U.S. Supreme Court HALE v. IOWA STATE BOARD OF ASSESSMENT AND REVIEW, 302 U.S. 95 (1937)

[Page 302 U.S. 95, 100]

exempt from taxation.' [Footnote 3] Iowa was without an income tax when these exemptions were declared. A 'Personal Net Income Tax' upon persons resident within the state was imposed for the first time by a statute enacted in 1934. Code 1935, 6943-f4 et seq. In the assessment of that tax for 1935 interest on appellants' bonds in the sum of $36,893.75 was included by the State Board of Assessment and Review against appellants' protest that the law, if so applied, impaired the obligation of contracts of exemption. Constitution of the United States, art. 1, 10. By appropriate proceedings the controversy was brought to the Supreme Court of Iowa, where the assessment was upheld. 271 N.W. 168. The court assumed, without deciding, that the statutes of exemption should be treated as giving rise to contracts, and not merely as declarations of a legislative policy subject to revocation at the legislative pleasure. Proceeding on that assumption, the court interpreted the contracts as limited to taxes laid directly upon property in proportion to its value, and not as touching taxes in the nature of an excise upon the net income of an owner. This conclusion was supported by an analysis of the Iowa statutes and a review of Iowa decisions as well as the decisions of this and other courts. The case is here upon appeal. 28 U.S.C. 344 (28 U.S.C.A. 344).

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mental Supplement to 1915 Code. [Footnote 4] It was then subdivision 1 of section 1304. There were other subdivisions exempting other items-the grounds and buildings for public libraries; household furniture up to a prescribed value; the farming utensils of any person who makes his livelihood by farming; and many other kinds of property. The section opens with the statement that 'the following classes of property are not to be taxed,' and then enumerates the classes. But the scope of the exemption is likely to be exaggerated unless the next preceding section (1303) is read at the same time. 'The board of supervisors of each county shall, annually, at its September session, levy the following taxes upon the assessed value of the taxable property in the county,' a mandate clearly addressed to the levy of ad valorem taxes only. The inference is a fair one that section 1304 did not exempt the items there enumerated from taxation of every form and for every purpose. It withdrew them from the operation of the levy commanded by the section next preceding. [Footnote 5] True, in later compilations of the statutes, the sections have been rearranged, though with substance unaffected. Cf. Code 1935, 6953. In the Code of 1935, subdivision 1 of section 1304 is subdivision 5 of section 6944; section 1303 is section 7171. There can be little doubt that the meaning remains what it was before. United States v. Ryder, 110 U.S. 729, 740, 4 S.Ct. 196; United States v. Sischo, 262 U.S. 165, 168, 169 S., 43 S.Ct. 511, 512; Warner v. Goltra, 293 U.S. 155, 161, 55 S.Ct. 46, 49; Davis v. Davis, 75 N.Y. 221,

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cided in 1902, held the exemption inapplicable to special assessments, limiting it at the same time 'to the taxes contemplated in title 6 of the Code.' [Footnote 6] So also Insurance Ass'n v. Gilbertson, 129 Iowa 658, 106 N.W. 153, decided in 1906, interpreting a different subdivision of the exemption statute, but a cognate one, again limited the exemption to taxes upon property, and refused to apply it to an excise or license tax measured by receipts. The ruling was reiterated in State v. City of Des Moines, 221 Iowa 642, 266 N.W. 41, decided in 1936, upon facts not greatly different. Cf. Plummer v. Coler, , 20 S.Ct. 829. From these precedents the Iowa court advanced to the holding, announced in the case at bar, that a tax upon net income was substantially an excise, and hence did not come within the scope of an exemption confined to taxes upon property. The result was conceived to be latent in the precedents if effect was to be given to their fair implications. 'So the state court has told us,' construing its own decisions, 'and the good faith of its declaration is not successfully impeached.' Stockholders of Peoples Banking Co. v. Sterling, 300 U.S. 175, 183, 57 S.Ct. 386, 390.

3. The ruling that a tax upon net income is without the scope of the exemption cannot be adjudged unreasonable, for it will be found to be supported by decisions in many other states, and even, indeed, by decisions of this court.

(a) The question as to the nature of such a tax has come up repeatedly under state constitutions requiring taxes upon property to be equal and uniform, or imposing similar restrictions. Many, perhaps most, courts hold that a net income tax is to be classified as an excise. [Footnote 7]

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'The tax levied on income is not a property tax, but is a percentage laid on the amount which a man receives, irrespective of whether he spends it, wastes it, or invests it.' Featherstone v. Norman, 170 Ga. 370, 382, 153 S. E. 58, 65, 70 A.L.R. 449; Purnell v. Page, 133 N.C. 125, 129, 45 S.E. 534. As early as 1870, the Supreme Court of Iowa had written an opinion which foreshadows the same thought. Dubuque v. Northwestern Life Ins. Co., 29 Iowa 9. Cf. Vilas v. Iowa State Board of Assessment and Review (Iowa) 273 N.W. 338. True, there are courts in other states that teach a different doctrine. [Footnote 8] Our duty does not call upon us to determine which view we would accept as supported by the better reason if the choice were an original one for us, unaffected by the view accepted in the court below. Enough for present purposes that with authority so nearly balanced the Iowa construction of the contract is at least not plainly wrong. The propriety of our keeping to it is the clearer when we bear in mind that there were Iowa

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annum, to be paid semiannually; that is to say, promises to pay $25 at the end of every six-month period, and $1,000 at the end of ten years. There is no difference between the two promises in respect of their binding or legal quality. Both are obligations of the bond. If one cannot be violated, neither can the other.

