Opinion
13605
March 20, 1933.
Before GRIMBALL, J., Charleston, October, 1931. Reversed.
Action by the Read Phosphate Company against South Carolina Tax Commission and others. From a judgment in favor of the plaintiff, the defendants appeal.
The decree directed to be reported and table appended to answer and referred to in opinion follow:
DECREEThis is a suit by the Read Phosphate Company against the South Carolina Tax Commission to recover the sum of $2,894.21, which plaintiff claims was illegally assessed against it by the South Carolina Tax Commission for additional income tax payments, payable in the years 1926, 1928, 1929 and 1930.
The defendants in their answer set up the fact that the rules and regulations applied to plaintiff in this case for the purpose of determining the true and lawful income taxes have been without variation applied to all persons and corporations in like plight with plaintiff from and since the adoption of an Income Tax Law in 1922 by the State of South Carolina, and until the present time, and set up a statement appearing at page 5 of the answer showing the method by which the calculations were arrived at. That the consistent rule applied to every person, firm, and corporation is that "reasonable depreciation" is that amount which should be set aside for each taxable year in accordance with a reasonably consistent plan whereby the aggregate of the amount so set aside, plus the salvage value, will at the end of the useful life of the property used in the business equal the cost of the property, and further that the sum to be replaced by depreciation allowances is the cost of the property upon which depreciation is allowed. If and when a taxpayer has deducted or has been allowed a sum for depreciation sufficient to replace the property, no further depreciation is deductible. That whenever a taxpayer has a sum set aside or has been allowed sufficient depreciation to replace the cost of the property, the allowance of additional or further depreciation would be unreasonable, and merely an allowance which would only go to increase the surplus. That the plaintiff in conformity with the provisions of the statute (Income Tax Law), has been allowed depreciation upon the cost of its plant and depreciation upon the cost of all additions and betterments, made thereto, after the construction of said plant, and until a sufficient depreciation was allowed to cover the cost of said original plant and a part of the additions. That upon the additions for which depreciation did not mature sufficient to cover the cost thereof, defendants are still allowing as to those additions the regular schedule of depreciation and will continue to do so until the cost thereof has been fully covered by depreciations hereafter to be allowed.
The matter is being heard upon an agreed statement of facts which is attached to this decree, in which it is agreed:
"That for the purpose of this suit, the value or cost of the plaintiff's property, as of March 1, 1913, was One Hundred Sixty-five Thousand Four Hundred Fifty-three and 99/100 ($165,453.99), Dollars, and since that date additions have been made, which are set forth year by year in the account as shown on page five (5) of defendants' answer, and that upon the value or cost and additions as set forth in the first column of figures appearing on said account, defendants have based the depreciation to determine the income tax assessment of plaintiff.
"The question to be determined is whether the plaintiff is entitled to deduct from income earned in 1926 through 1930 depreciation sustained in years prior to 1921.
"Plaintiff contends that the value of its property on which depreciation should be based is its value as of January 1st, 1921, arrived at by the agreed value or cost as of March 1, 1913, as shown on that account plus the additions made since that date through the year 1920, and that the total of those amounts represents the value on which annual depreciations at nine and one-half per centum (9 1/2%) should be thereafter made, except on the additions made in each previous year, the basis of depreciation on that item being fixed at four and three-quarters per centum (4 3/4%). That therefore the above items constituting the value or cost as of January 1st, 1921, should be the value on which depreciation should be commenced to be made from that date, and allowed annually at the above rates until the assets are exhausted.
"There is no dispute as to the percentage on which depreciation is based.
"Defendants contend that depreciation should be computed annually on the original cost of the property from date of acquisition, as reflected in the tabulation on page five (5) of the answer, until the same is exhausted by reason of the depreciation on the agreed cost. The defendants also contend that depreciation should be computed annually on the cost of additions and improvements from the date the same were made until the cost of the additions and improvements are exhausted by reason of such depreciation. Whenever the accumulated depreciation is sufficient to cover the cost of the properties no further depreciation should be allowed. Defendants have applied the above rule to every taxpayer similarly situated.
"It is agreed that if plaintiff's contention is correct then the payments made by plaintiff for the years 1926, 1927, 1928, 1929 and 1930 were the correct amounts due and no further payments are due for those years, and plaintiff is entitled to recover the amount claimed; and that if defendants' contention is correct then the tax paid by plaintiff under protest was due and can not be recovered."
