stating that an agency's interpretation "will not be overruled without cogent reasons"Summary of this case from Partners v. S.C. Dep't of Health & Envtl. Control
February 11, 1937.
Before STOLL, J., Williamsburg, October, 1936. Affirmed.
Action to recover income tax paid under protest by Howard S. Hadden and Agnes K. Hadden against the South Carolina Tax Commission. From a judgment for plaintiffs, defendant appeals.
Order of Judge Stoll follows:
This action was brought by the plaintiff against the South Carolina Tax Commission to recover the sum of $714.88 income tax paid under protest. The facts were agreed upon and the case was tried before me without a jury.
The tax so paid and here sought to be recovered was levied under Subsection 8, Subdivision (e), of Act No. 406, approved on the 31st day of May, 1933 (38 St. at Large, p. 572). The admitted facts are as follows:
The plaintiffs established their residence in South Carolina the latter part of 1933, or the early part of 1934. Prior to their taking up their residence in this State, they were residents of the State of New York. By will dated June 6, 1930, one Elizabeth S. Hadden, a resident of New York, created a trust whereby the plaintiff Howard S. Hadden was to receive the income therefrom for the period of his natural life, with remainder to certain beneficiaries therein named. The City Bank Farmers Trust Company of New York and Howard S. Hadden are now the trustees of the trust so created.
By proper instrument dated January 22, 1931, Howard S. Hadden created a trust whereby he is to receive the income therefrom for the period of his natural life, with remainder to certain beneficiaries therein named. The Chemical Bank Trust Company of New York is trustee of this fund. Both trusts are New York trusts and are governed by the laws of the State of New York, and the funds and investments thereof are held and managed by the trustees through their offices in the city of New York; neither have place of business in the State of South Carolina, nor are any of the trust funds invested in this State.
By their income tax return filed for the year 1935, the plaintiff showed the income received from the two trusts above mentioned as "income from fiduciaries," which income was subject to the normal income tax. Subsequently, the defendant notified plaintiffs that so much of the income received from the fiduciaries as was derived by the fiduciaries from dividends and interest and paid them was subject to the surtax on intangibles as provided by the Act above mentioned, and assessed plaintiffs the sum of $714.88 as surtax thereon, and upon demand being made for payment of the amount so assessed, such amount was paid under protest, and thereafter this proceeding brought for the recovery thereof.
Plaintiffs contend that the income from the two trusts is income from fiduciaries only, and not income from dividends and interest and subject to surtax levied on dividends and interest under the Act of 1933, and the sole question before the Court is whether such income retains its character of dividends and interest in the hands of the beneficiaries and subject to surtax under said Act.
By the terms of the Act, the surtax is restricted to interest and dividends received by individuals. The Act levying a general income tax Act (Section 2436, Code 1932), defines the word "taxpayer" as meaning any individual, fiduciary, or corporation; the word "fiduciary" as meaning a guardian, trustee, executor, etc., and the word "person" as meaning and including individuals, fiduciaries, partnerships, and corporations. From this it is clear that the legislature used the word "individual" in the Act of 1933 advisedly, intending thereby to expressly eliminate from the terms thereof fiduciaries, partnerships, and corporations, and the Supreme Court in the case of Marshall v. South Carolina Tax Commission et al., 178 S.C. 57, 182 S.E., 96, held that fiduciaries, partnerships and corporations were not subject to the terms of such Act, so unquestionably, the trustees, even though they were residents of South Carolina, would not be required to pay a surtax on the dividends and interest received from the trust funds invested by them.
Dividends have been defined as "a fund set apart out of the profits to be apportioned among the shareholders." 18 C.J., 1406. "A portion of the principal or profits divided among several owners of a thing." Bouviers' Law Dictionary, Rawle's Third Revision, page 898. "The term `dividend' for the purpose of title 1, comprises any distribution in the ordinary course of business, even though extraordinary in amount, made by a domestic or foreign corporation to its shareholders out of its earnings or profits." Federal Revenue Act of 1934, § 115 (26 U.S.C.A., § 115).
Interest has been defined as "the compensation allowed by law or fixed by the parties for the use of money." 33 C.J., 178. "The compensation which is paid by the borrowers of money to the lender for its use, and generally by a debtor to his creditor in recompense for his detention of the debt." Bouviers' Law Dictionary, Rawle's Third Revision, page 1642. "The term `interest' means any amount received for the use of the borrowed money." Federal Revenue Act 1934, § 351 (26 U.S.C.A., § — ).
