Norman v. Bradley , 173 Ga. 482 ( 1931 )

Beck, P. J.

This case arises under the act “to provide for levying and collecting a tax on net incomes in this State, approved August 22, 1929, -which act is generally referred to as the Boykin income-tax act. The act provided that the tax levied under it for 1929 should be assessed pro rata for one fourth of that year. The controlling question in the case may be stated in a general way as, what is taxable as income for 1929 ? But, to bring it within the issues made by the pleadings and facts in this case, it is more specifically stated thus: Where taxpayers sold corporate stock in February and October, 1929, and realized profits thereon, all of which had accrued prior to 1929, are such profits taxable as income for that year?

Bradley, Turner, and Glenn, the defendants in error, owned stock in the Coca-Cola Company, all of which was purchased prior to 1929. Bradley and Turner sold their stock at a profit in February, 1929. Glenn sold his at a profit in October, 1929. The profit on the stock so sold by them all accrued prior to January 1, 1929. Norman, the State tax-commissioner, sought to tax these profits as income under the Boykin act. Plaintiffs brought suit in Fulton superior court to enjoin the collection of income tax on these profits as a part of income. The petition as amended set out the facts stated above, and alleged further that the profits sought to be taxed represented an appreciation in capital assets and not income; that none of such appreciation is subject to income tax under the Boykin act; and that in so far as it undertakes to subject such profits to taxation, the Boykin act is violative of the Federal and State constitutions, because it is retroactive, because it deprives petitioners of their property without due process of law, and because it is an attempt to tax property under a statute not uniform. There were other allegations attacking the provisions of the law regarding contests by taxpayers, and seeking to justify resort to injunction, which are not here material, the parties agreeing that the question raised should be presented by the suit in its present form. Defendant filed a general and a special demurrer. Plaintiffs amended to meet the special demurrer. There was no dispute on the facts. The case was tried upon the demurrer, and upon the petition as amended and the answer and a stipulation as to other facts not otherwise appearing in the record. These facts so agreed upon are as follows:

“It is agreed between the parties that plaintiffs made duplicate of their returns to the United States for the year 1929 to the State of Georgia, and paid the tax shown thereby to be due the State of Georgia, except that in the returns made to the State of Georgia plaintiffs deducted from the income returned to the United States the alleged profits set up in the petition realized from the sale of the Coca-Cola stock described in the petition, which' plaintiffs contend is non-taxable and which defendant contends is taxable. Plaintiffs paid' the United States the tax computed without the aforesaid deduction.”

The judge overruled the demurrer and granted an injunction as prayed, stating in his judgment that “the court is of the opinion that the statute in question is retroactive and violates the constitution of Georgia.” To this judgment the tax-commissioner excepted.

The defendant contends that the Boykin act as it applies to the profits sought to be taxed is not unconstitutional as being retroactive, and in support of this contention he relies upon two propositions: First, the profits on all this stock are not capital gain, but are income, and they became income when they were realized, that is, when the stocks were sold. These profits, therefore, accrued or were realized, as income in February and October, 1929. That is to say, they became a part of the gross income of plaintiffs for 1929 during those months of that year. Second, the Boykin act taxes one fourth of the taxpayer’s net income for 1929, and such income was not ascertainable until the end of the year. The tax was then to be levied upon one fourth of the total net income for the year. The whole income for 1929 did not come into existence until December 31. The act became effective on August 22, on something that did not exist until December 31, and therefore could not be retroactive as to items going to make up the gross income that accrued before August 22, but nevertheless went to make up the whole income for the entire year.

The question arising here is, what is income under the Boykin act ? Section 1 of the act provides that “there shall be levied and collected by the State of Georgia an income tax similar to that of the United States, but at the rate and according to the scale hereinafter set forth.” Section 2 provides that taxpayers shall make to the State tax-commissioner duplicates of their returns to the United States. And it is provided that the tax paid to the State shall be one-third of that paid to the United States. The Boykin act adopts by reference the Federal income-tax act, making -it effective as the law of this State, with certain changes which are immaterial relatively to the controlling question in this record, which were intended to adapt it to our conditions and to carry out the purpose of the legislators. The Georgia law, except for the changes just referred to, is identical with the Federal law. And inasmuch as the Supreme Court of the United States has dealt with this question in construing and applying the Federal law, the question naturally arises, in view of the authoritative decisions by the . Supreme Court of the United States upon questions arising under the Federal statute, what is income under the Federal law? The Federal law of force when the Boykin act was adopted was the revenue act of 1928. That act provides that there shall be levied, collected, and paid for each taxable year, upon the net income of every individual, a tax at certain specified rates. 26 U. S. C. A. § 2011. It defines gross income, from which net income is arrived at, as including “gains, profits and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, . . or sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property, .. . or gains or profits and income derived from any source -whatever.” 26 U. S. C. A. § 2022. The act further defines the basis for determining gain or loss from sales of property as follows: “The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property. . . The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be: (1) the cost of such property . . or (2) the fair market value of such property as of March 1, 1913, whichever is greater.” 26 U. S. C. A. 2113 (a), (b).

