Oursler v. Tawes

Mitchell, J., delivered the opinion of the Court. The appeal in this case is from a decree of the Circuit Court of Baltimore City passed on March 1st, 1940, dismissing the bill of complaint, filed by individual citizens and residents of the state under the provisions of chapter 294 'of the Acts of 1939, known as the Uniform Declaratory Judgments Act, praying a decree declaring section 12 of chapter 277 of the Acts of 1939 unconstitutional and invalid. Section 12 of the above Act repeals sections 215 to 251 inclusive of article 81 of the Annotated Code of Maryland (1935 Supplement), .title “Revenue and Taxes,” subtitle “Income Tax,” and enacts, in lieu thereof, thirty-seven new sections to be known as sections 215 to 251, and to follow immediately after section 214 of said article. In substance the bill of complaint sets forth that the complainants are husband and wife; that they resided together in the City of Baltimore during the year 1939;. that during said year the husband operated a used car business from which he realized a net profit of $860.56; that the complainants own jointly, and in some instances individually, various dwellings, ground rents and mortgages from which, during the taxable year 1939, they .received as net income from said dwellings the sum of $905.66, income from said ground rents the sum of $838.09, and income from said mortgages the sum of $924.83.

That under the provisions of the act, the constitutionality of which they challenge, they are required to pay an income tax at the rate of two and one half per cent on their ordinary income, representing income ⁴⁷⁵ from rents of real estate owned and income from trade or business, and at the rate of six per cent on their investment income; less, however, a credit at the rate of two and one half per cent on a personal exemption of $2000 allowable, under the act, to a husband and wife who unite in an income tax return. The complainants further submit that by chapter 525 of the Acts of 1937, the Legislature of Maryland proposed an amendment to article 15 of the Declaration of Rights of the Constitution of Maryland, authorizing the General Assembly to impose taxes on incomes, and providing for the submission of said amendment to the qualified voters of the state for adoption; which amendment was submitted to, and defeated by, popular vote at the general election held on November 8th, 1938. And finally, it is alleged that section 12 (article 81, sections 215 to 251, inclusive), as enacted by chapter 277 of the Acts of 1939, and especially sections 218, 221, 222, 223, and 227 pertaining thereto, are unconstitutional and void as being repugnant to the 14th Amendment to the Federal Constitution, and to articles 15 and 23 of the Declaration of Rights of the Maryland Constitution; in that the said act is arbitrary and discriminatory in the classification of property, individuals, corporations, and income; that it provides for the taxing of property and income without due process of law, and is in direct violation of the mandate of the people as expressed by the popular vote to which reference has been made. The answer substantially admits all allegations of the bill, other than those which allege the unconstitutionality of the Act, to the effect that the same is repugnant to the 14th Amendment of the Constitution of the United States and repugnant to, or in conflict with, articles 15 and 23 of the Declaration of Rights or the Constitution of the State of Maryland.

As a corollary to that denial, the answer submits that the Income Tax Act is not arbitrary or discriminatory, in a constitutional sense, as alleged, or that it provides for the taxing of property and income without due process of law. Further an ⁴⁷⁶ swering, it is submitted that the defeat of the constitutional amendment, as set forth in the bill of complaint, by a vote of the citizens of the State of Maryland in 1938, can in no manner be construed to restrict or limit the power of the Legislature of said State to pass laws in conformity with the Declaration of Rights and Constitution of Maryland, as duly approved and adopted by the people of Maryland. A stipulation in the record concedes the facts bearing upon the status of the complainants as income taxpayers, and, among other things, submits that, of the ground rents owned by the complainants, one of them was created by a lease dated November 30th, 1936, by the said complainants to the York Road Building Association of Baltimore City, which provides that the demised premises be held by the lessee, its successors and assigns, for the term of ninety-nine years, at an annual rent of sixty dollars, over and above all deductions for taxes and assessments of every kind levied or assessed, or thereafter to be levied or assessed, on said premises or the rent issuing therefrom; with a covenant on the part of the lessee and its successors to pay the lessor the aforesaid rent, taxes, and assessments when legally demandable; that in the case of all other ground rents owned by the complainants, they are not the original lessors of the property but are either assignees of the original lessor or have acquired the reversionary interest through mesne conveyances, And that among said ground rents, all of which issue out of properties located in said city, is one created June 1st, 1937, in a lease from the Northeast Realty Company to Harry M. Schockett, Sr., the covenants in said last mentioned lease being identical with those in the lease to which reference is above made; the only difference, involved in the question respecting the same, being that in the latter lease, the complainants are assignees of the Northeast Realty Company, either directly or through mesne conveyances. It may be here stated that the case of John K. Culver.

