Basic Products Corp. v. Wisconsin Dept. of Taxation

• Decision Date: 05 March 1963
• Citation: 120 N.W.2d 161,19 Wis.2d 183
• Parties: BASIC PRODUCTS CORPORATION, Respondent, v. WISCONSIN DEPARTMENT OF TAXATION, Appellant.
• Court: Wisconsin Supreme Court

Page 161

120 N.W.2d 161

19 Wis.2d 183

BASIC PRODUCTS CORPORATION, Respondent, v. WISCONSIN DEPARTMENT OF TAXATION, Appellant.

Supreme Court of Wisconsin.

March 5, 1963.

Harold H. Persons and E. Weston Wood, Asst. Attys. Gen., Madison, for appellant.

Williams J. Willis, Foley, Sammond & Lardner, Milwaukee, for respondent.

GORDON, Justice.

The question which we must resolve in this case may be stated as follows: When a publicly held corporation borrows money for the purpose of retiring an entire issue of its preferred stock, is the corporation's payment of interest on such money to be considered ordinary and necessary expenses in the operation of the business of the corporation from which its income is derived, so as to be deductible for Wisconsin income tax purposes under the provisions of sec. 71.04(2), Stats.?

The Department rule (Tax 3.20) was adopted by the Department of Taxation as its interpretation of the court's holding in Wisconsin Ornamental I. & B. Co. v. Wis. Tax Comm. (1930), 202 Wis. 355, 229 N.W. 646, 233 N.W. 72. As applied to the Wisconsin Ornamental Case, the Department rule is appropriate; however, the rule goes considerably further than the statute, and, in our opinion, goes too far when applied to the instant case. An administrative rule, even of long duration, may not stand at variance with an unambiguous statute. State ex rel. Irany v. Milw. County C. S. Comm. (1962), 18 Wis.2d 132, 135, 118 N.W.2d 137; Plain v. Harder (1955), 268 Wis. 507, 68 N.W.2d 47. In the latter case, at page 511, 68 N.W.2d at page 50, this court said:

'The rule-making power does not extend beyond the power to carry into effect the purpose as expressed in the enactment of the legislature. 'A rule out of harmony with the statute, is a mere nullity.''

The Department rule was unheld in Pelton Steel Casting Co. v. Department of Taxation (1954), 268 Wis. 271, 276, 67 N.W.2d 294, which case was very similar to the Wisconsin Ornamental Case. In both cases interest was paid on money used to purchase the corporation's own shares, but the purpose in each case was to realign the interests of certain individual stockholders.

In the Wisconsin Ornamental Case interest was paid by the corporation on the deferred portion of the purchase price under a contract made by the corporation with a single stockholder. This prompted the Supreme Court to observe, 202 Wis. at page 363, 229 N.W. at page 649:

'The purchase of this stock on the part of the corporation was but a mere readjustment of its internal affairs, bearing no relation whatever to its activities giving rise to income.'

Similarly, in the Pelton Steel Case the corporation borrowed money to purchase the common stock held by two shareholders with the result that a third shareholder would remain the owner of all the common stock of the corporation. The court found that the Wisconsin Ornamental Case was directly in point, adding 268 Wis. at page 276, 67 N.W.2d at page 297:

'The rule is based on the obvious difference between a corporation borrowing money to buy material or to finance operating expenses and borrowing money to centralize control of the corporation for the direct benefit of an individual or certain individuals * * *.'

If interpreted in the light of the Wisconsin Ornamental Case and the Pelton Steel Case and limited to comparable factual situations, the Department rule is valid. In other words, if interpreted to preclude the deduction of interest paid on money borrowed by a corporation to purchase its own capital stock for the purpose of readjusting the...