AGO 1967 No. 5 - Feb 14 1967
TAXATION - EXEMPTION - COMPUTATION OF INCOME UNDER SUBSECTION (7), § 2, CHAPTER 168, LAWS OF 1965, EX. SESS.
In computing the combined income of the head of a household and his spouse, for purposes of determining eligibility for the real property tax exemption provided for by chapter 168, Laws of 1965, Ex. Sess., the following, except to the extent that they represent a return of capital or investment, are to be included: Social security benefits; railroad retirement benefits; teachers' retirement allowances; state, municipal and county employee retirement benefits; and private company pensions.
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February 14, 1967
Mrs. Joseph E. Hurley
State Representative, 3rd District
Cite as: AGO 1967 No. 5
Dear Mrs. Hurley:
By letter previously acknowledged you have requested the opinion of this office on the question of whether certain items are to be regarded as "income" for purposes of determining the eligibility of a retired person for the property tax exemption provided for by chapter 168, Laws of 1965, Ex. Sess. Specifically, you have inquired as to whether the following items are to be considered "income" for purposes of the $3,000 income limitation found in subsection (7) of § 2 of this chapter:
(1) Social security benefits; (2) Railroad retirement benefits; (3) Teachers' retirement allowances; (4) State, municipal and county employee retirement benefits; (5) Private company pensions.
We answer your question in the affirmative, subject to the qualification set forth in our analysis.
Chapter 168, Laws of 1965, Ex. Sess., is an act designed to [[Orig. Op. Page 2]] implement the provisions of H.J.R. No. 7, a constitutional amendment which was approved by the voters at the November 1966, general election. The constitutional amendment provides as follows:
"Notwithstanding the provisions of Article 7, section 1 (Amendment 14) and Article 7, section 2 (Amendment 17), the following tax exemption shall be allowed as to real property:
"The legislature shall have the power, by appropriate legislation, to grant to retired property owners relief from the property tax on the real property occupied as a residence by those owners. The legislature may place such restrictions and conditions upon the granting of such relief as it shall deem proper. Such restrictions and conditions may include, but are not limited to, the limiting of the relief to those property owners below a specific level of income and those fulfilling certain minimum residential requirements." (Emphasis supplied.)
In general, chapter 168, Laws of 1965, Ex. Sess. (now codified as RCW 84.36.125 through 84.36.127) grants to retired persons of limited income an exemption from the first fifty dollars of real property taxes due and payable in any one year. Section 2 thereof (RCW 84.36.126) provides for this exemption as follows:
"The following persons, as heads of households, shall be exempt from the first fifty dollars of real property taxes due and payable in any one year, provided they come within the following provisions:
"(1) A male head of a household shall be sixty-five years of age or older prior to February 15th of the year in which the real property is assessed and the taxes levied thereon;
"(2) A female head of a household shall be sixty-two years of age or older prior to February 15th of the year in which the real property is assessed and the taxes levied thereon;
[[Orig. Op. Page 3]]
"(3) The person claiming exemption shall have owned, either in fee or by contract purchase, the real property for which the exemption is claimed for at least five years or have been a resident of the state of Washington for at least ten years if not qualified under the five year ownership limitation;
"(4) A claim for exemption can only be made for a single family dwelling;
"(5) Said single family dwelling as provided in subsection (4) above cannot be permanently occupied by anyone who is not solely dependent upon the head of the household for his support;
"(6) The head of the household and spouse shall be retired from all gainful employment for at least one year prior to application for such exemption and shall not be actively engaged in any type of business;
"(7)The combined income of the head of the household and his spouse, from all sources whatsoever, shall not be in excess of three thousand dollars ($3,000) for the calendar year immediately preceding the year in which the real property is assessed and the taxes levied thereon.
"(8) All claims for exemption shall be made and signed either before a notary public or the county assessor or his deputy in the county where the real property is located. Any person signing a false claim shall be subject to either civil or criminal perjury;
"(9) Claims for exemption shall be made annually and solely upon forms as prescribed by the Washington State Association of County Assessors.
"Head of a household, as used in this section, may be any of the following: A married person, a single person, a widow or widower, a divorce or divorcee, provided they are the sole support of the household." (Emphasis supplied.)
