Trefry v. Putnam

• Citation: 227 Mass. 522,116 N.E. 904
• Parties: TREFRY v. PUTNAM. TREFRY v. GARFIELD.
• Decision Date: 28 June 1917
• Court: United States State Supreme Judicial Court of Massachusetts

227 Mass. 522

116 N.E. 904

TREFRY

v.PUTNAM.

TREFRY

v.GARFIELD.

Supreme Judicial Court of Massachusetts, Suffolk.

June 28, 1917.

Report from Supreme Judicial Court, Suffolk County.

Petitions for mandamus by William D. T. Trefry, Tax Commissioner, against Eliot E. Putnam and another. On report of a Justice of the Supreme Judicial Court. Peremptory writs directed to issue.H. C. Attwill, Atty. Gen., and W. H. Hitchcock, Asst. Atty. Gen., for petitioner.

Warren, Garfield, Whiteside & Lamson and Robert Walcott, all of Boston, for respondents.

RUGG, C. J.

The Forty-Fourth Amendment to the Constitution of this commonwealth, approved and ratified by the people in November, 1915, is in these words:

‘Full power and authority are hereby given and granted to the general court to impose and levy a tax on income in the manner hereinafter provided. Such tax may be at different rates upon income derived from different classes of property, but shall be levied at a uniform rate throughout the commonwealth upon incomes derived from the same class of property. The general court may tax income not derived from property at a lower rate than income derived from property, and may grant reasonable exemptions and abatements. Any class of property the income from which is taxed under the provisions of this article may be exempted from the imposition and levying of proportional and reasonable assessments, rates and taxes as at present authorized by the Constitution. This article shall not be construed to limit the power of the general court to impose and levy reasonable duties and excises.’

The inquiry raised on this record chiefly concerns the meaning of ‘income’ as that word is used in the grant of power to the General Court to ‘impose and levy a tax on income.’

[1][2] The Constitution of Massachusetts is a frame of government for a sovereign power. It was designed by its framers and accepted by the people as an enduring instrument, so comprehensive and general in its terms that a free, intelligent and moral body of citizens might govern themselves under its beneficent provisions through radical changes in social, economic and industrial conditions. It declares only fundamental principles as to the form of government and the mode in which it shall be exercised. Certain great powers are conferred and some limitationsas to their exercise are established. The original Constitution and all its amendments together form one instrument. It is to be interpreted in the light of the conditions under which it and its several parts were framed, the ends which it was designed to accomplish, the benefits which it was expected to confer, and the evils which it was hoped to remedy. It is a grant from the sovereign people and not the exercise of a delegated power. It is a statement of general principles and not a specification of details. Amendments to such a charter of government ought to be construed in the same spirit and according to the same rules as the original. It is to be interpreted as the Constitution of a state and not as a statute or an ordinary piece of legislation. Its words must be given a construction adapted to carry into effect its purpose.

The cases at bar raise four main questions:

(1) Are excesses of gains over losses in the purchase and sales of intangible personal property by one not engaged in the business of dealing in such property taxable as income?

(2) Are gains derived from the sale of rights to subscribe for new shares of stock to be issued by an existing corporation taxable as income?

(3) Is a stock dividend declared and issued by a corporation after the statute went into effect, out of an accumulation of profits earned and invested in its business before the statute was enacted taxable as income?

(4) Is a cash dividend declared and paid after the statute went into effect out of profits earned before the statute took effect, taxable as income?

1. We proceed to the discussion of the first main question.

Pursuant to the grant of power given by the Forty-Fourth Amendment, the income tax law (General Acts 1916, c. 269) was enacted. It is provided by section 5 that:

‘Income of the following classes received by any inhabitant of this commonwealth, during the calendar year prior to the assessment of the tax, shall be taxed as follows:

‘* * * (c) The excess of the gains over the losses received by the taxpayer from purchases or sales of intangible personal property, whether or not the said taxpayer is engaged in the business of dealing in such property, shall be taxed at the rate of three per cent. per annum. * * *’

The act took effect so as to include the income of the calendar year 1916. The tax commissioner issued a bulletin to be used in the preparation of income tax returns, giving the ‘Approved Valuation’ of stocks on January 1, 1916. No question has been raised as to the accuracy of this valuation. By the express terms of section 7 of the Income Tax Act the value of the intangible personal property on January 1, 1916, if owned by the taxpayer on that date, and its value on the date acquired in the event of purchase after that date, is made the basis of computation for determining gains and losses.

