Read Phosphate Co v. South Carolina Tax Comm'n

• Decision Date: 20 March 1933
• Docket Number: No. 13605,13605
• Citation: 168 S.E. 722
• Court: South Carolina Supreme Court
• Parties: READ PHOSPHATE CO. v. SOUTH CAROLINA TAX COMMISSION et al.

168 S.E. 722

READ PHOSPHATE CO.

v.SOUTH CAROLINA TAX COMMISSION et al.

No. 13605

Supreme Court of South Carolina.

March 20, 1933.

.

W. C. COTHRAN, A. A. J., dissenting.

Appeal from Common Pleas Circuit Court of Charleston County; W. H. Grimball, Judge.

Action by the Read Phosphate Company against the South Carolina Tax Commission and others. From a judgment in favor of the plaintiff, the defendants appeal.

Reversed.

The decree directed to be reported and table appended to answer and referred to in opinion follow:

Decree.

This is a suit by the Read Phosphate Company against the South Carolina Tax Commission to recover the sum of $2,894.21, which plaintiff claims was illegally assessed against it by the South Carolina Tax Commission for additional income tax payments, payable in the years 1926, 1928, 1929, and 1930.

The defendants in their answer set up the fact that the rules and regulations applied to plaintiff in this case for the purpose of determining the true and lawful income taxes have been without variation applied to all persons and corporations in like plight with plaintiff from and since the adoption of an Income Tax Law in 1922 by the state of South Carolina, and until the present time, and set up a statement appearing at page 5 of the answer showing the method by which the calculations were arrived at. That the consistent rule applied to every person, firm, and corporation is that "reasonable depreciation" is that amount which should be set aside for each taxable year in accordance with a reasonably consistent plan whereby the aggregate of the amount so set aside, plus the salvage value, will at the end of the useful life of the property used iu the business equal the cost of the property, and further that the sum to be replaced by depreciation allowances is the cost of the property upon which depreciation is allowed. If and When a taxpayer has deducted or has been allowed a sum for depreciation sufficient to replace the property, no further depreciation is deductible. That whenever a taxpayer has a sum set aside or has been allowed sufficient depreciation to replace the cost of the property, the allowance of additional or further depreciation would be unreasonable, and merely an allowance which would only go to increase the surplus. That the plaintiff in conformity with the provisions of the statute (Income Tax Law), has been allowed depreciation upon the cost of its plant and depreciation upon the cost of all additions andbetterments, made thereto, after the construction of said plant, and until a sufficient depreciation was allowed to cover the cost of said original plant and a part of the additions. That upon the additions for which depreciation did not mature sufficient to cover the cost thereof, defendants are still allowing as to those additions the regular schedule of depreciation and will continue to do so until the cost thereof has been fully covered by depreciations hereafter to be allowed.

The matter is being heard upon an agreed statement of facts which is attached to this decree, in which it is agreed:

"That for the purpose of this suit, the value or cost of the plaintiffs property, as of March 1, 1913, was One Hundred Sixty-five Thousand Four Hundred Fifty-three and 99/100 ($165,453.99), Dollars, and since that date additions have been made, which are set forth year by year in the account as shown on page five (5) of defendants' answer, and that upon the value or cost and additions as set forth in the first column of figures appearing on said account, defendants have based the depreciation to determine the income tax assessment of plaintiff.

"The question to be determined is whether the plaintiff is entitled to deduct from income earned in 1926 through 1930 depreciation sustained in years prior to 1921.

"Plaintiff contends that the value of its property on which depreciation should be based is its value as of January 1st, 1921, arrived at by the agreed value or cost as of March 1, 1913, as shown on that account plus the additions made since that date through the year 1920, and that the total of those amounts represents the value on which annual depreciations at nine and one-half per centum (9¹/₂%) should be thereafter made, except on the additions made in each previous year, the basis of depreciation on that item being fixed at four and three-quarters per centum (4³/₄%). That therefore the above items constituting the value or cost as of January 1st, 1921, should be the value on which depreciation should be commenced to be made from that date, and allowed annually at the above rates until the assets are exhausted.

