Source: https://supreme.justia.com/cases/federal/us/302/95/
Timestamp: 2019-04-21 14:25:25+00:00

Document:
1. In determining the extent of a contractual obligation alleged to have been impaired by a state law, this Court will accept the judgment of the highest court of the State unless manifestly wrong. P. 302 U. S. 100.
income of the owner. This Court follows the state court's conclusion, finding that at the least it is not plainly wrong, and that it has support (a) in the State's statutory system of taxation viewed in its entirety (P. 302 U. S. 101), (b) in decisions of Iowa and other States before the bonds were bought and afterwards (P. 302 U. S. 103), and (c) in decisions of this Court. P. 302 U. S. 104.
3. Contracts of tax exemption are strictly construed. P. 302 U. S. 103.
4. The classification of a tax upon net income as something different from a property tax, if not substantially an excise, is not unreasonable. P. 302 U. S. 106.
5. The tax complained of in this case is not laid upon the obligation to pay the principal or the interest at all events not within the meaning of the contract of exemption, but is laid upon the yield, if any, of an aggregate of occupations and investments. P. 302 U. S. 107.
Appeal from a decree sustaining the dismissal by the State District Court of a petition in equity praying annulment of an income tax assessment.
exempt from taxation." [Footnote 3] Iowa was without an income tax when these exemptions were declared. A "Personal Net Income Tax" upon persons resident within the state was imposed for the first time by a statute enacted in 1934. Code 1935, § 6943-f4 et seq. In the assessment of that tax for 1935, interest on appellants' bonds in the sum of $36,893.75 was included by the State Board of Assessment and Review against appellants' protest that the law, if so applied, impaired the obligation of contracts of exemption. Constitution of the United States, Article 1, § 10. By appropriate proceedings, the controversy was brought to the Supreme Court of Iowa, where the assessment was upheld. 271 N.W. 168. The court assumed, without deciding, that the statutes of exemption should be treated as giving rise to contracts, and not merely as declarations of a legislative policy subject to revocation at the legislative pleasure. Proceeding on that assumption, the court interpreted the contracts as limited to taxes laid directly upon property in proportion to its value, and not as touching taxes in the nature of an excise upon the net income of an owner. This conclusion was supported by an analysis of the Iowa statutes and a review of Iowa decisions as well as the decisions of this and other courts. The case is here upon appeal. 28 U.S.C. § 344.
to be assumed is limited in scope and operation as it was limited below. Whether the limitation should be accepted is thus the pivotal inquiry. The power is ours, when the impairment of an obligation is urged against a law, to determine for ourselves the effect and meaning of the contract as well as its existence. United States Mortgage Co. v. Matthews, 293 U. S. 232, 293 U. S. 236; Funkhouser v. Preston Co., 290 U. S. 163, 290 U. S. 167. Even so, we lean toward agreement with the courts of the state, and accept their judgment as to such matters unless manifestly wrong. Phelps v. Board of Education, 300 U. S. 319, 300 U. S. 322-323; Violet Trapping Co. v. Grace, 297 U. S. 119, 297 U. S. 120; Tampa Waterworks Co. v. Tampa, 199 U. S. 241, 199 U. S. 243-244; Dodge v. Board of Education, supra. For reasons to be developed, obvious error is not discernible in the ruling of the highest court of Iowa that the statutory exemptions invoked by the appellants were not intended to include taxes upon the net income derived from business or investments. To the contrary, the decision has support in the statutory system of taxation viewed in its entirety, in state decisions both in the courts of Iowa and elsewhere before the bonds were bought and afterwards, and even indeed in decisions of this Court. Our search is for something more than the meaning of a property tax or an excise in the thought of skilled economists or masters of finance. It is for the meaning that at a particular time and place, and in the setting of a particular statute might reasonably have acceptance by men of common understanding.
Supplement to 1915 Code. [Footnote 4] It was then subdivision 1 of section 1304. There were other subdivisions exempting other items -- the grounds and buildings for public libraries; household furniture up to a prescribed value; the farming utensils of any person who makes his livelihood by farming, and many other kinds of property. The section opens with the statement that "the following classes of property are not to be taxed," and then enumerates the classes. But the scope of the exemption is likely to be exaggerated unless the next preceding section (1303) is read at the same time.
"The board of supervisors of each county shall, annually at its September session, levy the following taxes upon the assessed value of the taxable property in the county,"
225, 226; Fifth Avenue Bldg. Co. v. Kernochan, 221 N.Y. 370, 375, 117 N.E. 579; Mitchell v. Simpson, L.R. 25 Q.B.D. 183, 189.
