Summary
In Benua v. City of Columbus, 170 Ohio 64, 68-69, 162 N.E.2d 467 (1959), the Ohio Supreme Court stated that "a tax levied on account of ownership of intangible property does not become an income tax simply because the amount of the tax is determined from or based on the income thereof."
Summary of this case from Weiss v. McFaddenOpinion
No. 35699
Decided November 18, 1959.
Taxation — Municipal income tax — Nonresident owner of real property situated in municipality — Rents received — Income subject to tax — Not tax on real property — Not levied on property — Not invasion of area pre-empted by state — Statutory construction — Definitions of words and phrases in determining intent.
1. Where a legislative body incorporates in an enactment definitions of words and phrases used therein, such definitions will be controlling in making a determination of the legislative intent.
2. Where rents received by a nonresident owner of real property situated in a municipality constitute "net profits" earned from "business," as those terms are defined in the ordinance of the municipality levying an income tax, such rents are income subject to such tax.
3. A municipal income tax does not become a tax on real property by reason of the fact that the income on which the tax is levied consists of rentals from such real property.
4. Where a municipal income tax is levied on rentals from real property, the tax is not levied on the property from which the income is derived, there is no invasion of an area of taxation occupied by the state, and the doctrine of pre-emption is without application.
APPEAL from the Court of Appeals for Franklin County.
This is an action seeking a declaratory judgment and an injunction against the city of Columbus, Ohio, by a resident of another Franklin County municipality. In his amended petition the plaintiff, appellant herein, alleges that he is the owner of certain real estate located within the city of Columbus which is rented to various tenants from whom he receives rents. The testimony in the trial court developed his ownership of four Columbus properties and the details of the income produced as rentals therefrom.
The plaintiff then alleges the enactment of certain ordinances by the city of Columbus, and at the trial such enactment was stipulated and copies of the ordinances were received in evidence by agreement. The ordinances so placed in the record are No. 1030-52, No. 1209-54 (which amends certain sections of ordinance No. 1030-52), No. 536-56, and No. 1073-56. By and through these ordinances the city established and levied the Columbus city income tax.
The plaintiff next alleges that the authorities of the city of Columbus have "insisted" that plaintiff include in his individual income tax return to the city of Columbus the income received as rents from his Columbus real estate, alleges that he has exhausted his administrative remedies in "endeavoring to convince" the municipal taxing authorities that said rents are not subject to the income tax, alleges that he is threatened with "civil and/or criminal proceedings" to enforce such payment by him, and alleges that he "desires" to pay the taxes levied by the ordinances referred to if he is legally liable therefor. Plaintiff sets forth five conclusions of law to which he asks the court to subscribe and prays further for an order permanently enjoining the municipal officials from commencing or maintaining any action to enforce the income tax ordinance against him. To the extent necessary for present purposes, the propositions for which the plaintiff prays support appear hereinafter.
The conclusions of the Court of Common Pleas were directly contrary to those set forth by the plaintiff, the court finding that the rents from the Columbus properties are subject to the tax, and that they are not exempted therefrom for any of the statutory or constitutional reasons suggested in the amended petition. The court denied the injunction and rendered judgment for defendant.
Upon appeal on questions of law and fact to the Court of Appeals, that court rendered a similar judgment.
An appeal as of right and the allowance of a motion to certify the record place the cause before this court for decision on its merits.
Mr. Willis H. Liggett, for appellant.
Mr. Russell Leach, city attorney, and Mr. John C. Young, for appellee.
It would at first blush appear that we have three principal issues here presented, but the plaintiff has clarified the situation with reference to the constitutional considerations by specifically stating that he is not raising the question of the constitutionality of the Columbus city income tax. Indeed, in view of the clear holding of this court in Angell v. City of Toledo, 153 Ohio St. 179, 91 N.E.2d 250, there would appear to be no longer any point in further debating the power of an Ohio municipality to levy an income tax, in the absence of a pre-emption of that field of taxation by the state, or the question, which was determined in that case, whether such pre-emption exists.
