Redfield v. Fisher
| Decision Date | 24 October 1930 |
| Parties | REDFIELD ET AL. v. FISHER ET AL. |
| Court | Oregon Supreme Court |
In Banc.
Appeal from Circuit Court, Marion County; L. H. McMahan, Judge.
Action by Scott Redfield and another, copartners doing business as Redfield & Wood, and others, against Earl L. Fisher and others. Decree for defendants, and plaintiffs appeal.
Remanded with instructions to enter decree for plaintiff.
Plaintiffs are five individuals residing within this state who are engaged in the investment banking business; that is, they purchase and sell bonds, stocks, notes, and other intangible property of the kind described in section 1 of 1929 Session Laws, c. 429, p. 636. Three of the defendants comprise the tax commission of this state; another is the Governor, and the fifth the Attorney General of this state. The purpose of this suit is to obtain a decree declaring invalid the above-mentioned act which levies a tax of 5 per cent. upon the gross income received from such property, and to enjoin its enforcement.
From a decree in favor of the defendants, based upon an order sustaining a general demurrer to the complaint, the plaintiffs have appealed.
Erskine Wood and M. M. Matthiessen, both of Portland (Wood, Montague & Matthiessen, of Portland, on the brief) for appellants.
Willis S. Moore and Miles H. McKey, Asst. Attys. Gen. (I. H. Van Winkle, Atty. Gen., on the brief), for respondents.
ROSSMAN J. (after stating the facts as above).
The complaint, after describing the plaintiffs and the defendants as above, together with the business in which the plaintiffs are engaged, recites the following matters: Each of the plaintiffs, during the year 1929, owned bonds, notes, shares of stock in private corporations, and other intangible property of the type described in 1929 Session Laws, c. 429 p. 636, § 1, subd. (e). None of the intangibles owned by the plaintiffs were issued by the federal government and none of them are exempted from taxation by the laws of this state. Two of the plaintiffs, who are engaged in business as copartners under the firm name of Redfield & Wood, owned intangible property in the year 1929 employed in the ordinary course of their business, from which each received in that year more than $500 by way of interest and dividends. These two individuals, during the same year, paid interest in the sum of $200 upon capital borrowed by them for the purchase of intangibles. Each of the other three defendants in 1929 received as interest and dividends, more than $500; and each paid during that year sums in excess of $200 on account of moneys borrowed to finance the purchase of intangibles. After the complaint had been filed, counsel on behalf of the plaintiffs and the defendants subscribed to a stipulation which recited, among other matters, the following facts, and agreed that they should be deemed a part of the complaint: The plaintiffs, in order to promptly supply the demands of their trade purchase quantities of securities and carry them in stock until sold to buyers. As a matter of common practice the value of the securities owned by the dealer to meet the requirements of his trade exceeds in a substantial sum the amount of his capital. The excess represents borrowed money upon which he is compelled to pay interest at the rate of not less than 6 per cent. per annum. Each of the plaintiffs maintains an office in the city of Portland, wherein he conducts his business, and is subjected to all of the expenses incident to such a venture. There are many corporations engaged in the same line of business in competition with the plaintiffs, and they pursue substantially the same practices employed by the plaintiffs. We quote from the stipulation the following:
"Persons residents and domiciled in the state of Washington are and in the year 1929 were engaged at Portland, Oregon, in conducting in Oregon the business of buying, owning and investing in notes made by Oregon residents and secured by mortgages on lands in Oregon."
The complaint recites various sections of the above-mentioned act, also sections of the federal and Oregon Constitutions; it charges that the act is invalid on account of its conflict with these constitutional limitations in several respects. We shall mention them later.
Chapter 429, p. 636, Session Laws 1929, is applicable only to individuals resident within this state. It imposes a tax of 5 per cent. per annum "upon income from money and credits." Section 2. It defines "money and credits" as intangible properties; that is, "money at interest, bonds, notes, claims and demands, secured or unsecured (not including open accounts), all shares of stock in corporations and any and all other evidences of indebtedness." Section 1 (e). In computing the amount of income subject to the tax, each individual is granted an exemption of $200. The act specifies that the tax shall become a personal debt from the taxpayer to the state. If the tax is not paid within the time specified by the act, severe penalties are added to the sum payable, and an expeditious method is provided whereby the taxpayers' common property becomes subjected to liability for the delinquent tax and the accumulated penalties. Enforcement of the act is intrusted to the state tax commission. Since the other provisions of this enactment are not material to the issues before us, we shall omit mention of them. It will be observed that, succinctly stated, the act imposes a tax of 5 per cent. upon the gross income from intangibles received by all individuals residing within the state; the tax is exacted only from individuals. Session Laws 1929, c. 427, p. 617, is applicable to corporations. The validity of the latter has not been challenged, but due to the fact that both appellants and respondents have made frequent reference to it, we deem it advisable at this point to make a résumé of its material provisions. It limits its scope to national and state banks, building, savings, and loan associations, financial, manufacturing, mercantile, and business corporations. This act (section 3) requires every national bank within the state to pay annually "an excise tax according to or measured by its net income * * * at the rate of 5 per cent upon the basis of its net income"; further (section 4), "every bank, other than a national banking association, and every financial corporation, building and loan association, savings and loan association and mutual savings bank, located within the limits of this state, shall annually pay to the state, for the privilege of carrying on or doing of business by it within this state, an excise tax according to or measured by its net income, to be computed in the manner hereinafter provided, at the rate of 5 per cent upon the basis of its net income." The act declares that the taxes exacted of banking institutions "shall be in lieu of all other state, county and municipal taxes, upon the corporations and associations therein mentioned, except taxes upon their real property." Chapter 427, p. 617,§ 6, next provides:
"Every mercantile, manufacturing and business corporation doing business within this state, * * * shall annually pay to this state, for the privilege of carrying on or doing of business by it within this state, an excise tax according to or measured by its net income, to be computed in the manner hereinafter provided, at the rate of 5 per cent upon the basis of its net income * * * each corporation mentioned in this section 6 shall be entitled to an offset against said tax in the amount of taxes paid by it upon its personal property located in this state, but the offset shall not exceed 90 per cent of the said tax."
The act provides that if the gross income of a corporation is derived from business done both within and without the state, the net income shall be determined upon the portion done within the state only. In computing net income corporations are permitted to deduct, among other items, interest payments, losses sustained during the year, and debts found to be worthless. The interest deduction "shall not exceed up to and including 5 per cent. upon deposits or withdrawable shares in banks, building and loan associations, savings and loan associations and mutual savings banks, and shall not include the income on nonwith-drawable shares, nor on amounts credited to undivided profits or surplus." The act provides for credits in the event the taxpayer has become liable to a similar tax levied by another state upon the net income of his business. The remaining portions of the act are not sufficiently material to the issues before us to warrant mention.
By way of brief résumé it will be observed that chapter 427 exacts a tax of 5 per cent. upon the net income of corporations from all sources, and that chapter 429 imposes a tax of 5 per cent. upon the gross income from intangibles owned by individuals only. The latter act makes no provision whereby an owner of securities who has made purchases by the use of borrowed capital can make deductions from his gross income for interest paid. In the event that some of his intangibles prove to be either totally or partially worthless, he is entitled to no deductions on those accounts. Likewise operating expenses incurred by him incidental to his investment must be borne by him without deduction. A corporation, however, engaged in the same kind of business is permitted by chapter 427 to make all of these deductions in computing net income. The plaintiffs insist that these circumstances establish their charges of discrimination. However, it is to be observed that chapter 427 requires corporations to include all gains received by them in computing net income; thus commissions earned in the sale of securities enter into the income upon which the tax is...
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