This is the law of the United States which the General Assembly has made the law of Georgia, with the slight changes just referred to, which changes it is not material to state here or consider. Under its provisions, profit from the sale of property is income for the year in which the sale is made. Such profit is the difference between the cost and the sale price, if the property was bought after March 1, 1913. If it was bought before that date, the profit is the difference between the sale price and the cost, or the value on March 1, 1913, whichever is greater. The date given is fixed for the reason that the income-tax amendment to the Federal Constitution did not go into effect until March 1, 1913. Thus, under the Federal law, profits derived from the sales of property, including corporate stock, are income under all the income-tax acts, and such profits are measured by the difference between the cost, or value as of March 1, 1913, and the amount realized from the sale. And such profits become income only when the sale is made. They may exist before in the form of increased value. They get to be income only at the time of realization by sale. And the Supreme Court of the United States has defined income thus: “Income may be defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets.” Eisner v. Macomber, 252 U. S. 189 (40 Sup. Ct. 189, 64 L. ed. 521, 9 A. L. R. 1570). In Merchants L. & T. Co. v. Smietanka, 255 U. S. 517 (41 Sup. Ct. 386, 65 L. ed. 751, 15 A. L. R. 1305), the court quoted and approved the foregoing definition from Eisner v. Macomber, saying further: “In determining the definition of the word 'income* thus arrived at, this court has consistently refused to enter into the refinements- of lexicographers or economists, and has approved, in the definition quoted, what it is believed to be the commonly understood meaning of the term which must haye been in the minds of the people when they adopted the 16th amendment to the constitution.” And still further in the Smietanka case the court said, laying down the rule as to when such profits become income: “We continue entirely satisfied with that definition [the one quoted above from Eisner v. Macomber], and since the fund here taxed was the amount realized from the sale of the stock in 1917, less the capital investment as determined by the trustee as of March 1, 1913, it is palpable that it was a 'gain or profit* 'produced by* or 'derived from* that investment, and that it 'proceeded* and was 'severed* or rendered severable from it by the sale for cash, and thereby became that ‘realized gain’ which has been repeatedly declared to be taxable income within the meaning of the constitutional amendment and the acts of Congress.” 'See also Lynch v. Hornby, 247 U. S. 339 (38 Sup. Ct. 543, 62 L. ed. 1149). While this case differs on its facts from the present case, a principle is there laid down that is applicable here — that unrealized value may exist which is not taxable as income, but which does become taxable immediately upon its present realization by 'the owner of the property; and the principle.is stated generally that it is “equally clear that Congress was at liberty under the amendment to tax as income, without apportionment, everything that became income, in the ordinary sense of the word, after the adoption of the amendment.” It seems to follow that accrued profits do not become income until realized by sale, but upon such realization they are taxable immediately as income; that is, profits, when they are realized, are taxable income under the Federal law regardless of when they accrued, if such accrual was after March 1, 1913.

In Black on Income and Other Federal Taxes (4th ed.), 28, § 22-, it is said: “ On general principles and irrespective of explicit constitutional limitations, a statute imposing an income tax may subject to taxation the income of the citizen for the whole of the current year in which the statute is passed, that is, not only so much of the income as accrued from the date of the enactment of 'the law to the end of the year, but also that portion which accrued or was earned from the beginning of the year to the date of the law. For the year’s income is treated and considered as one entire 'thing, not as made up of several portions or items. And hence, although the statute might be called retroactive in its operation upon a part of the first year’s income, it is not restrospective in such a sense as to render it unconstitutional.” See also the authorities cited in the note to this excerpt from the text. And a similar principle is stated in Ruling Case Law, as follows: “An income-tax law is not retroactive because it includes all incomes from the beginning of the year in which it is passed, and from the sale of real estate purchased within three years previously.” 25 R. C. L. 795. We can not attempt to take up and discuss or even set forth the substance of the numerous decisions and other authorities 'cited in the able briefs of counsel for the plaintiffs and the defendant. The plaintiffs themselves, without objection, paid tax on the profits involved here to the Federal Government, though nearly all of such profits accrued prior to the effective date of the revenue act of 1928. And after consideration of the question, we have concluded that the profits on the stock involved here became income when they were realized^ that is, when the stocks were sold, and consequently are not capital gain. And these profits accrued or were realized as income in February and October, 1929; that is to say, they became a part of the gross income of plaintiffs for' 1929 in those months of that year. The Boykin act taxes one fourth of .the income for 1929. That income was not ascertainable until the end of the year. The tax was then to be levied upon one fourth of the net income for the year. The whole income for 1929 did not come into existence until December 31, 1929. That is, the act became effective on something that did not exist until December 31, and therefore was not retroactive as to items going to make up the gross income that accrued before August 22, but went to make up the whole income for the year.

What is said above embodies the conclusions of Russell, C. J., and Beck and Hines, JJ., who, for the reasons stated, are of the opinion that the act in question here was not retroactive in the sense in which that term 'is used in our constitution, nor open to any of the constitutional objections that are raised to it.