

193 N.E. 855

MILES et al. v. DEPARTMENT OF TREASURY et al

No. 26354^[*]

Supreme Court of Indiana

January 29, 1935

Appeal from Superior Court, Marion County; Russell J. Ryan, Judge.

Action by J. Harry Miles and others against Department of the Treasury and others. From an adverse judgment, plaintiffs appeal.

Affirmed.

Bomberger, peters & Morthland, of Hammond, Owen S. Bolling Cox, Conder, Bain & Cox, and Martin M. Hugg, all of Indianapolis, Moses, Kennedy, Stein & Bachrach, of Chicago Ill., Nusbaum & Mowrer, of Indianapolis, and Stanley J Morris, Philip Glick, and Walter Bachrach, all of Chicago, Ill., for appellants.

Philip Lutz, Jr., of Boonville, Fred A. Wiecking, of Hartford City, and Joseph P. McNamara, of Indianapolis, for appellees.

Frederick E. Matson, Harry T. Ice, and Schuyler C. Mowrer, all of Indianapolis (Matson, Ross, McCord & Clifford, of Indianapolis, of counsel), amici curiae.

OPINION

FANSLER, Chief Justice.

Appellant brought this action as taxpayers on behalf of themselves and others similarly situated to enjoin appellees from paying out funds of the state for the printing of chapter 50 of the Acts of 1933, p. 388, known as the 'Gross Income Tax Act of 1933,' on the ground that the statute is unconstitutional and void. A demurrer for want of facts was sustained upon the theory that the act is constitutional. The only error assigned questions the correctness of the ruling on demurrer, and hence the constitutionality of the law.

The act in question is entitled 'An act to provide for the raising of public revenue by imposing a tax upon the receipt of gross income, to provide for the ascertainment, assessment and collection of said tax, and to provide penalties for the violation of the terms of this act, and declaring an emergency.' Clause (f) of section 1 provides:

'The term 'gross income,' except as hereinafter otherwise expressly provided, means the gross receipts of the taxpayer received as compensation for personal services, and the gross receipts of the taxpayer derived from trades, businesses or commerce, and the gross receipts proceeding or accruing from the sale of property, tangible or intangible, real or personal, or service, or any or all of the foregoing, and all receipts by reason of the investment of capital, including interest, discount, rentals, royalties, fees, commissions or other emoluments, however designated, and without any deductions on account of the costs of property sold, the cost of materials used, labor cost, interest or discount paid, or any other expense whatsoever, and without any deductions on account of losses. * * *'

All persons domiciled in the state are taxed either upon the basis of 1 per cent. of their incomes or one-fourth of 1 per cent. of their incomes. As a basis for computation, the income received by each person is classified according to source. The taxpayer pays a tax computed upon income from manufacturing or mining, producing oil or timber, from agriculture, or wholesaling, or jobbing tangible commodities, an amount equal to one-fourth of 1 per cent. of the income so derived. He pays a tax computed upon the income derived from producing or selling electrical energy or gas, operating a railway, motor vehicle, or other vehicle for the transportation of freight, express, or passengers; operating a pipe line, telephone, or telegraph line, or other public utility; or operating a bank, insurance, finance, or loan company; or from any business or professional activity not otherwise classified; on income resulting from the sale of property, or based upon funds received under any contract other than connected with the business otherwise classified, upon the basis of 1 per cent. of said income. Corporations are treated as persons domiciled within the state.

Appellants and amici curiae contend that the measure is property tax, and that, since the assessment is not uniform and the rate equal as to all property, it is unconstitutional under article 10, § 1, of the Constitution of Indiana. It is appellees' contention that it is an excise tax, measured by the amount of gross income, and therefore not controlled by the limitations described by article 10, § 1.

The power to tax is inherent in, and essential to, the existence of the state, and may be exercised without limit upon property, occupations, and activities carried on within the state, unless prohibited by state or Federal Constitutions. Union P. Railroad Co. v. Peniston (1873) 18 Wall. (85 U. S.) 5, 21 L.Ed. 787; Royall v. State of Virginia (1886) 116 U.S. 572, 6 S.Ct. 510, 29 L.Ed. 735; Bell's Gap R. Co. v. Pennsylavania (1889) 134 U.S. 232, 10 S.Ct. 533, 33 L.Ed. 892; State Board of Tax Com'rs of Ind. v. Jackson (1931) 283 U.S. 527, 51 S.Ct. 540, 75 L.Ed. 1248, 73 A. L. R. 1464.

