Middlekauff v. Galloway , 151 Or. 671 ( 1935 )

In Banc. The question presented for our determination is whether the amounts received in 1931 and 1932 by Alice H. Middlekauff, one of the appellants, from a trust estate located in the state of Iowa and there administered by a trustee, are subject to the tax imposed by the intangible income tax act of 1931 of this state.

According to the admitted facts, the will of Jennie Hornick, which was executed and probated in the state of Iowa, created a trust fund, which upon the settlement of the estate was turned over to the Security National Bank of Sioux City, Iowa. The trust estate consists of both tangible and intangible property, having its situs for taxation in that state. The trustee appointed by the Iowa court has its domicile in that state and has the sole and exclusive control of the trust estate and its investments, all of which are located in Iowa. Alice H. Middlekauff "has no title or interest in or to the corpus of said trust estate, either present or future". By the terms of the trust, the trustee is required, after paying the taxes against the corpus of the trust and the expenses of administration of the trust, including fees of attorneys and of the trustee, to turn over periodically to Alice H. Middlekauff one-half of the net income of the trust.

Under the laws of the state of Iowa in force during the times herein mentioned, the intangible property of an estate was taxed at the rate of five mills on the dollar of its actual valuation: §§ 6984 and 6985, Code of Iowa, 1931. The intangible property constituting the corpus of the trust was taxed on that basis in the state of Iowa for the years 1931 and 1932, and the tax was paid by the trustee.

On or about April 1, 1932, and the same date in 1933, the appellants, O. Middlekauff and Alice H. Middlekauff, his wife, filed with the Oregon state tax commission their joint tax returns for the years 1931 and 1932 respectively, which returns purported to include all income received by them during those years, subject both to personal income tax and intangible income tax. They reported having received no net income from intangibles during either of those years, but the amount received by Mrs. Middlekauff under the will of Jennie Hornick was reported for the year 1932 as income subject to the personal income tax, and tax was paid thereon accordingly. Thereafter, on January 29, 1934, the plaintiffs, at the request of the Oregon state tax commission, filed an amended return of their combined income for the year 1931, and included therein as income subject to the personal income tax the amount received by Mrs. Middlekauff from the trust estate in Iowa for that year.

The Oregon state tax commission, dissatisfied with this classification of the amounts received by Mrs. Middlekauff during the years 1931 and 1932 from the Iowa trust estate, assessed against the plaintiffs additional taxes for the years 1931 and 1932 based upon its construction of the law to the effect that the amounts so received by her represented income on intangibles and were therefore subject to a tax of 8 per cent in Oregon under the intangible income tax act. To these additional assessments were added interest and penalty.

The purpose of the legislature in enacting the intangible income tax law of 1931 is set forth in the preamble to that act, as follows:

"Whereas it appears that intangible personal property, represented by money and credits in various forms, is held by residents of Oregon in total value comparable to the value of all the real property in the state; and

"Whereas the ownership and possession of intangible personal property represents a benefit under the protection of government which appears not less valuable and secure than that enjoyed in the ownership and possession of property of any other class or kind; and

"Whereas the income consistently derived from intangible personal property represents a distinct taxpaying ability which, in justice and sound reason, should bear a fair share of the cost of government; and

"Whereas the general property tax system, in its pretense of taxing intangible personal property by the same rule and method applying to real estate and tangible personalty, is pitifully ineffectual because of inherent defects in theory and insuperable obstacles in administration; and

"Whereas there is a proper and insistent demand for a fair and efficient method of taxing the income from intangible personal property, in lieu of the archaic and impracticable ad valorem tax on the property itself, to afford a measure of relief to the owners of real estate and tangible personalty who now carry an unjust and distressful tax load; * * * therefore * * *" then follows the enacting clause. [Chapter 335, Oregon Laws, 1931.]