Besides the school and county bonds, appellants were the owners of a Soldiers' Bonus bond in the sum of $1,000, and Road bonds or certificates to the amount of $82,000. The exemption of the Bonus bond was declared by the statute authorizing the issue. Acts 39th G.A. c. 332, § 10, adopted March 23, 1921. The exemption is now subdivision 22 of § 6944-3f the Code of 1935, and should be given the same meaning as the exemption conferred by the other subdivisions. The Road bonds or certificates have their exemption under a different statute (§ 4753-a13, Codes of 1931 and 1935), but the bonds are expressly declared to be obligations of the county (§ 4753-a14), and, as the court below observed, there is no reason to suppose that the exemption given them was broader than that of county obligations generally.
in 1902, held the exemption inapplicable to special assessments, limiting it at the same time "to the taxes contemplated in title 6 of the Code." [Footnote 6] So also, Insurance Assn. v. Gilbertson, 129 Iowa 658, 106 N.W. 153, decided in 1906, interpreting a different subdivision of the exemption statute, but a cognate one, again limited the exemption to taxes upon property, and refused to apply it to an excise or license tax measured by receipts. The ruling was reiterated in State v. City of Des Moines, 221 Iowa 642, 266 N.W. 41, decided in 1936, upon facts not greatly different. Cf. Plummer v. Coler, 178 U. S. 115. From these precedents, the Iowa court advanced to the holding, announced in the case at bar, that a tax upon net income was substantially an excise, and hence did not come within the scope of an exemption confined to taxes upon property. The result was conceived to be latent in the precedents if effect was to be given to their fair implications. "So the state court has told us," construing its own decisions, "and the good faith of its declaration is not successfully impeached." Stockholders of Peoples Banking Co. v. Sterling, 300 U. S. 175, 300 U. S. 183.
"The tax levied on income is not a property tax, but is a percentage laid on the amount which a man receives, irrespective of whether he spends it, wastes it, or invests it."
decisions pointing the same way before appellants became owners.
(b) Finally, and even more conclusively, decisions of our own Court forbid us to stigmatize as unreasonable the classification of a tax upon net income as something different from a property tax, if not substantially an excise. New York ex rel. Clyde v. Gilchrist, 262 U. S. 94; New York ex rel. Cohn v. Graves, 300 U. S. 308; Brushaber v. Union Pacific R. Co., 240 U. S. 1, all point in that direction. We will consider them in the order stated.
The taxpayer in New York ex rel. Clyde v. Gilchrist claimed the benefit of an exemption under a statute of New York to the effect that, upon payment of a recording tax, debts and obligations secured by mortgages of real property should be exempt from other taxation by the state and local subdivisions. The question was whether the exemption thus accorded was applicable to an income tax enacted long afterwards. The state court ruled against the taxpayer (People ex rel. Central Union Trust Co. v. Wendell, 197 App.Div. 131, 188 N.Y.S. 344; People ex rel. Clyde v. Wendell, 197 App.Div. 913, 187 N.Y.S. . 949; 232 N.Y. 550, 134 N.E. 567), assuming the existence of a contract of exemption, but holding that it was not intended to apply to taxes upon income. This Court, considering the fact that, at the date of the exemption statute, "no one thought of an income tax," and recalling that "any contract of exemption must be shown to have been indisputably within the intention of the Legislature," sustained the judgment of the state court. "The conclusion does not seem to us very difficult to reach." 262 U.S. at p. 98.
The controversy in New York ex rel. Cohn v. Graves, decided at the last term, evoked a ruling by this Court that a state tax upon net income which included rents derived from land in another state was not equivalent to a property tax imposed upon the land itself.
of a tax on income differs from that of a tax on property. Neither tax is dependent upon the possession by the taxpayer of the subject of the other . His income may be taxed, although he owns no property, and his property may be taxed, although it produces no income."
300 U.S. at p. 300 U. S. 314. Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 158 U. S. 158 U.S. 601, was considered and distinguished. Two rulings emerge as a result of the analysis. By the teaching of the Pollock case, an income tax on the rents of land ( 157 U. S. 157 U.S. 429) or even on the fruits of other investments ( 158 U. S. 158 U.S. 601) is an impost upon property within the section of the Constitution (Article 1, Sec. 2, cl. 3) governing the apportionment of direct taxes among the states. 300 U.S. at 300 U. S. 315. By the teaching of the same case an income tax, if made to cover the interest on government bonds, is a clog upon the borrowing power such as was condemned in McCulloch v. Maryland, 4 Wheat. 316, and Collector v. Day, 11 Wall. 113, 78 U. S. 124, 300 U.S. at pp. 300 U. S. 315-316. There was no holding that the tax is a property one for every purpose or in every context. We look to all the facts.