It therefore becomes necessary to direct our attention only to the contention of the plaintiff that it was not the intention of the city of Columbus to include as taxable income, for the purpose of its income tax, rentals received by nonresident owners of Columbus real estate, or alternatively, if such intention existed it could not be constitutionally implemented.
The legislative intent of the Columbus city council may be ascertained by a consideration of ordinance No. 1073-56, passed July 30, 1956, the most recent of the ordinances referred to in the amended petition. In section 2 thereof a tax at the rate of one per cent per annum is levied upon personal service compensation earned by nonresidents for work done in the city of Columbus and upon "the net profits earned on and after January 1, 1957, of all unincorporated businesses, professions, or other activities conducted in the city of Columbus by nonresidents." Since our views with reference to this ordinance will be dispositive of the issues presented, the allied ordinances will not be considered herein.
The ordinance itself defines the word, "business," as used in the levying section, as "an enterprise, activity, profession, or undertaking of any nature conducted for profit or ordinarily conducted for profit." As used in the levying section, the phrase, "net profit," is defined in the ordinance as "the net gain from the operation of a business, profession, or enterprise, after provision for all costs and expenses incurred in the conduct thereof, either paid or accrued in accordance with the accounting system used, and without deduction of taxes based on income."
It does not seem to us that the intention of the city of Columbus to levy a tax on the net profits received by the plaintiff from his Columbus properties can be seriously questioned. He himself testified as to the "reasonable return" from his properties, and detailed operating statements as to each of the subject properties were received in evidence. The definitions of the words and phrases at issue arrayed by the plaintiff from various authorities are interesting and standing alone might be persuasive, but they must fall before the specific definitions adopted by the ordinance itself. In the exercise of the legislative function, a legislative body may define words and phrases used within an enactment, and such definitions will be controlling in making a determination of the legislative intent in adopting that enactment. See 2 Sutherland on Statutory Construction (3 Ed.), 222, Section 3002, and cases therein cited. It is our conclusion that the activities of the plaintiff fall squarely within the definition of "business" quoted from the ordinance above, and, as a matter of fact, his activities also constitute "business" under the definition contained in paragraph three of the syllabus of Ransom Randolph Co. v. Evatt, Tax Commr., 142 Ohio St. 398, 52 N.E.2d 738. We conclude further that net rentals received by an owner of real estate within the city of Columbus from properties let by him under such circumstances are included within the term, "net profits," as that term is defined by the ordinance. In the present circumstances, we attach no particular significance to the nonresident status of the plaintiff, and it is thus our holding that, where real property within a municipality is rented under such circumstances as to constitute a doing of business under the terms of an ordinance levying a municipal income tax, the rentals are subject to such tax as net profits from the operation of a business.
The plaintiff's contention that the city income tax ordinance is unconstitutional as applied to rents from real property is bottomed upon the theory that a tax upon such income is in fact a tax on the property itself. If this is true, the plaintiff's contention of unconstitutionality must prevail, and it therefore becomes imperative to examine the soundness of his contention.
In support of his position the plaintiff relies heavily on the opinion by the late Judge Matthias in Bennett v. Evatt, Tax Commr., 145 Ohio St. 587, 62 N.E.2d 345, and a series of other well reasoned cases from other jurisdictions. In the Bennett case. Judge Matthias stated, at page 593: "Concededly a tax based on the income yield of intangible property is not an income tax, an excise tax or a franchise tax. It necessarily is a tax upon property, and authority for this tax must be found in Section 2 of Article XII [of the Constitution]." Since Judge Matthias was speaking of the law levying a tax on intangible personal property in Ohio whereby the income yield of the previous year became the measure of the tax, the tax being levied against the owner on tax day, without regard to whether the taxpayer received all, some or none of the income, it becomes necessary to consider the fundamental structure of that tax in order to properly comprehend the meaning of the language quoted.
