American Family Mut. Ins. Co. v. Wisconsin Dept. of Revenue

• Decision Date: 30 October 1997
• Docket Number: Nos. 97-1105,97-1106,s. 97-1105
• Citation: 214 Wis.2d 577,571 N.W.2d 710
• Parties: AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Petitioner-Appellant, v. WISCONSIN DEPARTMENT OF REVENUE, Respondent-Respondent. d AMERICAN STANDARD INSURANCE COMPANY, Petitioner-Appellant, v. WISCONSIN DEPARTMENT OF REVENUE, Respondent-Respondent, d
• Court: Wisconsin Court of Appeals

Page 710

571 N.W.2d 710

214 Wis.2d 577

AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Petitioner-Appellant, v. WISCONSIN DEPARTMENT OF REVENUE, Respondent-Respondent.

d

AMERICAN STANDARD INSURANCE COMPANY, Petitioner-Appellant, v. WISCONSIN DEPARTMENT OF REVENUE,

Respondent-Respondent, ^d

Nos. 97-1105, 97-1106.

Court of Appeals of Wisconsin.

Submitted on Briefs Sept. 9, 1997.

Opinion Released Oct. 30, 1997.

Opinion Filed Oct. 30, 1997.

On behalf of the petitioners-appellants, the cause was submitted on the briefs of Timothy C. Frautschi of Foley & Lardner of Milwaukee.

On behalf of the respondent-respondent, the cause was submitted on the brief of James E. Doyle, Attorney General, with Alan Lee, Assistant Attorney General.

Before EICH, C.J, DYKMAN, P.J., and ROGGENSACK, J.

EICH, Chief Judge.

American Family Mutual Insurance Company appeals from an order affirming a decision of the Tax Appeals Commission assessing taxes on income generated from U.S. government obligations for the period 1984-91. ¹ The sole issue on appeal is whether the statute imposing the tax, § 71.43(2), STATS., is a nondiscriminatory franchise tax within the meaning of 31 U.S.C. § 3124(a)(1), which exempts U.S. government obligations from all state and local taxation except such as may be imposed by "a nondiscriminatory franchise tax."

The facts are not in dispute. American Family is subject to § 71.43(2), STATS., which imposes a franchise tax on the net income of Wisconsin-based insurance companies. The term "net income" is defined as "federal taxable income as determined in accordance with the provisions of the internal revenue code." Section 71.45(2)(a), STATS. The effect of incorporating the federal statutes is to bring income from federal obligations within net income and make it taxable.

American Family did not report income derived from federal obligations on its returns for the years in question. After conducting a field audit, the Department of Revenue assessed additional taxes on the company based, at least in part, on its income from federal government obligations. After the department denied its request for a redetermination, American Family appealed to the Tax Appeals Commission, arguing, among other things, that because Wisconsin law does not tax income on state and municipal obligations, its taxation of income from federal obligations renders the tax discriminatory and thus impermissible under 31 U.S.C. § 3124(a)(1). In support of its argument, American Family referred the commission to several statutes expressly exempting various state and municipal obligations from "all taxation."

The commission upheld the assessment. The commission ruled that the existence of the other exemption statutes was not enough to render the tax discriminatory. According to the commission, American Family must show not only that § 71.43(2), STATS., when considered in light of related exemptions from the tax, is discriminatory on its face but also that the department actually applied it in a discriminatory manner to defeat the tax. On the department's assertions that it does not, in practice, exempt state and local obligations from the tax, the commission concluded that, as applied, the tax was not discriminatory and dismissed American Family's appeal. American Family sought judicial review of the commission's decision, and the circuit court affirmed.

I. Standard of Review

Here, as in other administrative appeals, we review the agency's decision--in this case the commission's--not the circuit court's. ² Sterlingworth Condominium Ass'n v. DNR, 205 Wis.2d 710, 720, 556 N.W.2d 791, 794 (Ct.App.1996). Because the commission's decision is based largely on its interpretation and application of statutes to conceded facts, the scope of our review of that decision--more particularly, the degree to which we will defer to the commission's legal conclusions--is hotly contested by the parties. American Family, as expected, urges us to consider the issues de novo, while the commission argues that its decision is entitled to deference.

