This action arises under the Gross Income Tax Act of 1933, and particularly the Acts of 1947, ch. 370, § 1, p. 1471, being § 64-2601, Burns' 1943 Replacement (1949 Supp.).
Appellant, plaintiff below, was, on April 12, 1946, the owner of certain vacant lots in the city of Fort Wayne. On said date appellant borrowed of the Wayne Mortgage Company, Inc. the sum of $4,800.00 and executed its note and mortgage covering part of said vacant lots to secure the payment of said note when due. Said mortgage was properly recorded, and the last installment on the note is due August 1, 1951. The
Appellant reported, for gross income tax purposes, for the year 1946, the sum of $3,560.00 cash received from the Pranges and the sum of $4,200.00 representing the amount of the note and mortgage, subject to which the property was purchased by the Pranges, and which they subsequently paid, and paid tax on the said two amounts at the rate of one per cent. Subsequently, on September 12, 1947, appellant filed a claim for refund of the tax on the amount represented by the mortgage. Said claim for refund was denied and appellant filed this action pursuant to § 14 of the Gross Income Tax Act, as amended, § 64-2614, Burns' 1943 Replacement (1949 Supp.), for the recovery of said tax. From an adverse ruling by the trial court appellant, plaintiff below, has appealed to this court.
An examination of the questions raised by this appeal requires the construction of subsections (h), (i) and (m) of the Acts of 1947, ch. 370, § 1, p. 1471, being § 64-2601, Burns' 1943 Replacement (1949 Supp.), and their application to the facts as here presented. Said subsections provide:
It is well settled in this state that in construing statutes, words and phrases will be given their plain, ordinary and usual meaning unless a different purpose is clearly manifest by the statute itself, § 1-201, Burns' 1946 Replacement; State ex rel. Clemens v. Kern (1939), 215 Ind. 515, 526, 20 N.E.2d 514; except where a word or term is defined in the act the courts are bound by that definition. State, ex rel. v. Grange (1929), 200 Ind. 506, 510, 165 N.E. 239. In case of doubt as to the meaning of taxing statutes they are to be construed more strongly against the state and in favor of the taxpayer. Oster v. Department of Treasury (1941), 219 Ind. 313, 317, 318, 37 N.E.2d 528; Gr. Inc. Tax Dept. v. Harbison-Walker Ref. Co. (1943), 113 Ind.App. 695, 702, 703, 48 N.E.2d 834; Walgreen Co. v. Gross Income Tax Div. (1947), 225 Ind. 418, 420, 75 N.E.2d 784, 1 A.L.R.2d 1014; Department of Treasury v. Muessel (1941), 218 Ind. 250, 254, 32 N.E.2d 596.
The sole question presented for our determination is: Under the facts in this case, was the payment of said mortgage by the Pranges (purchasers) taxable as income to appellant within the meaning of the sections of the statutes above quoted? In determining this we consider:
It has also been held that the payment of indebtedness or the discharge of a liability by a third person is taxable income to the person for whom such payment was made or liability discharged. Walgreen Co. v. Gross Income Tax Div. (1947), 225 Ind. 418, 75 N.E.2d 784, 1 A.L.R.2d 1014, supra; Helvering v. Bruun (1940), 309 U.S. 461, 84 L.Ed. 864, 60 S.Ct. 631; Douglas v. Willcuts (1935), 296 U.S. 1, 80 L.Ed. 3, 56 S.Ct. 59; Old Colony Trust Co. v. Commissioner of Int. Rev. (1929), 279 U.S. 716, 73 L.Ed. 918, 49 S.Ct. 499; 47 C.J.S., Internal Revenue, § 107, p. 237.
