In my opinion Chapter 181, Laws of 1933, cannot stand because it is unreasonably discriminatory. It denies to persons within the jurisdiction of the state the equal protection of the laws contrary to section 1 of the fourteenth amendment to the United States Constitution. In defining a taxpayer under the Act, it expressly excludes corporations. A corporation is not subject to the tax. The supreme court of the United States has held that the equal protection clause of the federal Constitution prohibits a tax upon corporations that is not also imposed upon individuals and partnerships engaged in the same business. (Quaker City CabCo. v. Commonwealth of Pennsylvania, 277 U.S. 389,48 Sup. Ct. 553, 72 L. Ed. 927.) *Page 132
Mr. Justice Brandeis, in a powerful dissenting opinion concurred in by Mr. Justice Holmes and Mr. Justice Stone, thought that it was proper to impose a heavier tax upon corporations than upon individuals or partnerships because of the advantages enjoyed by corporations over individuals and partnerships. These advantages were pointed out in Flint v. Stone Tracy Co.,220 U.S. 107, 31 Sup. Ct. 342, 353, Ann. Cas. 1912B, 1312,55 L. Ed. 389, as follows: "The continuity of the business, without interruption by death or dissolution, the transfer of property interests by the disposition of shares of stock, the advantages of business controlled and managed by corporate directors, the general absence of individual liability, these and other things inhere in the advantages of business thus conducted, which do not exist when the same business is conducted by private individuals or partnerships." These advantages were adverted to in EquitableLife Assur. Co. v. Hart, 55 Mont. 76, 173 P. 1062, 1065.
The supreme court of Washington has also held that a tax on the net income of corporations without a like tax on individuals is a denial to the corporations of the equal protection of the laws. (Aberdeen Savings Loan Assn. v. Chase, 157 Wash. 351,289 P. 536, 290 P. 697, 71 A.L.R. 232.)
Conversely, a tax on individuals from which corporations are exempt denies to the individuals the equal protection of the laws. In Equitable Life Assur. Co. v. Hart, supra, this court, speaking through Mr. Justice Sanner, propounded this pertinent inquiry: "On what basis of equality could an unincorporated malting concern be required to pay an occupation license while its incorporated rival is exempt?"
I know of no reason why an individual may be taxed while corporations engaged in the same competitive business are exempt. There are cases holding that an income tax on individuals may be upheld though corporations are exempt, on the theory that the corporation income is taxed when it passes as dividends to individuals subject to the tax, and that the scheme thus avoids double taxation. (Franklin v. Carter, (C.C.A.)51 F.2d 345, and Lawrence v. State Tax Commission, *Page 133 286 U.S. 276, 52 Sup. Ct. 556, 76 L. Ed. 1102.) The case ofFranklin v. Carter was based upon the New Hampshire case ofConner v. State, 82 N.H. 126, 130 A. 357. The LawrenceCase is also based on the Conner Case and the Franklin Case. It may fairly be said that both decisions rest upon the ConnerCase. If under our statute the corporate income were taxed as dividends to the individuals, these cases would have application. It is a matter of common knowledge that a corporation does not distribute all its net income to the stockholders as dividends. It may be retained by the corporation to build up its surplus. It may be used to enlarge its plant and extend its operations. As much as is so used is not taxable, while an individual engaged in a competitive business must pay on the net income though it is used to enlarge his plant or extend his operations. (Sec. 9, subd. 2, Chap. 181; and compare Redfield v. Fisher, 135 Or. 180,292 P. 813, 295 P. 461, 73 A.L.R. 721.)
Also the Conner Case, which is the foundation for the holding in the Franklin and Lawrence Cases, has been held by the supreme court of New Hampshire in the later case of In reOpinion of the Justices, 84 N.H. 557, 149 A. 321, 328, to have no application under a proposed statute such as Chapter 181. After making reference to the Conner Case, the court in the later case said: "The proposed law presents a different situation. It provides for the taxation of certain income earned in the course of transacting business, and that permanent improvements and betterments made to increase the value of the estate of the taxpayer are not to be deducted from gross income. The inequality of not taxing corporations is more marked here than under the present law [being the law involved in the ConnerCase]. Improvements and betterments upon the corporate estate, or a surplus held in the treasury, would not be passed on to stockholders, and they would thus escape taxation if the business were incorporated, whereas they would be taxable in the case of an individual owner. For this reason it seems to us that it is not permissible to exclude corporations from the category of those subject to a tax upon *Page 134 business income. Any inequality by reason of double taxation of income can be, and should be, avoided by exempting the dividends paid by such corporations, in so far as they are paid out of income which is taxed in this state. There will then be neither double taxation nor failure to tax. Such a provision would obviate the defect in the present income tax law, under which dividends, received by local corporations and by them in turn paid out as dividends to nonresident stockholders, go tax free."
The Act under consideration here expressly provides that no deductions shall be made in computing the net income of an individual for "any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate." (Sec. 9, subd. 2, supra.) This case falls squarely within the rule of the later New Hampshire case, and calls for a different conclusion than that announced in theFranklin, Lawrence or Conner Cases.