Jr., against the same defendant as in this case, namely, ⁴⁷⁷ J. Millard Tawes, Comptroller of the Treasury of the State of Maryland, designated, as No. 58 Appeals of the April Term, 1940, of this court, and appealed from a decree similar to the decree from which the case now under consideration was taken, passed on the same date by the same chancellor, in the Circuit Court for Baltimore City, was argued in this court, and submitted on the same briefs as was the instant case. And that, except as to appropriate amendments, made necessary for the purpose of stating the facts incident to the case, the bill of complaint in the Culver case, and the answer thereto, are similar in detail, respectively, to those to which we have referred in the instant case. The stipulation in the Culver case shows sources of income and classifications thereof, upon which the income tax complained of is based, to be as follows: 1. Net income received by the trustees from the rental of improved property in Maryland and Georgia ......................§ 3,032.44 Interest of the beneficiary (]4 ) 758.11 2.

Gross Income received by the Trustee and classified as Investment income Interest on tax free covenant corporation bonds ............ § 180.00 Interest on Maryland mortgages 5,204.96 Interest on contracts of sale. . . 6,273.28 Interest on Georgia Mtg....... 1,885.10 Interest on Georgia Contracts of sale ........ 1,308.14 Interest on notes receivable.... 87.54 Ground Rents owned in Md..... 620.00 Taxable dividends . .. .'....... 1,276.25 816,835.27 Interest of the beneficiary (]4) 4,208.82 ⁴⁷⁸ 3. Deductions: Tax on Maryland unimproved land ....................... ? 1,584.80 Operating expense ........... 2,820.65 Administrators and Trustees expenses ..................... 2,882.59 $ 7,288.04 Interest of the beneficiary (%,) 1,822.01 For reasons apparent, therefore, the two cases will be considered together. No issue has been raised as to the form of procedure, nor is there any controversy as to the facts involved in the two cases. As has been indicated, therefore, the basic question submitted by both of said cases centers around the constitutionality of chapter 277 of the Acts of 1939, in so far as the same is designed to impose a tax on incomes in this state.

In this connection two subsidiary questions are also raised, to wit: (1) Whether section 223 (c) of section 12 of the Act is invalid as impairing the obligations of a contract, in that it provides that no tax imposed under the provisions of said subtitle on any person with respect to ground rent received by him shall be collected from the lessee by the lessor, and renders void any agreement entered into between a lessor and a lessee providing for the payment of such tax by the lessee; furthermore, that the provisions of said subsection are not embraced in the title of the Act; and (2) that the Act violates the constitutional inhibition against the delegation of legislative authority, by virtue of the general administrative powers vested in the Comptroller of the State under its provisions. Since the adoption of the Maryland Constitution of 1867, which, with successive amendments thereto, is the organic law of this state at the present time, there has been but one prior act passed by the General Assembly of the State, designed to adopt a general policy of imposing a tax on incomes. By that prior legislation, chap ⁴⁷⁹ ter 11 of the Special Session of 1937, thirty-seven new sections were added to article 81 of the Annotated Code of Maryland (1935 Supplement), under a new subtitle known as “Income Tax”; in effect imposing a tax upon net incomes as defined by the act. That act, in so far as the same sought to tax incomes accruing from salaries of judges in this state, was held by this court to be in conflict with sections 24 and 31 of article 4 of the Maryland Constitution.

