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Thorpe v. Mahin

OPINION FILED AUGUST 14, 1969.

LEE K. THORPE ET AL., PETITIONERS,

v.

GEORGE MAHIN, DIRECTOR OF REVENUE ET AL., RESPONDENTS.



ORIGINAL PETITION for declaratory judgment and injunction.

MR. JUSTICE HOUSE DELIVERED THE OPINION OF THE COURT:

This is an original taxpayers' action filed pursuant to leave of this court for a declaratory judgment that the Illinois Income Tax Act, (Public Act 76-261, Laws 1969, approved July 1, 1969,) is invalid and seeking writs of injunction to restrain the authorities from collecting any tax under the Act and from expending any moneys for that purpose. The cause is submitted on petition, supplement to petition and the answer of the defendant State officials. In addition, we have permitted the filing of certain amicus curiae briefs. There is no question of fact involved.

Following oral argument heard on July 17, 1969, this court on July 25, 1969, entered an order finding and declaring the Act is not vulnerable to the constitutional challenges made by petitioners. This opinion explains the reasons for that conclusion.

The Act is comprehensive and contains the following general salient features. The tax is measured by net income and is imposed on the privilege of earning or receiving income. The rates are 2 1/2% of the net income of individual, trust or estate taxpayers and 4% of the net income of corporate taxpayers. Net income is computed for individuals by taking the adjusted gross income from the Federal income tax return, with certain adjustments, less a standard deduction of $1,000 for each taxpayer and an additional $1,000 exemption for each exemption in excess of one for the taxpayer's spouse, additional $1,000 exemptions for the taxpayer or spouse who is blind or 65 years of age or over and a like amount for each dependent. Net income for corporations is computed by taking the base income, which is Federal taxable income, making certain adjustments, and deducting the standard exemption of $1,000. Further references to the Act will be made as required for an understanding of the questions posed.

The first question concerns the nature of the tax. Petitioners argue that it is a property tax; that, as such, it is subject to the limitations of article IX of our constitution concerning a property tax; and that among the constitutional limitations the tax transcends is the one requiring a property tax to be levied by valuation on every person and corporation. Respondents, on the other hand, argue that the tax is a nonproperty tax and not subject to the constitutional limitations article IX imposes on a property tax.

Petitioners in support of their argument place strong reliance on Bachrach v. Nelson, 349 Ill. 579, which involved the constitutionality of "An act in relation to a tax upon persons and fiduciaries based upon income." In considering the nature of the income tax there imposed, the court proceeded on the basis that "income" is "property" and concluded that a tax on income "is a tax upon the property itself." 349 Ill. 579, 591-596.) It then held the tax unconstitutional because "It is a proposed tax on property by graduation rather than by valuation." 349 Ill. 579, 596.

In arriving at its conclusion that a tax on income is a tax on property the court in Bachrach relied heavily in form, theory and conclusion on Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 15 S.Ct. 673, 39 L.Ed. 759, (modified on rehearing, 158 U.S. 601, 15 S.Ct. 912, 39 L.Ed. 1108,) and quoted from Pollock as follows: "The name of the tax is unimportant. The real question is, is there any basis upon which to rest the contention that real estate belongs to one of the two great classes of taxes, and the rent or income which is the incident of its ownership belongs to the other? We are unable to perceive any ground for the alleged distinction. An annual tax upon the annual value or annual user of real estate appears to us the same in substance as an annual tax on the real estate, which would be paid out of the rent or income." 349 Ill. 579, 595, quoting from 157 U.S. 429, 580-581, 15 S.Ct. 673, 689, 39 L.Ed. 759, 819.

In New York ex rel. Cohn v. Graves, 300 U.S. 308, 57 S.Ct. 466, 81 L.Ed. 666, it became clear that Pollock could no longer, if it ever did, stand for the proposition that a tax on income derived from property is a tax on property. In Cohn the Supreme Court held that the State of New York could impose a tax upon a New York resident measured by rental income received from real estate in New Jersey. In analyzing the nature of a tax on income and a tax on its source the court observed: "Neither analysis of the two types of taxes, nor consideration of the bases upon which the power to impose them rests, supports the contention that a tax on income is a tax on the land which produces it. The incidence of a tax on income differs from that of a tax on property. Neither tax is dependent upon the possession by the taxpayer of the subject of the other. His income may be taxed, although he owns no property, and his property may be taxed, although it produces no income. The two taxes are measured by different standards, the one by the amount of income received over a period of time, the other by the value of the property at a particular date. Income is taxed but once; the same property may be taxed recurrently. The tax on each is predicated upon different governmental benefits; the protection offered to the property in one state does not extend to the receipt and enjoyment of income from it in another." (300 U.S. 308, 314, 57 S.Ct. 466, 468, 81 L.Ed. 666, 671.) The court also pointed out that Pollock was not based "upon the ground that the tax was a tax on the land." 300 U.S. 308, 315, 57 S.Ct. 466, 468, 81 L.Ed. 666, 672.