Also Chapter 181 cannot be sustained on the theory that the corporate income is taxed when it passes to individual stockholders. It is a well-known fact that many, if not most, of the shares of stock of corporations doing business in this state are owned by nonresidents, within the definition of nonresidents contained in the Act. Also many are owned by other corporations. The Act provides that "the word `resident' applies only to natural persons and includes for the purpose of determining liability to the tax imposed by this Act with reference to the income of any taxable year, any person domiciled in the state of Montana, and any other person who maintains a permanent place of abode within the state, and spends in the aggregate more than seven months of the taxable year within the state." All others are, of course, nonresidents within the meaning of the Act.
The Act, in imposing the tax on others than residents, provides: "In the case of taxpayers other than residents, gross income includes only the gross income from sources within this state, but shall not include annuities, interest on bank deposits, interest on bonds, notes or other interest-bearing *Page 135 obligations, or dividends on stock of corporations; except to the extent that such annuities, bank deposits, bonds, notes or other obligations or stocks shall be a part of income from any business, trade, profession or occupation carried on in this state." Thus it will be seen from the Act that a nonresident may have a bank deposit in Montana from which he draws interest, and this income in the way of interest is not taxed unless it can be shown that the deposit itself "shall be a part of income from any business, trade, profession or occupation carried on in this state." And so with dividends from stock of corporations. Unless the stocks shall themselves be a part of income from a Montana business, trade, profession or occupation, the dividends received thereon by one other than a resident as defined in the Act are nontaxable.
Also the Act makes no provision for determining the names and residences of nonresident stockholders of corporations, foreign or domestic, doing business in Montana, and hence there is no possible means of collecting a tax on nonresident stockholders receiving dividends of a corporation doing business in this state if the same were taxable under the Act. The only means of enforcing the tax against an unwilling person subject to it is by levy and sale of his property found in this state. (Sec. 26.) The shares of stock of nonresident stockholders of a corporation doing business in Montana have their situs at the residence of the owner. The nonresident stockholders generally own no property in Montana, and hence if their names and residences may be ascertained there is no way of enforcing the tax against them if under the Act it can be said they are at all liable. Hence the practical working of our statute is to favor corporations, for they are themselves exempt from the tax and nonresident stockholders are in effect exempt from the tax on dividends received from corporations doing business in this state.
Finally it is sought to sustain the Act against the charge of discrimination on the ground that corporations are subjected to a license tax not imposed on individuals. This contention might have some merit if the license tax imposed a burden *Page 136 on corporations substantially as great as this Act imposes on individuals. But the license tax on corporations is 2 per cent. on their net income. (Chap. 166, Laws of 1933.) In determining their net income, the interest on bonds, notes or other interest-bearing obligations of nonresidents is not included. (Sec. 2296, Revised Codes 1921, as amended by Chap. 166, Laws of 1933; Opinions of Attorney General, vol. 11, p. 109.) In determining the income of a resident individual, interest on all interest-bearing obligations is included regardless of the residence of the person or corporation paying the interest.
And, as to the individual income tax, the rate after the first $4,000 of taxable income is 3 per cent. up to $6,000, when the rate on everything above that amount is 4 per cent. Thus except for the deduction of $1,000 to an unmarried person, $2,000 to the head of a family, and $300 for each dependent (aside from husband and wife), the tax on an individual receiving an income in excess of $6,000 is double that of a corporation. In the case of a man without wife or children receiving a net income of $10,000, his tax under the Act would be $240, while that of a corporation with the same net income from the same business transacted in competition with the individual would be $200. And if of that income $5,000 consisted of interest on bonds or obligations of a nonresident, the individual would still be subject to the tax of $240, while the corporation would be subject to a tax of only $100. And if an unmarried individual had a total net income of $100,000, his tax would be $3,840, while a corporation with the same net income from exactly the same business would pay but $2,000; and if of the total net income $50,000 represented interest on obligations of nonresidents, the individual's tax would still be $3,840, while that of the corporation would be but $1,000. The discrimination is palpable.
I concede that if there is any just ground for such discrimination the legislative policy should control us. (Lawrence v. State Tax Commission, supra.) But I am unable to conceive of any reasonable basis for such classification. Just why the legislature should discriminate against individual citizens of *Page 137 the state as against corporations, or why it should place a burden upon one who spends seven months and one day of the taxable year in Montana and relieves another engaged in exactly the same business but who spends only six months and twenty-five days in the state is beyond my comprehension. In my opinion the Act must fall as unreasonably discriminatory. The discrimination produced by Chapter 181 is as glaring and unjustifiable as that produced by the statute condemned by this court in State v.Sunburst Refining Co., 73 Mont. 68, 235 P. 428. Since in my view of the case Chapter 181 must fall because it is in conflict with the federal Constitution, no useful purpose would be subserved in discussing the question whether it violates our own state Constitution.
Whether under our present Constitution an income tax may be enacted by the legislature is an interesting and difficult question. It will be time to discuss that question when an Act otherwise valid is enacted. If the proposed constitutional amendment receives the favorable consideration of the electorate, the perplexing question now pressed upon us whether an income tax is permissible under the present Constitution can never arise.
In my opinion, the injunction should issue as prayed for.
Rehearing denied September 30, 1933. *Page 138