The United States Supreme Court in Douglas v. Willcuts (1935), 296 U.S. 1, 9, 80 L.Ed. 3, 8, 56 S.Ct. 59, supra, said: "We have held that income was received by a taxpayer, when, pursuant to a contract, a debt or other obligation was discharged by another for his benefit. The transaction was regarded as being the same in substance as if the money had been paid to the
The contract price for the sale of said real estate was $7,760.00 from which the unpaid balance of the mortgage — viz. $4,200.00 — was deducted by the purchaser leaving the sum of $3,560.00 which was paid in cash to appellant upon delivery of the deed. When the grantees (Pranges) deducted the amount of the unpaid balance of the mortgage from the total purchase price, it may be presumed that they (grantees) assumed the payment of said debt of appellant as a part of the purchase price of the property. Shuler v. Hardin, Administrator of South (1865), 25 Ind. 386; Atherton v. Toney et al. (1873), 43 Ind. 211, 213; Cf. Fair Oaks Bldg. & Loan Assn. v. Kahler (1935), 320 Pa. 245, 181 Atl. 779, 111 A.L.R. 1108, 1111.
When the purchasers (Pranges) paid said mortgage to the Wayne Mortgage Company, Inc. and the sum of $4,200.00 was then credited to the account of appellant and its account with the Wayne Mortgage Company, Inc. was reduced by that amount, it was the same in substance and effect as if the entire purchase price of $7,760.00 had been paid to appellant in cash and it had then paid its debt of $4,200.00 to its creditor, the Wayne Mortgage Company, Inc. Such credit to appellant's account will, for the purpose of assessing gross income tax, be considered as a part of appellant's total receipts and taxable income actually received by it within the taxing period in which such credit was entered. (Sec. 1 (m)).
Second: Was the payment of said mortgage by the purchasers (Pranges) for the direct benefit of appellant within the meaning of subsection (i) or (h)?
While it may have been in the interest of the purchasers in this case to pay off the mortgage to the
In securing the fund out of which said mortgage was to be paid the purchasers (Pranges) assumed only an equitable obligation to pay the debt secured by the mortgage, Bunch v. Grave et al. (1887), 111 Ind. 351, 354, 12 N.E. 514, supra; and the legal obligation for the payment of the debt secured by said mortgage remained that of the mortgagor (appellant). Slate v. Peoples Mutual Savings & Loan Assn. (1937), 104 Ind.App. 460, 466, 8 N.E.2d 101; Stamper v. Link (1947), 117 Ind.App. 212, 219, 69 N.E.2d 600; 59 C.J.S., Mortgages, § 342, p. 473.
At the time the purchasers (grantees) discharged their equitable obligation and finished payment of the purchase price of said property by paying to the Wayne Mortgage Company, Inc. the debt secured by said mortgage, they also discharged the legal obligation of appellant. Also, such payment, when made by Pranges, was credited by the Wayne Mortgage Company, Inc. to the account of appellant and satisfied the obligation which appellant incurred when
We believe the transaction here clearly comes within the above definition of "benefit."
This court has indicated in Harvey v. Lowry (1932), 204 Ind. 93, 183 N.E. 309, that the satisfaction of an obligation such as the one here involved would be a benefit to the grantor. In this case certain real estate was sold subject to existing encumbrances consisting of a judgment against the original grantor and, after execution and sale, which resulted in a deficiency judgment against the original grantor, a third person purchased the real estate in question "subject to the payment of the judgment" which the grantee (third person) assumed and agreed to pay. Subsequently an execution was issued for the amount of the deficiency judgment and the sheriff levied upon certain other real estate owned by the original grantor and to prevent a sale he (original grantor) paid the balance due on
It therefore follows that the satisfaction of the debt secured by said mortgage by the purchasers (Pranges) under the facts and circumstances in this case was sufficient to constitute a "receipt" and the "receiving" of income as defined in said § 1 (h) and § 1 (i) of the Gross Income Tax Act and was taxable gross income to appellant within the taxable period in which the debt was satisfied and paid. Having reached this conclusion, it is not necessary to consider the other questions raised by appellant.
The judgment of the trial court is affirmed.
NOTE. — Reported in 99 N.E.2d 847.