The question, therefore, is to be determined by a proper construction on the Income Tax Act, approved October 12, 1926, appearing at page 1 of the Acts of 1927, amended by Act No. 124 (page 217), of the Acts of 1927, as embodied in Section 2435 et seq., of the Code of Laws of South Carolina, 1932.
The first income tax law of the State of South Carolina is the Act of 1922, appearing in Acts of 1922, page 896. This Act imposed an income tax upon all persons and corporations, adopting the federal income tax law in all of its particulars, and requiring an income tax to be paid one-third of the amount paid to the federal government, a copy of the return to the federal government being all that was required and one-third of the tax therein shown was to be paid.
The Tax Commission had to abide by the rules and regulations of the federal government and had no discretion whatsoever in the method of computing the tax, so that to all intent and purposes, the method of computing the tax was not regulated by state statute but solely by federal statute, and the rulings of the Internal Revenue Department of the government.
But, in 1926, the State of South Carolina passed its separate and complete income tax Act; directed by statute to be known as the "Income Tax Act of 1926," which in express terms repealed in toto the 1922 Income Tax Act, with its amendments, and therein set forth in detail how income tax was to be arrived at and provided what deductions were to be allowed. What had been done in computing income under the earlier Act was no longer to be considered, except that (Section 43) it should remain in force for the assessment and collection of taxes which have or may accrue under that Act, and the imposition of penalties and interest.
The Income Tax Act of 1926 will be referred to by its section numbers in the 1932 Code.
Section 2449 provides: "In computing net income there should be allowed as deductions a `reasonable allowance' for the depreciation and obsolescence of property used in the trade or business, provided that in computing the deductions allowed under this paragraph, the basis shall be the cost plus any additions and improvements."
And, in Section 2451, which relates to nonresident and foreign corporations, it is provided: "That in computing the income tax upon business done and transacted within this State it shall be based upon a proportion which shall be such a proportion of the entire net income derived from all sources as the fair cash value of the real estate and tangible personal property actually used in the conduct of the business in the State of South Carolina (no deductions on account of encumbrances), is to the cash value of the entire real estate and tangible personal property actually used in the conduct of the trade or business wheresoever located (no deductions on account of encumbrances). Such property shall be taken at its actual value, which in the case of property valued or appraised for the purposes of inventory, depletion, depreciation or other purposes shall be the highest amount at which so valued or appraised, and which in other cases shall be deemed to be its book value in the absence of affirmative evidence showing such value to be greater or less than the actual value."
In Subdivision 3 of said section it provided: "The term `tangible property' as used in this article includes only the property held or used to produce income, which is derived from sources partly within and partly without the State (including all property held or used to produce income which is allocated or apportioned to other classes of income). Such property should be taken at its actual value, which in the case of property valued or appraised for the purposes of inventory, depreciation, depletion or other purposes, shall be the highest amount at which so valued or appraised, and in any other cases should be deemed to be the book value, showing such value to be greater or less than the actual value."
These are all the provisions relating to deductions and regulations on which depreciation should be based.
The South Carolina Tax Commission, under Section 2470, has authority to administer and enforce the tax herein imposed, and under Section 2476, has the right from time to time to make such rules and regulations not inconsistent with this Act as it may deem necessary to enforce its provisions.
As is stated in the case of Santee Mills v. Query, 122 S.C. 158, 115 S.E., 202, 206:
"The State Tax Commission has no power delegated to make any rules or regulations inconsistent with the law enacted or for any other purpose than to carry out the legislative will expressed in statutory form."
So that in arriving at the correct allowances for depreciation, the Tax Commission is controlled by the statute and the fact, as alleged in its answer, that it applies the same rule to all other persons and firms and corporations as was applied to the plaintiff, if the rule is in violation of the statute, can have no effect as a defense to this action.
The question therefore is, Under the Income Tax Act of 1926, on what date is the cost or value of the property of the plaintiff on which depreciation is to commence to be fixed?
There is no dispute by either party that the cost or value of this property on March 1, 1913, was $165,453.99, and that additions were made from time to time thereafter in the years and at the cost as appears on page 5 of the answer.