In their ordinary sense, and from the definitions above cited, dividends are paid to shareholders of a corporation; that is, to those owning the stock of such corporation, and interest is the compensation paid to a creditor for the use of his money, that is, to the owner of the principal; hence, dividends and interest can be received as income only by the legal owner of the stock on which the dividend is paid, and interest can be received only by the legal owner of the principal on which the interest is paid. The legal title to the securities and funds constituting the trusts in question, vests in the trustees, and the trustees alone may receive the dividends and interest paid on account of the investments thereof. The beneficiaries have no right to demand possession of the securities constituting the corpus of the estate; they cannot transfer or sell the same, nor can they vote as stockholders the stock held by the trustees. It cannot be said that two persons (used in the sense whereby it covers individuals, corporations, fiduciaries, etc.), can receive the same dividend or interest as income on the same investment. Only one person may receive the same as dividends and interest, and it necessarily follows that the holder of the legal title to the stock or investment on which the dividend or interest is paid, is the person who receives such as dividends or interest. The beneficiaries only receive income without other classification than "income from fiduciaries." I am satisfied the income received by them cannot fall under both classifications, and as the holders of the legal title to the trust investments are the only ones who can legally receive and collect the dividends and interest on such investments, I hold that the trustees receive dividends and interest, and the income paid by the trustees to the beneficiaries for the purpose of taxation, falls under the head of income from fiduciaries, and it is not "dividends" or "interest."
Having so found, may the Act in question be extended so as to include within its terms so much of the income received by the plaintiffs from the trusts as came into the hands of the trustees as dividends and interest?
It is a well-established principle of law that tax statutes cannot be extended by implication beyond the clear import of the language used, and in case of doubt, such doubt must be resolved against the government and in favor of the taxpayer.
"On behalf of the government it is urged that taxation is a practical matter and concerns itself with the substance of the thing upon which the tax is imposed rather than with legal forms or expressions. But in statutes levying taxes the literal meaning of the word employed is most important for such statutes are not to be extended by implication beyond the clear import of the language used. If the words are doubtful, the doubt must be resolved against the government and in favor of the taxpayer. Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct., 53, 62 L.Ed., 211." United States v. Merriam, 263 U.S. 179, 44 S.Ct., 69, 71, 68 L.Ed., 240, 29 A.L.R., 1547.
Mr. Justice Sutherland, in delivering the opinion of the Court in the last-mentioned case, quoted from an old case:
"I am not at all sure that in a case of this kind * * * form is not amply sufficient; because, as I understand the principle of all physical legislation, it is this: If the person sought to be taxed comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute."
See, also, Eidman v. Martinez, 184 U.S. 578, 22 S.Ct., 515, 46 L.Ed., 697.
The South Carolina Supreme Court has laid down the same rule as the Federal Court in the matter of interpretation of tax statutes. In the case of Fuller v. South Carolina Tax Commission, 128 S.C. 14, 121 S.E., 478, 481, Mr. Justice Marion, writing the opinion, stated:
"While a tax statute is to be reasonably construed as a whole, with the view of carrying out its purpose and intent, * * * where the language relied upon to bring the particular person or subject within the law is ambiguous or is reasonably susceptible of an interpretation that would exclude the person or subject sought to be taxed, the well-established general rule requires that any substantial doubt should be resolved against the government and in favor of the taxpayer."
"The established rule that, where substantial doubt exists as to the construction and interpretation of legislative action with respect to the enactment and enforcement of tax statutes, the doubt must be resolved against the government.' Columbia Railway, Gas Electric Company v. Carter, 127 S.C. , 482, 121 S.E. , 380. Where the language * * * is ambiguous, or is reasonably susceptible of an interpretation that will exclude such person, then the person will be excluded, any substantial doubt being resolved in his favor. Fuller v. South Carolina Tax Commission, 128 S.C. 14, 121 S.E., 478." Columbia Gaslight Co. v. Mobley, 139 S.C. 107, 137 S.E., 211, 213.
The doctrine to the effect that the taxpayer should receive the benefit in case of doubt in the enforcement of tax statutes was reaffimed by the South Carolina Supreme Court in the case of Atlantic Coast Lumber Corporation v. Derham et al., 171 S.C. 441, 172 S.E., 432.
In the case of Marshall v. South Carolina Tax Commission et al., 178 S.C. 57, 182 S.E., 96, 99, which settled the constitutionality of the Act under which the tax here in question was imposed, it was held:
"That individuals may be required to bear such tax, and corporations, estates, and fiduciaries be exempted, I think needs no further treatment. The two are in separate and distinct classes and the Legislature has exercised its discretion and power to classify in this respect. It all comes to the point as to whether this tax is imposed under a classification which is permitted under the Fourteenth Amendment to the Constitution of the United States. From the decisions cited, it clearly appears that the Legislature possesses the power to classify income derived from interests and dividends, when received by individuals, in one class, and may exempt corporations, estates, and fiduciaries receiving interest and dividends from the payment of the tax."
The legislature had it in its power to provide that the tax in question would apply to dividends and interest received by fiduciaries, or that beneficiaries receiving an income from fiduciaries must pay such tax on so much of such income as was originally derived from dividends and interest, but it did not so provide, and the case above cited holds that individuals may be required to bear such tax and estates and fiduciaries exempted therefrom; hence such act applies only to such class as is specifically brought within the terms thereof.
