Reynolds Metal Co. v. Martin

• Decision Date: 23 June 1937
• Citation: 107 S.W.2d 251,269 Ky. 378
• Parties: REYNOLDS METAL CO. et al. v. MARTIN et al.
• Court: Kentucky Court of Appeals

107 S.W.2d 251

269 Ky. 378

REYNOLDS METAL CO. et al. v. MARTIN et al.

Special Court of Appeals of Kentucky.

June 23, 1937

Appeal from Circuit Court, Franklin County.

Consolidated suits by the Reynolds Metal Company and others and by A. H Grayburn against James W. Martin and others. From the judgment, plaintiffs appeal.

Judgment modified, and as modified, affirmed.

McMURRY Special Justice, dissenting in part.

Woodward Dawson & Hobson, Edward P. Humphrey, and Robert F. Vaughan, all of Louisville, Caldwell & Gray and John C. Vigor, all of Ashland, Benton & Benton, of Newport, John H. Gardner, of Winchester, and Marvin H. Taylor, of Louisville, for appellants.

Hubert Meredith, Atty. Gen., A. E. Funk, Asst. Atty. Gen., and Robert E. Hatton, of Frankfort, for appellees.

RICHARD PRIEST DIETZMAN, Special Justice.

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, whether real or personal, growing out of the ownership, or use, or interest in such property *** also from rent, royalties, interest, dividends, securities or transactions of any business carried on for gain or profit, or gains or profits and income derived from any source whatever, including gains or profits and income derived through estates or trusts by the beneficiaries thereof, whether as distributive or as distributable shares."

There is excluded from the term "gross income" certain portions of life insurance, endowment or annuity contracts, gifts, accident and health insurance, compensation under workmen's compensation acts, amount of damages received by compromise or suit on account of injuries or illness, and interest upon the obligations of the United States, or instrumentalities of the federal government, and interest upon the obligations of this commonwealth, or any of its political subdivisions and instrumentalities thereof.

Section 3 provides for certain deductions which may be made from gross income, among which are: "dividends received during the taxable year upon stock of national banks and dividends received during the taxable year upon stock of banks and trust companies organized under the laws of this State."

Section 4 expressly provides that for certain enumerated expenditures no deductions are to be allowed.

Section 5 defines the term "net income" as meaning "the gross income of a taxpayer less the deductions allowed by this Act."

Section 6 governs the determination of income arising from gains or losses from the sale or other disposition of property, real, personal, or mixed; and section 7 that arising out of exchanges of such property.

Section 8 prescribes the accounting period upon which the income of the taxpayer is computed.

Sections 9 to 12, inclusive, have to do with returns.

Section 13 deals with exemptions. In the case of a single person, the personal exemption is $1,000, and in the case of a head of the family or of a husband and wife living together, the exemption is $2,500, to which is added the further exemption of $400 per dependent, as such dependent is defined in the act. Subsection 1 of this section further provides: "A husband and wife living together shall make a joint return, or may make separate returns if submitted together; provided, that if husband and wife living together make separate returns their incomes shall be aggregated for the purpose of computing the tax due. [If husband and wife have separate incomes, they may divide the tax between them in proportion to income.]" Section 13 also provides that the exemptions allowed by its provisions are chargeable against the first bracket or brackets of income.

Section 14 of the act, the one imposing the tax, does so in this language: "A tax is hereby annually levied for each taxable year upon every resident individual of this State upon his entire net income as herein defined for purposes of taxation (subject to exemptions provided in Section 13) at the following rates." (Here follow the brackets of income with the applicable rate of taxation.)

Subsection (2) of this section 14 levies like taxes upon nonresidents deriving income from property owned or business carried on in this state with respect to such income. This subsection further provides: "In the case of non-residents and of residents who receive credits on account of income taxes paid in other states, the personal exemptions allowable under this Act shall be that proportion of those permitted under Section 13 which is represented by the ratio of the taxpayer's net income in Kentucky to his total net income from all sources." This subsection also provides that an employer of a nonresident and any person making payments to a nonresident may be required by the Department of Revenue to withhold from any payments made to such nonresidents, an amount not exceeding 5 per cent. of the payments so made. After the nonresident shall have submitted his annual return to the Department of Revenue, and the same has been audited, the department must refund any overpayment caused by this withholding, together with interest thereon at the rate of 6 per cent. per annum from the date received, until certified for refund.

Subsection (3) of section 14 of the act provides for the rate of taxation to be paid by corporations. There is excluded from those corporations which have to pay the tax: "State and national banks and trust companies, insurance companies including farmers' or other mutual hail, cyclone, windstorm or fire insurance companies, insurers and reciprocal underwriters, and religious, educational, charitable and other corporations not organized or conducted for pecuniary profit."

Section 15 of the act allows resident individuals who receive income from sources without the state, subject to taxation under this act, which income is taxed by the state of its origin, a credit on the tax to be paid this state by the amount so paid the foreign state, provided such foreign state allows credits similar to those granted by section 16 of the act.

This section 16 provides that where a nonresident individual becomes liable for income taxes to the state wherein he resides upon his net...