"the conclusion reached in the Pollock case did not in any degree involve holding that income taxes generically and necessarily came within the class of direct taxes on property,"
but that to the contrary such taxes were enforceable as excises except to the extent that violence might thus be done to the spirit and intent of the rule governing apportionment.
excise and a property tax, or between the different meanings of a property tax, is not permitted to escape us. Unless the foregoing analysis is faulty, the tax complained of by appellants is not laid upon the obligation to pay the principal or interest created by the bonds at all events within the meaning of the contract of exemption. The tax is laid upon the net results of a bundle or aggregate of occupations and investments. Under a statute so conceived and framed, a man may own a quantity of state and county bonds and pay no tax whatever. The returns from his occupation and investments are thrown into a pot and, after deducting payments for debts and expenses as well as other items, the amount of the net yield is the base on which his tax will be assessed. Cf. United States Glue Co. v. Oak Creek, 247 U. S. 321, 247 U. S. 329. In the light of all the precedents brought together in this opinion, we cannot say that a tax assessed on such a base is a plain violation of any contract of exemption to be discovered in the laws of Iowa.
U.S. at 279 U. S. 634. However, the courts of Massachusetts had already rejected the contention that an income tax was to be classified as an excise, rather than a tax on property. In re Opinion of the Justices, 220 Mass. 613, 624, 108 N.E. 570; 266 Mass. 583, 585, 165 N.E. 900; Harrison v. Commissioner of Corporations, 272 Mass. 422, 427, 172 N.E. 605. The meaning of the exemption was properly ascertained in subjection to that ruling. Cf. Educational Films Corp. v. Ward, 282 U. S. 379, and Pacific Co. v. Johnson, supra.
Nothing in this opinion is at war with Weston v. Charleston, 2 Pet. 449, or other cases declaring the immunities of governmental agencies. In the case cited and its congeners, the problem for decision was whether a tax upon income, even though not a property tax in strictness or for every purpose, was one in such a sense or in such a measure as to hamper the freedom of the central government through the interference of the states or the freedom of the states through the interference of the central government. The limitations declared in those decisions were gathered by implication from the structure of our federal system, and were accommodated, as the court believed, to the public policy at stake. What the court is now concerned with, however, is not the preservation or protection of any governmental function. Iowa cannot be held to cripple in an unconstitutional way her own privileges and powers when she levies an income or even a property tax upon bonds issued by herself. The court is now concerned with the meaning and effect of particular contracts of exemption to be read narrowly and strictly. There is no room at such a time for the freer and broader methods that have been thought to be appropriate in the development of the doctrine of implied restraints.
"The following classes of property are not to be taxed: 1. The property of the United States and this state, . . . municipal, school, and drainage bonds or certificates hereafter issued by any municipality, school district, drainage district or county within the state."
Iowa Code Supplemental Supplement of 1915, § 1304, subd. 1; Code 1935, § 6944, subd. 5.
"Bonds, and road certificates . . . shall not be taxed." Acts 38th G.A. c. 237, § 28; Code 1935, § 4753-a13.
"All bonds issued hereunder [the Soldiers' Bonus Act] shall be exempt from taxation." Acts 39th G.A. c. 332, § 10; Code 1935, § 6944, subd. 22.
Compare Code 1851, § 455; Code 1873, § 797; Code 1897, § 1304.
An earlier form of the same statute, after providing, like the later one, that "the following classes of property are not to be taxed," adds the significant words, "and they may be omitted from the assessments herein required." Code 1873, § 797. The opinion in Sioux City v. Independent School District, 55 Iowa, 150, 151, 152, 7 N.W. 488, refers to these words as emphasizing the conclusion that exemption relates to taxes on the value of the property. The 1851 Code provision is almost identical.
The Code in force at that time was the one of 1873.
