Court Opinion

ID: 7915571
Source: CourtListenerOpinion
Date Created: 2022-09-08 22:10:31.848273+00
Date Added: 2024-06-11T16:32:47.596334
License: Public Domain

Hoch, J.
(concurring in part and dissenting in part): I concur in the decision on the issue as to management fees. In the absence of a showing by appellant as to the nature and extent of the services for which such fees were charged by the parent compaiiy and as to the reasonableness of the formula used for allocating the charges to subsidiary companies the commission was clearly justified in refusing to allow deductions.
I must again dissent from the view that interest paid to stockholders on debts incurred for capital expenditures may not, under any circumstances, be deducted in computing net income. My views on that issue were briefly expressed in a dissenting opinion in the recent case of Natural Gas Pipe Line Co. v. Commission of Revenue and Taxation, 155 Kan. 416, 423, 125 P. 2d 397, here followed, and I would not now be reiterating that dissent except for a firm conviction that the interpretation which the decision gives to the statute involved is fundamentally unsound, doing violence to the basic principle upon which an income tax rests. With no attempt at thorough treatment of the subject, I shall merely add short comment to what was said in the former dissent.
*624In their brief in this case the appellees accurately summarize the former decision as follows: “This court held in the Natural Gas
Pipe Line case that capital expenditures are not ordinary expenditures for actually carrying on the business of the corporation.”
Again I submit that such expenditures are not only ordinary, but that of course the corporation could not actually carry on the business without them. Without the necessary plant the corporation can no more earn the income that is to be taxed than it could if it had the plant but did not operate it.
The. primary principle of an income tax is that it is a tax levied on “ability to pay.” That involves, obviously, the idea that the tax is to be levied on net income, for unless there be net income there can be no ability to pay. That our law is intended a's a tax on net income is unquestioned. But when we say that under our statute the taxpayer may not deduct from gross income the interest which he has to pay- on debts incurred for capital expenditures, necessary for carrying on the business, we transform the tax, to that extent, from a tax on net income to a tax on gross income. The result, by the same token, is a tax levied without regard to ability to pay. To illustrate: A company finds itself just “breaking even” after paying interest—along with other necessary outlays—on debts lawfully and honestly incurred to stockholders who have advanced funds for necessary capital expenditures. It has no- net income. It has no “ability to pay.” But under our interpretation of the statute, the money necessarily paid out for such interest charges must be treated as income and taxed as such. The tax thus becomes one on gross income, for there is no net income. I find nothing in the statute which indicates that the legislature intended such an illogical and unsound result.
Conceding that the legislature has broad power to determine what deductions are to be allowed in determining taxable income, why should we adopt an interpretation which denies the right to deduct expenditures which have to be made before any net income can be said to have been earned? Suppose the legislature should say that in computing the “net income” to be taxed no deductions shall be made for operating expenses? Is it clear that such an “income tax” law would be valid simply because a broad power exists to determine the allowable deductions? How far along the road of confiscation may a legislature go under the guise of an “income tax” law? That question may not arise out of the factual situation in the instant *625case, but it clearly inheres in the interpretation which we have here established for general application.
Appellees cite, for illustration, our statute (G. S. 1941 Supp. 79-3206) which denies deduction for interest paid on money borrowed to purchase securities the interest of which is tax exempt. The answer is obvious. Not only is such an expenditure not necessary for “actually carrying on the business” but the provision is clearly aimed at evasion of the tax. While I shall not extend this .dissenting opinion by analysis of other provisions and cases cited, I think they may be similarly distinguished from the instant case. Certainly any deduction may be and should be disallowed when the expenditure is not reasonably required in order to earn the income. To say that the legislature may fix deductions wholly without regard to that principle is to ignore fundamentals.
One more comment. Appellees ask: “If a capital expenditure is an ordinary expenditure as intended by the statute, what expenditure would not be ordinary so as to give the statute operative effect?” No imagination is necessary to give many illustrations, for answer. The day being warm, as I write, I suggest the case of a loan by stockholders to build a swimming pool in the corporation’s office building. Deduction of interest might be disallowed on the ground that the expenditure was neither “ordinary” nor “necessary for actually carrying on the business” of the corporation! Countless other better illustrations might be given. They would illustrate the intent of the legislature, as I construe it, to prevent any deductions for interest paid on loans for unnecessary or “phony” expenditures, whether those expenditures are for alleged operating expenses or capital outlay. The acid test is, Are the expenditures, whether in plant or for operating expenses, reasonably necessary in order to earn the income that is to be taxed? In other words, in the language of the statute, was the money “actually borrowed,” and were the expenditures “ordinary,” for “actually carrying on the business”?
Under the interpretation of the statute adopted by the court, the income tax law is given a new efficiency—it is made to work both cornin’ and goin’. The stockholder must pay an income tax—and properly so—upon the interest which he receives on his loan to the corporation, and the corporation must now pay an “income” tax on the same money which it pays out to the stockholder! I submit that this disregard of fundamentals makes the term “net income” something wholly artificial and without essential meaning.