In its program of providing revenues by property taxation, Ohio makes a levy based on the ownership of both real and personal property and, in the latter category, on the ownership of both tangible and intangible property. Various formulae exist for the determination of the amount of tax to be paid on account of the ownership of these various kinds of real and personal property, but in each instance the fact of taxation is based upon the ownership. In the case of intangible personal property, there are included securities which in turn are broken down into productive and nonproductive classifications. A formula for valuation determination in the case of the nonproductive securities is provided, and in the case of the productive securities the amount of the tax to be paid is based upon the revenue produced. The tax, however, continues to be levied on account of the ownership of the securities and not on the revenues, revenue production only being used as the measure of the tax as a matter of equity and convenience. This does not alter the fact that the tax levied by the state of Ohio on account of the ownership of a share of dividend-paying stock is just as much a tax on property as is the tax levied upon a parcel of land (or, for that matter, upon a nonproductive security).
We invite a rereading of the above quotation from Bennett v. Evatt, with a new emphasis added: "Concededly a tax based on the income yield of intangible property is not an income tax, an excise tax or a franchise tax. It necessarily is a tax upon property * * *." In other words, a tax levied on account of the ownership of intangible property does not become an income tax simply because the amount of the tax is determined from or " based on the income yield" of the intangible property. Indeed, our exposition here is no more than a reaffirmation of the point made by Judge Matthias.
In the case of New York, ex rel. Cohn, v. Graves, 300 U.S. 308, 314, 81 L. Ed., 666, 57 S. Ct., 466, 108 A.L.R., 721, Justice Stone pointed up the distinction between property and income taxes in the following language:
"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."
Similar distinctions between income taxes and property taxes may be found in Youngstown Sheet Tube Co. v. City of Youngstown, 91 Ohio App. 431, 108 N.E.2d 571, and Wheeling Steel Corp. v. Glander, Tax Commr., 337 U.S. 562, 93 L. Ed., 1544, 69 S. Ct., 1291, and in many cases from other jurisdictions. Among the latter are Norris, Exrx., v. Wisconsin Tax Comm., 205 Wis. 626, 629, 238 N.W. 415; Boston Maine Rd. Co. v. Wilton Rd. Co., 87 N.H. 416, 181 A. 545; Young v. Illinois Athletic Club, 310 Ill. 75, 141 N.E. 369, 30 A.L.R., 985; and Featherstone v. Norman, Tax Commr., 170 Ga. 370, 153 S.E. 58, 70 A.L.R., 449.
In the light of the foregoing, the distinction between the Columbus city income tax and any property tax readily becomes apparent. The Columbus city income tax is a tax upon net profits earned, and, as stated above, a property tax is a tax on account of ownership and in the case of one type of personal property its productive capacity is used as a means of arriving at the amount of the tax to be assessed. In this process the tax is not shifted from the property to the income and in the case of the Columbus city income tax the levy is not shifted from the income to the property simply because the former happens to be derived from the latter.
Having adopted this view of the case, it becomes unnecessary for us to consider the doctrine of pre-emption, which has application only where a municipal authority seeks to enter an area of taxation already occupied by the state ( e.g., State, ex rel. Arey, v. Sherrill, City Mgr., 142 Ohio St. 574, 53 N.E.2d 501, and Haefner v. City of Youngstown, 147 Ohio St. 58, 68 N.E.2d 64). As was conclusively established in the case of Angell v. City of Toledo, supra, Ohio municipalities have the power to levy and collect income taxes in the absence of pre-emption by the General Assembly and no such pre-emption has occurred in the income tax field. The Columbus city income tax is a tax on income and not on property and does not intrude into a pre-empted field of property taxation.
Further in line with the foregoing, this court is in accord with the conclusions reached by the courts below respecting the five specific propositions advanced by the plaintiff, as follows:
Rents received by plaintiff, a nonresident, from real estate located within the city of Columbus are (a) subject to the Columbus income tax, (b) not exempt from such tax by reason of any pre-emption by the state of Ohio of the right to tax plaintiff, (c) not expressly or otherwise exempt from such tax by the statutes of Ohio, (d) not exempt from such tax by virtue of the Constitution of the state of Ohio, and (e) not exempt from such tax by implication of the statutes and laws of Ohio.
The judgment of the Court of Appeals is affirmed.
Judgment affirmed.
WEYGANDT, C.J., ZIMMERMAN, MATTHIAS, BELL and HERBERT, JJ., concur.
TAFT, J., dissents.