Whether courts should defer to an administrative agency's interpretation and application of statutes, and if so, to what degree, has been the subject of much discussion in the cases in recent years. While it has long been recognized that, as a general proposition, the interpretation and application of statutes present a question of law for courts to decide, we will defer to an agency's interpretation in some cases--in particular, where the agency is charged with administering the particular statute, where its interpretation is of "long-standing," and where it has employed its "expertise or specialized knowledge" in arriving at its decision. Harnischfeger Corp. v. LIRC, 196 Wis.2d 650, 660, 539 N.W.2d 98, 102 (1995). ³ Generally, where deference is appropriate, we will sustain the agency's interpretation if it is reasonable. Id. at 661, 663, 539 N.W.2d at 102, 103. ⁴

The issue before us in this case, however, involves the interpretation of an act of Congress. The commission concluded that even though the language of § 71.43(2), STATS. (considered in light of exemptions elsewhere in Wisconsin's taxing statutes), taxed interest on federal obligations but not on state or municipal obligations, the tax was nonetheless nondiscriminatory within the meaning of 31 U.S.C. § 3124(a)(1) because of the manner in which the department purported to apply the statute. In other words, the commission interpreted the phrase "nondiscriminatory ... tax" in the federal law to validate a facially discriminatory tax, as long as the tax was being applied by a state agency in a nondiscriminatory manner.

In William Wrigley, Jr., Co. v. DOR, 153 Wis.2d 559, 565, 451 N.W.2d 444, 447 (Ct.App.1989), rev'd on other grounds, 160 Wis.2d 53, 465 N.W.2d 800 (1991), rev'd on other grounds, 505 U.S. 214, 112 S.Ct. 2447, 120 L.Ed.2d 174 (1992), we held that when the commission is interpreting and applying a federal statute, its decision is entitled to no deference at all. ⁵ In Wrigley we said:

Under more usual circumstances, we would accord some deference to the commission's decision in this case, based as it is on the interpretation of a law in a field in which it has expertise. Here, however, the statute subject to interpretation is an act of Congress, not a law created by the Wisconsin Legislature. Like all administrative agencies, the commission was created, structured and empowered by the legislature for the primary purpose of "determin[ing] ... all questions of law and fact arising under [specified provisions of the Wisconsin Statutes]." Sec. 73.01(4)(a), Stats. But whatever deference may be appropriate to the interpretation of particular sections of the Wisconsin Statutes by an agency created by the Wisconsin Legislature to do just that, we fail to see how or why similar deference should be accorded to the agency's interpretation of federal law.

Wrigley, 153 Wis.2d at 565, 451 N.W.2d at 447.

The dispute in Wrigley closely tracks the dispute in this case. The commission, applying 15 U.S.C. § 381, which bars state taxation of income from interstate commerce unless the scope of the company's state business extends beyond solicitation of sales, ruled that Wrigley's activities in Wisconsin fit within the federal statutory exception and, as a result, its income was subject to state taxation. Id. at 563, 577, 451 N.W.2d at 446, 452. There, as here, the commission's decision turned on the interpretation and application of a federal statute, and we held that it was entitled to no deference. We see nothing in this case that would cause us to rule any differently here. Accordingly, we will review the commission's decision de novo. ⁶

II. Discussion

The bar against state taxation of federal obligations set forth in 31 U.S.C. § 3124(a) was described by the United States Supreme Court in Memphis Bank & Trust Co. v. Garner, 459 U.S. 392, 397, 103 S.Ct. 692, 695, 74 L.Ed.2d 562 (1983), as a "restatement of the constitutional rule ... of tax immunity established in McCulloch v. Maryland." (Citation omitted.) It has its source in the Supremacy Clause. Rockford Life Ins. Co. v. Illinois Dep't of Rev., 482 U.S. 182, 190, 107 S.Ct. 2312, 2317, 96 L.Ed.2d 152 (1987).

While exempting "nondiscriminatory" franchise taxes from the bar against income taxation of federal obligations, 31 U.S.C. § 3124 does not define that term. In Memphis Bank, however, the Supreme Court described a discriminatory tax in this context as one that "imposes a greater burden on holders of federal property than on holders of similar state property." Memphis Bank, 459 U.S. at 397, 103 S.Ct. at 696. Such a tax, said the Court, "impermissibly discriminates against federal obligations." Id.

Memphis Bank involved a tax similar to the one before us. A Tennessee statute taxed banking institutions on income from federal obligations, as well as on bonds and other obligations of states other than Tennessee, but it excluded interest on obligations of the State of Tennessee and its political subdivisions. Memphis Bank challenged the tax as violating the predecessor statute to 31 U.S.C. § 3124, ⁷ and the Court agreed, concluding that the Tennessee taxing statute was discriminatory. The Court said:

It is clear that under the principles established in our previous cases, the Tennessee bank tax cannot be characterized as nondiscriminatory under § [3124]. Tennessee discriminates in favor of securities issued by Tennessee and its political subdivisions and against federal obligations. The State does so by including in the tax base income from federal obligations while excluding income from otherwise comparable state and local obligations. We conclude, therefore, that the Tennessee bank tax impermissibly discriminates against the Federal Government and those with whom it deals.

Id. at 398-99, 103 S.Ct. at 696.

Without question the plain language of § 71.45(2)(a), S TATS., defining "net income" in...