Sims v. Ahrens, 167 Ark. 557, 271 S.W. 720; Stanley v. Gates, 179 Ark. 886, 19 S.W.2d 1000; Waring v. Savannah, 60 Ga. 93, 100; Featherstone v. Norman, 170 Ga. 370, 379, 153 S.E. 58; Diefendorf v. Gallet, 51 Idaho, 619, 627, 10 P.2d 307; Miles v. Department of Treasury, 209 Ind. 172, 199 N.E. 372; In re Opinion of the Justices, 133 Me. 525, 528, 178 A. 820; Hattiesburg Grocery Co. v. Robertson, 126 Miss. 34, 52, 88 So. 4; Lublow-Saylor Wire Co. v. Wollbrinck, 275 Mo. 339, 351, 205 S.W.196; Bacon v. Ranson, 331 Mo. 985, 999, 56 S.W.2d 786; O'Connell v. State Board of Equalization, 95 Mont. 91, 112, 25 P.2d 114; Mills v. State Board of Equalization, 97 Mont. 13, 17, 33 P.2d 563; Maxwell, Commissioner v. Kent-Coffey Mfg. Co., 204 N.C. 365, 371, 168 S.E. 397; Hunton v. Commonwealth, 166 Va. 229, 243, 183 S.E. 873; Appeal of Van Dyke, 217 Wis. 528, 535, 259 N.W. 700; 4 Cooley on Taxation (4th Ed.) § 1743. Many cases are collected in Brown, The Nature of the Income Tax, 17 Minn.L.Rev. 127, 130, 139.
Eliasberg Bros. Mercantile Co. v. Grimes, 204 Ala. 492, 86 So. 56; Bachrach v. Nelson, 349 Ill. 579, 595, 182 N.E. 909; In re Opinion of the Justices, 220 Mass. 613, 624, 108 N.E. 570; 266 Mass. 583, 585, 165 N.E. 900; Harrison v. Commissioner of Corporations, 272 Mass. 422, 427, 172 N.E. 605; Redfield v. Fisher, 135 Or. 180, 192, 292 P. 813, 295 P. 461; Kelley v. Kalodner, 320 Pa. 180, 185, 181 A. 598; Culliton v. Chase, 174 Wash. 363, 25 P.2d 81; Jensen v. Henneford, 185 Wash. 209, 216, 53 P.2d 607.
At the time the bonds here involved were purchased, the statutes of Iowa expressly provided that they "are not to be taxed" or "shall not be taxed" or "shall be exempt from taxation." These are plain words, and there is no room for construction. When the language is clear, it is conclusive. "There can be no construction where there is nothing to construe." This has been held so often by this Court that it has become axiomatic. That the provisions with respect to the nontaxability of the bonds constitute a statutory contract with the purchaser of the bonds, and that any subsequent statute which violates these provisions impairs the obligation of the contract, is not a matter of dispute. The sole question is whether the imposition of an income tax in respect of the interest derived from the bonds is a tax upon the bonds.
annum, to be paid semiannually -- that is to say, promises to pay $25 at the end of every six-month period, and $1,000 at the end of ten years. There is no difference between the two promises in respect of their binding or legal quality. Both are obligations of the bond. If one cannot be violated, neither can the other.
There is no difference in principle between such a bond and one where the bond is issued upon a discount basis, as in the case of United States Savings bonds (Treasury Department Circular No. 529, February 25, 1935). A United States Savings bond for $1,000, payable in ten years "without interest," may be purchased for the sum of $750 -- the remaining $250 being deferred interest. Plainly, the $250 deferred interest is as much a part of the bond as the $750 originally invested, and a contractual obligation exempting the bond from taxation is equally applicable to each. Is the case different if the bond shall provide for the payment of $750, together with interest in the sum of $250 to be paid in installments or at the end of ten years? Certainly not, unless form is to be exalted and substance ignored.
The force of what has been said cannot be avoided by merely calling the tax an excise. If a tax falls upon the bond and lessens its proceeds, either in respect of principal or interest, it is a tax on the bond, and cannot be made something else by resort to the vocabulary or by employing some circuitous method of imposing it. It is well settled, at least generally, that "what cannot be done directly . . . cannot be accomplished indirectly by legislation which accomplishes the same result." Fairbank v. United States, 181 U. S. 283, 181 U. S. 294, 181 U. S. 300, and cases cited. I am unable to subscribe to that philosophy which seems to teach that a forbidden result may nevertheless be achieved if only some delusive and devious way of achieving it can be found.

References: § 6943
 § 10
 § 344
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 § 10
 § 6944
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 § 1304
 § 6944
 § 28
 § 4753
 § 10
 § 6944
 § 455
 § 797
 § 1304
 § 797
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 § 1743
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