Court Opinion

ID: 6452920
Source: CourtListenerOpinion
Date Created: 2022-06-25 12:36:01.708836+00
Date Added: 2024-06-11T15:51:34.211141
License: Public Domain

Cordy, J.
(dissenting, with whom Cowin, J., joins). In striking down § 32 of the Revenue Enhancement Act of 2002, St. 2002, c. 186 (§ 32), the court concludes, as a constitutional matter, that taxes on long-term capital gains income can only be assessed on an annual basis, and that the requirement that income derived from a class of property be taxed “at a uniform rate throughout the commonwealth,” prohibits any change to the tax rate effective mid-year. Because I conclude that the language and history of art. 44 of the Amendments to the Massachusetts Constitution (art. 44) do not support such a restriction on the taxing power of the Legislature, and the plaintiffs have not met their formidable burden of overcoming the presumption of validity afforded to § 32,1 respectfully dissent.1
In interpreting the meaning of art. 44, we look to construe its language “so as to accomplish a reasonable result and to achieve its dominating purpose. Its words should be interpreted in the sense most obvious to the common intelligence, because a matter proposed for public adoption must be understood by all entitled to vote.” Lincoln v. Secretary of the Commonwealth, 326 Mass. 313, 317 (1950), citing Tax Comm’r v. Putnam, 227 Mass. 522, 524 (1917). We look first to the words of the amendment, “bearing in mind that ‘the Constitution “is a statement of general principles and not a specification of details.” ’ ” Brookline v. Secretary of the Commonwealth, 417 Mass. 406, 419 (1994), quoting McDuffy v. Secretary of the Executive Office of Educ., 415 Mass. 545, 559 (1993). The relevant language is as follows:
“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 *434property, 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.” (Emphasis added.)
While the amendment’s words plainly articulate the principle that whatever tax rate the Legislature may set for income derived from a classification of property, the rate must be “uniform . . . throughout the commonwealth,” they do not speak to whether or when the Legislature may change this “uniform rate” of taxation.
To draw further meaning from the amendment, the court must look to the “conditions under which it. . . [was] 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.” Mazzone v. Attorney Gen., 432 Mass. 515, 526 (2000), quoting Tax Comm’r v. Putnam, supra at 524. For this purpose, I turn to the history of its ratification.
Before art. 44 was ratified in 1915, the Legislature derived its authority to levy taxes solely from the enumeration of the powers of the General Court in Part II, c. 1, § 1, art. 4, of the Constitution of the Commonwealth (art. 4). That article provides that: “full power and authority are hereby given and granted to the said general court, from time to time ... to impose and levy proportional and reasonable assessments, rates and taxes, upon all the inhabitants of, and persons resident, and estates lying, within the said Commonwealth. ’’2 This provision was repeatedly construed to require that municipalities (the principal collectors of taxes levied at the time) must apply a single rate of taxation to the total value of the property of all taxpayers in their respective communities, thereby ensuring that each taxpayer paid a share of the municipal burden proportional to his share of the wealth in the municipality. See Opinion of the Justices, 208 Mass. 616, 618 (1911). While each municipality could apply a different rate of taxation on property in its com*435munity, the rate applied was required to be uniform for all property throughout that municipality. See id.
Until the late 1800’s, the requirements of art. 4 posed no real problems for the Legislature or municipalities: because “all the personal property of each individual was tangible and visible and kept in the town in which he dwelt... it was an easy matter to assess such property.” P. Nichols, Taxation in Massachusetts 463 (3d ed. 1938). However, as intangible property (stocks, bonds, and other financial instruments) became a more common and important component of wealth, the taxation of all property at a single rate that varied from municipality to municipality posed two related problems: First, because some intangible property constituted indirect ownership of tangible property (i.e., a corporate bond of a corporation that owned real estate), taxation of the value of intangible property and taxation of the value of the underlying asset was thought to amount to double taxation. See id. at 463-465. Accord First Report of the Special Commission to Develop a Master Plan Relative to Constitutional Limits on the Tax Power, 1969 Senate Doc. No. 126, at 33. Second, because tax rates were different in each municipality, and the rates of the property tax in larger cities (with the greatest financial needs) were higher, “the burden of the tax on intangibles alone furnished strong motive for concealment of intangible property, and also for transfers of domicile from Boston and other cities to smaller communities having lower tax rates and less efficient assessors.” Id. As a result of concealment and domicil shifting,3 “hardly a fifth of the personal property in [the] commonwealth was subjected to taxation.” P. Nichols, Taxation in Massachusetts, supra at 465.
By the early 1900’s, the Legislature was actively exploring a number of alternative proposals to address the growing problems occasioned by the taxation of intangible property, including: *436exempting some or all intangible property from the property tax and levying a Statewide special “excise” on intangible property; taxing personal property at a single rate uniform throughout the Commonwealth based on the average local tax rate; and requiring that intangible property be assessed based on the income it generated, rather than on its asset value. It sought advisory opinions from this court evaluating the constitutionality of these legislative proposals, and the court found each of them to be in excess of the taxing authority granted by art. 4. See Opinion of the Justices, 195 Mass. 607 (1908); Opinion of the Justices, 208 Mass. 616 (1911); Opinion of the Justices, 220 Mass. 613 (1915).
