Cliffs Chem. Co. v. Wis. Tax Comm'n

• Decision Date: 03 May 1927
• Citation: 193 Wis. 295,214 N.W. 447
• Parties: CLIFFS CHEMICAL CO. v. WISCONSIN TAX COMMISSION.
• Court: Wisconsin Supreme Court

193 Wis. 295

214 N.W. 447

CLIFFS CHEMICAL CO.

v.WISCONSIN TAX COMMISSION.

Supreme Court of Wisconsin.

May 3, 1927.

Appeal from Circuit Court, Dane County; August C. Hoppmann, Judge.

Suit by the Cliffs Chemical Company against the Wisconsin Tax Commission. From a judgment confirming an order of the Tax Commission, levying additional income tax against plaintiff for the years 1917 to 1924, inclusive, plaintiff appeals. Affirmed.--[By Editorial Staff.]Andrews & Belden, of Cleveland, Ohio, and North, Parker, Bie & Welsh, of Green Bay, for appellant.

John W. Reynolds, Atty. Gen., and Franklin E. Bump, Asst. Atty. Gen., for respondent.

CROWNHART, J.

A concise statement of the facts involved in this case is found in the findings of fact of the tax commission, as follows:

“(1) In its 1917 return of income, the company deducted under the caption of ‘Other Ordinary and Necessary Expenses,’ the sum of $84,789.30 as ‘war tax.’ This deduction was allowed in the original assessment. There is nowhere in the return any information which represents this sum to be an accrued tax. The balance sheet did not disclose this accrual, nor was the word ‘accrued’ used in describing the tax.

From the report of its auditor, the commission now finds that this tax was not paid in 1917, and not even all of it in 1918; that the sum represented an estimated war tax on 1917 income; and that the full sum deducted was never paid to the government, but was reduced before final settlement. The commission did not have all of the facts when it made its original assessment, and if the commission had had the facts from which it could have ascertained the true nature of this deduction, this amount of tax would not have been allowed as a 1917 deduction.

(2) The Cliffs Chemical Company is a corporation organized in 1912 under the laws of this state. It was formed by the Goodman Lumber Company and the Cleveland-Cliffs Iron Company, they owning, respectively, 28 per cent. and 72 per cent. of the capital stock. The Cleveland-Cliffs Iron Company is a foreign corporation and the Goodman Lumber Company is a domestic corporation.

At the time of the organization of the chemical company, the Goodman Lumber Company owned and operated a sawmill plant at Goodman, Wis., and produced a considerable amount of slabs, edgings, and cordwood of a character suitable for distillation purposes, which would be wasted if not used. The Cleveland-Cliffs Iron Company was desirous of securing an additional supply of charcoal for use as fuel, and of crude alcohol and acetate of lime for refining purposes. These two companies entered into a series of contracts, the result of which was the formation of the Cliffs Chemical Company. This company was located at Goodman, Wis., and the Goodman Lumber Company agreed to furnish it with a regular supply of seasoned wood at a stipulated price per cord. In addition the Goodman Lumber Company agreed to furnish the new company with sufficient power and light for which it was to be reimbursed.

The Cleveland-Cliffs Iron Company agreed to purchase the entire output of the plant at prices based upon market prices of finished products. For example, the price to be paid for charcoal was 4 cents per bushel when pig iron was $13.50 or less per ton f. o. b. furnace; and the basic price of 4 cents per bushel advanced one-half cent per bushel with each $1 increase in the market price of pig iron. Crude alcohol was purchased from the company upon another scale. For 82 per cent. wood alcohol the iron company paid 56 per cent. of the minimum price per gallon of 95 per cent. refined alcohol, as quoted at the date of delivery in the publication known as ‘The Oil, Paint, and Drug Reporter.’ If the crude alcohol which was delivered had a greater percentage than 82 per cent., the basic price was to be adjusted. The price to be paid for acetate of lime was determined by the market price in New York, less freight, and also less 3 per cent. This price was to be the same as the Cliffs Chemical Company would receive if it sold its product net at Goodman through a certain New York agency specified in the contract.

The Cliffs Chemical Company started business in 1913 under these contracts. For the years 1913 to 1917, inclusive, its operations were successful, there being a loss only in the year 1914. During this period of time substantial dividends were declared and its income was reported to and assessed by the state of Wisconsin.

Early in 1918 the stockholders effected a radical change in the character of the organization. At the time the by-laws were amended and the following resolution was adopted:

‘Resolved, that the by-laws of this company be and they hereby are amended by adding thereto a new by-law as follows, viz.:

Article XXIV. That from and after the 1st day of March, 1918, each stockholder of record shall be entitled to receive, each year, such a proportion of the products produced by the company f. o. b. cars at Goodman, Wisconsin, at actual cost of production as the stock held by each bears to the entire issued stock of the company then outstanding; it being understood that such stockholder shall pay in cash to the company on or before the 10th day of each month, for the products so delivered to him during the month preceding, the actual cost of said products based upon an equitable and lawful accounting.

Be it further resolved, that it is agreed by all of the stockholders of the company, present and prospective, that this by-law shall not be amended, annulled, changed, or modified in any way except with the unanimous consent of all the stockholders of the company.'

At the same meeting the officers were authorized and instructed to secure modification or cancellation of the sales contracts or other agreements conflicting with the by-laws as amended.

Since the passage of this by-law the stockholders have taken the entire product of the company at its cost of production, the Cleveland-Cliffs Iron Company receiving 72 per cent. and the Goodman Lumber Company 28 per cent. The Cliffs Chemical Company reported no taxable income in the returns filed for the years from 1918 to 1924, inclusive. The income items exactly equaled the deduction items on these returns and no net income was shown for the reason that the entire product of the company was turned over to the stockholders at cost.

According to the by-laws as amended, the Goodman Lumber Company was to receive 28 per cent. of the products manufactured by the Cliffs Chemical Company, but it had no immediate use for them. The Cleveland-Cliffs Iron Company thereupon agreed to purchase these products from the Goodman Lumber Company and pay for them at the same scale of prices which were in effect previous to the amendment of the by-laws of the Cliffs Chemical Company.

Beginning with the year 1918 the Goodman Lumber Company erroneously reported for taxation the profit which it derived from the sale of its share of these products. However, the commission is accordingly reducing the taxable income of the Goodman Lumber Company for the years involved.

The Cleveland-Cliffs Iron Company filed no returns of income from 1918 until 1921. In the year 1921 it was licensed to transact business in Wisconsin, and began the operation of a coal dock at Green Bay. It has apparently returned for taxation the income from its operations at Green Bay, but has not reported any profit on its share of Cliffs Chemical Company product.

The auditor's report disclosed the prices received by the Goodman Lumber Company from the Cleveland-Cliffs Iron Company for the former's share of the Cliffs Chemical Company's product. Working from these figures, the tax commission was able to determine the net gain derived by the Goodman Lumber Company from its share. Since the Goodman Lumber Company received only 28 per cent. of the product, the net gain received by it was treated by the commission as representative of only 28 per cent. of the net gain accruing by the Cliffs Chemical Company from the manufacture of its products. The total gain was thereupon computed as set forth in the audit report accompanying the preliminary assessment notice.

(3) Inasmuch as the Cliffs Chemical Company sold all of its product from 1913 to 1918 to the Cleveland-Cliffs Iron Company, and since it distributed its product among its two stockholders from 1918 to 1924, it was never called upon to establish and maintain a sales organization. In view of the fact that the chemical company received its cost of production immediately upon...