Reynolds Metal Co. v. Martin

• Decision Date: 23 June 1937
• Citation: 269 Ky. 378
• Parties: Reynolds Metal Co. et al v. Martin et al.
• Court: United States State Supreme Court — District of Kentucky

269 Ky. 378

Reynolds Metal Co. et al v. Martin et al.

Court of Appeals of Kentucky. Special Court of Appeals of Kentucky.

Decided June 23, 1937.

1. Constitutional Law. — In considering constitutionality of state income tax law, Special Court of Appeals was not concerned with

wisdom or expediency of law and was required to resolve any doubt of its validity in favor of its constitutionality (Acts 1936, 3d Ex. Sess., c. 7).

2. Taxation. — The power to tax is inherent in state's sovereignty and is essential to its existence, and power may be exercised without limit except to extent that it may be prohibited or limited by State or Federal Constitutions.

3. Taxation. — An "income tax" is a contribution, measured by taxpayers' ability to pay on basis of extent of income, exacted from those domiciled or doing business in state to defray expenses of government.

4. Taxation. — A taxpayer is required to pay income tax because he is domiciled or doing business in state and so enjoys protection of government, right to earn a living, to receive, keep, and expend income, and to be safe in his property and pursuit of happiness.

5. Taxation. — An income tax is not a tax on "property," but partakes of the nature of an "excise" tax.

6. Taxation. — The state income tax law is not unconstitutional as violating constitutional provisions requiring that taxes upon property shall be uniform and declaring that laws exempting property other than that mentioned shall be void, since an income tax is not a "property tax" (Acts 1936, 3d Ex. Sess., c. 7; Constitution, secs. 170-172).

7. Taxation. — The Legislature must act reasonably and not arbitrarily in making classifications for taxing purposes.

8. Taxation. — The Legislature has wide discretion in selection and classification of subjects of income taxation, and its selection and classification will be upheld as constitutional if any state of facts reasonably can be conceived to support selection and classification made.

9. Constitutional Law; Taxation. — The exemption of state banks and trust companies from imposition of income tax and exclusion of dividends on their stock from taxpayers' gross income are justifiable classifications, and not discriminatory, in view of present economic conditions demanding different treatment of banking institutions from that of industrial and other corporations (Acts 1936, 3d Ex. Sess., c. 7, secs. 3, 14 (3); Constitution U.S. Amend. 14).

10. Statutes. — The exemption of federal office holders from state income taxes under Federal Constitution does not render unconstitutional entire income tax law, which does not expressly exempt such officers, on ground that it cannot be presumed that Legislature would have taxed all other persons if federal office holders are not taxed, in view of declaration in law of legislative intent to tax separately each class of income contemplated by any of its provisions (Acts 1936, 3d Ex. Sess., c. 7, sec. 38).

11. Statutes. — A holding, from which no appeal was taken, that so much of state income tax law as compels husbands and wives to aggregate their income to determine rate of taxation to be paid by them is unconstitutional, does not invalidate entire law, in view of provision that decision holding any provision unconstitutional should not affect remainder of law (Acts 1936, 3d Ex. Sess., c. 7, sec. 38).

12. Constitutional Law. — The trial court in determining question of constitutionality of state income tax law with respect to state, county, and municipal officers, had no authority to hold that law was not applicable to such officers elected or appointed for term in office at time law was passed, where there was no one before court affected by question.

13. Officers. — The state income tax law is not invalid as to state, county, and municipal officers as violating constitutional prohibition against diminishing their salaries during term of office for which they are elected (Acts 1936, 3d Ex. Sess., c. 7).

14. Statutes. — The state income tax law, even if invalid as to state, county, and municipal officers as diminishing their salaries, does not render entire law unconstitutional, on ground that it cannot be presumed that Legislature would have taxed all other persons if such officers are not taxed, in view of provision in law declaring legislative intent to tax separately each class of income contemplated by any of its provisions (Acts 1936, 3d Ex. Sess., c. 7, sec. 38).

15. Taxation. — The state income tax law is not unconstitutional as discriminating against nonresidents with reference to exemptions allowed them as against income derived from business in state, since, under law, nonresidents and residents are treated exactly alike in that respect (Acts 1936, 3d Ex. Sess., c. 7).

16. Taxation. — The requirement of state income tax law that personal exemptions be taken from first brackets of taxation, instead of from higher brackets or last bracket as federal law requires, does not work unjust discrimination (Acts 1936, 3d Ex. Sess., c. 7, sec. 13).