There is no difference in principle between such a bond and one where the bond is issued upon a discount basis, as in the case of United States Savings bonds (Treasury Department Circular No. 529, February 25, 1935). A United States Savings bond for $1,000, payable in ten years 'without interest,' may be purchased for the sum of $750-the remaining $250 being deferred interest. Plainly, the $250 deferred interest is as much a part of the bond as the $750 originally invested; and a contractual obligation exempting the bond from taxation is equally applicable to each. Is the case different if the bond shall provide for the payment of $750, together with interest in the sum of $250 to be paid in installments or at the end of ten years? Certainly not, unless form is to be exalted and substance ignored.

The force of what has been said cannot be avoided by merely calling the tax an excise. If a tax falls upon the bond and lessens its proceeds, either in respect of principal or interest, it is a tax on the bond, and cannot be made something else by resort to the vocabulary or by employing some circuitous method of imposing it. It is well settled, at least generally, that 'what cannot be done directly ... cannot be accomplished indirectly by legislation which accomplishes the same result.' Fairbank v. United States, 181 U.S. 283, 294, 300 S., 21 S.Ct. 648, 653, and cases cited. I am unable to subscribe to that philosophy which seems to teach that a forbidden result may nevertheless be achieved if only some delusive and devious way of achieving it can be found.

Mr. Justice McREYNOLDS and Mr. Justice BUTLER join in this opinion. Footnotes

Footnote 1 'The following classes of property are not to be taxed: 1. The property of the United States and this state, ... municipal, school, and drainage bonds or certificates hereafter issued by any municipality, school district, drainage district or county within the state.' Iowa Code Supplemental Supplement of 1915, 1304, subd. 1; Code 1935, 6944, subd. 5.

Footnote 2 'Bonds, and road certificates ... shall not be taxed.' Acts 38th G.A. c. 237, 28; Code 1935, 4753-a13.

Footnote 3 'All bonds issued hereunder (the Soldiers' Bonus Act) shall be exempt from taxation.' Acts 39th G.A. c. 332, 10; Code 1935, 6944, subd. 22.

Footnote 4 Compare Code 1851, 455; Code 1873, 797; Code 1897, 1304.

Footnote 5 An earlier form of the same statute, after providing, like the later one, that 'the following classes of property are not to be taxed,' adds the significant words, 'and they may be omitted from the assessments herein required.' Code 1873, 797. The opinion in Sioux City v. Independent School District, 55 Iowa, 150, 151, 152, 7 N.W. 488, refers to these words as emphasizing the conclusion that exemption relates to taxes on the value of the property. The 1851 Code provision is almost identical.

Footnote 6 The Code in force at that time was the one of 1873.

Footnote 7 Sims v. Ahrens, 167 Ark. 557, 271 S.W. 720; Stanley v. Gates, 179 Ark. 886, 19 S.W.(2d) 1000; Waring v. Savannah, 60 Ga. 93, 100; Featherstone v. Norman, 170 Ga. 370, 379, 153 S.E. 58, 70 A.L.R. 449; Diefendorf v. Gallet, 51 Idaho, 619, 627, 10 P.(2d) 307; Miles v. Department of Treasury, 209 Ind. 172, 199 N.E. 372, 101 A.L.R. 1359; In re Opinion of the Justices, 133 Me. 525, 528, 178 A. 820; Hattiesburg Grocery Co. v. Robertson, 126 Miss. 34, 52, 88 So. 4, 25 A.L.R. 748; Lublow-Saylor Wire Co. v. Wollbrinck, 275 Mo. 339, 351, 205 S.W. 196; Bacon v. Ranson, 331 Mo. 985, 999, 56 S.W.(2d) 786; O'Connell v. State Board of Equalization, 95 Mont. 91, 112, 25 P.(2d) 114; Mills v. State Board of Equalization, 97 Mont. 13, 17, 33 P.(2d) 563; Maxwell, Commissioner, v. Kent-Coffey Mfg. Co., 204 N.C. 365, 371, 168 S.E. 397, 90 A.L.R. 476; Hunton v. Commonwealth, 166 Va. 229, 243, 183 S.E. 873; Appeal of Van Dyke, 217 Wis. 528, 535, 259 N.W. 700, 98 A.L.R. 1332; 4 Cooley on Taxation (4th Ed.) 1743. Many cases are collected in Brown, The Nature of the Income Tax, 17 Minn.L.Rev. 127, 130, 139.

Footnote 8 Eliasberg Bros. Mercantile Co. v. Grimes, 204 Ala. 492, 86 So. 56, 11 A.L.R. 300; Bachrach v. Nelson, 349 Ill. 579, 595, 182 N.E. 909; In re Opinion of the Justices, 220 Mass. 613, 624, 108 N.E. 570; Id., 266 Mass. 583, 585, 165 N.E. 900; Harrison v. Commissioner of Corporations, 272 Mass. 422, 427, 172 N.E. 605, 71 A.L.R. 677; Redfield v. Fisher, 135 Or. 180, 192, 292 P. 813, 295 P. 461, 73 A.L.R. 721; Kelley v. Kalodner, 320 Pa. 180, 185, 181 A. 598; Culliton v. Chase, 174 Wash. 363, 25 p.(2d) 81; Jensen v. Henneford, 185 Wash. 209, 216, 53 P.(2d) 607.