Before the enactment of the intangible income tax law, intangibles owned and controlled by residents of this state and such intangibles as had their situs for taxation purposes in this state were subject to an ad valorem tax in like manner as real property and tangible personal property located in this state. The legal fiction of "mobilia sequuntur personam" was applied in Oregon, as in many other states, to determine the situs of intangible personal property for taxation purposes, in the instance of such intangibles as had not acquired a fixed situs for taxation elsewhere. Attempts to tax intangible personal property on an ad valorem basis proved unsuccessful, due in part to the fact that the tax in many instances if applied according to the mandate of the law would equal or exceed the income received from the intangibles. It was deemed only proper and right that those who received dividends or interest on the property which the legislature saw fit to define as intangibles should pay to the state a certain percentage of the interest and dividends so received, in those cases in which such property had its situs for taxation in this state.

From the wording of the intangible income tax act of 1931 it is apparent that the tax therein provided for was intended to apply only to those instances in which the state of Oregon had the right to levy an ad valorem tax on such intangibles. And, as already noted, the state had a right to levy an ad valorem tax on intangibles which had acquired a situs for taxation in the state of Oregon, whether owned or controlled by residents or nonresidents of the state, and, in addition, on such intangibles as were owned and controlled by residents of the state and had not acquired a definite situs for taxation elsewhere. The purpose of the state in enacting this law, as previously observed, is borne out by the language of § 36 of the 1931 enactment, which reads as follows:

"The tax on income from intangibles imposed by this act shall be in lieu of general property taxes on all intangibles, as defined in this act, and the same shall not be assessed for taxation as personal property for the year in which the income therefrom is or may become liable to taxation under this act."

It will be necessary to refer further to the act itself, in order to ascertain the intention of the legislature in this regard.

An annual tax at the rate of 8 per cent is imposed with respect to the taxpayer's net income as defined by the act: § 3. Net income is defined to mean the gross income of the taxpayer from intangibles "less the deductions allowed by this act": § 7. And by § 8, "the term ``gross income' includes all interest and dividends derived from intangibles as defined in § 2 of this act". According to subdivision 9 of § 2, "the word ``intangibles' means and includes money at interest, bonds, notes, claims, demands and all other evidences of indebtedness, secured or unsecured (not including open accounts), including notes, bonds or certificates secured by mortgages, and all shares of stock in corporations, joint stock companies or associations".

It is to be noted that the only income on which the tax is assessed is that represented by interest or dividends on intangibles as defined by the act. By § 4 the intangible income tax is imposed upon all nonresident individuals and corporations "with respect to the taxpayer's net income as herein defined,having a situs for taxation within the state of Oregon during the tax year". Section 6 provides that "the tax imposed by this act shall apply to estates and trusts, which tax shall be levied, collected and paid annually on and with respect to the incomefrom intangibles of estates and trusts". Subdivision 2 of § 6 makes a fiduciary responsible "for making the return of income from the estate or trust, whether such income be taxable to the estate or trust, or to the beneficiaries thereof".

In the instance of a trust administered in Oregon the beneficiary of which is not a resident of this state, only the income from such intangibles of the trust as have a situs for taxation within the state is subject to the tax: § 6, subdivision 4.

Section 14 of the act provides in part as follows:

"Every fiduciary, except receivers appointed by authority of law in possession of part only of the property of a taxpayer, shall make under oath a return for the individual or estate or trust for whom he acts, as follows:

* * * * * "3. If he acts (a) for an estate or trust the income of which is to be distributed to the beneficiaries periodically; or (b) * * *; and any beneficiary of such estate or trust who receives or is entitled to a distributive share of the income of the estate or trust."

Were the trust created by the will of Jennie Hornick being administered in the state of Oregon instead of Iowa, under the same conditions as it is in that state, the interest and dividends received by the trust estate on the intangibles owned and held by the trust would be subject to the intangible income tax of this state, regardless of where the beneficiaries of the trust reside. This is as we construe the law and as stated by counsel for the state tax commission in oral argument. Were the state of domicile of a nonresident beneficiary, in the instance above stated, to subject the income to another tax, the situation would be the same as we now find in this case, with this exception: here the state tax commission is seeking to impose on the income derived from both tangible and intangible property the intangible income tax.

