State v. Stickney

• Decision Date: 17 July 1942
• Docket Number: No. 33201.,33201.
• Citation: 213 Minn. 89,5 N.W.2d 351
• Parties: STATE v. STICKNEY.
• Court: Minnesota Supreme Court

5 N.W.2d 351

213 Minn. 89

STATE v. STICKNEY.

No. 33201.

Supreme Court of Minnesota.

July 17, 1942.

Rehearing Denied September 2, 1942.

Appeal from District Court, Ramsey County; Carlton McNally, Judge.

Action by the State against Mrs. Jennie E. W. Stickney to recover an unpaid income tax claimed to be due for the year 1935. From a judgment for plaintiff, defendant appeals.

Affirmed.

Ira C. Oehler and Cole Oehler, both of St. Paul, for appellant.

J. A. A. Burnquist, Atty. Gen., and P.F. Sherman, Asst. Atty. Gen., for respondent.

PETERSON, Justice.

This action was brought to recover $205.57 claimed to be due as unpaid income tax for the year 1935.

The tax was assessed on a profit alleged to have been realized by the taxpayer from the sale of 110 shares of stock of the St. Paul Fire & Marine Insurance Company for $19,663.65. These shares were part of 1,420 shares which she acquired on April 6, 1928, as the residuary legatee under the will of Clara W. C. Mann, a resident of Ramsey county, who died on that date. In the probate proceedings these shares were inventoried by the representative and were appraised as of the date of the testator's death at $24,860 for inheritance tax determination. The market value of the shares on January 1, 1933, was $11,660.

For the purpose of determining gain or loss from the sale, the taxpayer took the inventory value in the probate proceedings. On this basis she sustained a loss of $5,196.35, and she was not liable for any tax. The commissioner of taxation took the January 1, 1933, value. On this basis, instead of the loss which she claims, the taxpayer realized a profit of $8,003.65, upon which she is liable for the tax claimed.

The court below sustained the determination of the commissioner and ordered judgment accordingly, from which the taxpayer appeals.

The taxpayer claims that the inventory value is the basis for determining gain or loss in virtue of L.1933, c. 405, § 19, Mason St.1936 Supp. § 2394-19, which provides: "The basis for determining the gain or loss from the sale or other disposition of property acquired before January 1, 1933, shall be the fair market value thereof on said date except that, if its costs to the taxpayer (or, in the case of inventory property, its last inventory value) exceeds such value, the basis shall be such cost (or last inventory value)."¹

The state contends that the inventories referred to in § 19 are not those used in the probate court, but those authorized by § 15 (Id. § 2394-15) and the regulations adopted thereunder for use in determining gain or loss from a trade or business.

The questions for decision are (1) whether property included in a probate inventory is "inventory property" within the meaning of § 19 for the purpose of determining gain or loss; and (2) whether the fair market value of the shares on January 1, 1933, is the basis for determining gain or loss.

1. By the terms of § 16(a), Mason 1936 Supp. § 2394-16(a), "the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in Sections 18 and 19." Section 18, Id. § 2394-18, defines the basis for determining gain or loss from the sale or other disposition of property acquired on or after January 1, 1933. Section 19 defines the basis for determining such gain or loss where the property was acquired before January 1, 1933. See Thorpe v. Spaeth, 211 Minn. 205, 300 N.W. 607.

The language and principles of the state income tax statute were taken from the various federal income tax acts enacted prior thereto since 1918. For an elaborate comparison of the state and federal acts and a table of corresponding sections, see Rottschaefer, "The Minnesota State Income Tax," 18 Minn.L.Rev. p. 93. The prior construction of the federal act should be considered in construing the state law. Where the state statute is the same or substantially the same as the federal act from which it was copied, the prior construction of the federal statute should be deemed controlling by us in construing the state statute. Christgau v. Woodlawn Cemetery Ass'n, 208 Minn. 263, 293 N.W. 619.

