Nichols v. Comm'r of Corps. & Taxation

• Decision Date: 30 June 1943
• Citation: 314 Mass. 285,50 N.E.2d 76
• Parties: NICHOLS v. COMMISSIONER OF CORPORATIONS AND TAXATION (two cases). HIGGINS v. COMMISSIONER OF CORPORATIONS AND TAXATION.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

314 Mass. 285

50 N.E.2d 76

NICHOLS

v.COMMISSIONER OF CORPORATIONS AND TAXATION (two cases).

HIGGINS

v.COMMISSIONER OF CORPORATIONS AND TAXATION.

Supreme Judicial Court of Massachusetts, Suffolk.

June 30, 1943.

Appeal from Decision of Appellate Tax Board.

Proceedings by Philip Nichols, surviving executor under the will of Charles H. Farnsworth, deceased, and by Aldus C. Higgins, for abatement of income taxes assessed by the Commissioner of Corporations and Taxation. From decisions of the Appellate Tax Board sustaining the Commissioner's refusal of abatements, petitioners appeal.

Petitions for abatement dismissed. P. Nichols, of Boston, and B. Morton, of Fall River, for Nichols.

L. E. Green, of Boston, for Higgins.

O. V. Fortier, Asst. Atty. Gen., for Commissioner of Corporations in first two cases.

H. E. Magnuson, Asst. Atty. Gen., for Commissioner in third case.

Before FIELD, C. J., and DONAHUE, LUMMUS, QUA, DOLAN, COX, and RONAN, Jj.

FIELD, Chief Justice.

These are three appeals respectively from three decisions of the Appellate Tax Board relating to liability to income tax. G.L.(Ter.Ed.) c. 58A, § 13, as appearing in St.1933, c. 321, § 7, as amended. St.1937, c. 400. G.L. (Ter.Ed.) c. 62, § 45. St.1939, c. 451, § 24. In two cases the appellant is Philip Nichols, surviving executor under the will of Charles H. Farnsworth, who died February 11, 1933, herein referred to as the testator. In the third case the appellant is Aldus C. Higgins. The appellant in each case is herein referred to as the taxpayer. In the Nichols cases the taxes involved were assessed respectively upon income for the year 1937 and income for the year 1938. In the Higgins case the tax involved was assessed upon income for the year 1937.

The appeals present somewhat related questions arising under the provisions of G.L.(Ter.Ed.) c. 62, §§ 1, 2. Material parts of these sections are as follows: General Laws (Ter.Ed.) c. 62, § 1, imposes a tax upon income from certain intangibles, including in subsection (a), with exceptions not here applicable, ‘Interest from bonds, notes, money at interest and all debts due the person to be taxed.’ Section 2 provides that from ‘the income taxable under the preceding section, the taxpayer may,’ subject to certain conditions not requiring consideration here, ‘receive a deduction on account of interest paid by him during the year on debts of the following classes: * * * (b) Debts owed by other persons, except debts secured by such mortgage or pledge and debts on account of which the taxpayer is entitled to claim a deduction under sections five and six.’ (The words ‘other persons' mean persons ‘other’ than the persons described in subsection (a) of section 2.)

It properly is not contended in any of the present cases that the taxpayer therein is not such a person as to be within the terms of the statute. The matter in controversy in each of these cases is whether interest received or paid by such taxpayer is interest of such a kind as to be within the statute, for the purpose of taxation as income in the Nichols cases, and for the purpose of a deduction from taxable income in the Higgins case.

In the Nichols cases interest was received by the taxpayer in the following circumstances: In the year 1937 the taxpayer obtained a judgment against the United States, in substance, for a refund of money paid as Federal income tax upon income of the testator for the year 1932, on the ground that the testator was not liable for such tax. In said year 1937 the United States paid to the taxpayer a sum in satisfaction of this judgment together with $8,665.46 interest thereon. In the year 1938 the taxpayer also obtained a judgment against the United States, in substance, for a refund of money paid by the executor under the will of the testator as a Federal estate tax in excess of the amount due for such tax. In said year 1938 the United States paid to the taxpayer a sum in satisfaction of his judgment together with $21,184.90 interest thereon. We infer from the record, though the fact is not specifically found, that in each instance interest was computed from the date of payment, as a tax, of the amount refunded and that the amount received by the taxpayer as interest included interest accruing after the entry of the judgment. See U.S.C.1934 Ed., U.S.C.Sup. IV, Title 26, § 1671, 26 U.S.C.A. Int.Rev.Code, § 3771. The commissioner of corporations and taxation assessed to the taxpayer a State income tax for each of the years 1937 and 1938 upon the interest received by him in these years respectively upon the judgments here described. Abatements of the taxes so assessed were refused by the commissioner, and the taxpayer appealed to the Appellate Tax Board. In each case the Appellate Tax Board refused the taxpayer's requests for rulings to the effect that such interest was not subject to taxation under the State income tax law, and from the decision of the Appellate Tax Board the taxpayer appealed to this court.

