Appellants, husband and wife, during the time here in question, were residents of this State. Each owned an interest in ore lands located in the State of Minnesota. The lands were being operated under mining leases, and they, as fee owners, received from the lessees royalties based on the tonnage of ore removed. For the years 1930 and 1931 they paid a State income tax on the amount of royalties received. In 1933 a claim was duly made against the State for a refund of the 1930 and 1931 *Page 408 taxes so paid. In a joint return, filed for 1933, appellants did not include in the statement of taxable income the royalties, although they stated the amount of such royalties. The State assessed an additional tax upon such royalties and appellants paid it under protest. Since January 1, 1933, the State of Minnesota has imposed an income tax on royalty income of non-residents received from mining leases on lands located in that State.
The income taxes assessed against appellants for the years 1930, 1931 and 1933 were assessed under section 359 of the Tax Law (Cons. Laws, ch. 60), as amended in 1935. (Laws of 1935, ch. 933.) This section, as amended, reads (new matter italicized):
"§ 359. The term `gross income':
"1. Includes gains, profits and income derived from salaries, wages or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, and whether situated within or without thestate, growing out of the ownership or use of or interest in such property; also from interest, rent (including rent derivedfrom real property situated outside the state), dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever, including gains or profits or income derived through estates or trusts by the beneficiaries thereof, whether as distributed or as distributable shares, it being intended toinclude all of the foregoing items, without regard to the sourcethereof, location of the property involved, or any other factor,except only a case where the inclusion thereof would be violativeof constitutional restrictions. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the methods of accounting permitted in this article, any such amounts are to be properly accounted for as of a different period; but *Page 409
"§ 2. This act shall be retroactive to January first, nineteenhundred nineteen.
"§ 3. This act shall take effect immediately."
(May 16, 1935)
Prior to the amendment the case of People ex rel. Pierson v.Lynch (263 N.Y. 533; writ of certiorari dismissed, 293 U.S. 52) came before this court and it was decided that income received by residents of this State from rental of real property located in another State was not taxable under section 359 as it then read.
Subsequent to the amendment the case of People ex rel. Cohn v. Graves (271 N.Y. 353; affd., 300 U.S. 308) was decided by this court, and it was held that rentals received by residents of this State in 1931 and 1932 from land situated in another State were taxable as income. In that case it was not contended that the assessments were void because of the retroactive clause contained in the amendment of section 359, and for that reason the United States Supreme Court did not pass upon that question.
Appellants here contend that the amendment of 1935 is void because it is violative of the "due process" clause of the State and Federal Constitutions (U.S. Const., 14th Amendt.; N Y Const., art. 1, § 6); also that it is unreasonable and arbitrary.
While it is true that not all retroactive statutes are void, nevertheless, it is a fundamental rule of construction that retroactive operation of statutes is not favored by courts and will not be given such construction unless the language expressly or by necessary implication requires it. Whether a statute which by its express terms is retroactive will be sustained is usually a question of degree.
Taxing statutes which by their terms were retroactive for short periods have been held to be valid. No case has ever held such a statute to be valid which attempted to permit a retroactive assessment of a tax for as long a period as sixteen years. The case of Welch v. Henry (305 U.S. 134), relied upon by respondents, related to a Wisconsin income tax statute which by its terms was retroactive for a period of two years. The act declared it was an emergency *Page 410 tax statute, enacted to provide revenue for "unemployment relief purposes." It was enacted at the first session of the Legislature at which tax legislation could be considered, as regular sessions of the Legislature in that State are held in each odd-numbered year. In that case the State Supreme Court, in holding the statute valid, said that the statute might "approach or reach the limit of permissible retroactivity" but that it could not say it exceeded it. (223 Wis. 319, 327.) Justice STONE, writing for the United States Supreme Court, said: "Assuming that a tax may attempt to reach events so far in the past as to render that objection valid, we think that no such case is presented here." (p. 148.) He called attention to cases which decided statutes valid which were retroactive for a period of one year. The case is not authority for holding a statute valid which purports to allow the collection of a tax on income received sixteen years before its passage. In fact, the implication of the opinion is that such a statute would not be valid.
"The constitutional validity of law is to be tested, not by what has been done under it, but what may, by its authority, be done." (Stuart v. Palmer, 74 N.Y. 183, 188; People ex rel.Barnard v. Wemple, 117 N.Y. 77, 84; Gilman v. Tucker,128 N.Y. 190, 200; City of Rochester v. West, 164 N.Y. 510;Matter of Richardson, 247 N.Y. 401, 421; Rosalsky v. Stateof New York, 254 N.Y. 117, 121.)
Prior to the amendment of 1935 it was settled law in this State that the income in question was free from taxation. (People exrel. Pierson v. Lynch, supra.) The amendment cannot, therefore, be treated as a clarifying statute.
We believe the amendment is unreasonable, arbitrary, capricious and palpably unjust.
The order of the Appellate Division should be reversed and the determination of the State Tax Commission annulled, the refund allowed, and the assessment for the year 1933 canceled, with costs to the appellants in all courts.