Carter v. Hill , 31 Haw. 264 ( 1930 )

I respectfully dissent. In my opinion the legislature of the Territory not only "has the power to tax the income of residents received from all sources," as conceded by counsel for the taxpayer, but, contrary to counsel's claim, it has exercised that power in the enactment of section 1388, R.L. 1925.

The majority withholds, as unnecessary in the premises, any expression of opinion as to whether counsel's concession of power above referred to is proper or improper. The theory of this dissent requires a preliminary statement of views and supporting citations upon that point.

In discussing the power of Congress or the power of the state or territorial legislatures in income tax matters it is necessary to keep in mind the twofold theory of jurisdiction in such matters, which is that in certain instances the jurisdiction of the government and the courts is over the person of the taxpayer, while in others it is over the income or property taxed. Quoting from Shaffer v. Carter, 252 U.S. 37, 49, 50: "Governmental jurisdiction in matters of taxation, as in the exercise of the judicial function, depends upon the power to enforce the mandate of the State by action taken within its borders, either inpersonam or in rem according to the circumstances of the case, as by arrest of the person, seizure of goods or lands, garnishment of credits, sequestration of rents and profits, forfeiture of franchise, or the like. * * * In our system of government the States have general dominion, and, saving as restricted by particular provisions of the Federal Constitution, complete dominion over all persons, property, and business transactions within their borders; they assume and perform the duty of preserving and protecting all such persons, property, and business, and, in consequence, have the power normally pertaining to governments to resort to all reasonable forms of taxation in order to defray the governmental expenses. Certainly they are not restricted to property taxation, nor to any particular form of excises. In well-ordered society, property has value chiefly for what it is capable of producing, and the activities of mankind are devoted largely to making recurrent gains from the use and development of property, from tillage, mining, manufacture, from the employment of human skill and labor, or from a combination of some of these; gains capable of being devoted to their support, and the surplus accumulated as an increase of capital. That the State, from whose laws property and business and industry derive the protection and security without which production and gainful occupation would be impossible, is debarred from exacting a share of those gains in the form of income taxes for the support of the government, is a proposition so wholly inconsistent with fundamental principles as to be refuted by its mere statement. That it may tax the land but not the crop, the tree but not the fruit, the mine or well but not the product, the business but not the profit derived from it, is wholly inadmissible. Income taxes are a recognized method of distributing the burdens of government, favored because requiring contributions from those who realize current pecuniary benefits under the protection of the government, and because the tax may be readily proportioned to their ability to pay. Taxes of this character were imposed by several of the States at or shortly after the adoption of the Federal Constitution. * * * The rights of the several States to exercise the widest liberty with respect to the imposition of the internal taxes always has been recognized in the decisions of this court."

In Maguire v. Trefry, 253 U.S. 12, it was held, affirming230 Mass. 503, that (quoting from the syllabus) "the income received by the beneficiary from a trust estate consisting of bonds and equipment certificates held and administered by the trustee in another State, is taxable by the State of the beneficiary's domicile." In the case last above cited the contention of the plaintiff in error was "that the tax was direct on the property producing the income; personal intangible property held in trust and personal tangible property held by a trustee who had leased it on the equipment trust plan had its situs where it and the trustee were; the domicile of the cestui in Massachusetts did not authorize the taxation over again of the property itself."

Answering this contention, the Supreme Court of the United States quotes with approval from the opinion of the supreme judicial court of Massachusetts in the same case as follows: "The income tax is measured by reference to the riches of the person taxed actually made available to him for valuable use during a given period. It establishes a basis of taxation directly proportioned to ability to bear the burden. It is founded upon the protection afforded to the recipient of the income by the government of the Commonwealth of his residence in his person, in his right to receive the income and in his enjoyment of the income when in his possession. That government provides for him all the advantages of living in safety and in freedom and of being protected by law. It gives security to life, liberty and the other privileges of dwelling in a civilized community. It exacts in return a contribution to the support of that government, measured by and based upon the income, in the fruition of which it defends him from unjust interference. It is true of the present tax, as was said by Chief Justice Shaw inBates v. Boston, 5 Cush. 93, at page 99, `The assessment does not touch the fund, or control it; nor does it interfere with the trustee in the exercise of his proper duties; nor call him, nor hold him, to any accountability. It affects only the income, after it has been paid by the trustee' to the beneficiary."