Article 44 was adopted by the Legislature and ratified by the people in this context.4 Its adoption came “after prolonged study by successive Legislatures of the legal and practical aspects of income taxes, and after the proposal and consideration of numerous plans.” Opinion of the Justices, 266 Mass. 583, 587-588 (1929). Among the plans considered at length but rejected was an amendment to the Constitution explicitly authorizing a graduated tax on income. See 1914 Senate J. 1613-1614. “The Legislatures of the political years 1914 and 1915 [being] not unfamiliar with taxes graded as to rates and progressively increasing in proportion to the amount of property involved,” id. at 587, adopted language that rejected this approach.
The purpose of art. 44 was “not so much to produce additional revenue for public use, as to provide a more satisfactory system for the taxation of intangible personal property than that which had been in use since intangible property had come into existence.” P. Nichols, Taxation in Massachusetts, supra at 463. To accomplish this purpose, art. 44 gave the Legislature greater power and flexibility to structure a system of taxation, including the power to tax income and the ability to set different *437rates for the taxation of income derived from different classes of property.5 It also eliminated the requirement of proportionality for the taxation of income, requiring instead that a single rate of taxation be set for each type of income that would not vary from municipality to municipality, but would be the same throughout the Commonwealth. See, e.g., Knights v. Treasurer & Receiver Gen., 237 Mass. 493, 495 (1921), aff’d sub nom. Knights v. Jackson, 260 U.S. 12 (1922) (“Under this amendment plainly income taxes are not required to be proportional or equal as between different validly established classes. They need only be reasonable and uniform . . .”).
Consistent with its “dominant purpose” and its historical context, it is apparent that the use of the word “uniform” in art. 44 was intended to ensure that whatever tax rate was to apply to each classification of income, it be a flat (rather than graduated) rate that would apply across the Commonwealth. Opinion of the Justices, 266 Mass. 583, 586 (1929) (art. 44 exacts geographic uniformity and does not permit different rates based on differences in amounts of income received by taxpayers). There is no suggestion, discussion, or implication in the history of its adoption that art. 44 was intended to control the timing of the setting of the tax rate or the length of the period during which any particular rate would apply. The court, however, reads a far broader meaning into the term “uniform,” one that restricts the date on which the Legislature is authorized to change the “tax rate.” Ante at 426-428. This meaning is neither apparent from the amendment’s words nor necessary to achieving its purpose.
The “uniform rate” requirement does not prevent the Legislature from changing the rate of taxation on income derived from a class of property: “It cannot be doubted that *438[art. 44] confers power to change the rate of the tax from time to time as the public welfare may require,” Knights v. Treasurer & Receiver Gen., supra at 495. Similarly, the Legislature should have broad discretion to determine the effective date of a tax. Cf. Johnson v. Department of Revenue, 387 Mass. 59, 67 (1982), quoting McLaughlin v. Alliance Ins. Co., 286 U.S. 244, 250 (1932) (“[The Legislature], having constitutional power to tax the gain . . . may choose the moment of its realization [and recognition] and the amount realized [and recognized], for the incidence and the measurement of the tax”). But the court now reasons that any new rate must apply to an entire year, because “[t]ime is ... a component of income” and “income has always been determined annually in Massachusetts for purposes of taxation.” Ante at 426. It reaches this conclusion relying on language in Tax Comm’r v. Putnam, 227 Mass. 522, 526-527 (1917). Ante at 425-426. But the Putnam case does not mandate so restrictive a definition of income and does not incorporate any particular measure of it into the Constitution.
The Putnam case involved a challenge to the first income tax statute enacted after art. 44 was ratified, the Income Tax Act of 1916, St. 1916, c. 269. The defendant in that case alleged that the act violated art. 44, because it authorized the taxation 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” — i.e., capital gains. Id. at 524. The challenge involved two contentions: (1) that such capital gains were not “income” and could not constitutionally be reached by the taxing power, and (2) even if capital gains could be taxed, the income tax law unconstitutionally taxed them at a different rate (three per cent) than it taxed income from stock dividends and bond interest (six per cent). See id. at 528-531. The court upheld the law, holding first that, in art. 44, “the word ‘income’ . . . 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.” Id. at 525-526. Thus, “income” included capital gains. Then, noting that earning income from capital gains requires significant effort on the part of the investor, while earning income from stock dividends and *439bond interest is essentially a passive activity, the court concluded that capital gains and income from stock dividend and bond interest “do not belong to the same class” and could therefore be taxed at different rates. Id. at 531.
The Putnam case’s broad interpretation of “income” is consistent with the general purpose of art. 44, namely, to grant the Legislature increased flexibility in taxing and setting rates of taxation for income derived from different classes of property. The language from the Putnam case on which the court relies for its conclusion in the present case was not intended to restrict that legislative flexibility; rather it comes from a general and prefatory discussion early on in the opinion involving the conceptual distinction between “income” and “wealth”:
