Henderson v. City of Missoula

I dissent. The question here involved is whether the minor son of a veteran of the World War is exempt from taxation on certain realty in the city of Missoula, purchased with funds received by the guardian of the deceased father.

In the year 1936 the city of Missoula levied general taxes against the property of the minor, which were paid by the plaintiff under protest, and this action was brought to recover the amount paid and to restrain the defendant from future levies during the minority of the minor or while the title to the property remains in him. Judgment is prayed for accordingly.

Defendant's demurrer to the complaint was overruled and it was allowed ten days to answer. The answer admits all the allegations of the complaint, except that the minor's property is exempt from taxation, which claim of exemption is denied on the ground that that part of section 1998, Revised Codes, under which the exemption is claimed, is in contravention of section 2, Article XII of the Constitution. The part of section 1998 thus contested is as follows: "All property, real or personal, in the possession of legal guardians of incompetent veterans of the World War or minor dependents of such veterans, where such property is funds or derived from funds received from the United States as pension, compensation, insurance, adjusted compensation, or gratuity, shall be exempt from all taxation as property of the United States while held by the guardian, but not after title passes to the veteran or minor in his or her own right on account of removal of legal disability." The reply reiterated the right of exemption. By stipulation the action was submitted to the court upon the pleadings, and the court was requested to make findings.

The court found that all the funds used to purchase the property were derived by the father of the minor from compensation and awards from the United States to the soldier; that the property was in the possession of the guardian of the minor for the minor but was "exempt from all taxation as property of the United States so held and possessed by such guardian." The taxes collected were ordered repaid to the guardian with interest and the injunction was granted. From such judgment the defendants appeal.

The five assignments of error made are predicated upon the one contention that that part of section 1998 quoted above is unconstitutional.

The judgment of the trial court is predicated upon an agreed statement of facts, which involves questions of law only, and, such being the case, the action comes here under the rule that, "where * * * there is no dispute as to the facts, this court is in as favorable a position in applying the law as the district court." (Birdwell v. Three Forks Portland Cement Co.,98 Mont. 483, 40 P.2d 43, 47.)

In taking up the consideration of the question of the constitutionality of that part of section 1998 quoted above, we proceed under certain well-defined rules which are laid down and supported by numerous citations in State ex rel. Du Fresne v.Leslie, 100 Mont. 449, 50 P.2d 959, 101 A.L.R. 1329, and which will be mentioned here only incidentally. We there said (page 454): "Every doubt must be resolved in favor of the validity of the legislative Act"; but that "with reference to the subjects upon which the Constitution assumes to speak, its declarations are conclusive upon the Legislature."

I think the Constitution has spoken in very clear terms on the subject of exemption from taxation. Section I, Article XII, provides: "The necessary revenue for the support and maintenance of the state shall be provided by the legislative assembly, which shall levy a uniform rate of assessment and taxation, and shall prescribe such regulations as shall secure a just valuation for taxation of all property, except that specially provided for in this Article. * * *" In construing this section, this court said, in Mid-Northern Oil Co. v. Walker, 65 Mont. 414, 421,211 P. 353, 354, "Taxation is the rule and exemption the exception," and one claiming an exemption has the burden of showing that he comes within some definite exception to the rule. In Hale v. Jefferson County, 39 Mont. 137, 141, 101 P. 973, it was said (page 141): "Apart from certain exemptions specifically mentioned, all property in the state is subject to taxation. (Const., secs. 1, 3, Art. XII.)"

Section 2 of Article XII provides: "The property of the United States, the state, counties, cities, towns, school districts, municipal corporations and public libraries shall be exempt from taxation; and such other property as may be used exclusively for the agricultural and horticultural societies, for educational purposes, places for actual religious worship, hospitals and places of burial not used or held for private or corporate profit, institutions of purely public charity and evidences ofdebt secured by mortgages of record upon real or personalproperty in the state of Montana, may be exempt from taxation." The part in italics was an amendment submitted to the electors by Chapter 142, Laws of 1917, and duly adopted, and has no application here.

It will be noted that the property mentioned in the first sentence of the section is absolutely exempt and that mentioned in the second may be exempted. The second group may be exempted at the discretion of the legislature. This court has heretofore construed this section in a number of decisions.