Differentiating the principles involved in the case before it from those involved in DeGanay v. Lederer cited in the majority opinion in the case at bar, the opinion in Maguire v.Trefry, supra, continues: "At the last term we held in DeGanay v. Lederer, 250 U.S. 376, that stocks and bonds issued by domestic corporations and mortgages secured on domestic real estate, although owned by an alien nonresident but in the hands of an agent in this country with authority to deal with them, were subject to the Income Tax Law of October 3, 1913, 38 Stat. 166. In the present case we are not dealing with the right to tax securities which have acquired a local situs, but are concerned with the right of the State to tax the beneficiary of a trust at her residence, although the trust itself may be created and administered under the laws of another State."

In other words, in DeGanay v. Lederer, the court was concerned only with the question of governmental jurisdiction in income taxation matters dependent upon its power to enforce its mandate within its borders in rem, while in Maguire v.Trefry, it was concerned with the question of such jurisdiction dependent upon its powers in personam. In DeGanay v.Lederer, supra, the question certified was as to the taxability or nontaxability of income from "property owned * * * in the United States by persons residing elsewhere" under the provisions of the Federal Income Tax Law of 1913. It will be noted that the section of the law containing the foregoing provision contains another provision, to-wit: "That there shall be levied, assessed, collected and paid annually upon the entire net income arising or accruing from all sources in the preceding calendar year to every citizen of the United States, whether residing at home or abroad, and to every person residing in the United States, though not a citizen thereof, a tax," etc. Under the provision last above quoted the Federal government is still collecting taxes upon the incomes of residents derived from sources without the United States. Article 13, Treasury Income Tax Regulations 74, provides in part as follows: "In general, citizens of the United States, wherever resident, are liable to the tax, and it makes no difference that they may own no assets within the United States and may receive no income from sources within the United States. Every resident alien individual is liable to the tax, even though his income is wholly from sources outside the United States." DeGanay v. Lederer is not authority to the effect that such incomes cannot be taxed in this country, and, so far as I have been able to find, there is no such authority.

Quoting from Holmes on Federal Income Tax (6th Ed.), Par. 25, p. 30: "The theory upon which the income tax is imposed seems to be twofold. The law imposes the tax upon the net income of all persons within its jurisdiction, regardless of the source of such income, and upon all income arising from sources within the United States, regardless of whether or not the United States has jurisdiction of the recipient. The tax has been defined as a tax on the person, measured by his ability to pay his net income, and as a tax on the income itself. As a matter of fact, it is both. The government claims personal jurisdiction over all aliens who reside within the borders of the United States. Hence, as to citizens and resident aliens, the tax is imposed on income from all sources whether arising in this country or in a foreign country. No jurisdiction can be claimed over the persons of nonresident aliens but in so far as their income is received from sources within this country, it is taxed on the theory that the government has jurisdiction over the income, grants protection to the creation of such income, and is, therefore, entitled to a share thereof to defray the expense of government. The fact that a person is taxable in foreign countries on all or part of his income does not relieve him from tax liability on the same income in this country, although he is entitled to credit in certain cases against his tax liability in this country by reason of the payment of taxes to foreign countries."

In the footnotes of the foregoing text are cited Brady v.Anderson, 240 Fed. 665, 667, to the following effect: "In our opinion the tax is against the citizens and residents of the United States personally; they are chargeable in respect to income received by them;" and State ex rel. Sallie F. MoonCompany v. Wisconsin Tax Commission, 166 Wis. 287, 290, 163 N.W. 639, 640, as follows: "It is the recipient of the income that is taxed, not his property; and the vital question in each case is, Has the person sought to be taxed received an income during the tax year? If so, such income, unless specifically exempted, is subject to a tax though the property out of which it is paid may have been exempt from an income tax in the hands of the payor. It is the relation that exists between the person sought to be taxed and the specific property claimed as income to him that determines whether there shall be a tax. If the person sought to be taxed is the recipient during the tax year of such specific property as income in its ordinary significance, then the person is taxed. But the tax is upon the right or ability to produce, create, receive and enjoy, and not upon specific property. * * * In the ordinary acceptation of the term this may be said to be a tax upon income as the statute denominates it. But the tax does not seek to reach property or an interest in property as such. It is a burden laid upon the recipient of an income."

The legislature thus having the power to tax the income of residents from property the situs of which is either within or without the Territory, there remains to be discussed the dissenting view hereinabove expressed that it has imposed such a tax on the income of individuals by the provisions of section 1388, R.L. 1925.

