Allnut v. Comptroller of Treasury

BISHOP, Judge. Appellants, Fred W. Allnut, Sr. and Fred W. Allnut, Jr. (Allnuts) appeal from a judgment entered in the Circuit Court for Howard County, (Sybert J.) dismissing their complaint for failure to state a claim for which relief could be granted. ISSUE Although appellants raise several issues, we will address only one of them in resolving this case, i.e., whether the validity of the Maryland personal income tax depends upon either the constitutionality of former Section 205 of the Revised Statutes of the United States, or the proper ratification of the Sixteenth Amendment to the United States Constitution. FACTUAL BACKGROUND The Allnuts filed a complaint against the Comptroller of the Treasury of Maryland which sought to enjoin the Comptroller from assessing and collecting Maryland personal income taxes.

The complaint principally charged that the tax imposed under Article 81 § 279 et seq. is tied to and dependent upon the federal income tax imposed by Internal Revenue Code, ch. 736, 68A Stat. 3 (1954) (codified as amended at 26 U.S.C. §§ 1-9602 (1986 & 1988 Supp.)), the validity of which depends in turn upon the proper ratification of the Sixteenth Amendment. Appellants reasoned that a finding that the Sixteenth Amendment had not been properly ratified would mandate a finding that the Maryland personal income tax is void. Appellants additionally sought declaratory relief that former § 205 of the Revised Statutes of the United States 1 is unconstitutional, and that ⁴²⁷ the Sixteenth Amendment had not been ratified and was fraudulently certified as ratified. In response to the Allnuts’ complaint, the Comptroller moved to dismiss.

He argued that the Allnuts’ contention was frivolous, constituted a non-justiciable political question, and was premised on an inaccurate view of the source of the State’s taxing power. MARYLAND’S TAXING POWER In Wood v. Tawes, 181 Md. 155, 165 , 28 A.2d 850 (1942) , cert. denied 318 U.S. 788 , 63 S.Ct. 982 , 87 L.Ed. 1154 (1943) , the Court of Appeals explained that “the tax ... is founded upon the protection afforded by the state to the recipient of the income in his person, in his right to receive the income and in his enjoyment of it when received.” (quoting People v. state of New York ex rel. Cohn v. Graves, 300 U.S. 308, 313 , 57 S.Ct. 466, 467 , 81 L.Ed. 666 (1937)). In Katzenberg v. Comptroller, 263 Md. 189 , 282 A.2d 465 (1971) the court stated: [TJhere is a wide disparity between state and federal power in this area.

The State’s power to tax is a basic attribute of sovereignty____ No similar power rested in the government of the United States, which is the reason why it was necessary to adopt the 16th Amendment to the constitution in order to permit the passage of valid federal income tax laws and why draftsmen have taken particular care not to extend the reach of federal legislation before 1 March 1913 2 . The state is subject to no such limitation. 263 Md. at 205 , 282 A.2d 465 . (citations omitted) (footnote added). Katzenberg therefore makes clear that the source of Maryland’s taxing power is not, as appellants suggest, the Sixteenth Amendment.

Moreover, the court explained ⁴²⁸ the General Assembly’s use of federal adjusted gross income as the basis for the State personal income tax: This is a formula or yardstick objectively derived which initially takes no account of the source, nature or composition of the funds; it is simply a figure developed by the federal return____ It is undoubtedly true that the General Assembly, had it seen fit to do so, could have imposed a tax on a taxpayer’s gross income, without considering the source from which it came, whether it be earnings, investment income or profits realized from the sale of capital assets, and without granting exemptions, allowing deductions or permitting any other adjustments. If it could validly do this, and we think it could, there is no reason to doubt that it could select some other figure, objectively arrived at, upon which the tax could be based. Tawes v. Strouse, 182 Md. 508, 512-13 , 35 A.2d 233 (1943). It did this when it chose to base the tax on the figures for adjusted gross income and taxable income, as developed by the federal returns.

Id. at 204-06, 282 A.2d 465 . The Court thereby made it clear that while there is no necessary tie between the federal income tax and Maryland’s tax, the General Assembly exercised its discretion to adopt the federal adjusted gross income as the guide for calculating state tax. This yardstick is mandated in Annotated Code of Maryland, art. 81 § 280(a) (1957, 1980 Repl.Vol.) which provides: The taxable net income of an individual taxpayer of this State shall be that taxpayer’s federal adjusted gross income as defined in the laws of the United States, as amended from time to time and in