That part of section 1998 quoted above which is in question here was added to the section by Chapter 98 of the Laws of 1931, and, according to Cruse v. Fischl, 55 Mont. 258,175 P. 878, is in excess of the exemptions authorized by the Constitution. It was said in the Cruse-Fischl Case (page 262):

"The subject `Revenue and Taxation' is covered by Article XII of the Constitution. By section 2 of that Article two classes of property, and only two, were deemed proper subjects of relief from taxation. The first comprises public property — that is, the property of the United States, the state, counties, cities, towns, school districts, municipal corporations and public libraries — and with respect to this property the Constitution declares that it shall be exempt. The second class comprises property of a quasi public character — that is, property used exclusively for agricultural and horticultural societies, educational purposes, places of actual religious worship, hospitals and places of burial not used or held for private or corporate profit, and institutions of purely public charity. The legislature is permitted, but not required, to relieve any or all of the property of this class from taxation,and it has all been declared to be exempt. (Sec. 2499, Rev. Codes.)

"There cannot be a difference of opinion concerning the meaning of the language employed in section 2 above. The authority to tax any property of the first class is denied the lawmakers absolutely. The provision is mandatory in character, is self-executing and the legislation thereafter enacted declaring property of that class exempt added nothing to its force or effectiveness.

"When we recall that our Constitution is not a grant of authority, but a limitation upon the powers of government — that our legislature exercises inherent and not delegated authority — the reference to the second class becomes equally explicit. While the language is permissive in form, it is prohibitory in effect.The Legislature may extend the exemption to the propertyenumerated, but it cannot go further or include any other. This is the construction uniformly placed upon such provisions, and is commanded by the rule of interpretation contained in the Constitution itself. (Sec. 29, Art. III.)

"Section 2 thus expresses the entire will of the people with respect to the property absolutely exempt and the extent of legislative power to create exemptions. Section 2499, Revised Codes, is therefore to be construed strictly; that is to say, nothing is to be implied, for the legislation is as broad in itsterms as the [constitutional] limitation permits, and in itsenactment the lawmakers exhausted their power to relieve propertyfrom taxation. All other property within the state is liable to taxation. (Sec. 2498, Rev. Codes.)"

Section 2499, Revised Codes, mentioned above, was the number of the section in the 1907 Codes that was brought forward into the 1921 Codes as section 1998, and is the same section in question here, except section 1998 now carries the 1931 amendment hereinbefore quoted. It will be noted that the decision inCruse v. Fischl holds in substance that the legislative power to create exemptions under the second division of section 2, Article XII of the Constitution, was exhausted by the enactment of section 2499 of the 1907 Codes, long before the amendment of 1931 was added to section 1998. (See, also, City of Kalispell v. School Dist., 45 Mont. 221, 122 P. 742, Ann. Cas. 1913d 1101; Hale v. Jefferson County, supra; Union Bank TrustCo. v. Moore, 62 Mont. 132, 204 P. 361; Stoner v.Timmons, 59 Mont. 158, 196 P. 519; Mid-Northern Oil Co. v.Walker, supra; State ex rel. Mills v. Dixon, 66 Mont. 76,213 P. 227; Town of Cascade v. County of Cascade, 75 Mont. 304,243 P. 806; In re Wilson's Estate, 102 Mont. 178,56 P.2d 733, 105 A.L.R. 367.)

The decisions of other jurisdictions to the extent I have investigated them are generally in harmony with ours. The Constitution of California has a multitude of exemptions, and as evidence of a clear intent to confine exemptions strictly to express constitutional authority, in November, 1926, adopted section 1 1/4, Art. XIII, as an amendment to its Constitution, exempting from taxation property of honorably discharged soldiers and sailors to the extent of $1,000, and that is restricted in various ways; one restriction being that the exemption shall not be operative if the claimant or his wife owns property of the value of $5,000 or more.

Iowa has no constitutional provision regulating exemptions, and Oklahoma, in adopting its Constitution, provided therein that exemptions provided for by territorial statutes should remain operative until otherwise provided by law. Consequently, citations from those states would not be applicable here. All citations from Oklahoma by plaintiff were controlled by territorial statutes that had not been altered since the adoption of its Constitution.