I find and hold that the income received by the plaintiffs from the two trusts in question, when received by them, is not dividends and interest; that such income is not included within the terms of the Act of 1933, and that such Act, being a tax statute, cannot be extended by implication beyond the clear import of the language used therein; that the words employed must be used in their literal sense, and any doubt as to the construction thereof resolved in favor of the plaintiffs. It follows that the income received by the plaintiffs and taxed as dividends and interest received by the plaintiffs surtax on dividends and interest, and they are entitled to refund of the amount paid as surtax thereon; therefore, it is ordered, adjudged, and decreed that the plaintiffs have judgment against the defendant for the sum of $714.88, with interest thereon from the date of the payment thereof at the rate of 6 per cent. per annum.
Messrs. John M. Daniel, Attorney General, and Claude K. Wingate, for appellant, cite: Surtax on interest and dividends received from trustee: 253 U.S. 12; 40 Sup. Ct., 417; 178 S.C. 57; 182 S.E., 97. Construction of statute: 169 S.C. 314; 168 S.E., 722; 186 S.E., 395.
Mr. J.D. O'Bryan, for respondents, cites: Surtax restricted to interest and dividends received by individual: Section 2436, Code 1932; 18 C.J., 1406; 33 C.J., 178. Tax statutes not to be extended by implication: 245 U.S. 151; 62 L.Ed., 211; 263 U.S. 241; 68 L.Ed., 179; 184 U.S. 578; 46 L.Ed., 697; 128 S.C. 14; 127 S.C. 482; 139 S.C. 107; 171 S.C. 441; 178 S.C. 57.
February 11, 1937. The opinion of the Court was delivered by
For the reasons stated in the order of Honorable Philip H. Stoll, Judge of the Third Judicial Circuit, which will be reported, and for the additional reasons hereinafter set out, the judgment appealed from is affirmed.
There are three well-recognized principles of law applicable to this case: (1) This Court is not a law-making body; (2) where a tax statute is ambiguous or is reasonably susceptible of an interpretation that would exclude the person or subject sought to be taxed, any substantial doubt must be resolved against the government in favor of the taxpayer; and (3) the construction given 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. As to (1), citation of authority is unnecessary. As to (2), in addition to the cases cited in the order of Judge Stoll, we call attention to the recent case of Cooper River Bridge, Inc., v. South Carolina Tax Commission et al., 182 S.C. 72, 188 S.E., 508. As to (3), we have given the identical language of the Court in Read Phosphate Co. v. S.C. Tax Commission, 169 S.C. 314, 168 S.E., 722, and City of Spartanburg v. Leonard, 180 S.C. 491, 186 S.E., 395.
In the order of Judge Stoll, he refers to the surtax levied on dividends under the Act of 1933. In the brief of appellant, it is stated that the taxes in question were levied under Section 2, Subdivision (e), approved the 16th day of April, 1934 (38 St. at Large, p. 1572), "being in the nature of an amendment to the Act of 1933. * * *" The Act of 1934 merely raised the nontaxable interest and dividends from $100.00 to $200.00, and made changes in the percentage rate at which the excess is taxable.
As hereinbefore stated, we think the Circuit Judge reached the correct conclusion in interpreting this statute, especially applying the principle that any substantial doubt should be resolved in favor of the taxpayer.
Under the statute law of this State (Section 2456, Code 1932), "returns shall be in such form as the Tax Commission may from time to time prescribe," it being inferentially the duty of the tax commission to furnish the taxpayers with blank forms on which to make their returns. The tax commission so understood its duty, and prepared and sent out forms for individual income tax returns for the calendar year 1935. On such form, under the title "Income," item 3 reads as follows:
"(All interest, except on obligations of the United States and the State of South Carolina or Political Subdivisions of the State of South Carolina) (Attach itemized schedule)
"(Except dividends of National Banks or Banks of the State of South Carolina) (Attach itemized schedule)."
Item 4 is as follows:
"Income from Partnerships or Fiduciaries, Etc.
"(Give Name and Address of Partnership, Etc.)"
Under the title "Computation of Tax, Surtax on Intangibles," Item 18 is as follows:
"Interest and Dividends (Item 3 (a) and (b) — "); and Item 19 is as follows:
"Less Exemption ........................$200.00"
It will thus be seen that the tax commission, appellant herein, has placed the same construction on the income tax statutes as does the order appealed from, and as appellant is charged with the duty of executing the statute, the construction which it gave the statute is entitled to most careful consideration, and will not be overruled without cogent reasons.
As stated in the beginning, this Court is not a law-making body. Such function of government is entirely within the province of the legislature. If the income tax laws are deficient, relief will have to be obtained from that body.
All exceptions are overruled.
MR. CHIEF JUSTICE STABLER and MESSRS. JUSTICES CARTER, BONHAM and FISHBURNE concur.