Scott v. South Carolina Tax Commission

Braiuskord, Justice:

In this action to recover additional South Carolina income taxes for 1966 and 1967 paid under protest, the plaintiffs are husband and wife. The husband is a retired naval commander. Prior to his retirement from active service in 1961, the husband made an irrevocable election under the Federal Retired Servicemen’s Family Protection Plan, 10 U. S. C., Sec. 1431 et seq., to have certain sums withheld from his statutory retirement pay and applied to the purchase of an annuity payable to his wife for life should she survive him. For 1961 through 1965 the spouses reported his full statutory retirement pay in gross income on federal and state income tax returns. As authorized by Pub. L. 89-365, 80 Stat. 32, 26 U. S. C., Sec. 122, enacted by Congress in 1966, they excluded from gross income on their federal income tax return for that year the sum of the family plan reductions in his retirement pay for 1961 through 1966, amounting to $3,256.20; and, as authorized by the federal statute, they excluded from gross income on the 1967 return the reduction in his retirement pay for this purpose in that year.

On the joint returns of the spouses for South Carolina income tax for 1966 and 1967 the exclusions from gross income allowed by the federal statute for federal income tax purposes were applied sub silentio. The South Carolina Tax Commission disallowed these “deductions” and assessed an additional tax of $231.06, which is the subject of this controversy.

The broad definition of gross income in the South Carolina Income Tax Act, Sec. 65-251, Code of 1962, and that in the Federal Income Tax Act, 26 U. S. C., Sec. 62, are substantially the same. Clearly, however, a special exclusion from gross income for federal income tax purposes generated by federal statute does not mitigate the obligation of a state income taxpayer. Whether conformity in this respect with the federal statute should be accomplished is strictly for legislative judgment.

The argument that the consideration for the annuity should not be included in the husband’s gross income because by his irrevocable election he will never get his hands on the money is unsound. The benefit to the husband is essentially the same as though he had contracted with an insurance company for such an annuity for his wife on her surviving him and assigned this part of his retirement compensation to the company to pay the consideration therefor. The tax statute includes in gross income all compensation for personal service “of whatever kind and in whatever form paid.” Surely, the annual consideration for the annuity contract is part of the husband’s compensation. As such, “in whatever form paid” it is includible in gross income. It is interesting to note that the federal statute granting the exclusion from gross income refers to the sum of such exclusions as the “consideration for the (annuity) contract.” 26 U. S. C., Sec. 122(b).

In our view, the following rationale quoted from Helvering v. Horst, 311 U. S. 112, 61 S. Ct. 144, 85 L. Ed. 75 (1940), is fully applicable:

“The taxpayer has equally enjoyed the fruits of his labor or investment and obtained the satisfaction of his desires whether he collects and uses the income to procure those satisfactions, or whether he disposes of his right to collect it as the means of procuring them. . . . The power to dispose of income is the equivalent of ownership of it.” 311 U. S. at 117-118, 61 S. Ct. at 147.

Reversed.

Moss, C. J., and Lewis and Littlejohn, JJ., concur. Bussey, J., dissents.