The state income tax law became effective April 21, 1933. The first tax thereunder was for the calendar year 1933. The purpose of adopting as the basis for determining gain or loss the value of the taxpayer's property sold or disposed of as of the effective date of the tax, January 1, 1933, under §§ 18 and 19, like that of adopting the effective date of the federal tax, March 1, 1913, under corresponding provisions of the federal act, is "to measure that part of his total gain which has arisen or accrued after the enactment of any of the statutes taxing income and thus to arrive at his gain which may be taxed as income." Lucas v. Alexander, 279 U.S. 573, 579, 49 S.Ct. 426, 428, 73 L.Ed. 851, 61 A.L.R. 906.

Since the taxpayer acquired the shares of stock prior to January 1, 1933, the basis for determining gain or loss is governed by § 19. Unless the shares in question are "inventory property" within the meaning of § 19, the "fair market value" thereof on January 1, 1933, must be adopted as the only other basis permissible for computing gain or loss.

The use of inventories for determining gain or loss for income tax purposes is governed by § 15 of the act, which reads: "Whenever in the opinion of the Commission the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commission may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business involved and as most clearly reflecting the income."

Pursuant to statutory authorization contained in § 50, the tax commission, and later the commissioner of taxation as the statutory successor to such authority, promulgated rules specifying the particular instances in which a taxpayer was authorized to use an inventory to determine gain or loss for income tax purposes and regulating such use in detail. The basic rule is: "Inventories are necessary in order to properly reflect the net income in every case in which the production, purchase, or sale of merchandise is an income producing factor." Enumerated as those entitled to use inventories are dealers in securities, livestock raisers and farmers, miners and manufacturers, retail merchants, dealers in real estate, dealers in foreign exchange, and lumber companies. Income Tax Law and Regulations (September 1934) pp. 64-72. Executors, administrators, devisees, legatees, and distributees are not mentioned and do not belong to any class of taxpayers enumerated as authorized to use inventories for determining gain or loss.

Section 15 is a replica of § 22(c) of the federal income tax act, 26 U.S.C.A. Int. Rev.Code, § 22(c). Section 22(c) was enacted in 1918, 40 Stat. 1060, § 203, and has been carried forward without change in the several revisions of the federal act. James Clark Dist. Co. v. United States, 1929, 66 Ct.Cl. 726, certiorari denied 279 U.S. 868, 49 S.Ct. 482, 73 L.Ed. 1005; 1 Paul and Mertens, Law of Federal Income Taxation, pp. 654, 655, § 13.02. The commissioner of internal revenue promulgated regulations for the use of inventories under § 22(c), which, although they differ from those adopted under § 15 in many respects, are comparable in content and language.

Section 22(c) of the federal act and the regulations thereunder were construed both prior to and subsequent to the enactment of the state act and the adoption of the regulations thereunder. The federal statute has been construed to confer upon the commissioner of internal revenue the power to determine as a practical question in the exercise of his judgment whether in a particular case inventories are necessary for the determination of income. The regulations adopted by the commissioner have the force of law. Lucas v. Kansas City Structural Steel Co. 281 U.S. 264, 50 S.Ct. 263, 74 L.Ed. 848; Schafer v. Helvering, 299 U.S. 171, 57 S.Ct. 148, 81 L.Ed. 101, affirming 65 App.D.C. 292, 83 F.2d 317; Seeley v. Helvering, 2 Cir., 77 F.2d 323. A taxpayer has no right to use an inventory for determining gain or loss except as authorized by the regulations. Schafer v. Helvering, 299 U.S. 171, 57 S.Ct. 148, 81 L.Ed. 101, affirming 65 App.D. C. 292, 83 F.2d 317, supra; Haviland v. Edwards, 2 Cir., 20 F.2d 905, 906. In the Haviland case the court (per Learned Hand, Cir.J.) said: "Plainly, not only does any right whatever to use inventories rest in the hands of the Commissioner, but the instances in which they may be used." We adopt as the construction of § 15 of the state law the construction of § 22(c) by the federal courts.

A probate court inventory is not an inventory of the kind authorized by ...