State v. Flenner

• Decision Date: 02 June 1938
• Docket Number: 6 Div. 316.
• Citation: 181 So. 786,236 Ala. 228
• Parties: STATE v. FLENNER.
• Court: Alabama Supreme Court

181 So. 786

236 Ala. 228

STATE v. FLENNER.

6 Div. 316.

Supreme Court of Alabama

June 2, 1938

Appeal from Circuit Court, Jefferson County; E. M. Creel, Judge.

Appeal by J. R. Flenner to the Circuit Court from a deficiency assessment made by the State Tax Commission for income tax. From a decree setting aside the assessment, the State appeals.

Affirmed.

A. A Carmichael, Atty. Gen., Chas. L. Rowe, Asst. Atty. Gen., and Arthur F. Fite, of Jasper, for the State.

Smith Windham, Jackson & Rives, of Birmingham, for appellee.

Bradley Baldwin, All & White, of Birmingham, amici curiae.

KNIGHT Justice.

The appeal in this case is prosecuted by the State of Alabama from a decree and judgment of the Circuit Court of Jefferson County, in Equity, setting aside and annulling a "deficiency assessment" made by the State Tax Commission in the matter of the income return of the appellee for the tax year 1936, and confirming the return as made by the taxpayer.

The cause was tried in the Circuit Court of Jefferson County upon an agreed statement of facts. From this statement it appears that the taxpayer filed his Income Tax Return for the calendar year 1936 with the State Tax Commission of Alabama showing an income tax due the State in the amount of $8.67.

Thereafter, over the protest, objection and showing of the taxpayer, the State Tax Commission made and entered a final assessment by way of income tax against the taxpayer of $829.87 for the calendar year 1936. From this assessment the taxpayer duly took an appeal to the circuit court, sitting in equity.

It appears that the assessment made by the State Tax Commission was based upon an asserted net taxable gain of $15,775.00, arising out of the sale by the taxpayer of 200 shares of the common stock of the International Harvester Company, purchased prior to the year 1932, for the total price of $19,147.50, and sold by him during the year 1936 for the sum of $20,000.00.

The contention of the State Tax Commission was that the proper legal basis for determining the amount of the taxpayer's income tax on the sale of said stock was the difference between the amount recovered by him on the sale of such stock, and the fair and reasonable market value thereof as of January 1st, 1933, which was $4,225.00, rather than the actual cost price to the taxpayer of such stock, which was, as above stated $19,147.50. On the present appeal the state makes the same insistence.

So, then, the only question we are called upon to determine on this appeal is, what is the correct legal basis, under the provisions of section 345.4(A) (9) of the Income Tax Act, approved July 10, 1935, General Acts, 1935, p. 256, (at page 401) for ascertaining the taxpayer's income tax for the year 1936 from the sale of the said 200 shares of stock?

Article 22, amendment No. 25, of the Constitution of Alabama provides: "The legislature shall have the power to levy and collect taxes for state purposes on net incomes from whatever source derived within this state * * * for the calendar year, 1933, and thereafter and to designate and define the incomes to be taxed and to fix the rates of taxes provided the rate shall not exceed 5 per cent nor 3 per cent on corporations. * * *"

Section 345.1 of the Act of 1935, page 397, provides: "In addition to all other taxes now imposed by law there is hereby levied and imposed a tax on the entire net income as defined in this Article," etc.

Section 345.3 of the same Act, page 399, provides: "The tax herein levied and imposed upon every resident of this State, which tax is in addition to all other taxes imposed by this Act, and which tax shall be assessed, collected and paid annually upon and with respect to his entire net taxable income as herein defined and shall be computed at the rates as follows * * *."

Subsection (A) (9) of Section 345.4, same Act, page 401, provides: "The basis for determining gain or loss on a sale or disposition of property acquired prior to January 1, 1933, shall be the fair and reasonable market value as of January 1, 1933."

Section 345.10, same Act, page 406, provides: "The term 'gross income' as used herein: (1) Includes gains, profits and income derived from * * * commerce or sales, or dealings in property whether real or personal, growing out of ownership or use of or interest in such property; also from interest, royalties, rents, dividends, securities or transactions of any business carried on for gain or profit and the income derived from any source whatever, including any income not exempted under this Article and against which income there is no provision for a tax."