An article appearing in the North Carolina Law Review on "Exemption of Property Bought with Federal War Risk Insurance or Compensation Money," by William Medford, I think worthy of repetition here in part:

"An Act of Congress provides that the money payable to veterans of the World War shall be exempt from `all taxation.' A later section adds that `no sum payable under this chapter * * * shall be subject * * * to national or state taxation.' Three state supreme courts have construed these sections recently with somewhat varying results. The Kansas court decided that corporate securities bought with federal insurance money were not exempt from state taxation. (State ex rel. Smith, Atty. Gen., v.Board of County Commrs. of Shawnee County, 1931, 132 Kan. 233,294 P. 915.) The Georgia court decided that land bought with such money was exempt. (Rucker, Tax Collector, v. Merck, 1931, 172 Ga. 793, 159 S.E. 501.) The North Carolina court held that land and an automobile bought in part with compensation money could not escape any part of the assessed taxation. (Martin v. Guilford County et al., 1931, 201 N.C. 63,158 S.E. 847, 76 A.L.R. 978.)

"The Georgia court in reaching its conclusion that, under these statutes, land bought with federal insurance money was exempt from taxation, applied the specific exemption of a `sum' to property bought with this `sum' as well. The underlying reason for the decision seems to have been one of policy. * * * In view of this decision some pertinent questions might be raised as to what extent the Georgia court would carry its exemption policy. Would land for which this exempted land had been exchanged also be exempt? Would personal property bought either with the `sum' or with the proceeds of the sale of this exempted land be exempt? Would profit realized from transactions involving this exempted sum be exempt even as to the income tax? Does this exemption apply with reference to the inheritance tax? If either the legal justification or the policy of this decision is followed to its logical conclusion it seems that these questions would have to be answered in the affirmative. The complications and absurdities to which such holdings would lead are apparent. It would be possible for war veterans to build up small fortunes that the state could not tax. It would be a very difficult task to administer the tax laws. The policy of the decision might be further questioned. Is it the function of the state to protect payments by the federal government to veterans of National Wars? Granting this, it does not seem that the protection should take the form of exempting real estate from taxation."

The Act of Congress exempting the compensation paid to veterans or their dependents from taxation expressly provides that such compensation shall be exempt only so long as it is retained in the form of money or its equivalent, ready to be used as need arises to provide for the welfare of the veteran or his dependent, and the immunity ceases when the money is invested. The decisions of the Supreme Court of the United States construing the Act are illuminating here.

In Trotter, Guardian, v. Tennessee, 290 U.S. 354,54 Sup. Ct. 138, 78 L. Ed. 358, decided December 4, 1933, it is said:

"Joseph A. Leake became mentally incompetent by reason of his service in the Army during the World War. Since May, 1922, the United States government has paid compensation to his guardian at the rate of $100 a month in accordance with the provisions of Part II of the World War Veterans' Act, 38 U.S.C.A., sec. 471 et seq., and disability benefits at the rate of $57.50 a month under a policy of war risk insurance in accordance with the provisions of Part III of the same Act. (38 U.S.C.A., sec. 511 et seq.) On June 3, 1924, the guardian purchased land and buildings in Blount county, Tenn., paying therefor $2,500 in cash out of the moneys theretofore received from the government, $2,000 in promissory notes, which have been paid out of later moneys derived from the same source, and $1,500 by assuming the payment of a mortgage which has been discharged by the use of the proceeds of fire insurance covering one of the buildings. State and county taxes assessed upon the land for the year 1929 are in arrears with interest and penalties. The state of Tennessee, the respondent here, brought suit in the chancery court to declare the tax a lien enforceable by a sale. The guardian and his ward answered that by force of the federal statutes the land was exempt. The chancellor sustained the defense and dismissed the complainant's bill. The supreme court of Tennessee reversed, and directed the court of chancery to award judgment to the state. (State v. Blair,165 Tenn. 519, 57 S.W.2d 455.) The case is here on certiorari.

"By the World War Veterans' Act, `The compensation, insurance, and maintenance and support allowance payable under Parts II, III, and IV, respectively, shall not be assignable; shall not be subject to the claims of creditors of any person to whom an award is made under Parts II, III, or IV; and shall be exempt from all taxation.' (Act of June 7, 1924, c. 320, sec. 22, 43 Stat. 613; 38 U.S.C. § 454 (38 U.S.C.A., sec. 454); cf. 38 U.S.C. § 618 (38 U.S.C.A., sec. 618.)