During the years from 1913 to 1921 depreciation was taken off this property in the government returns, by reason of the fact that Federal Income Tax Acts authorized it as a proper deduction in returns made under those Acts. This depreciation, of course, was merely theoretical, and so far as the actual value is concerned, was not reflected in 1921 by deducting the theoretical depreciation, and if there had been in 1921 the independent tax law which was passed in 1926 the plaintiff could at that time have fixed a value upon its property independent of values appearing in the government return, and if not accepted by the South Carolina Tax Commission then determination of actual value by the usual means would have been resorted to. But this right of fixing such actual value was not given to plaintiff, and until 1926 it had to abide by government values, which did not reflect actual value, but only value for income tax purposes to the federal government under the regulations prescribed by the Federal Act.
But in 1926, the right to fix actual value was given to the taxpayer, and on its first return under the 1926 Act, plaintiff fixed the actual value of its property and based its income tax return on that value. This value so fixed was the value determined on March 1, 1913, with the additions and betterments added thereto from that date to January 1, 1921, the total being fixed as the actual value of the property, which values were not disputed by the South Carolina Tax Commission until a review was had in 1931 of taxpayers' returns from 1926, and this, even then, was not a denial that the actual value of property was not as given by plaintiff, but was based upon the fact that depreciation over years prior to 1926 should have been charged against this value, which for purposes of further depreciation had exhausted its value. The plaintiff, however, it appears, in order that the State of South Carolina might be given credit for the deductions which had accrued to benefit of plaintiff during the years it had been paying income tax to the State, viz., from 1921, showed in its returns depreciation deductions for each year from 1921 to 1925, so that exhaustion will accrue four years earlier than if started only after passage of 1926 Act.
Confusion should not arise from the use of the term "actual values" as if the determination of the amount would affect the tax, as the tax would not be affected irrespective of actual value until the total depreciation deducted equals the original value, as each annual deduction on original value was the same, but the injustice arises to taxpayer in the situation under discussion, if depreciation had started earlier than it should with consequent earlier exhaustion.
Under the schedule in defendants' answer, and according to their contention, the depreciation started on original actual value in 1913, the depreciation allowed being 9 1/2 per cent.; therefore, by the end of the year 1925 the depreciation allowed had covered the cost or value of the plant, and when plaintiff in 1926 undertook to make a further deduction for depreciation, the Tax Commission held that the cost had already been covered by the depreciation and there was nothing left on which depreciation could be based; the same was applicable to additions which had been made prior to 1921, and when subsequent to that time the depreciations equalled the cost of the additions, then further deduction disallowed. This appears on the account where deduction for depreciations on additions made in 1917 were disallowed after 1928, and those in 1918 disallowed after 1929 and so on. Whereas, as plaintiff contends, if deductions did not start to be made until 1921, then on original actual values, deductions for depreciation would be allowable until 1932, and on additions for each year from and after 1921 until exhausted by total of annual depreciation. It would appear that actual values in 1926 instead of 1921 should be the date on which depreciation should begin, but plaintiff has consented to abide by 1921 as accounts have been made up on that date. This is the sole cause of the difference between claim of plaintiff and defendants.
The matter of actual value has been defined in hearings before the Internal Revenue Commission, and there appears in Appeal of Rockford Malleable Iron Works, 2 B.T.A., 817, cited in 26 U.S.C.A. § 986, note 146, the following as the definition of "value": "Value is a real, actual, definite thing, and, in many instances, cost or depreciation * * * have very little to do with it."
And again in Appeal of Kinsman Transit Co., 1 B.T.A., 552: "Actual cost or reconstruction cost, less theoretical depreciation neither prove nor approximate actual cost nor cost on a certain date."
The evidence of value which we have is the declaration of the plaintiff in its returns, which is undisputed by the defendants, and is admitted by both parties to be a correct amount for the purposes of income tax under the Act of 1926, except that defendants maintain that exhaustion for previous years should be charged against it.
To sustain the contention of defendants would be to hold that although the Act of 1926 authorized for the purposes of deduction under Section 2449, the cost, plus any additions and improvements, and under Section 2451, the highest amount at which values are appraised, the Tax Commission has undertaken to ignore those provisions and to fix without any proof whatsoever an arbitrary value upon that property arrived at by taking the cost or value on March 1, 1913, and making annual theoretical deductions for depreciation from it until its value was exhausted, absolutely depriving the plaintiff of any value for that property for the purposes of income tax deductions for the year 1926, on the right to which deductions was given under the Acts 1926-1927.
As stated above, this is clearly a matter of construction of the statute, and to place the construction upon the statute contended for by the Tax Commission would in this case mean that although the plaintiff had in 1925 property of large actual value, a large portion of it for the purposes of income tax deductions would have to be ignored, which under my construction was not the purport or intention of the Act.
