Shields v. Williams

• Decision Date: 19 July 1929
• Parties: SHIELDS et al. v. WILLIAMS, Commissioner of Finance and Taxation, et al.
• Court: Tennessee Supreme Court

19 S.W.2d 261

159 Tenn. 349

SHIELDS et al. v. WILLIAMS, Commissioner of Finance and Taxation, et al.

Supreme Court of Tennessee.

July 19, 1929

Appeal from Chancery Court, Davidson County; R. B. C. Howell Chancellor.

Suit by William S. Shields and others against Albert S. Williams Commissioner of Finance and Taxation, and others. From the decree, defendants appeal. Reversed, and bill dismissed.

P. D Maddin, Hume, Newman & Armistead, W. P. Cooper, and Bass, Berry & Sims, all of Nashville, for complainants.

John J. Vertrees and Bradley Walker, both of Nashville, for educational and like institutions.

L. D. Smith, of Nashville, R. E. Maiden, of Dresden, and M. P. O'Connor and W. E. Norvell, Jr., both of Nashville, for defendants.

GREEN C.J.

Chapter 86 of the Acts of 1929, amended by chapter 116 of the acts of the same year, undertook to impose a tax on the incomes of certain stocks and bonds not taxed ad valorem. The bill herein was filed by the owners of such securities against the fiscal officers of the state, primarily assailing the enactments as unconstitutional, but, in the event they were upheld, asking for a construction of certain provisions thereof. The state officials demurred to the bill. The chancellor was of opinion that, in passing these acts, the Legislature exceeded the limitations thrown around the taxing power by the Constitution, and that is the principal question that has been debated before us.

Chapter 602 of the Acts of 1907 was the last general assessment law passed by the Legislature. Sections 21, 22, and 26 of that statute provided for the taxation of various corporations. The tax levied by these sections was upon the capital stock or corporate property, not on the shares of stock. Section 24 of the statute mentioned provided for the taxation of other corporations, and the tax levied by this section was upon the shares of stock, not on the capital stock or corporate property.

Section 8 of the aforesaid act contained an enumeration of personal property for assessment under numbered classes, among other classes the following:

"Class 5. The amount of income derived from United States bonds and all other stocks and bonds not taxed ad valorem.

Class 6. All bonds, except United States bonds, and all shares of stock, except when the corporate property or capital stock is assessed in lieu of the share of stock as hereinafter provided in section 22 of this Act.

Class 7. Notes, duebills, choses in action, accounts, mortgages, or any other evidence of indebtedness, and money on hand or on deposit or invested in any manner in this State or elsewhere not otherwise assessed."

Chapter 86 and chapter 116 of the Acts of 1929 amend chapter 602 of the Acts of 1907 so as to omit from taxation the items specified in class 5, class 6, and everything in class 7 except money on hand or on deposit. The Acts of 1929 also make some minor amendments in chapter 602 of the Acts of 1907 so as to make the whole of the amended legislation consistent.

Chapter 86 of the Acts of 1929 levies a tax of 5 per cent. per annum on incomes derived from stocks and bonds not taxed ad valorem with certain exceptions. The income from United States bonds was excepted, and likewise income from stock in corporations which were arms or agencies of the United States; the income from bonds of the state of Tennessee or any political subdivision of the state, where the bonds were authorized by law to be issued tax exempt; the income on stock in corporations whose capital stock or corporate property was assessed under sections 21, 22, or 26 of chapter 602 of the Acts of 1907, or whose shares of stock were assessed under section 24 of that act, and bonds which, under that act, went to make up the aggregate of corporate stock or corporate property or to determine the value of the shares of stock; the income derived by educational, religious, or other like institutions organized for general welfare exempt from taxation under other provisions of chapter 602 of the Acts of 1907; and (as amended by chapter 116 of the Acts of 1929) the income from $1,000 of stocks and/or bonds was exempted to each taxpayer.

