Opinion
No. 32829.
October 18, 1937.
1. TAXATION.
Exemptions from taxation are to be strictly construed against the taxpayer.
2. TAXATION.
"Other compensations received from the United States Government" exempted by statute from state income tax means payment received for personal services, including disability compensation, retirement pensions, pensions and bonuses to members of land and naval forces, and the like, growing out of or incident to personal services in civil or military establishments of the nation (Laws 1934, chapter 120, section 7(b)(6).
3. TAXATION.
Rental of land received under Agricultural Adjustment Act was a "gain" or "income" from land and not "other compensations received from United States Government" so as to be exempt from state income tax within terms of statute (Laws 1934, chapter 120, section 7(b) (6); Agricultural Adjustment Act, 48 Stat. 31).
4. TAXATION.
The state income tax statute would not be inoperative against rentals of land received under Agricultural Adjustment Act, as taxing government instrumentality, since Agricultural Adjustment Act has been declared unconstitutional and void (Laws 1934, chapter 120, section 7(b) (6); Agricultural Adjustment Act, 48 Stat. 31).
5. TAXATION.
As respects taxation by state, an activity or instrumentality of government not authorized by law is not a "governmental activity" but is activity of individuals, who are not acting at all so far as government is legally concerned.
6. TAXATION.
One who retained rental of land received under Agricultural Adjustment Act, after discovery that receipt thereof was illegal, was subject to state income tax with respect to such rental, against contention that he was liable to suit to recover it (Laws 1934, chapter 120, section 7(b)(6); Agricultural Adjustment Act, 48 Stat. 31).
7. TAXATION.
Rental of land received under Agricultural Adjustment Act was not exempt from state income tax as a "gift," since gift by government must be authorized by valid act of Congress (Laws 1934, chapter 120, section 7(b)(3); Agricultural Adjustment Act, 48 Stat. 31).
APPEAL from the chancery court of Hinds county. HON. V.J. STRICKER, Chancellor.
Nelson E. Taylor, of Greenwood, for appellant.
The statute under which the State of Mississippi seeks to hold appellant liable for income taxes on the amounts paid to appellant by the United States Department of Agriculture is Chapter 120 of the Acts of the Mississippi Legislature of 1934, Section 7. Appellant contends that said Section 7 specifically exempts from taxation by the State of Mississippi items of income received from the United States Government under paragraph (b) and sub-paragraph (6).
Hart v. Smith, 159 Ind. 182, 64 N.E. 661, 95 A.S.R. 280, 58 L.R.A. 949, 25 R.C.L. 307.
Statutes levying taxes are not to be extended by implication beyond the clear import of the language used.
U.S. v. Field, 225 U.S. 257, 41 S.Ct. 256, 8 A.L.R. 4161; Hecht v. Malloy, 265 U.S. 114, 44 S.Ct. 462; Bankers Trust Co. v. Bowers, 295 Fed. 89, 31 A.L.R. 922.
A fundamental rule in the construction of tax laws is that such laws will be strictly construed, and all doubt resolved in favor of the taxpayer.
State v. Union Tank Car Co., 151 Miss. 797, 119 So. 310.
Provisions for the exemption of property from taxation should be given a fair and reasonable interpretation in order to ascertain the true intent as to their scope, and then should be strictly applied and enforced so that the limits thus defined shall not be unduly enlarged or extended.
Y.M.C.A. v. Lancaster, 106 Neb. 105, 182 N.W. 593, 34 A.L.R. 1060.
The language of a tax exemption statute should be given the ordinary meaning.
Bistline v. Basset, 272 P. 696, 62 A.L.R. 323.
Where there is any ambiguity or doubt it must be resolved in favor of the person upon whom it is sought to impose the burden.
McGannon v. State, 33 Okla. 145, 124 P. 1063, Ann. Cas. 1914B 620.
Appellant shows that the payments received by him from the United States Government are by the provisions of Section 7, paragraph (b) and sub-paragraph (6) of Chapter 120 of the Acts of 1934, exempt from Mississippi income tax. As the statute reads, there is no ambiguity as to this exemption. Instead of being limited to salaries and wages, the statute is self-broadening and made to include "other compensation" received from the United States Government. The language of sub-paragraph (6) is self evident and reflects the intention of the legislators to exempt from tax, that which they knew they could not tax, and this is supported by the exemption set forth in sub-paragraph (4) of paragraph (b) of said Section 7, whereby interest on federal obligations, Federal Land Banks and other federal instrumentalities are exempted, not necessarily because the legislators wanted to exempt them, but because they knew that the State of Mississippi, through its taxing power, could not reach such income, for so to do would be to tax a federal instrumentality, and this is beyond the power of a state to do.
That the state cannot tax either directly or indirectly the instrumentalities of the federal government is well settled.