It is to be noted that the provisions of the Alabama Income Tax Statute are substantially similar to the Federal Income Tax Statutes, and of the States of New York, Massachusetts, Wisconsin and Georgia. These statutes were in force when the Alabama Income Amendment was adopted. The fact is the Alabama Act, Section 345.4(A) (9), which is involved in this case, was evidently borrowed from the Federal Act. However, it is insisted by appellant that Article 22 of the Constitution (the Income Tax Amendment) has conferred power upon the Legislature to define what is net income upon which the tax is levied, and that the Legislature has exercised this power in providing a basis for determining gains or losses on the sale of property acquired prior to January 1, 1933. After all, however, the question is what did the Legislature mean by enacting Subsection (A) (9) of Section 345.4, when construed in connection with the entire Act?

While the construction placed upon a similar provision of the Federal Income Statute, or by the Courts of New York, Massachusetts, Wisconsin and Georgia, upon similar provisions in their respective statutes, are not binding upon this Court, yet the decisions of those courts are justly entitled to weight. Particularly is this true with reference to the decisions of the Supreme Court of the United States, when it is remembered that the Alabama Act was borrowed from the Federal statute, and after the Supreme Court of the United States had passed upon, and construed the same.

The Legislature of Alabama has deliberately and substantially used in the Acts now before us practically the same language employed in the pertinent provisions by the Congress in adopting the Federal Income Tax law. It was no accidental happening. While this Court will not abdicate its jurisdiction in construing and determining the meaning of an act of its own state legislature, yet this Court recognizes the legislative presumption that obtains here, as well as elsewhere, that, in borrowing an Act of the Legislature of another state, which had received a settled construction in that state before enacted here, it was the purpose of the Legislature in so adopting the statute that the construction placed on the same by the highest court of the state of original enactment should be given the statute, unless there appears something in the act as enacted here to show a contrary purpose. We know this rule is not absolute, or controlling, but it is at least persuasive. Alabama Fuel & Iron Co. v. Denson, 208 Ala. 337, 94 So. 311.

We will now refer to the decisions of the Supreme Court of the United States, and other states having similar provisions in the Income Tax Acts, as subsection (A) (9) of Section 345.4 of the Alabama Act of 1935.

The case of Goodrich v. Edwards, United States Collector of Internal Revenue for the Second District of the State of New York, 255 U.S. 527, 41 S.Ct. 390, 65 L.Ed. 758, decided March 28, 1921, presents the following facts: "(2) The plaintiff in error being the owner of shares of the capital stock of another corporation, in 1912 exchanged them for stock, in a reorganized company, of the then value of $291,600. It was averred and admitted that on March 1, 1913, the value of this stock was $148,635.50, and that it was sold in 1916 for $269,346.25. Although it was thus apparent that the stock involved was of less value on March 1, 1913, than when it was acquired, and that it was ultimately sold at a loss to the owner, nevertheless the collector assessed the tax on the difference between the value on March 1, 1913, and the amount for which it was sold."

The taxpayer, having paid the assessment under protest, sued the collector to recover the amount of the illegal assessment, taking the position that as the property was sold at a real loss to him, he was not chargeable as for any gain, notwithstanding that the property was sold for an amount in excess of its value as of March 1st, 1913, the claimed date for computing the value.

The Supreme Court answered this contention in the following language (41 S.Ct. page 391):

"The act under which the assessment was made provides that the net income of a taxable person shall include gains, profits, and income derived from * * * sales or dealings in property, whether real or personal, * * * or gains or profits and income derived from any source whatever. 39 Stat. 757; 40 Stat. 300, 307.

"Section 2(c) of this same act provides that--'For the purpose of ascertaining the gain derived from a sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived.'

"And the definition of 'income' approved by this court is: ' "The gain derived from capital, from labor, or from both combined," provided it be understood to include profit gained through a sale or conversion of capital assets.' Eisner v. Macomber, 252 U.S. 189, 207, 40 S.Ct. 189 (64 L.Ed. 521, 9 A.L.R. 1570).

"It is thus very plain that

...