"There is no dispute as to the percentage on which depreciation is based.

"Defendants contend that depreciation should be computed annually on the original cost of the property from date of acquisition, as reflected in the tabulation on page five (5) of the answer, until the same is exhausted by reason of the depreciation on the agreed cost The defendants also contend that depreciation should be computed annually on the cost of additions and improvements from the date the same were made until the cost of the additions and improvements are ex hausted by reason of such depreciation. Whenever the accumulated depreciation is sufficient to cover the cost of the properties no further depreciation should be allowed. Defendants have applied the above rule to every taxpayer similarly situated.

"It is agreed that if plaintiff's contention is correct then the payments made by plaintiff for the years 1920, 1927, 1928, 1929 and 1930 were the correct amounts due and no further payments are due for those years, and plaintiff is entitled to recover the amount claimed; and that if defendants' contention is correct then the tax paid by plaintiff under protest was due and can not be recovered."

The question, therefore, is to be determined by a proper construction on the Income Tax Act, approved October 12, 1926, appearing at page 1 of the Acts of 1927, amended by Act No. 124 (page 217), of the Acts of 1927, as embodied in section 2435 et seq., of the Code of Laws of South Carolina, 1932.

The first income tax law of the state of South Carolina is the act of 1922, appearing in Acts of 1922, page 896. This act imposed • an income tax upon all persons and corporations, adopting the federal income tax law in all of its particulars, and requiring an in come tax to be paid one-third of the amount paid to the federal government, a copy of the return to the federal government being all that was required and one-third of the tax therein shown was to be paid.

The Tax Commission had to abide by the rules and regulations of the federal government and had no discretion whatsoever in the method of computing the tax, so that to all intent and purposes, the method of computing the tax was not regulated by state statute but solely by federal statute, and the rulings of the Internal Revenue Department of the government.

But, in 1926, the state of South Carolina passed its separate and complete income tax act; directed by statute to be known as the "Income Tax Act of 1926, " which in express terms repealed in toto the 1922 Income Tax Act, with its amendments, and therein set forth in detail how income tax was to be arrived at and provided what deductions were to be allowed. What had been done in computing income under the earlier act was no longer to be considered, except that (section 43) it should remain in force for the assessment and collection of taxes which have or may accrue under that act, and the imposition of penalties and interest.

The Income Tax Act of 1926 will be referred to by its section numbers in the 1932 Code.

Section 2449 provides: "In computing net income there should be allowed as deductions a 'reasonable allowance' for the depreciation and obsolescence of property used in the trade or business, provided that in comput-ing the deductions allowed under this paragraph, the basis shall be the cost plus any additions and improvements."

And, in section 2451, which relates to nonresident and foreign corporations, it is provided: "That in computing the income tax upon business done and transacted within this State it shall be based upon a proportion which shall be such a proportion of the entire net income derived from all sources as the fair cash value of the real estate and tangible personal property actually used in the conduct of the business in the State of South Carolina, (no deductions on account of encumbrances), is to the cash value of the entire real estate and tangible personal property actually used in the conduct of the trade or business wheresoever located (no deductions on account of encumbrances). Such property shall be taken at its actual value, which in the case of property valued or appraised for the purposes of inventory, depletion, depreciation or other purposes shall be the highest amount at which so valued or appraised, and which in other cases shall be deemed to be its book value in the absence of affirmative evidence showing such value to be greater or less than the actual value."

In subdivision 3 of said section it provided: "The term 'tangible property' as used in this article includes only the property held or used to produce income, which is derived from sources partly within and partly without the State (including all property held or used to produce income which is allocated or apportioned to other classes of income). Such property should be taken at its actual value, which in the case of property valued or appraised for the purposes of inventory, depreciation, depletion or other purposes, shall be the highest amount at which so valued or appraised, and in any other cases should be deemed to be the book value, showing such value to be greater or less than the actual value."

These are all the provisions relating to deductions and regulations on which depreciation should be based.

The South Carolina Tax Commission, under section 2470, has authority to administer...