Nichols v. Commissioner of Corporations and Taxation

• Decision Date: 10 May 1940
• Citation: 314 Mass. 285,50 N.E.2d 76
• Parties: PHILIP NICHOLS, executor, 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

PHILIP NICHOLS, executor, v. COMMISSIONER OF CORPORATIONS AND TAXATION.

Supreme Judicial Court of Massachusetts, Suffolk.

May 10, 1940

October 9, 1941. -- June 30, 1943. Present: FIELD, C.

J., DONAHUE LUMMUS, QUA, DOLAN, COX, & RONAN, JJ.

Taxation, Income tax. Interest. Statute, Construction. Words "Interest," "Money at interest," "Income," "Debt."

Interest, paid by the Federal government to a Massachusetts taxpayer, computed from the date of his payment of a Federal income tax and upon the amount of a judgment in his favor upon a claim for a refund of such payment, was taxable under G. L. (Ter. Ed.) c 62, Section 1 (a), as interest "from . . . money at interest." A tax is not a debt.

Interest paid by a Massachusetts taxpayer to the Federal government upon the amount of a deficiency assessed to him in respect to a Federal income tax was not deductible under G. L. (Ter. Ed.) c. 62, Section 2, as interest paid by him on a debt.

APPEALS by taxpayers from decisions of the Appellate Tax Board. The Nichols cases were argued on May 10, 1940, before Field C.J., Lummus, Dolan, Cox, & Ronan, JJ., and afterwards were submitted on briefs to Donahue & Qua, JJ.

The Higgins case was argued on October 9, 1941, before Field, C.J., Donahue, Qua, Cox, & Ronan, JJ., and afterwards was submitted on briefs to Lummus & Dolan, JJ.

P. Nichols, (B.

Morton with him,) for Nichols, executor.

O. V. Fortier, Assistant Attorney General, for the Commissioner of Corporations and Taxation, in the first two cases.

L. E. Green, for Higgins. H. E. Magnuson, Assistant Attorney General, for the Commissioner of Corporations and Taxation, in the third case.

FIELD, C.J. 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, Section 13, as appearing in St. 1933, c. 321, Section 7, as amended. St. 1937, c. 400. G. L. (Ter. Ed.) c. 62, Section 45. St. 1939, c. 451, Section 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, Sections 1, 2. Material parts of these sections are as follows: General Laws (Ter. Ed.) c. 62, Section 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, Section 1671. 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, Section 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, Section 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, Section 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, the court quoted from Hayes v. Commissioner of Corporations &amp Taxation, 261 Mass. 134 , 136, 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, Section 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. 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) 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, Section 1671 [a], [b]) and to be "assessed" and "paid" "upon the amount determined as a deficiency" of income tax (U. S. C., 1934 ed., Title 26, Section 292), in the former instance "from the date of the overpayment" and in the latter instance "from the date prescribed for the...