I am of the opinion that the correct solution of this question is based upon the condition which would have existed if the 1926 Act with all its terms had been passed in 1922, instead of the Act which was passed in that year. If it had been, then no question could have arisen as is now involved, because the federal income tax values would not have been brought in, but values fixed strictly according to the State statute. Accordingly, when this Act was passed in 1926, then the construction of that Act should be as independent of the federal returns as if it had been enacted in 1922.
It is significant in the construction of the intent of this Act, that in Section 2446, covering the ascertainment for income tax purposes of the loss or gain from sale of property, it was provided that the basis shall be in case of property acquired before January 1, 1921, the fair market price or value as of that date, and in all other cases ( i. e., property acquired subsequent to January 1, 1921), the cost thereof, provided that in case of property which was included in the last preceding annual inventory used in determining net income in a return under this article ( i. e., the Income Tax Act of 1926), such inventory value shall be taken in lieu of costs or market value. Thus recognizing and showing the intent of the Legislature that no matter what had appeared in the returns under 1922 Act due to federal regulations, for the purposes of the 1926 Act (this article) those values should be disregarded and the fair market price on January 1, 1921, should determine and in all other cases, that is property acquired subsequent to that date, the cost, with the proviso that if deductions for depreciation were made in the last inventory made for purposes of income tax under the 1926 Act, then that inventory value should control.
These being the express provisions regulating the ascertainment of gain or loss on sales, showing that the 1926 Act was independent of previous income tax laws, I cannot but conclude that the same intention was in the minds of the legislators that 1926 should be a new beginning for income tax purposes, and what had been previously done for federal income purposes should thenceforth have no effect.
In this view I cannot see how federal decisions or rulings of Federal Tax Board of Appeals as is contended by defendants' counsel, can be controlling on this Court in its construction of the 1926 Income Tax Act of the State of South Carolina.
I therefore hold that the collection of the taxes by the South Carolina Tax Commission set forth in the complaint, amounting to $2,894.21 were wrongfully and illegally collected and hereby certify that the sum of $2,894.21 was wrongfully collected from the plaintiff, Read Phosphate Company, by South Carolina Tax Commission and ought to be refunded, and the South Carolina Tax Commission be and is hereby ordered to issue its order to the State treasurer of South Carolina to refund said taxes to Read Phosphate Company, and the State treasurer do thereupon make such refund.
Table referred to in opinion is as follows:
Depreciation to Jany. 1, 1916 ....... $ 29,910.83 " " " " 1917 ....... 15,718.13 " " " " 1918 ....... 15,718.13 " " " " 1919 ....... 15,718.13 " " " " 1920 ....... 15,718.13 " " " " 1921 ....... 15,718.13 " " " " 1922 ....... 15,718.13 " " " " 1923 ....... 15,718.13 " " " " 1924 ....... 15,718.13 " " " " 1925 ....... 4,658.62 ___________ Total Depreciation to 12-31-25 .... $160,314.49Messrs. John M. Daniel, Attorney General, and J. Fraser Lyon, for appellant, cite: Statute should be construed by those charged with the duty of executing same: 113 U.S. 568; 5 Sup. Ct., 648; 12 Wheat., 210; 95 U.S. 763; 24 L.Ed., 588. As to income and profit taxes: 25 F.2d 42; 20 F.2d 208; 25 F.2d 453; 274 U.S. 295; 47 Sup. Ct., 608; 274 U.S. 295; 71 L.Ed., 1054; 41 Fed. 2d 606; 283 U.S. 301; 51 Sup. Ct., 418; 274 U.S. 205; 56 F.2d 1021.
Messrs. Nathans Sinkler, for respondent, cite: As to state taxing foreign corporations: 129 S.E., 429; 115 S.E., 206.
March 20, 1933. The opinion of the Court was delivered by
The respondent, who is plaintiff in this action and will be so styled in this opinion, alleges in its complaint that it filed its income tax returns to the South Carolina Tax Commission, which is defendant in this action and shall be so called herein, for the years 1926, 1927, 1928, 1929, and 1930, respectively, and paid the income taxes in accordance with the said returns, which it avers were the correct amounts of taxes for which it was liable: That in 1931 the defendant made adjustments of plaintiff's returns and payments of taxes, alleging errors in the returns, and under-payments of taxes in the aggregate sum of $2,894.21, and demanding payment thereof; the plaintiff paid under protest the amount thus demanded, and brings this action to recover it under the provisions of the Income Tax Act of 1926 (Code 1932, § 2435 et seq.)