Macallen v. Mass, 279 U.S. 620, 73 L.Ed. 874, 65 A.L.R. 866, 46 S.Ct. 532.
The Mississippi income tax held to be an excise tax in the following cases: Hattiesburg Grocery Co. v. Robertson, 126 Miss. 34, 88 So. 4, 25 A.L.R. 748; State ex rel. Knox v. G.M. N.R.R. Co., 138 Miss. 70, 104 So. 689.
In the case of Panhandle Oil Co. v. Mississippi, decided in 1928 by the United States Supreme Court upon appeal from the Mississippi Supreme Court, and which involved the right of the State of Mississippi to collect a gasoline tax from a dealer upon gasoline sold to the federal government and its agencies, the right of the State to burden the transactions by exacting such a tax was denied, and this case as we interpret it is almost a parallel case to the one now before this court.
Panhandle Oil Co. v. Mississippi ex rel. Knox, 48 S.Ct. 451, 56 A.L.R. 583; Brush v. Commissioner of Internal Revenue, 81 L.Ed. 446.
In the cases of the leasing by the Federal Government of Indian lands to individuals, wherein the lessee made a profit from the leases, the State of Oklahoma endeavored to subject the income or profit to an income tax levied by the State of Oklahoma, but it was held in Gillespie v. Oklahoma, 42 S.Ct. 171, 257 U.S. 501, 66 L.Ed. 338, and in the case of the Indian Territory Illuminating Oil Co. v. Oklahoma, 240 U.S. 522, 60 L.Ed. 779, 36 S.Ct. 453, that this would be taxing a federal instrumentality, which the state had no power to do.
The lower court in its opinion held that "because of the unconstitutionality of the act, the payments were made under a mistake of law, in which the government itself was involved, and for which it is doubtful whether recovery may be had." This does not nor could it alter the fact that the money was received by appellant from a federal instrumentality.
W.W. Pierce, Assistant Attorney General, for the State.
Section 3 of Chapter 120, Laws of 1934, levies a graduated tax upon the net income of every resident individual, corporation, association, trust or estate. Section 6 of Chapter 120, Laws of 1934, defines "net income" to mean the "gross income" as defined in the statute, less the deductions allowed.
Under sub-section 6 of sub-section (b) of Section 7, Chapter 150, Laws of 1934, "salaries, wages and other compensation" received from the United States government is not included in the term "gross income."
Section 8 of Chapter 120, Laws of 1934, names the items of deductions allowed in order to arrive at the net taxable income. Therefore, under these statutes we have the formula for computing the income taxes levied upon every resident individual corporation, association, trust or estate.
"Net income" means "gross income" less the deductions allowed.
Gross income includes rents as taxable income unless taken out of the gross income by the deductions allowed in Section 8 of Chapter 120, Laws of 1934. When we examine the deductions, we find that rent received is not an item of deduction. Therefore, we have the formula. Net income equals gross income, including items of rent less the deductions allowed by Section 8 of Chapter 120, Laws of 1934, wherein rent is not mentioned as an item of deduction. Rent not being an item of deduction allowed by the statute, it necessarily follows that rent is a part of the net income which is the taxable income.
We submit that the phrase "other compensation received from the United States Government" means compensation for personal service in performing a governmental function of the United States under our constitutional system of government and not rentals received from the United States Government for the use of land owned by a private individual.
Hattiesburg Grocery Co. v. Robertson, 126 Miss. 34; Gulf Refining Co. v. Cleveland Trust Co., 108 So. 158.
It is not disputed that the $2549.68 received from the United States Department of Agriculture by the appellant is gain from land.
St. Louis-San Francisco R.R. Co. v. Middlekamp, 256 U.S. 226, 65 L.Ed. 905.
Notwithstanding the holding of the court in Gillespie v. Oklahoma and Indian Territory Illuminating Oil Co., supra, the Supreme Court of the United States in the case of Indian Territory Oil Co. v. Board of Equalization, 288 U.S. 325, sustained a state ad valorem tax on crude oil held by a lessee of Indian lands, and in Burnet v. A.T. Jergins Trust, 288 U.S. 508, the Supreme Court of the United States sustained a federal tax on the income derived from a lease of oil in lands owned by a municipality on the ground that there the land was held pursuant to an express trust.
We realize that no state can apply a tax in a manner so as to conflict with the performance of a federal function, but the scope of the doctrine of tax immunity is limited by its necessity.
National Bank v. Commonwealth, 9 Wall. 353; Board of Trustees v. United States, 289 U.S. 48; Indian Territory Oil Co. v. Board, 288 U.S. 325; Helvering v. Powers, 293 U.S. 214; Metcalf Eddy v. Mitchell, 269 U.S. 514.
The Supreme Court of the United States has recognized the importance of guarding against attrition of governmental tax sources.