The right to tax is not a constitutional grant, but exists independently, and constitutional provisions regarding taxation operate as limitations only on an otherwise unlimited power. State Board of Tax Com'rs v. Holliday (1898) 150 Ind. 216, 49 N.E. 14, 42 L. R. A. 826; Hart v. Smith (1902) 159 Ind. 182, 64 N.E. 661, 58 L. R. A. 949, 95 Am. St. Rep. 280.

It is well settled that article 10, § 1, which provides for uniform and equal rate of assessment and taxation, and forbids exempting property except for specific purposes, applies only to property taxes under a general levy. Thomasson v. State (1860) 15 Ind. 449; Bright v. McCullough (1866) 27 Ind. 223; Kersey v. City of Terre Haute (1903) 161 Ind. 471, 68 N.E. 1027; Gafill v. Bracken (1924) 195 Ind. 551, 145 N.E. 312, 146 N.E. 109; State Board of Tax Com'rs of Ind. v. Jackson, supra.

In recent years there has been considerable apparent difference of opinion as to whether a general income tax is a tax on property, but it was not always so.

'The income tax which has been in force in England since 1798 has been considered to be a duty or excise, and it has been held that the tax was applicable to interest on the public debt, although it was provided by statute that such interest should be paid free of any tax or charge whatever.' 26 R. C. L. 142.

Prior to 1894, the question seemed settled in this country. In the case of Brushaber v. Union Pacific R. Co. (1916) 240 U.S. 1, 36 S.Ct. 236, 240, 60 L.Ed. 493, the Supreme Court of the United States, in an opinion written by Chief Justice White, said: 'Again the situation is aptly illustrated by the various acts taxing incomes derived from property of every kind and nature which were enacted beginning in 1861, and lasting during what may be termed the Civil War period. It is not disputable that these latter taxing laws were classed under the head of excises, duties, and imposts because it was assumed that they were of that character inasmuch as, although putting a tax burden on income of every kind, including that derived from property real or personal, they were not taxes directly on property because of its ownership. And this practical construction came in theory to be the accepted one, since it was adopted without dissent by the most eminent of the text-writers. 1 Kent, Com. 254, 256; 1 Story, Const. § 955; Cooley, Const. Lim. (5th Ed.) 480; Miller, Constitution, 237; Pom. Const. Law, § 281; 1 Hare, Const. Law, 249, 250; Burroughs, Tax'n, 502; Ordronaux, Constitutional Legislation, 225.'

In 1894 Congress passed an act placing a tax on income from all sorts of property and sources of revenue, which did not apportion the burden among the states. The constitutionality of the act was passed on by the Supreme Court in the case of Pollock v. Farmers' Loan & Trust Co. (1895) 157 U.S. 429, 15 S.Ct. 673, 39 L.Ed. 759; Id., 158 U.S. 601, 15 S.Ct. 912, 39 L.Ed. 1108. The law was held unconstitutional for lack of apportionment; the court dividing five to four upon the question. Careful and lengthy opinions were written by the majority and the minority dissenting; and upon petition for rehearing other opinions were written by both the majority and minority. Since the decision of the Pollock Case, some courts have construed the opinion as holding that a general tax based upon incomes is a property tax. In one of the briefs, in which the cases holding that an income tax is a property tax are reviewed, it is said that most of those cases get their lead in the Pollock Case, and this is true. It has been recognized, however, by the Supreme Courts of Illinois and Arkansas, that the Pollock Case does not hold a general income tax to be property tax. Young v. Illinois Athletic Club (1923) 310 Ill. 75, 141 N.E. 369, 30 A. L. R. 985; Sims v. Ahrens (1925) 167 Ark. 557, 271 S.W. 720, 730.

In the case of Brushaber v. Union Pacific R. Co., supra, the United States Supreme Court places an interpretation upon its own decision in the Pollock Case, which we think should be conclusive as to the effect of that decision. Chief Justice White, speaking for the court, said: 'The conclusion reached in the Pollock Case did not in any degree involve holding that income taxes generically and necessarily came within the class of direct taxes on property, but, on the contrary, recognized the fact that taxation on income was in its nature an excise entitled to be enforced as such unless and until it was concluded that to enforce it would amount to accomplishing the result which the requirement as to apportionment of direct taxation was adopted to prevent, in which case the duty would arise to disregard form and consider substance alone, and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it.'

And again the effect of the Pollock Case is emphasized by the court's explanation of the purpose of the Income Tax Amendment to the Federal Constitution (Amendment 16), which the court determined to be 'the...