The defendants for answer deny those things not specifically admitted, and set up that the rules and regulations applied in this instance to determine the true and lawful income taxes due by plaintiff for the years 1926 to 1930, inclusive, have been invariably applied by defendant to all persons and corporations in like plight with plaintiff since the passage by the General Assembly of the Income Tax Law of 1922 up to the present time. There is set out in some detail the method by which defendant fixed the amounts of the taxes it alleges were due by plaintiff for the years 1926 to 1930, inclusive; which methods it alleges are in conformity with the provisions of the Income Tax Act of 1926.
By consent the case was heard by Judge Grimball, without a jury, and upon an agreed statement of facts. This statement contains an admission of the correctness of the formal allegations of the pleadings, the payment of taxes as alleged in the complaint, the readjustments made by defendant, the payment under protest of the additional amount of taxes; it is further agreed, for the purposes of this suit, that the value or costs of plaintiff's property as of March 1, 1913, was $165,453.99, and of additions since that date, as set out in a table appended to the answer and printed in the transcript at page 5, upon the value or cost of property and additions the depreciation to determine the income tax of plaintiff was based.
The statement then proceeds in this wise:
"The question to be determined is whether the plaintiff is entitled to deduct from the income earned in 1926 through 1930 depreciation sustained in the years prior to 1921.
"Plaintiff contends that the value of its property on which depreciation should be based is its value as of January 1, 1921, arrived at by the agreed value or cost as of March 1, 1913, plus the additions made since that date through the year 1920, and that the total of those amounts represents the value on which annual depreciations at 9 1/2% should thereafter be made except on the additions made in each previous year * * *. That the above items constitute the value or cost on which depreciation should be commenced to be made from that date and allowed annually at the above rate until the assets are exhausted.
"Defendants contend that depreciation should be computed annually on the original cost of the property from the date of acquisition, as reflected in the tabulation on page 5 of the answer, until the same is exhausted by the depreciation on the agreed cost. The defendants also contend that depreciation should be computed annually on the costs of additions and improvements from the date the same were made until the cost of the additions and improvements are exhausted by reason of such depreciation."
Judge Grimball filed his decree July 23, 1932, upholding the contentions of plaintiff that the taxes collected by defendant as set forth in the complaint were illegally collected, and the South Carolina Tax Commission was ordered to issue its order to the State treasurer to refund said taxes to Read Phosphate Company, and that the State treasurer do thereupon make such refund.
From this decree appeal by defendant comes to this Court based upon eight exceptions, and a number of subdivisions of some of these exceptions. The decree of the Circuit Judge, the exceptions, and the arguments take a wide range and discuss matters which in our judgment are not necessary to be considered in determining the cardinal issue in the case.
As stated by both parties to the appeal, this issue is: "Has the plaintiff the right to deduct from income earned in 1926 through 1930 depreciation sustained in years prior to 1921?"
In 1922 the General Assembly passed its first income tax law (Income Tax Act of 1921 [32 St. at Large, p. 896]). Up to that time those liable therefor were paying to the federal government an income tax. The Income Tax Law of 1921 of South Carolina provided that the return for income taxes under that Act should be the same as that made to the federal government and the amount of the tax paid to the State should be one-third of the amount paid to the federal government.
In the year 1927, the General Assembly passed another income tax law (Income Tax Act of 1926 [35 St. at Large, p. 1]), which repealed the Act of 1921, and which required that the taxpayer make his own return, and provided how the tax should be assessed thereon. This case turns upon the proper interpretation of the Act of 1926.
Plaintiff's contention, as already stated, is that the Act intended to fix the value of property and additions as of January 1, 1926, as the basis upon which deductions for depreciation should be made. But plaintiff states that, in a spirit of liberality, it is willing that deductions for depreciation should be taken to begin with the year 1921.
The defendant contends that the primary purpose of the Act of 1926 was to cut away from the requirement made by the Act of 1921 that the tax be based upon the federal return and to require the taxpayer to make his own return; that the Act does not intend nor undertake to fix 1926 or 1921 as a new starting point for the beginning of deductions for depreciations; and that the Act of 1926 never intended to change the rule that the assessment of the tax and deductions for depreciation are to be based upon the cost of the property at the time of acquisition, and of additions at the times they were made.