Susquehanna Co. v. State Tax Commission, 283 U.S. 291; Willcuts v. Bunn, 282 U.S. 216; Helvering v. Powers, 293 U.S. 214; United States v. California, 297 U.S. 175.
The tax assailed herein should be sustained. It contains no threat to the sovereignty of the United States and affords no opportunity for a hostile state to interfere with the constitutional function of the national government.
Fidelity Deposit Co. v. Pennsylvania, 240 U.S. 319; Metcalf Eddy v. Mitchell, 269 U.S. 514.
We take it that there can be no doubt that the income in the form of rents derived from contracts with the United States is taxable under the statute, unless it cannot be so taxed, because the statute under and by virtue of which this particular income was received was unconstitutional and void, and the receipts by appellant, the landowner, were without lawful authority and in violation of the fundamental law of the land — the Constitution of the United States.
The question when boiled down to its substance is: Whether or not income derived from a transaction without sanction of law may be taxed.
The principle of law that gains acquired in an unlawful business are taxable has been settled by the Supreme Court of the United States.
U.S. v. Sullivan, 274 U.S. 259, 71 L.Ed. 1037.
In conclusion, we respectfully submit, (1) that rent, regardless from what source received, is taxable income under Chapter 120, Laws of 1934, (2) that the levy of income tax on rent received from land by virtue of a contract with the Secretary of Agriculture of the United States does not impose an unconstitutional burden on the governmental activities of the federal government in the exercise of its governmental functions and powers, and (3) that income from any transaction, although without authority of law, is taxable for the reason that "gain from any source whatsoever" is taxable income under the statute, because it is not excluded by sub-section (b) of Section 7 of Chapter 120, Laws of 1934, nor is such gain an item of deduction as provided for in Section 8 of said chapter.
Under the provisions of the so-called Agricultural Adjustment Act (48 Stat. 31), appellant rented for the year 1934 to the Department of Agriculture of the United States certain of his lands for which he received through said Department and from the Treasury of the United States the sum of $2,549.68; and the question before us is whether this income is taxable under our state income statutes.
It is first contended that the particular income is exempt under chapter 120, sec. 7, par. (b), subpar. (6), Laws 1934, which provides that (b) "the term gross income does not include the following items, which shall be exempt from taxation hereunder: . . . (6) Salaries, wages and other compensations received from the United States government or officials or employees thereof." It is familiar law under our decisions that exemptions from taxation are to be strictly construed against the taxpayer, and, so construing the quoted exemption and applying the rule ejusdem generis, we are of the opinion that the words "and other compensations" mean payments received for all manner of personal services, including disability compensations, retirement pensions, and pensions and bonuses to members of the land and naval forces, and all such like, which grow out of or are incident to personal services both in the civil and military establishments of the nation; wherefore the quoted exemption in the state statute would not include as exempt such an item as rent, which, of course, is a gain or income from land.
But it is contended, secondly, that, if the state statute be construed so to include as taxable the rent income here in question, the statute would be inoperative to that extent, because it would tax an activity or instrumentality of the federal government, which, as a general rule, is not within the power of the state. See Gillespie v. Oklahoma, 257 U.S. 501, 42 S.Ct. 171, 66 L.Ed. 338. Compare Federal, etc., Co. v. McLean, 291 U.S. 17, 54 S.Ct. 267, 78 L.Ed. 622. We are relieved of decision on that point, because the Agricultural Adjustment Act was declared unconstitutional and void in its entirety by the Supreme Court of the United States in United States v. Butler, 297 U.S. 1, 56 S.Ct. 312, 80 L.Ed. 477, 102 A.L.R. 914. Obviously, an activity or instrumentality of the government must be one authorized by law, else it is not a governmental activity, but is one in which those who mistakenly act as if for the government are, in fact, acting as individuals; and, therefore, are not acting at all so far as the government is legally concerned.
The next contention is that, since the money was received without authority of law, hence illegally, the recipient is liable to suit on behalf of the government to recover it back; and it is argued that the money received could not at the same time be a liability and also an income. Had appellant returned the money to the government within a reasonably short time after discovery that its receipt was illegal, his point might, and probably would be, well taken; but he retained it and still retains it. In U.S. v. Sullivan, 274 U.S. 259, 47 S.Ct. 607, 71 L.Ed. 1037, 51 A.L.R. 1020, it was expressly decided that gains derived from illegal transactions, and voluntarily retained, are subject to the income tax statutes.
Appellant contends finally that, the payment being unauthorized, it should be considered as a gift by the government, and therefore exempt under subparagraph 3, paragraph (b), section 7, of said chapter 120. There is no such thing as a gift by the government unless it be authorized by a valid act of Congress, and here, there was no such valid act. Moreover, the contention that it was a gift is inconsistent with the argument mentioned in the next foregoing paragraph that the money is subject to be recovered back by the government on suit.
The trial court was correct in its decree that appellant is subject to the asserted tax.
Affirmed.