Section 4 of chapter 86 of the Acts of 1929 is as follows:

"Be it further enacted, that the word 'stock' as used in this Act shall be held and construed to mean shares of stock issued by corporations chartered and organized under the laws of the State of Tennessee, or of any other State, or of the United States, or of any foreign government, and all interests in partnerships, associations, or trusts represented by transferable evidences of such interest, save and except shares of stock in corporations directly formed by the United States as agencies for executing Federal powers, which stock is by law exempt from state taxation under the laws of the United States. Income from stocks as herein defined shall not be assessable to the holder thereof if the income which would otherwise be assessable has been assessed to and paid by the organization issuing the same, it being the purpose of this Act to impose only one income tax on assessable income. The word 'bond' shall be held and construed to include all obligations issued by any person, firm, joint stock company, business trust or corporation organized and doing business under the laws of the State of Tennessee, or any other State, evidenced by an instrument whereby the obligor is bound to pay interest to the obligee regardless of whether the obligor is doing business in the State of Tennessee, or whether the obligation under the terms of which the interest accrues is a mortgage or lien on property located in the State of Tennessee, or beyond the jurisdiction thereof; provided that the word 'bond' shall not include ordinary commercial paper, trade acceptances and rent notes, etc., maturing in six months or less from the date of issuance."

Besides freeing them from ad valorem taxation, the recent legislation subjects to the income tax shares of stock in foreign corporations (and possibly some other shares) and all written interest-bearing obligations to pay money, except ordinary commercial paper, trade acceptances, rent notes, etc., maturing in six months or less from date of issuance. Upon the income of such securities the income tax is levied.

The immediate inquiry is as to the power of the General Assembly to enact such legislation under the restraints of section 28 of article 2 of the Constitution. The relevant language of that section is this:

"All property, real, personal or mixed, shall be taxed, but the legislature may except such as may be held by the state, by counties, cities or towns, and used exclusively for public or corporation purposes, and such as may be held and used for purposes purely religious, charitable, scientific, literary or educational, and shall except one thousand dollars' worth of personal property in the hands of each taxpayer, and the direct product of the soil in the hands of the producer, and his immediate vendee. All property shall be taxed according to its value, that value to be ascertained in such manner as the legislature shall direct, so that taxes shall be equal and uniform throughout the state. No one species of property from which a tax may be collected, shall be taxed higher than any other species of property of the same value, but the legislature shall have power to tax merchants, peddlers and privileges, in such manner as they may from time to time direct. * * * The Legislature shall have power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem."

What did the framers of the Constitution have in mind when they authorized the Legislature to levy a tax "upon incomes derived from stocks and bonds that are not taxed ad valorem"?

As the result of the amendments of chapter 602 of the Acts of 1907, stocks and bonds of great worth are not taxed ad valorem. The state contends that, under express authority of the Constitution, the Legislature was entitled to levy a tax on incomes derived from such stocks and bonds.

On the other hand, the complainants contend that, in omitting such securities from ad valorem taxation, the Legislature transgressed the constitutional mandate that all property should be taxed and that authority for the income tax cannot be drawn from such legislative dereliction.

It is said by complainants that, in conferring this power to levy a tax upon incomes on stocks and bonds not taxed ad valorem, the makers of the Constitution had in view government bonds and stocks in certain railroad corporations, the shares of which were exempted by charter provisions from taxation. In other words, stocks and bonds which could not be taxed ad valorem.

We are not able to agree to the latter proposition. The Journal of the Constitutional Convention shows that, as first reported to that body by the committee on finance, etc., section 28 contained this provision:

"The Legislature shall have power to levy a special tax upon incomes derived from stocks and bonds exempted by the laws of the United States from taxation."

An alternative proposal was offered containing this language:

"The Legislature shall levy a special tax upon incomes derived from stocks and bonds exempted by the laws of the United States from taxation."

Thereafter the convention substituted for the clauses offered the clause embodied in section 28:

"The Legislature shall have power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem."

It is suggested by counsel for the complainants that members of the convention were aware of provisions in the charters of said railroad corporations created by legislative acts which exempted the shares of stock in said corporations from ad...