Mills v. State Board of Equalization

I concur in the result reached by the majority opinion in condemning the surtax, but dissent from the result reached as to the other provisions of Chapter 40, Laws of the Extraordinary Session of the Twenty-third Legislative Assembly.

For the reasons stated in my dissenting opinion in O'Connell v. State Board of Equalization, 95 Mont. 91, 25 P.2d 114, I think the entire Act is unconstitutional as unreasonably discriminatory in favor of corporations and against individuals. To say that an income tax is not a tax on property does not answer this question. There must still be found some reasonable basis for such hostile discrimination before the Act can be sustained whatever the character of the tax. (State v.Sunburst Ref. Co., 73 Mont. 68, 235 P. 428.) In passing I may say that I have not the slightest doubt that income is property and therefore I agree with what is said by Mr. Chief Justice Callaway on this point.

The mere fact that of two rivals in business one is incorporated and the other not, furnishes no justification for penalizing the latter by a tax from which the former is exempt. Our fundamental law declares against such a policy (sec. 7, Art. XII, Montana Constitution). This section provides: "The power to tax corporations or corporate property shall never be relinquished or suspended, and all corporations in this state, or doing business therein, shall be subject to taxation for state, county, school, municipal and other purposes, on real and personal property owned or used by them and not by this Constitution exempted from taxation." This section does not relate to property taxes only but by its express language embraces "the power to tax corporations." The meaning of this section, when applied to a property tax, was stated by this court to be that the property of corporations shall bear its equal share of the burden of taxation. (Northwestern Mut. Life Ins.Co. v. Lewis and Clarke County, 28 Mont. 484, 72 P. 982, 98 Am. St. Rep. 572.) When we consider the words, "the power to tax corporations," as used in this section, it plainly means that corporations shall bear their equal share of the burden of taxation in whatever form. But if it can be said that section 7 of Article XII does not prohibit the exemption of corporations from a tax imposed upon individuals, certainly when read in conjunction with section 11 of the same Article, there can be no doubt that the framers of the Constitution so intended. Section 11, in treating of taxes, provides, "They shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax." A tax on income, whether regarded as a property tax or not, is certainly a tax. When it is imposed upon individuals and not on competing corporations it is not uniform upon the same class of subjects.

Also, our Act conflicts with the federal Constitution in that it denies to individuals the equal protection of the laws as against competing corporations. (Sec. 1, Art. XIV, United States Constitution.)

The majority, hard pressed to find some reason for the hostile discrimination patent on the face of the Act, resort to an address of Harold M. Groves, Professor of Economics, of the University of Wisconsin, reported in the March, 1934, issue of the "Tax Magazine." He in effect states that it is his opinion that the states will sooner or later realize that a tax on corporations is not a satisfactory way to tax the stockholder, and that dividends should be taxed to the stockholder. He points out, however, that of the twenty-nine states having income taxes, only one taxes individuals only. The state which he names is the state of Delaware, the home and haven of corporations doing business elsewhere. He apparently overlooked the fact that the Montana law also does so. The Delaware Act does not appear to have been passed upon by the courts of that state.

It is to be noted also that Professor Groves does not suggest the remedy. He does not suggest that corporations be exempt. His complaint is that a tax on corporations is not a satisfactory way to impose a tax on stockholders. It is entirely possible that his view is that the corporation as well as the stockholder should be taxed in such a manner that all the corporate income shall be once taxed. After the statement quoted in the majority opinion, this eminent professor in speaking of an income tax on corporations went on to say: "If the corporation is located in one place and the stockholder in another as is frequently the case, the stockholder may contribute nothing to the community in which he lives." It is immaterial that the stockholder may contribute nothing to the community in which he lives. If the corporation is taxed, the stockholder contributes to the community in which he enjoys the privilege of making an income through the corporate activities by a proportionate reduction in dividends, and that is the community which rightfully should receive the contribution in the way of an income tax. An income tax on the corporation as well as the stockholder could be so framed as to obviate the difficulty pointed out by Professor Groves and yet not result in double or unequal taxation.

The majority opinion also makes reference to the report of the Wisconsin State Tax Commission, in which that commission pointed out that under the laws of that state a person receiving as his sole income $500 as dividends on corporate stock has the same rate of taxation applied against it as the person who receives $500,000 annually from the same source. That objection is not eliminated by exempting corporations. Under our Act the same rate of taxation is applied to all incomes. Thus one receiving $500 of taxable income has the same rate of taxation applied against it as is applied against the first $500 of taxable income received by the one who receives an income of $500,000. If A has a taxable income of $6,500 the $6,000 receives the same rate of taxation as the first $6,000 received by B, who receives a taxable income of $500,000. And the $500 received by A in excess of the first $6,000 of taxable income takes the same rate of taxation as all that received by B in excess of $6,000. So that, if there be merit in the report of the Wisconsin State Tax Commission, the situation is not remedied by exempting corporations.

If we concede that it is competent for the legislature to exempt corporations on the theory that the burden is properly distributed by collecting the tax from the individuals receiving dividends, still this Act cannot stand because of the discrimination between resident and nonresident stockholders, and because of the lack of machinery to collect the tax from absentee stockholders, and because corporations do not distribute as dividends all their income, as pointed out in my dissenting opinion in the O'Connell Case.

Since I think the whole Act must fall, I express no opinion as to the other points discussed in the opinion of Mr. Justice Anderson, except that I do not agree with his attempt to distinguish this case from that of Byrne v. Fulton Oil Co.,85 Mont. 329, 278 P. 514, on the retroactive feature of Chapter 40. In the Byrne Case the statute involved was passed March 9, 1927, effective January 1, 1927, and by its terms it imposed a tax payable in 1927 on income yielded during the preceding calendar year. The preceding calendar year was, of course, 1926. Here Chapter 40 was passed January 16, 1934, effective January 16, 1934, and by its terms it imposes a tax payable in 1934 on income received in 1933. The two cases are identical in principle. It is true that Chapter 40 specifically states that the tax for 1934 shall be on the income received in 1933, but that is no different from the Act involved in the Byrne Case, which imposed the tax in 1927 on the income received during the preceding calendar year. The Byrne Case was followed in the later cases of Anderson v. Sunburst Oil Ref. Co., 89 Mont. 175,296 P. 1108, and Forbes v. Mid-Northern Oil Co.,90 Mont. 297, 2 P.2d 1018. I disagreed with the majority opinion on this point in the Byrne Case and agreed to theAnderson and Forbes Cases on the ground of stare decisis.

I agree with the conclusion stated in the opinion of Mr. Justice Anderson on the subject of the retroactive effect of Chapter 40, but I think in arriving at that conclusion theByrne, Anderson and Forbes Cases should be expressly overruled so far as they treat of this point.

Since I think the whole of Chapter 40 is invalid, I concur in the result announced in the opinion of Mr. Justice Anderson so far as it condemns the surtax. I think the court should go further and condemn the whole Act and overrule the opinion inO'Connell v. State Board of Equalization, supra.