The defendant Putnam on January 1, 1916, owned certain shares of stock in corporations, which he sold during the calendar year 1916 at sums in excess of the prices given in the ‘Approved Valuation’ bulletin, so that the net profits realized exceeded his total losses. He also bought certain stocks during the year 1916 and sold them during the same year at a profit. It is contended on his behalf that these gains do not constitute ‘income’ within the meaning of that word in the Forty-Fourth Amendment.

The Forty-Fourth Amendment was adopted by the General Court and by it proposed to the people after prolonged study and at the end of various efforts under the grant of power to tax contained in chapter 1, § 1, art. 4, of the Constitution to establish a general and extensive income tax. Numerous resolves of the Legislature have been passed from time to time extending over many years, providing for the investigation of the subject of taxation by special commissions and committees. The reports from these sources were voluminous, and most, if not all of them, suggested some form of tax on incomes from investments. Advisory opinions to the General Court or one of its branches by the justices of this court touching particular phases of the matter are to be found in Opinions of Justices, 195 Mass. 607, 84 N. E. 499;Id., 208 Mass. 616, 94 N. E. 1043;Id., 220 Mass. 613, 108 N. E. 570. All the schemes thus proposed either were not acceptable to the Legislature or appeared to be in conflict with the grant of the power to tax contained in the Constitution. It became necessary to declare unconstitutional one statute of this general nature. Perkins v. Westwood, 226 Mass. 268, 115 N. E. 411. The adoption and ratification of the Forty-Fourth Amendment under these circumstances renders imperative the inference that the word ‘income’ was there used with the purpose of setting at rest any doubt about the full and complete power of the Legislature to deal with ‘income’ as a subject of taxation. That word was employed to express a comprehensive idea. It is not to be given a narrow or constricted meaning. It must be interpreted as including every item which by any reasonable understanding can fairly be regarded as income. One purpose of the amendment was to avoid with reference to anything rightly describable as ‘income’ the requirement of chapter 1, § 1, art. 4, of the Constitution that property taxes must be ‘proportional * * * upon all * * * estates lying’ within the commonwealth, and to enable income to be taxed at a rate not ‘proportional’ to all other property and to exempt from other taxation the property from which such income arises.

[4][5][6][7][8] ‘Income,’ like most other words, has different meanings dependent upon the connection in which it is used, and the result intended to be accomplished. One purpose of its use in the Forty-Fourth Amendment doubtless was to distinguish property flowing out of an original investment from that which in its inherent nature is permanent investment, already subject to the ample taxing power of chapter 1, § 1, art. 4. But that is not its exclusive signification in the amendment. In its ordinary and popular meaning, ‘income’ is the amount of actual wealth which comes to a person during a given period of time. At any single moment a person scarcely can be said to have income. The word in most, if not all, connections involves time as an essential element in its measurement or definition. It thus is differentiated from capital or investment, which commonly means the amount of wealth which a person has on a fixed date. Income may be derived from capital invested or in use, from labor, from the exercise of skill, ingenuity, or sound judgment, or from a combination of any or all of these factors. One of the most recent of its definitions is ‘the gain derived from capital, from labor, or from both combined.’ Stratton's Independence v. Howbert, 231 U. S. 399, 415, 34 Sup. Ct. 136, 140 (58 L. Ed. 285). Doubtless it would be difficult to give a comprehensive definition which can be treated as universal and final. It is common speech for one to say that he made so much money during a particular 12 months and to mean thereby that he has increased his wealth to that amount. Such a remark made by one not engaged permanently or intermittently in business or any gainful occupation naturally means that by casual purchases or sales of property made in the exercise of good judgment he has augmented the total value of his property. The decisive word in the Forty-Fourth Amendment is ‘income.’ That is a word which not only had been much discussed by legislators and in the press in connection with taxation, but which also is in everyday use. The common meanings attached to it by lexicographers, therefore, have...