The court in Bachrach also implied that the "overwhelming weight of judicial authority" holds that an income tax is a property tax. 349 Ill. 579, 591-595.) We have reviewed the many State cases dealing with this question and find the weight of authority to be that an income tax is not a property tax. Without citing or discussing the numerous cases that have passed on the issue, we feel it is sufficient to quote the conclusions reached by others as to the weight of authority.

In Hale v. Iowa State Board of Assessment and Review, 302 U.S. 95, 58 S.Ct. 102, 82 L.Ed. 72, the Supreme Court observed: "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. [Citing cases.] `The tax levied on income is not a property tax, * * *.' [Citing cases.] * * * True, there are courts in other states that teach a different doctrine. [Citing cases including Bachrach.]" (302 U.S. 95, 104-05, 58 S.Ct. 102, 105, 82 L.Ed. 72, 78.) "While there is authority to the effect that an income tax is a `property tax', and that a tax on the income from property is a tax on the property, the view generally taken is that an income tax is not a tax on property, but is more within the category of excise taxes, and that a tax on income is not a tax on the source of the income." (85 C.J.S., Taxation, sec. 1089.) "The prevailing view appears to be that an income tax is not a tax on `property' within the meaning of such provisions." (State constitutional provisions governing property taxes.) 27 Am. Jur., Income Taxes, sec. 19.

The court in Bachrach also completely ignored the decision of Young v. Illinois Athletic Club, 310 Ill. 75, in which it was held that a tax upon the income from property was not a tax imposed upon an interest in real estate. In Young it was stated: "An income tax is not similar to other forms of taxation, since it is not imposed upon property or business but upon the proceeds arising therefrom. (Black on Income and Other Federal Taxes, sec. 1.) An income tax is an assessment upon the income of the person and not upon any particular property from which that income is derived." 310 Ill. 75, 80-81.

As the Supreme Court observed in Cohn, the income tax differs from a property tax as to its incidence, its measure, the recurrence of the tax on the same subject, and the governmental benefits on which it is predicated. Professor Magill puts it this way. "Hence, a tax upon incomes appears to be quite a different tax from one upon property. In the parlance of corporation finance, the one utilizes an income statement, the other a balance sheet. The taxes are laid upon quite different subjects, and will yield quite different results." (Magill, Taxable Income, 223, Rev. Ed. 1945.) We agree with this analysis.

We hold that the tax in question is not a property tax and therefore does not come within the limitations article IX of our constitution imposes on property taxes. The holding in Bachrach v. Nelson, 349 Ill. 579; Ohio Oil Co. v. Wright, 386 Ill. 206, and Friedrich v. Wright, 386 Ill. 229, that an "income tax" is a "property tax" and subject to the limitations article IX places on property taxes, is overruled.

Petitioners contend that our constitution prohibits the passage of an income tax. This contention begins with the broad dictum of Bachrach that article IX limits the taxing power of the General Assembly to (1) property taxes on a valuation basis; (2) occupation taxes; and (3) franchise or privilege taxes. They point out that the present tax is obviously not a franchise or occupation tax and that if it is not a property tax, then it must be considered a privilege tax to be sustained. It is then argued that the right to earn or receive income is not a privilege and cannot be taxed as a privilege. They conclude from this that the General Assembly is without authority to enact the tax in question.

In Turner v. Wright, 11 Ill.2d 161, we observed: "It has been authoritatively said that `[m]any years of litigation have not resolved the uncertainties and ambiguities in the nonproperty provisions of section 1 and 2' of article IX of the constitution. (Cushman, Proposed Revision of Article IX, 1952 Ill. Law Form, 226, 237.) Section 2 provides: `The specification of the objects and subjects of taxation shall not deprive the general assembly of the power to require other subjects or objects to be taxed in such manner as may be consistent with the principles of taxation fixed in this constitution.' This provision of the revenue article of the constitution has received varying interpretations. See, e.g., Illinois Central Railroad Co. v. County of McLean, 17 Ill. 291; People v. Worthington, 21 Ill. 170; Raymond v. Hartford Fire Insurance Co., 196 Ill. 329; Harder's Fire Proof Storage and Van Co. v. City of Chicago, 235 Ill. 58; Bachrach v. Nelson, 349 Ill. 579; Reif v. Barrett, 355 Ill. 104; ...


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