Gordy v. Dennis, 176 Md. 106 , 5 A. 2nd 69. And it was also originally held by this court to be unconstitutional as to income accruing from salaries of resident officers of the federal government. Gordy v. Prince, 175 Md. 519 , 2 A. 2nd 692, but nevertheless, upon reargument, because of a subsequent decision of the Supreme Court of the United States, in the case of Graves et al. v. New York ex rel. O’Keefe, 306 U. S. 466 , 59 S. Ct. 595 , 83 L. Ed. 927 , this holding was reversed.

Gordy v. Prince, 175 Md. 688 , 7 A. 2nd 611. Aside from the case of Gordy v. Dennis, supra, taxes on net incomes appear to have been imposed and collected upon such incomes for the years 1937 and 1938, in this state. As is indicated by the allegations of the bills in each case, the grounds upon which the constitutionality of the Act is attacked are based upon alleged discriminations, which mainly arise; (1) in classifications as to persons and corporate bodies, whose incomes are made the objects of the tax; (2) in differences as to the method of ascertaining the basis upon which the tax is computed as between the several classifications of taxpayers; (3) in variances in tax rates made applicable to such several classifications, including methods of computing such tax, as applied to such several classifications; and (4) in variances as to deductions and exemptions allowable to taxpayers coming under such classifications, respectively. The design of the latter sections of chapter 277 is to separate the sources of income into two subdivisions: (a) “investment income,” defined by the act to mean that portion of gross income which is derived from divi ⁴⁸⁰ dends, ground rents, annuity income, and interest, from whatever source derived, other than certain allowable business interest exemptions; and (b) “ordinary income,” defined as being that portion of gross income which is not investment income.

Gross income is defined as income from whatever source derived, including salaries, wages or compensation for personal services of every kind, interest, dividends, rents, royalties and annuity income; gains, profits and income derived from professions, vocations, trades, businesses and commerce, other than certain allowable exemptions; and net income is defined as the gross income óf the taxpayer, less deductions allowed by the act. The Act imposes an annual tax on the net income of each resident individual of the state, and on the net income, taxable in the state, of every individual non-resident thereof; computed by adding six per cent of the “investment income” to two and one-half per cent of “ordinary income,” and subtracting from the amount thus ascertained two and one-half per cent on the sum of allowable deductions, plus personal exemptions, namely, $1000 to a single person or a married person not-living with the other spouse, $2000 to a married person living with the other spouse, and $400 for each dependent as defined in the act. Corporations which do not come under the classes exempted from the provisions of the act are subject to a tax of one and one-half per cent on such portion of the net income of such corporations, either domestic or foreign, as is allocable to the state under special provisions relating to such allocation set forth in the act. Obviously no deductions, such as allowed individual taxpayers for personal exemptions, are allowed in computing corporate income tax under the act.

But, in the cases of fiduciaries subject to the tax, a personal exemption of $200 is allowed. Numerous other details respecting ascertainment of sources of taxable income and exemptions, or deductions pertaining thereto, need not be herein set forth. ⁴⁸¹ The theory of the appellants seems to rest upon alleged discriminations which it is urged have been arbitrarily made by the Legislature: (1) in severing the sources of income into two distinct classes and applying different rates, respectively, to the two classes for the purpose of computing the tax; (2) in designating the respective sources of income which the Act provides shall be construed as representing “investment income” and those which it defines as representing “ordinary income”; (3) in the deductions allowable under the Act, applicable to the respective sources of income; and (4) in the exemptions of ail income accruing from some sources defined in the Act. In support of these contentions, various cases from courts of last resort in other states of the Union are cited in the carefully prepared briefs before us. It should be borne in mind, however, that state constitutional provisions with reference to the important and vital subject of raising revenue for the support of the respective state governments are by no means uniform, and that, while the decisions of the appellate courts of these states are helpful in reaching a conclusion in the instant cases, they are far from being in accord, and of course not controlling.

In 4 Cooley on Taxation (4th Ed.), sec. 1743, p. 3477, it is said: “There is considerable conflict of opinion as to how income taxes should be classified. Are they a property tax or are