17. Taxation. — The provision of state income tax law empowering commissioner of revenue to require withholding of not in excess of 5% of income payable to nonresidents is not unconstitutional as in effect being a forced loan to commonwealth, in view of revenue regulations and provision that on final audit, if more has been withheld than was due from nonresident, it shall be refunded with interest (Acts 1936, 3d Ex. Sess., c. 7, sec. 14 (2)).

18. Taxation. — The constitutional provisions that nothing in Constitution shall be construed to prevent General Assembly from providing for taxation based on income, licenses, or franchises, is not a grant of power to tax, as against contention that taxation can be based on only one of such three methods (Constitution, sec. 174).

Appeal from Franklin Circuit Court.

WOODWARD, DAWSON & HOBSON, EDWARD P. HUMPHREY,

ROBERT F. VAUGHAN, CALDWELL & GRAY, JOHN C. VIGOR, BENTON & BENTON, JOHN H. GARDNER and MARVIN H. TAYLOR for appellants.

HUBERT MEREDITH, Attorney General, A.E. FUNK, Assistant Attorney General, and ROBERT E. HATTON for appellees.

OPINION OF JUDGE DIETZMAN, OF SPECIAL COURT OF APPEALS.

Modifying judgment and affirming as modified.

This case involves the constitutionality of chapter 7 of the Acts of the Third Extraordinary Session of the General Assembly of 1936, now section 4281b-1 et seq. of the 1936 Edition of Carroll's Kentucky Statutes, and commonly known as the "State Income Tax Law."

The regular members of the Court of Appeals having declined to sit in this case and that of Martin et al. v. Wolfford, 269 Ky. 411, 107 S.W. (2d) 267, this day decided, such fact was certified to his Excellency, the Honorable A.B. Chandler, Governor of the Commonwealth, who thereupon appointed and commissioned as special judges of the Court of Appeals to hear the appeals in these cases, the following practicing attorneys of the state: James W. Cammack, as Chief Justice, and D. Bernard Coughlin, Frank Daugherty, Richard Priest Dietzman, Noel Harper, W.F. McMurry, and Henry R. Prewitt, as Associate Justices.

Except in certain particulars, to which reference will hereafter be made, the lower court held the provisions of the act constitutional, and since it thought that those parts of the act which it deemed unconstitutional could be readily separated from the rest of the act without doing violence thereto, it made such separation, and upheld the validity of the rest of the act. From the judgment so entered this appeal is prosecuted.

At the outset, in deference to the earnestness of counsel for the appellants in their briefs, it may be observed that with the wisdom or expediency of this State Income Tax Law, this court has no concern. That is a matter for the legislative branch of our government. The question presented is, not the wisdom or expediency of the act, but its constitutionality. Our sole duty is to measure the act by the yardstick of the Constitutions, State and Federal, ever bearing in mind the further duty which rests upon us of resolving any doubt of the validity of the act in favor of its constitutionality. Talbott, Auditor, v. Laffoon, Governor, 257 Ky. 773, 79 S.W. (2d) 244.

The power to tax is inherent in the sovereignty of the state, and is essential to its existence. Save to the extent that such power may be prohibited or limited by the State's Constitution, or that of the United States, it may be exercised without limit. Billeter & Wiley v. State Highway Commission, 203 Ky. 15, 261 S.W. 855; Board of Education of Calloway County v. Talbott, 261 Ky. 66, 86 S.W. (2d) 1059. The provisions of our Constitution regarding taxation therefore operate as limitations only on what is otherwise an unlimited power.

We are met at the threshold of this case with the primary contention of the appellants that the State Income Tax Law here involved imposes a property tax, and that if this be so, it is plainly unconstitutional in the light of the provisions of our State Constitution requiring uniformity of taxation. The appellees concede that if the tax imposed by this State Income Tax Law be in reality a property tax, then it is unconstitutional, being in violation of sections 171 and 172 of our State Constitution, but insist that such tax is not a property tax, but a tax in the nature of an excise or duty. We are therefore first required to determine the nature of the exaction imposed. A brief summary of the State Income Tax Law is here appropriate.

Section 1 of that act deals with certain definitions, none of which is helpful in determining the question of the nature of the tax.

Section 2 defines "gross income" as that term is used in the act in these words: It "includes gains, profits and income derived from salaries, wages, or compensation for personal services of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales or dealings in property,...