"Exemptions from taxation are not to be enlarged by implication if doubts are nicely balanced. (Chicago TheologicalSeminary v. Illinois, 188 U.S. 662, 674, 23 Sup. Ct. 386,47 L. Ed. 641.) On the other hand, they are not to be read so grudgingly as to thwart the purpose of the lawmakers. The moneys payable to this soldier were unquestionably exempt till they came into his hands or the hands of his guardian. (McIntosh v.Aubrey, 185 U.S. 122, 22 Sup. Ct. 561, 46 L. Ed. 834). * * * We think it very clear that there was an end to the exemption when they lost the quality of moneys and were converted into land and buildings. The statute speaks of `compensation, insurance, and maintenance and support allowance, payable' to the veteran, and declares that these shall be exempt. We see no token of a purpose to extend a like immunity to permanent investments or the fruits of business enterprises. Veterans who choose to trade in land or in merchandise, in bonds or in shares of stock, must pay their tribute to the state. If immunity is to be theirs, the statute conceding it must speak in clearer terms than the one before us here.

"The judgment of the supreme court of Tennessee disallowing the exemption has support in other courts. (State v. Wright, 224 Ala. 357, 140 So. 584; Martin v. GuilfordCounty, 201 N.C. 63, 158 S.E. 847, 76 A.L.R. 978.) There are decisions to the contrary, but we are unable to approve them. (Rucker v. Merck, 172 Ga. 793, 159 S.E. 501; Atlanta v.Stokes, 175 Ga. 201, 165 S.E. 270; Payne v. Jordan,36 Ga. App. 787, 138 S.E. 262.)"

In Lawrence v. Shaw, 300 U.S. 245, 57 Sup. Ct. 443,81 L. Ed. 623, 108 A.L.R. 1102, decided March 1, 1937, it is said:

"`Where a guardian of a World War Veteran receives from the Veterans' Bureau of the United States Government, warrants or checks issued by said Government in payment of adjusted compensation or insurance due the guardian's ward, and said warrants or checks are deposited by the guardian in a depository, collected by it, and the proceeds are credited in the guardian's account carried in such depository, are such deposits subject to taxation by county and municipal authorities?' The state court answered this question in the affirmative, denying the federal right asserted. * * * [The Trotter Case, supra, is then quoted from at length.] The World War Veterans' Act, 1924, provided that the compensation and insurance allowances should be `exempt from all taxation.' [38 U.S.C.A., sec. 454.] The Act of 1935 is more specific, providing that the payments shall be exempt from taxation and shall not be liable to process `either before or after receipt by the beneficiary.' [38 U.S.C.A., sec. 454a.] There was added the qualification that the exemption should not extend `to any property purchased in part or wholly out of such payments.' This more detailed provision was substituted for that of the earlier Act and was expressly made applicable to payments theretofore made. We think it clear that the provision of the later Act was intended to clarify the former rather than to change its import and it was with that purpose that it was made retroactive.

"The state court found no distinction with respect to taxability `between stocks and bonds, and notes and bank deposits and other solvent credits.' Amplifying this position, counsel for respondent at this bar, while conceding that the warrants or checks issued by the government would be exempt, and that if they were cashed the moneys thus received would likewise be exempt until they were invested, contended that if the guardian instead of cashing the warrants or checks deposited them in bank, the resulting bank credits would be taxable. We think that this contention is inadmissible. Congress has declared that the payments of benefits by the government shall be exempt not only before but `after receipt by the beneficiary.' We cannot conceive that it was the intent of Congress that the veteran should lose the benefit of this immunity, which would attach to the moneys in his hands, by depositing the government warrants or checks in bank to be collected and credited in the usual manner. These payments are intended primarily for the maintenance and support of the veteran. To that end neither he nor his guardian is obliged to keep the moneys on his person or under his roof. As the immunity from taxation is continued after the payments are received, the usual methods of receipt must be deemed available so that the amounts paid by the government may be properly safeguarded and used as the needs of the veteran may require.

"The provision of the Act of 1935 that the exemption should not apply to property purchased out of the moneys received from the government shows the intent to deny exemption to investments, as was ruled in the Trotter Case. It is of course true that deposits in bank may be made under a special agreement by which the deposits assume the character of investments and would lose immunity accordingly. No such agreement is shown here. Nor are the bank balances shown to be the proceeds of investments. They are stipulated to be `uninvested balances' of the government payments. Some reference was made at the bar to the possible effect of an allowance of interest upon bank deposits. It does not appear that there was such an allowance in this instance, and we do not suggest that a mere allowance of interest upon deposits would be enough to destroy an immunity where it would otherwise attach. We hold that the immunity from taxation does attach to bank credits of the veteran or his guardian which do not represent or flow from his investments but result from the deposit of the warrants or checks received from the government which such deposits are made in the ordinary manner so that the proceeds of the collection are subject to draft upon demand for the veteran's use. In order to carry out the intent of the statute, the avails of the government warrants or checks must be deemed exempt until they are expended or invested."