“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 n 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.” (Emphasis added.) Id. at 526.
The court goes on further to describe income as synonymous with “ ‘gain,’ ‘profit,’ ‘revenue.’ ”6 Id. at 527. While it may be that income, as compared to wealth, cannot be meaningfully *440captured in a single snapshot of financial condition, and that as a practical matter its measurement requires an element of time, the duration of that period of time is not a question of constitutional dimension. It is whatever the Legislature, by statute, says it is.
The language in Tax Comm’r v. Putnam, supra at 530, tying “income as ascertained for tax purposes” to the calendar year is not to the contrary. What that language describes is taxable income as calculated under the income tax act of 1916 — the act that Putnam was interpreting:
“The Income Tax Act, according to the express provisions of section 7 and as interpreted by the commissioner in its application to these defendants, is to be levied only on such increases in values as have been realized by sales within the year, using as the basis of value in instances where stock was owned by the taxpayer on January 1, 1916, the fair cash value at that time. Thus the income as ascertained for tax purposes is the annual income in its strict sense. It is a direct apportionment of the increment from this source to the year in which it was received and converted into cash.” (Emphasis added.)
Tax Comm’r v. Putnam, supra at 529-530. The significance of this language does not relate to the one-year period it references, but to a different constitutional concern present in the Putnam case, but not here. That concern arose from the historical fact that the 1916 statute was the State’s first income tax statute. In an effort to ensure that the income tax was not unconstitutionally imposed on appreciation in asset value accruing prior to the effective date of the tax, the statute set new basis values for all assets as of January 1, 1916. Thus, the court emphasized that the tax imposed on gains from asset sales made during the 1916 tax period was only being imposed on gains attributable to the increased value of those assets accruing after January 1, 1916.7 Nothing in Putnam suggests that its discussion of taxable income under the 1916 act was intended to limit *441the meaning or measure of “income” under art. 44, or under any subsequent tax statute, to any particular period of time. The length of the income measuring or tax period could have been six months or three months, had the Legislature so chosen, rather than the one year period it specifically included in the 1916 statute.
The present case does not involve the income tax act of 1916; it involves the Revenue Enhancement Act of 2002. That act explicitly taxes long-term capital gains income at a different rate during two different periods within a calendar year. The taxpayer is required to total up all long-term capital gains and losses incurred during the period from January 1, 2002, through April 30, 2002, and apply one tax rate to any resultant net income, and to perform the same task for all such gains and losses incurred during the period from May 1, 2002, through December 31, 2002, and apply a different tax rate. Contrary to the argument of the plaintiffs, this does not improperly treat long-term capital gains as different “classes” of property depending on when the gain was realized (i.e., before May 1, 2002, or thereafter), no more than capital gains received on December 31 of one year would be viewed as being treated as a different class of property from those received on January 1 of the following year, if a different tax rate applied to them. The relevant constitutional inquiry is not the difference in tax rates applicable to capital gains income made effective by a legislative enactment, but whether income earned after the enactment’s effective date is taxed uniformly. Here, the act imposes one uniform rate — 5.3 per cent — on all long-term capital gains income realized during the period from May 1, 2002, through December 31, 2002. St. 2002, c. 186, § 13.
In sum, I reject the court’s reading of the limited definition of “income” as change in wealth over a calendar year into the art. 44 requirement that income be taxed at a “uniform rate throughout the commonwealth.” The element of time in the calculation of income is a matter of statutory rather than constitutional concern. Here the Legislature has chosen to measure and tax long-term capital gains income at periods less *442than one year. The uniformity provision of art. 44 requires merely that all income similarly derived and received during the same measuring period (however narrowly defined by statute) be taxed at the same flat rate across the Commonwealth. Because § 32 plainly meets this requirement, it is in conformance with art. 44.8
In rejecting the commissioner’s contention that the “uniform rate” provision requires only that the rate of taxation for a class of property be identical on any date on which the tax is imposed, the court voices the concern that under this view “the taxable year could be broken into segments having different- tax rates, thereby creating a form of graduated income tax, which is prohibited by art. 44.” Ante at 428. The plaintiffs raised a similar concern, claiming that the authority to change the tax rate midyear would permit the Legislature to research the dates on which the wealthiest individuals acquired income, and then impose a temporary higher tax on those dates (presumably retroactively), to create the effect of a graduated income tax. While these concerns may be legitimate, they are misdirected: principles of due process and equal protection — not the uniformity clause — prevent the potential abuses that trouble the court and the plaintiffs. No such abuses are presented to us in this case.
I would hold that the plaintiffs have not met their heavy burden of proving “beyond a rational doubt” that § 32 of the Revenue Enhancement Act of 2002 violates art. 44 of the Amendments to the Massachusetts Constitution. Andover Sav. Bank v. Commissioner of Revenue, 387 Mass. 229, 235 (1982).