[[Orig. Op. Page 4]]
This, then, is the text of the law which was passed by the legislature in implementation of the enabling constitutional amendment.1/ Your question is limited to the meaning of subsection (7) thereof, which we have underscored. Specifically, the issue to be determined is whether the five items of retirement payments enumerated in your question are to be considered in determining whether "the combined income of the head of the household and his spouse, from all sources whatsoever, . . ." was, or was not, ". . . in excess of three thousand dollars ($3,000) for the calendar year immediately preceding the year in which the real property is assessed and the taxes levied thereon."
In attempting to ascertain the meaning of the term "income" for purposes of subsection (7) of § 2, chapter 168, Laws of 1965, Ex. Sess., supra, several observations should be made preliminarily.
Although the term "income" is not defined anywhere in the act, it is modified by the phrase "from all sources whatsoever." This modifying phrase is quite similar to the phrase used in the sixteenth amendment to the federal constitution, which empowers Congress to collect taxes on incomes "from whatever source derived." As pointed out inMagness v. Commissioner of Internal Revenue, 247 Fed.2d 740 cert. den., 355 U.S. 931, 2 L.Ed.2d 414 (1957), these modifying words are words of enlargement, indicating an intention that the meaning of "income" should not be restricted, but should be taken as broadly as possible. The same observation would appear to be pertinent here.
It should also be noted that judicial definitions of "income" for tax purposes have exhibited a definite trend toward expansion in meaning. Thus, in the early case ofEisner v. Macomber, 252 U.S. 189, 207, 64 L.Ed. 521, 529 (1920), the United States supreme court stated as follows:
[[Orig. Op. Page 5]]
"Income may be defined as the gain derived from capital, from labor, or from both combined."
However, inCommissioner of Internal Revenue v. Glenshaw Glass Company, 348 U.S. 426, 99 L.Ed. 483 (1955), the United States supreme court rejected this prior definition as being unduly restrictive. The court thereupon held that punitive damages recovered by a plaintiff in antitrust proceedings constituted income for federal tax purposes, even though such income did not fit within the traditional definition given inEisner. The court stated:
"Here we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion," (99 L.Ed. 15 490.)
The court went on to show that these payments were not gifts, and then concluded that they constituted income.2/
There is an additional consideration which compels us to give to the term "income" the broadest possible meaning. In construing a statute of tax exemption, it is the rule that the statute will be construed strictly, in favor of the taxing power. Crown Zellerbach v. State, 45 Wn.2d 749, 757, 278 P.2d 305 (1954). This principle of statutory construction requires us to use a broad definition of the term "income" in order to give as narrow as possible a scope to the exemption itself, in the absence of any expression by the legislature that some other approach should be taken. However, a review of the legislative history of chapter 168, Laws of 1965, Ex. Sess., supra, confirms rather than disaffirms the notion that a broad, all inclusive, definition of the term "income" was intended by the 1965 legislature which enacted the statute.
The bill which became chapter 168, Laws of 1965, Ex. Sess., was introduced as House Bill 190. The original bill was significantly different from the bill finally enacted. Notably, subsection (7) of § 2, the $3000 income limitation, was not in the original bill at all. Additionally, subsections (5) and (6) of the original bill provided as follows:
[[Orig. Op. Page 6]]
"(5) Said single family dwelling as provided in subsection (4) above cannot be occupied by anyone except those members of the family which are solely dependent upon the head of the household for their support: Provided, That OASI benefits paid to the spouse shall not disqualify the head of the household from the exemption;
"(6) The head of the household shall be retired from all gainful employment and shall not be actively engaged in any type of business,other than as provided by OASI;" (Emphasis supplied.)
However, by committee amendments in the house, both of these references to OASI (social security) benefits were deleted. Thereupon, the bill was sent on to the senate, where the present subsection (7) was inserted into the bill by floor amendment.3/ Subsequently, in substantially this form, House Bill 190 was approved by both houses of the legislature and signed by the governor.
Two points should be noted about this legislative history. The bill, as initially passed by the house, would have required only that the applicant for a property tax exemption be retired, and thus have no income at all from gainful employment or active engagement in any type of business. Thus, the addition of subsection (7) must obviously have been directed to various types of retirement income or income from investments, for the receipt of income from employment or active engagement in business had already been made a disqualification by subsection (6).
Secondly, by the reference in the original subsection (5) to OASI (social security) benefits, it was recognized in the original bill that social security benefits might disqualify an otherwise qualified taxpayer for purposes of claiming the exemption, unless they were expressly exempted. However, as already noted, this exemption as contained in the original bill was deleted by committee amendment in the house.