Section 1388 provides in part as follows: "There shall be levied, assessed, collected and paid annually upon the gains, profits and income received by every individual residing in the Territory, from all property owned, and every business, trade, profession, employment or vocation carried on in the Territory, and by every person residing without the Territory, from all property owned, and every business, trade, profession, employment or vocation carried on in the Territory * * * a tax," etc. Section 1389, R.L. 1925, providing for the taxation of the incomes of corporations, contains similar terms. It provides in part that "there shall be levied, assessed, collected and paid annually, except as hereinafter provided, a tax of five per centum on the net profit or income above actual operating and business expenses derived during such taxation period, from all property owned, and every business, trade, employment or vocation, carried on in the Territory, of all corporations doing business for profit in the Territory, no matter where created and organized." Under the last named section this court held, in EwaPlantation v. Wilder, 26 Haw. 299, affirmed by the ninth circuit court of appeals, 289 Fed. 664, in effect and among other things, that the income from bonds and stocks of mainland municipalities and corporations and bank credits in mainland banks held by mainland agents of a local taxpayer is taxable here — this, however, upon the theory that their situs is here under the maxim mobilia sequuntur personam. With the foregoing theory and with the differentiation in the majority opinion of the facts in the Ewa case and the facts in the case at bar, justifying a different conclusion in the latter case as to the situs of the personal property, the income from which is sought to be taxed, I am not presently concerned. In the Ewa case counsel for the Territory conceded that the phrase "owned in Hawaii" as employed in the statute then under consideration "must be taken as referring to the property and not the owner and the final form of the question is, `Are these bonds and deposits property in Hawaii,' and that the case stands as though the statute read `income from property in Hawaii owned by the taxpayer.'" Said the court: "We are not as ready as counsel to accept this construction of the meaning of the statute. It seems to us that it could be strongly argued that the phrase `property owned in Hawaii' has reference to the place of ownership and not to the location of the property. We are referred to the rule that in the construction of a statute the language employed should be taken in its common and usual signification and we are reminded that if a person were asked, `What property do you own in the Territory?' he would not in answering enumerate bonds and notes of foreign or mainland corporations or deposits in foreign or mainland banks. This may be true, but on the other hand if the San Francisco agents of these corporations were asked in respect to the property in question, `Where are these bonds, notes or bank credits owned?' the answer obviously would be, `In the Territory of Hawaii,' and that answer would be entirely correct. We will not pursue this discussion further for the reason that even adopting the construction placed on the statute by the parties the result will be the same." The question, therefore, of the meaning of the words "income * * * from all property owned * * * in the Territory" in their context, was left unanswered by the Ewa case and remained open for future decision.

It seemed to the court, as quoted above, that "it could be strongly argued that the phrase `property owned in Hawaii' has reference to the place of ownership and not to the location of the property." It seems to me that the words above quoted from the statute do bear the interpretation suggested by the court. This is not to say that the words named refer necessarily and in all instances to the place of residence of the owner. I agree with the majority in the present case, and for the reasons expressed in its opinion, that such an interpretation is untenable. But the opinion in the former case conveys the suggestion that the words may have a flexible meaning, dependent in each instance upon their context, and in my view they do have such a meaning. It is significant in this connection that the tax imposed by the statute is in express terms a tax upon income and not upon the property which produces such income; that in the phase under discussion it is a tax upon income received by every individual residing in the Territory, from all property owned — not necessarily situated — in the Territory. In this connection it should be borne in mind that "the word `property,' although in common parlance frequently applied to a tract of land or a chattel, in its legal signification means only the rights of the owner in relation to it. It denotes a right over a determinate thing." Andrews Am. Law, Sec. 96, quoted with approval by this court in Carter v.Territory, 14 Haw. 465, 474.

The words "gains, profits and income" are defined by section 1390, R.L. 1925. After setting forth certain specific things which they shall include, the statute continues "and all other gains, profits and income derived from any source whatsoever during said taxation period."