Because I would hold that § 32 of the Revenue Enhancement Act of 2002, St. 2002, c. 186, meets the constitutional requirement of uniformity, I would not reach the issue whether capital gains income is income “derived from property.” See ante at 424.

Part II, c. 1, § 1, art. 4, of the Constitution of the Commonwealth (art. 4) also gives the Legislature the power to impose “reasonable duties and excises.”

Because intangible property was taxed at its owner’s domicil, the wealthy could lower their tax burden by shifting their domicils from cities, with high tax rates and sophisticated assessors, to homes in rural communities with low tax rates and less aggressive and knowledgeable assessors. As a consequence, tax rates in the cities where resources were needed grew even higher (to make up for the lost wealth), and tax rates in rural communities moved artificially lower, magnifying the differences in municipal revenues. P. Nichols, Taxation in Massachusetts 464-465 (3d ed. 1938).

Before it adopted the ultimate text of art. 44 of the Amendments to the Massachusetts Constitution (art. 44), the Legislature also .considered other amendments that might solve these problems, including: amendments that would have eliminated the proportionality requirement entirely, 1914 House Doc. No. 729 and 1914 House Doc. No. 1052; and an amendment that would have authorized a single Commonwealth-wide tax rate for intangible property, 1914 House Doc. No. 1560.

In the year following the amendment, the Legislature enacted the first income tax law. It “was intended to enable the state to impose a tax on intangible securities which was capable of enforcement with some degree of equality and without driving capital out of the state. So far as it applied to income from property it affected only the classes of intangible property which were previously taxable on their capital value at the local rate, and as to such property it reduced the tax from a variable local rate, which amounted frequently to from 30 to 50 per cent of the income, to a fixed rate of 6 per cent, but provided means for the strict and impartial enforcement of the tax.” P. Nichols, Taxation in Massachusetts, supra at 467.

While it may be more meaningful for some purposes to say that a person has wealth rather than income at any single moment in time, a person acquires — or, in the words of Tax Comm’r v. Putnam, 227 Mass. 522, 527 (1917), “derive[s]” — income (“gains,” “profit,” or “revenue”) at specific moments in time. And the moment of receipt of income is a very important demarcation point in our tax laws. Tax liability for income “arises when the income passes into the hands of the person beneficially entitled to it.” Hart v. Tax Comm’r, 240 Mass. 37, 39 (1921) (invalidating tax on income that taxpayer acquired before moving into Massachusetts). Thus, for example, tax liability for a paycheck received on January 2, 2004, for work done in December, 2003, is taxed at the rate effective January 2, 2004 • — • the moment at which the income was received — not at the rate effective in December, 2003 — the time over which the income was earned. See 26 C.F.R. § 1.446-l(c)(i) (2003) (“under the cash receipts and disbursements method in the computation of taxable income, all items which constitute gross income [whether in the form of cash, *440property, or services] are to be included for the taxable year in which actually or constructively received”). Taxpayers are subject to tax liability on income as of the date that they receive it, and at the rate that is in effect at that time.

The concern over the constitutionality under art. 44 of measuring gain on the sale of an asset with reference to a basis prior to the applicability of a tax *441was finally put to rest in Johnson v. Department of Revenue, 387 Mass. 59, 67 (1982).

The court’s opinion concedes that there is no constitutional right to a particular period of taxation (see ante at 428 n.6), and that the tax rate can change between periods of taxation. It concludes, however, that § 32. violates art. 44 because it changes the “tax rate” while maintaining the same “period of taxation.” This distinction is not meaningful either as a practical or as a constitutional matter. By changing the tax rate in effect on income earned during the period from May 1, 2002, through December 31, 2002, § 32, defines (or changes) the period of time during which income will be measured for purposes of imposing the tax.