One readily understands the rationale of each contention when one understands and applies the theory upon which the plan of deduction for depreciation is founded.
The method of such application is stated in appellant's argument as follows: "A reasonable rate of depreciation, depending on the kind or character of property, is deducted and such rate is applied on the cost beginning on the date of the cost, that is, the date of acquisition, on the original cost of the property, and it is applied on the costs of improvements and betterments beginning on the dates the improvements or betterments are made, and continued until the property so depreciated is, by lapse of time, exhausted, or until the cost of the property is recovered."
It will be seen that it is to the interest of plaintiff to have deducted from its income earned during the years 1926, 1927, 1928, 1929, 1930, the deductions allowed for depreciation during the years prior to 1921, because by that method the amount upon which it would be taxed would be materially lessened. It claims to find authority for this course in the Income Tax Act of 1926. It interprets that Act to establish a new period, to wit, 1926, for fixing the value of its property and the income derived thereupon upon which the tax is to be levied, and to give it the right arbitrarily to fix that value in its return to the Tax Commission, and to that end to deduct from its income for the years 1926 through 1930 the deductions for depreciation allowed it in the years prior to 1921.
A careful perusal of the Act does not sustain this interpretation of it. The Circuit decree assumes that it was the intention of the Act. But the context of the Act itself destroys the assumption. It distinctly provides that the basis of taxation and allowances for depreciation shall be the cost (not the value) of the property and additions. Now in the nature of things the cost of the property is the price paid for it at the time of its acquisition and the cost of any improvements and betterments at the time they were made. The Act does not authorize the taxpayer arbitrarily to fix a value of the property and additions as of January 1, 1926. Under the federal income tax laws plaintiff paid its taxes annually as of a valuation of property as of the date of March 1, 1913, and on additions as of the date of January 1, 1917. It has had the benefit of the deductions for depreciation of these properties and additions and seeks now to benefit again by deducting them from income for the years 1926 through 1930.
To apply an old adage, "One cannot have his cake and eat it, too."
The defendant construes the statute as fixing the cost of property at the date of acquisition, and of additions at the time they are made as the basis of calculation, and that it does not give to plaintiff the right to fix as the basis of the calculation its arbitrary value of its property as of January 1, 1926.
Its interpretation commends itself to our judgment.
"The construction given to a statute by those charged with the duty of executing it is always entitled to the most respectful consideration, and ought not to be overruled without cogent reasons.
" Edwards v. Darby, 12 Wheat. [U.S.], 210 [ 6 L.Ed., 603]; U.S. v. State Bank of N. Car., 6 Pet. [U.S.], 29 [ 8 L.Ed., 308]; U.S. v. McDaniel, 7 Pet. [U.S.], 1 [ 8 L.Ed., 587]. The officers concerned are usually able men, and masters of the subject. Not unfrequently they are the draftsmen of the laws they are * * * called upon to interpret." U.S. v. Moore, 95 U.S. 760, 763, 24 L.Ed., 588.
The Act of 1926, embodied in the Code of Laws for 1932 as Section 2449, Subd. 8, lays down the rule for ascertaining the allowance for depreciation as follows: "A reasonable allowance for the depreciation and obsolescence of property used in the trade or business: * * * Provided, That in computing the deductions allowed under this paragraph, the basis shall be the cost plus any additions and improvements."
This rule is in effect the same as that adopted and is in use under the federal income tax laws, and is approved by federal tax authorities and the federal Courts.
The Act of 1926 (35 St. at Large, p. 25, § 39 [Code 1932, § 2476]) provides that: "The Tax Commission may, from time to time, make such rules and regulations, not inconsistent with this article, as it may deem necessary to enforce its provisions, and the same shall have full force and effect of law."
We find nothing in the rule adopted by the Tax Commission and enforced in this case which is in any respect in contravention of any provision of the Act.
We have not attempted to follow the ramifications of the Circuit decree, the exceptions, and the arguments. We have confined ourselves to the consideration and determination of the question which both parties agree is the one issue to be decided, viz.: "Is plaintiff entitled to deduct from income earned in 1926 through 1930, depreciation sustained in years prior to 1921?" To that question we answer: No. And it follows that the decree of the Circuit Judge should be reversed. And it is so ordered.