The majority opinion proceeds on the theory that the property involved here, the use of which is in the minor, is property of the United States. This is clearly untenable under the Act of Congress mentioned and the two United States Supreme Court decisions above quoted from. It is there held, in language as clear and unambiguous as it is possible to make it, that the immunity from taxation ceases when the money awarded the veteran or his minor dependent is converted from money into investments in the form of lands and buildings. The view that the property involved here is "property of the United States" can be sustained upon no theory of law nor by the decisions of the federal courts, former decisions of this court, or our Constitution. The theory that federal authorities have, in some vague way, supervision over the funds in the hands of guardians of incompetent veterans or their minor dependents, has no bearing upon our tax exemption provisions as set out in our Constitution. Any power representatives of the federal government may have in looking after the welfare of veterans could have no application in an action such as that at bar, for the reason that the latest pronouncement by the United States Supreme Court (Lawrence v.Shaw, supra) holds that, in so far as federal authority is concerned, immunity from taxation ceases when the funds paid the veteran or his minor dependent are converted from money into investments. That decision is grounded on the Act of Congress of August 12, 1935, sections 3 and 5, 49 Stat. 607, 609, 38 U.S.C.A., secs. 54 note, 454a and note where these words are found: "Such provisions shall not attach to claims of the United States arising under such laws nor shall the exemption hereincontained as to taxation extend to any property purchased in partor wholly out of such payments." The contention that the property involved here is "property of the United States" is clearly without merit. It is specifically provided by Act of Congress to be not exempt from taxation, and the construction of the Act by the Supreme Court in the LawrenceCase, merely declares what the unambiguous provisions of the statute provide. How, then, can any official of the federal government pursuing his duties towards protecting incompetent veterans from those who would cheat or defraud them proceed? Certainly not on the presumption that such property as that involved is property of the United States. It is very clear that the federal courts would not assume jurisdiction to enforce any such right grounded upon any such theory. If we accept, as we must, the construction placed upon the Act of Congress by the Supreme Court of the United States in the decisions heretofore cited, no ground is left for any "admissible construction that title to these funds remained in the United States," after such funds were invested in lands and houses.

Much is said in the majority opinion about public policy. Whether the public policy announced by the legislature is sound or not depends first upon whether the Act giving voice to such announcement be consonant with the provisions of the Constitution or not. The sole question here is whether or not the 1931 amendment to section 1998, Revised Codes, contravenes section 2 of Article XII of the Constitution of Montana, and public policy like "the flowers that bloom in the spring time has nothing to do with the case." It is difficult to understand why the question of public policy was intruded into the case, unless it be that it is always a convenient peg to hang a ragged argument upon. Any attempt to quote from decisions written by the late Chief Justice Theodore Brantly, to make public policy a pertinent issue here, is a wild misconception of the clearly expressed views of that distinguished jurist. The case of MacGinniss v. Boston Mont.C.C. S.M. Co., 29 Mont. 428, 461, 75 P. 89, is quoted from to illustrate what public policy is. Of the part quoted the portion most pertinent obviously did not impress the majority. After outlining the source of public policy, the chief justice summed up by saying: "When, however, the legislature has spoken upon a particular subjectand within the limits of its constitutional powers, its utterance is the public policy of the state." The same statement on the question of public policy is made again by Chief Justice Brantly, speaking for the court, in Parchen v. Chessman,49 Mont. 326, 142 P. 631, 146 P. 469, Ann. Cas. 1916A, 681. To use a modified form of the usual expression suitable to the occasion: What the blue blazes does anyone care about the public policy of a statute if it be unconstitutional?

The 1931 amendment to section 1998, Revised Codes, is, in my opinion, clearly in conflict with section 2, Article XII of the Constitution, and therefore void.

The judgment of the district court should be reversed and the cause remanded with instruction to dismiss the action.

Rehearing denied June 1, 1938, MR. JUSTICE MORRIS dissenting.