In the instant case the intangible property owned by the trust estate in Iowa there not only is subject to, but has actually paid, an ad valorem tax for the years 1931 and 1932. Such intangible property could not be and is not subject to a tax of any kind in this state. So far as the state of Oregon is concerned, it matters not whether the income received by Mrs. Middlekauff is derived from intangible personal property or from real property.

Let us examine for a moment what property rights Mrs. Middlekauff owns. The facts, as admitted, are that she does not own or have any interest in or control of the corpus of the trust. The management of the investments of this trust property is entirely controlled by the trustee. Her right is to have distributed to her by the trustee one-half of a certain fund as provided by such trustee.

Her right to an aliquot part of this fund may be considered as intangible personal property, but it is questionable whether such right comes within the definition of "intangibles" contained in the 1931 enactment. But, even if considered as such, it is only the interest or dividend on the intangibles that is subject to the tax. Mrs. Middlekauff has received no interest or dividends on this right to a part of the net income of the trust estate. The amount due her has been paid to her, we must assume, as provided by the trust agreement. To the effect that she has no interest in the corpus of the trust, but only in a fund as created by the trustee, see Anderson v. Wilson, 289 U.S. 20 (53 S. Ct. 417, 77 L. Ed. 1004).

Reference has hereinabove been made to numerous sections of the 1931 enactment relative to the duties of fiduciaries under existing trusts. That the state of Oregon can not exercise any jurisdiction over the trustee in this case is obvious. There is no requirement that the trustee, an Iowa bank, report to the Oregon state tax commission the net amount received annually by it from this trust as interest or dividends on intangibles. And we know of no way by which the beneficiaries can require it to report to them those facts.

The state tax commission apparently does not consider that it matters whether the income received by a beneficiary from a foreign trust is made up of interest and dividends from intangibles or income from tangible personal property and real property. So far as the beneficiary personally is concerned, the reasoning is correct. Nor should the state of Oregon be interested, if the beneficiary has no interest in or control over the corpus of the Iowa trust estate. Nothing that such beneficiary could do would subject the corpus of the trust to a tax in this state. It has a fixed situs elsewhere for taxation and does not avoid contributing its share to pay the costs of government.

That the legislature understood that the 1931 enactment did not cover incomes from nonresident trusts would appear from the amendment made in 1933 to § 8 of the act, reading as follows:

"The term ``gross income' includes all interest and dividends derived from intangibles as defined in section 2 of this act,including intangibles income derived through resident andnonresident estates and trusts by the beneficiaries thereof."

The part in italics was added by the amendment (§ 1, chapter 32, Oregon Laws, 1933, Second Special Session).

In our opinion the legislature in enacting the intangible income tax act of 1931 did not intend to subject this income to the tax provided by that act, and the terms of that act are not broad enough to include a tax on income such as derived by Mrs. Middlekauff from the Iowa trust estate.

It is not here necessary to pass on the question of whether or not the construction placed by the tax commission on this income tax law would subject the corpus of the trust to a double tax. The observation made by the court in Safe Deposit T. Co. v.Virginia, 280 U.S. 83 (74 L. Ed. 180, 50 S. Ct. 59, 67 A.L.R. 386), is, however, appropriate to our discussion. In the opinion therein it was said:

"It would be unfortunate, perhaps amazing, if a legal fiction originally invented to prevent personalty from escaping just taxation, should compel us to accept the irrational view that the same securities were within two states at the same instant and because of this to uphold a double and oppressive assessment."

We are not called upon to decide whether the income received by Mrs. Middlekauff from the Iowa trust is subject to the personal income tax of this state, as she has already paid such tax and it is not here in review.

It follows that the decree appealed from should be reversed. It is so ordered.

BEAN, KELLY and RAND, JJ., concur.