This opinion was written as a dissent to the opinion of Mr. Acting Associate Justice Cothran, but inasmuch as the majority of the members of the Court concur in it, it becomes the leading opinion.
MR. CHIEF JUSTICE BLEASE and MESSRS. JUSTICES STABLER and CARTER concur.
We have given most careful consideration to this appeal with the result that the decree of the Circuit Judge be affirmed and made the judgment of this Court.
We wish, however, to add the following observations to the decree:
The fact that the respondent is a foreign corporation should not in any manner affect the "method" of taxation as provided in the statute. The word "value" in Section 2451 is used merely in reference to ascertaining a taxation basis when the foreign corporation conducts business in other places than in this State. It is not used in relation to depreciation.
In 1922 an income tax law was enacted, applicable to incomes received in 1921, which adopted the federal income tax returns of all citizens of this State who made returns and which required the payment of one-third of the federal tax. This continued until 1926, when the State decided to have its separate and distinct income tax law. This was a complete breakaway from the federal law, and, as a natural consequence, the federal authorities cited by the appellant do not appear to be applicable to the question herein involved. We are forced to a construction of our own statute.
The Income Tax Act of 1926 recognized the right of the taxpayer to take depreciation on the property therein mentioned and this depreciation is upon the cost of the property plus improvements. The cost can be determined in only one of two methods: Either the cost of construction or the purchase price. Speculation as to what might have been is usually useless, but we cannot refrain from saying that had the Act contained the word "value" instead of "cost" all of this difficulty would have been obviated. The value in 1926 might have been favorable to one taxpayer and detrimental to another, but there would at least have been a stable foundation for the basis of depreciation.
The respondent does not claim depreciation between the years 1921 and 1926 for the reason that depreciation for those years was allowed by the federal law and the respondent obtained this advantage through the relation of the State law to the federal law. The respondent does not, however, admit the legality of this concession.
Doubtful or ambiguous language in taxation statutes is to be construed in favor of the taxpayer. As said by the Supreme Court of the United States in Gould v. Gould, 245 U.S. 151, 38 S.Ct., 53, 62 L.Ed., 211: "In case of doubt they are construed most strongly against the government, and in favor of the citizen."
But where the legislative intent, as disclosed on the face of the Act, is clear, there is no need for the invocation of this rule. Here the language of the statute is unambiguous and leaves no room for doubt that it was the intention of the Legislature that the taxpayer in computing his net income for the purpose of determining the taxes imposed by the Act of 1926, and for each succeeding year, should be allowed a reasonable deduction for depreciation based upon cost of his depreciable assets used in his trade or business.
The enactment of the Act of 1926 repealed the Act of 1922 except as to uncollected taxes under that Act and, in so far as the Act of 1926 is concerned, it was as though no former Act had ever been passed. A new starting point was fixed by the Act of 1926, and under the terms of that Act the taxpayer is allowed a reasonable depreciation based upon cost.
While the Act of 1926 fixes a new point of beginning for depreciation based on cost, it would not be equitable or reasonable to permit the taxpayer to claim the right of 100 per cent. depreciation beginning in 1926 when he has had the advantage of depreciation since 1921 through the medium of the federal law. Such per cent. of depreciation as had been, or may have been, claimed since 1921 should be deducted from his future claims for depreciation. To permit the taxpayer to commence his claim in 1926 when he has already been allowed depreciation since 1921 would not be such reasonable depreciation as is contemplated in the Act. Moreover, having been allowed depreciation from 1921, the taxpayer would be estopped from denying this benefit received by him.
In adopting the decree of the Circuit Judge we wish to say that we do not altogether approve of his frequent use of the word "value." For instance, he says: "But in 1926, the right to fix actual value was given to the taxpayer, and on its first return under the 1926 Act, plaintiff fixed the actual value of its property and based its income tax return on that value."
The allowance for depreciation, as clearly expressed in the Act, is based on cost and the arbitrary fixing of a value as of March 1, 1913, in accordance with the federal law, should have no bearing upon the question of cost, which, under the Act of 1926, is the only basis for calculating depreciation.
The Act of 1926, being concededly separate and distinct and a total breakaway from the federal Act, I do not see how the federal Act can be called upon to determine any feature of depreciation applicable to this case.
This opinion was written as the leading opinion of the Court, but the other members of the Court having disagreed, it is filed as a dissenting opinion.
Let the decree of the Circuit Judge be reported in connection herewith.