In the Higgins case interest was paid by the taxpayer in the following circumstances: In the year 1937 the taxpayer paid to the United States a deficiency assessed to him in respect to Federal income taxes upon business and other income received by him during the year 1934 together with interest thereon in the sum of $9,122.58.¹ This amount of $9,122.58 was claimed by the taxpayer in his income tax return as a basis for the limited deduction of interest paid by him from taxable interest and dividends, under the provisions of G.L.(Ter.Ed.) c. 62, § 2, of slightly more than $8,000. The commissioner disallowed the deduction to the extent of $8,030.35 and assessed an income tax accordingly without giving the taxpayer the benefit of this deduction. Application for abatement was made by the taxpayer and refused by the commissioner, and the taxpayer appealed to the Appellate Tax Board. The Appellate Tax Board decided against the taxpayer on the ground that the interest so paid by the taxpayer was not deductible, and from this decision of the Appellate Tax Board the taxpayer appealed to this court.

The questions for decision are whether in the Nichols cases the interest received by the taxpayer upon amounts paid in satisfaction of the judgments recovered by him against the United States was ‘Interest from bonds, notes, money at interest and all debts due the person to be taxed’ within the meaning of G.L.(Ter.Ed.) c. 62, § 1(a), and whether in the Higgins case the interest paid by the taxpayer to the United States upon the deficiency assessed to him upon his income not derived from professions, employments, trade or business was ‘interest paid by him * * * on debts' including ‘Debts owed by * * * persons' other than the persons described in subsection (a) of G.L.(Ter.Ed.) c. 62, § 2, within the meaning of said section, not within the exception stated in subsection (b). (There is no contention that this taxpayer is not one of the persons described in said section 2, subsection (b), or that his obligation to the United States was within the exception described in that subsection.)

The amounts herein referred to as ‘interest’ received by the taxpayer in the Nichols cases and the amount herein so referred to paid by the taxpayer in the Higgins case constituted ‘interest’ within the meaning of this word as used in the governing statute. In Sayles v. Commissioner of Corporations & Taxation, 286 Mass. 102, 105, 189 N.E. 579, 580, 91 A.L.R. 1267, the court quoted from Hayes v. Commissioner of Corporations & Taxation, 261 Mass. 134, 136, 158 N.E. 539, the statement that the ‘word ‘interest’ in its usual sense is the compensation fixed by the parties or allowed by law for the use of money or as damages for its detention,' and said that, in construing G.L.(Ter.Ed.) c. 62, § 1(a), ‘we think the word ‘interest’ should be taken in that usual sense.' See, also, Wolbach v. Commissioner of Corporations & Taxation, 268 Mass. 365, 371, 167 N.E. 677. Clearly the word is used in the same sense in section 2. The ‘interest’ here in question is ‘allowed by law’ either as ‘compensation * * * for the use of money’ or as ‘damages for its detention’-in this aspect of the case it is immaterial which. While the statute containing the word ‘interest’ that is to be construed is the statute of the Commonwealth, some, though not decisive, weight rightly may be attributed to the use of the word (Wolbach v. Commissioner of Corporations & Taxation, 268 Mass. 365, 371, 167 N.E. 677) in the Federal statutes providing for the payment of the amounts here involved under the designation of ‘interest.’ By the terms of these statutes ‘interest’ is to be ‘allowed and paid upon any overpayment in respect of any internal revenue tax’ (U.S.C.1934 ed., see also U.S.C.Sup. IV, Title 26, § 1671(a), (b), 26 U.S.C.A. Int.Rev.Code, § 3771(a to c), and to be ‘assessed’ and ‘paid’ ‘upon the amount determined as a deficiency’ of income tax (U.S.C.1934 ed. Title 26, § 292, 26 U.S.C.A. Int.Rev.Code, § 292), in the former instance ‘from the date of the overpayment’ and in the latter instance ‘from the date prescribed for the payment of the tax’ or the first instalment thereof. Congress clearly regarded the amount so made payable by statute and denominated ‘interest’ either as ‘compensation * * * for the use of money’ or as ‘damages for its detention’ within the ordinary meaning of the word ‘interest.’ And the Supreme Court of the United States in Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 86, 55 S.Ct. 50, 79 L.Ed. 211, held that the interest paid upon the amount of a tax refund fell within the classification ‘Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise,’ as interest upon an ‘interest-bearing’ obligation subject to taxation under the Revenue Act of 1926, c. 27, 44 U.S.Sts. at Large 9, §§ 217(a)(1), 233(b), 26 U.S.C.A. Int.Rev.Acts, pages 170, 185. See, also, American Viscose Corp. v. Commissioner of Internal...