[[Orig. Op. Page 7]]
Had the matter ended there, it would have been arguable that any social security benefits received by a spouse would have disqualified an applicant under subsection (5). However, the addition in the senate of subsection (7) obviated this problem and made it clear that the combined income of the head of the household and his spouse, from whatever sources, could be as high as $3000 per year without disqualification for the exemption. Thus, one result of this amendment was to allow what the house version of the bill arguably did not allow, viz., receipt of some social security benefits without loss of qualification under subsection (5). The corollary of this, of course, is that "income" in subsection (7) must include social security benefits, as well as various other retirement income.
Based upon all of these considerations, we must conclude that all five of the items mentioned in your opinion request are within the meaning of income. They are derived from different sources, but subsection (7) of § 2, supra, makes it clear that the source of the income is irrelevant. The subsection, for ease of reference, provides:
"(7) The combined income of the head of the household and his spouse,from all sources whatsoever, shall not be in excess of three thousand dollars ($3,000) for the calendar year immediately preceding the year in which the real property is assessed and the taxes levied thereon." (Emphasis supplied.)
However, our conclusion must be qualified in one respect. In no definition of the term "income" which we have examined, does the term include what is essentially a return of capital or investment. In every instance the concept ofgain is a necessary element. See, e.g.,Stanton v. Zercher, 101 Wash. 383 (1918). Thus, we conclude that the term "income" should not include receipts which are an ascertainable return of an investment. This is a distinction which is recognized by § 72 of the 1954 Internal Revenue Code, which provides that proceeds from a pension plan shall not be taxable to the extent that they constitute a return of the employee's investment.4/
[[Orig. Op. Page 8]]
As a matter of providing administrative guidelines, we would suggest that the provisions of § 72 be used for purposes of ascertaining that part of a payment from a pension or retirement plan which constitutes a return of investment. Examples of this sort of thing, of course, are the annuity portions of teachers' or state employees' retirement allowances, which are distinctly funded by employee contributions5/ ‑-separate and apart from the funding of the pension portions of these retirement allowances‑-and hence are ascertainable returns of investments (and are so treated for purposes of federal income taxation). On the other hand, in the case of social security there is no such ascertainable return of capital for the reason that, though the OASI program is funded in part by taxes paid by employees, the payment of these taxes simply qualifies an employee for social security payments. His eventual receipt of social security benefits does not constitute an ascertainable return of the tax moneys he has paid.
Special mention should be made of railroad retirement pensions. The railroad retirement system is similar to the social security system, in that both are federally provided pension plans. They are each funded by a trust fund established by the federal government, consisting of moneys appropriated from the general fund of the United States Treasury and interest earned thereon. All benefits paid under both plans represent a distribution from the trust fund. Thus, we cannot conclude that railroad retirement pensions should be treated differently from social security pensions for purposes of subsection (7) of § 2, supra.
As we have previously indicated, it may be that amendatory bills presently before the legislature will change the present state of the law. However, in the meantime, it is our considered opinion, based upon apparent legislative intent derived from the all encompassing language of the income qualification provision and from the legislative history thereof, that each of the items of retirement payments which you have listed must be regarded as having been intended by the legislature to be included within the meaning of "income" for purposes of subsection (7) of § 2, except to the extent that such items include a return of capital or investment.
[[Orig. Op. Page 9]] We trust the foregoing will be of assistance to you.
Very truly yours,
JOHN J. O'CONNELL
TIMOTHY R. MALONE
Assistant Attorney General
*** FOOTNOTES ***
1/We are aware that various bills are currently being considered by the legislature to amend provisions of this existing law; e.g., Senate Bill 114, and House Bills 218, 233 and 510. It is entirely possible, therefore, that the state of the law relative to the tax exemption may be altered before the practical deadline for claiming exemptions as to 1967 taxes. See, AGO 65-66 No. 122, copy enclosed. However, our present task is simply to interpret the provisions of the existing law.
2/For a general discussion of this trend toward expanding the concept of income, see Merten's "Law of Federal Income Taxes" §§ 5.01-5.03, 1962.
3/See, 1965 Senate Journal, pp. 1478-1479.
4/See, also, § 402 of the Code, which incorporates the provisions of § 72 in determining the taxability of the beneficiary of an employee's trust.
ix5/See, RCW 41.32.497 and RCW 41.40.190.