Wisconsin Gas & Electric Co. v. United States

• Decision Date: 08 November 1943
• Docket Number: No. 8276.,8276.
• Citation: 138 F.2d 597
• Parties: WISCONSIN GAS & ELECTRIC CO. v. UNITED STATES.
• Court: U.S. Court of Appeals — Seventh Circuit

138 F.2d 597 (1943)

WISCONSIN GAS & ELECTRIC CO. v. UNITED STATES.

No. 8276.

Circuit Court of Appeals, Seventh Circuit.

November 8, 1943.

Samuel O. Clark, Jr., and Sewall Key, Department of Justice, both of Washington, D. C., J. Louis Monarch and T. Carroll Sizer, Sp. Assts. to Atty. Gen., and Berthold J. Husting, U. S. Atty., and Elsmere J. Koelzer, Asst. U. S. Atty., both of Milwaukee, Wis., for appellant.

James D. Shaw and Van B. Wake, both of Milwaukee, Wis., for appellee.

Before MAJOR and MINTON, Circuit Judges, and LINDLEY, District Judge.

MINTON, Circuit Judge.

The State of Wisconsin has what is called the Privilege Dividend Tax Law. The pertinent provisions thereof we set forth in the margin.¹

The Wisconsin Gas and Electric Company, the plaintiff-appellee, is a utility corporation whose total business is done in Wisconsin. It is a Wisconsin corporation. In 1935 the plaintiff declared a dividend of $150,000. It distributed $146,250 to its stockholders, and paid 2½% of the dividend declared, or $3,750, to the Tax Department of the State of Wisconsin. The plaintiff deducted this $3,750 as an expense on its Federal income tax return for 1935. The Commissioner disallowed the deduction and assessed a deficiency. The plaintiff paid the assessment and sued to recover what it claimed to be an excessive assessment. The District Court sustained the position of the plaintiff, and gave judgment accordingly. From this judgment, the Government has appealed.

The sole question is whether the plaintiff was entitled to deduct in 1935 under Sec. 23(c) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 672, the amounts paid pursuant to the Wisconsin Privilege Dividend Tax Law. The answer to this question depends upon whose burden it is to pay this tax.

The power of Wisconsin to exact such a tax was upheld by the United States Supreme Court in State of Wisconsin v. J. C. Penney Co., 311 U.S. 435, 61 S.Ct. 246, 85 L.Ed. 267, 130 A.L.R. 1229. Since that decision, the Supreme Court of Wisconsin has answered the question as to where this burden rests. In the case of Wisconsin Gas & Electric Company v. Wisconsin Tax Department, 243 Wis. 216, 10 N.W.2d 140, 141, the Wisconsin Gas and Electric Company, the same company that is the plaintiff here, claimed the payment of the Privilege Dividend Tax as a deductible expense against its gross income under the Income Tax Law of Wisconsin, just as it is claiming here the payment of such tax as a deductible expense under the Federal statute. The Supreme Court of Wisconsin denied such claim, saying: "We are certain of three things: (1) that the burden of the tax is specifically laid upon the stockholder; (2) that the corporation declaring the dividend must deduct the tax from the dividend and may not under any circumstances treat the tax as a necessary expense of doing business; (3) that the power to levy the tax so construed was authoritatively established in the Penney case."

On the same day, the Supreme Court of Wisconsin decided Blied v. Wisconsin Foundry & Machine Co., 243 Wis. 221, 10 N.W.2d 142. In that case, a preferred stockholder sued the defendant corporation to recover from it the amount it had withheld from a dividend it had declared, and which amount the corporation had paid over to the State of Wisconsin in literal compliance with Sec. 3, Chap. 505 of the Wisconsin Laws of 1935, as amended. The plaintiff's contention was that while the language seems to place the tax on the stockholder, it must be ignored in view of the fact that the corporation alone is liable for the tax and the penalties if not paid, and there is no personal liability imposed on the stockholder. A demurrer to the complaint was sustained, the complaint dismissed, and from this judgment an appeal to the Wisconsin Supreme Court was taken. On the authority of Wisconsin Gas & Electric Company v. Wisconsin Tax Department, supra, the cause was affirmed.

Thus it will be seen that the Supreme Court of Wisconsin has decided very clearly that the burden of this tax is upon the stockholder and not upon the corporation, and that it was not an expense of the corporation.

In determining who is liable for a State tax and who may deduct it as an expense, the Federal courts will follow the decisions of the State courts. Keith v. Johnson, 271 U.S. 1, 8, 46 S.Ct. 415, 70 L. Ed. 795, 44 A.L.R. 1432; Magruder v. Supplee, 316 U.S. 394, 396, 62 S.Ct. 1162, 86 L.Ed. 1555.

In the case at bar, the tax is laid against the dividend. If there is no dividend declared, there is no tax. When a dividend is declared, it is the property of the stockholder, and he may sue for it as a debt due him...