The view above expressed is strengthened by examination of other parts of the statute and of statutes in pari materia. Section 1388, R.L. 1925, provides for a tax upon the income of every individual residing in the Territory, not only from all property owned therein but also from every business, trade, profession, employment or vocation carried on therein. This I do not interpret to mean that the physical assets of a business owned, directed and controlled here and whose income is received here must be located in Hawaii and its actual transactions take place in Hawaii in order to bring the income of the owner of such business within the provisions of the statute. The same may be said of the similar provisions hereinabove quoted of section 1389 with reference to corporation incomes derived from business "carried on in the Territory." Of persuasive influence in bringing about this conclusion is the reasoning in certain English cases cited in the case notes in Ann. Cas. 1918A, beginning on page 426. I quote from the notes above referred to: "In Apthorpe v. Peter Schoenhofen Brewing Co., 80 L.T.N.S. (Eng.) 395, it appeared that an English company owned a majority of the shares in an American brewing company. The larger number of the English company's shares were owned in the United States but the larger number of shareholders resided in England. The business was carried on and the profits were earned in America, and although the American directors managed the brewery, they did so under the authority delegated to them by the English directors. It was held that the English company must pay an income tax on `the larger amount' of profits, although only a part thereof was remitted to England. Collins, L.J., said: `We have on the face of this case a finding that the business which is carried on in America is the business of the respondent company. * * * In my judgment, there is no incompatibility between a company holding shares in another company and at the same time carrying on a business analogous to that carried on by the other company. Among the objects for which the English company was formed, mentioned in paragraph 3 of the memorandum of association, are not only `to acquire all or any of the shares of the Peter Schoenhofen Brewing Company,' but also `to carry on business as brewers, distillers,' and so on. There is a finding in the case that the English company carries on business as brewers at Chicago, and they also carry on business in England. Then comes the question whether this business is not one and the same business, carried on partly in England and partly in Chicago. The finding in paragraph 7 of the case seems to me to be absolutely conclusive on this point. It is that `All the books of account and other documents relating to the working and carrying on of the brewery, as well as the cash locally required, are kept, received, and dealt with at Chicago; but reports, letters, papers, and other documents, sufficient to enable the respondent company to judge of the manner in which the managers at the brewery carry out and undertake the necessary control and direction, are from time to time transmitted to and received in England by the respondent company's directors.' Then it is also stated: `The board of directors meet in England and have power to dismiss any or all of the managers, officials, and others carrying on the business in Chicago.' The company therefore resides in England, has its office in England, carries on business by its directors in England, deals with the routine of the company so far as it has to be dealt with in England, and directs, as in terms it has been found to do, through a committee of management appointed by it, or for it, a large trade in Chicago. * * * One central factor in this question is whether or not the ultimate tribunal of appeal, the ultimate controlling power, is in England. If it is in England, as in the present case, can it be said that a company whose business abroad is carried on under its paramount control and supervision in England is not partly carried on in England? In my judgment, it cannot. On the facts of this case it seems to me absolutely clear that the business of the company is carried on partly in England and partly in America, and the company is therefore liable to pay income tax on the larger amount.'"

In San Paulo R. Co. v. Carter (1896) A.C. 31, affirming 1 Q.B. 580, 3 Tax Cas. 344, cited in the same case note, a similar construction was placed upon the provision regarding the carrying on of business in the United Kingdom. In that case Lord Davey said: "I do not attach any importance to the facts of the railway and business belonging to a corporation and not to an individual, except that in the case of an English joint stock company formed for the purpose of carrying on a particular business it is perhaps easier to say where is the seat of administration and direction." The same view as to the doing of business in England was adopted in St. Louis Breweries v.Apthorpe, 79 L.T.N.S. (Eng.) 551, and Bartholomay Brewing Co. v. Wyatt, 2 Q.B. 499, 62 L.J.Q.B. 525, 69 L.T.N.S. 561, 42 Wis. 173, and in other cases cited in the voluminous notes above referred to.

In Peter Schoenhofen Brewing Co., supra, in San Paulo R.Co. v. Carter, supra, and in other cases cited in the notes above referred to, the English courts were also concerned with the question as to whether the companies carrying on business in England in the sense therein applied were taxable upon the basis of the whole of their profits or only the portion thereof remitted to England. The two cases, titles of which are given above, held that the respective companies were taxable in the larger amounts. Other cases cited in said notes hold that the English companies in circumstances set forth in said notes are liable to income tax only on profits earned abroad and transmitted to the United Kingdom. The question last above stated, applied to the facts in this case, has not been submitted or suggested by counsel and therefore no opinion is expressed as to how it should be answered under our own statutes.

Under the agreed facts, for the reasons above set forth, I believe that judgment should be for the tax assessor.