Cudahy v. Wisconsin Dept. of Taxation

• Decision Date: 04 March 1952
• Citation: 52 N.W.2d 467,261 Wis. 126
• Parties: CUDAHY, v. WISCONSIN DEPARTMENT OF TAXATION.
• Court: Wisconsin Supreme Court

Page 467

52 N.W.2d 467

261 Wis. 126

CUDAHY, v. WISCONSIN DEPARTMENT OF TAXATION.

Supreme Court of Wisconsin.

March 4, 1952.

Whyte, Hirschboeck & Minahan, Milwaukee, for appellant.

Vernon W. Thomson, Atty. Gen., Harold H. Persons, Asst. Atty. Gen., for respondent.

CURRIE, Justice.

Two questions are presented on this appeal: (1) whether the taxpayer, Cudahy, was authorized by sec. 71.04(4), Stats., then in effect, to deduct from the gross income listed in his individual tax returns for the four years of 1942-1945, inclusive, the amount of dividends received by him from Northern in computing his net taxable income; and (2) if the taxpayer were not so entitled to deduct such dividends, whether the Wisconsin department of taxation is estopped from assessing the additional income tax due against taxpayer by reason of hime having deducted said dividends.

Sec. 71.04, Stats. 1945, provided in part as follows:

'Persons other than corporations, in reporting incomes for purposes of taxation, shall be allowed the following deductions:

* * *

* * *

'(4) Dividends, except those provided in section 71.02(2)(b) 2 and 3, [distributions from pre-1911 earnings and liquidating dividends] received from any corporation conforming to all of the requirements of this subsection. Such corporation must have filed income tax returns as required by law and the income of such corporation must be subject to the income tax law of this state. The principal business of the corporation must be attributable to Wisconsin and for the purpose of this subsection any corporation shall be considered as having its principal business attributable to Wisconsin if fifty per cent or more of the entire net income or loss of such corporation after adjustment for tax purposes (for the year preceding the payment of such dividends) was used in computing the average taxable income provided by chapter 71, except that deductibility of dividends received in the year 1926 shall be governed by the assessment of the income of the year 1925.' * * * (This subsection was the same in the 1941 and 1943 Stats.)

An analysis of sec. 71.04(4), Stats. 1945, discloses that, in order for an individual taxpayer to be entitled to deduct dividends from gross income in arriving at net taxable income, there are three requirements on the part of the corporation which paid the dividends which must exist, all three of which requirements must concur, and the failure to meet any one of the three will be fatal to taxpayer's right to deduct the dividends. These three requirements are:

(1) The corporation must have filed income tax returns as required by law.

(2) The income of such corporation must be subject to the income tax law of this state.

(3) The principal business of the corporation must be attributable to Wisconsin.

Northern did file Wisconsin corporation income tax returns for the four years in question and taxpayer contends that the first requirement of sec. 71.04(4), supra, has therefore been met by the corporation. The department of taxation contends that the corporation was not 'required by law' to file such returns. For the basis of this opinion, we are assuming, but not deciding, that taxpayer's contention in this respect is correct, and pass on to the second requirement.

As we view it, the vital issue in the case is whether the income of Northern for the four years in question was 'subject to the income tax law of this state.' Just what did the legislature intend when it used the word 'subject'?

The taxpayer maintains that the words 'subject to the income tax law of this state' has reference to a general class of corporations and not to the income of a particular corporation such as Northern, and therefore if Northern falls in such general class it is immaterial if it has any income which is taxable by Wisconsin. In support of such argument taxpayer cites the provisions of sec. 71.01, Stats.1941, 1943, and 1945, whereby the state taxes 'every nonresident of the state, upon such income as is derived from property located or business transacted within the state'; and then argues that even if the corporate stocks and other intangibles owned by Northern are deemed to have their situs in Delaware, the corporation's domicile, nevertheless, if Northern transacted any business in Wisconsin it was subject to Wisconsin income tax within the meaning of sec. 71.04(4), Stats.1941, 1943, and 1945, and whether it had any taxable income or sustained a loss is immaterial. The fallacy in such argument lies in the fact that the words 'income as is derived from * * * business transacted within the state' quoted from sec. 71.01, supra, has reference to income of a type made taxable by the ensuing provisions of our income tax statutes. The holding of corporate meetings by Northern, collecting dividends, looking after investments, etc., in the state were not in themselves activities which produced income which was taxable by Wisconsin if such ensuing provisions then in effect imposed no income tax on the income received by Northern on its investments.

In our attempt to arrive at the proper construction of the phrase 'the income of such corporation must be subject to the income tax law of this state' appearing in sec. 71.04(4), Stats.1941, 1943, and 1945, it is helpful if we ascertain the legislative intent of the subsection as a whole. There can be little doubt that the general underlying purpose of the subsection was to avoid double taxation by exempting from taxation dividends of a corporation paid out of corporate earning which were subject to Wisconsin income tax regardless of whether the corporation was a Wisconsin corporation or a foreign corporation transacting business in the state. Surely the legislature never intended to give the exemption resulting from deductibility of dividends to stockholders of a corporation which had no income subject to Wisconsin income tax. While it is true that the subsection does not require that any fixed percentage of the corporate income be subject to Wisconsin income tax, it is reasonable to assume that the legislature thought that the third requirement, that the corporation must have its principal business attributable to Wisconsin, coupled with the fifty per cent of net income or net loss test, would prevent the benefit of deductibility being bestowed upon the stockholders of a corporation whose income subject to Wisconsin income tax was anything less than a substantial part of the whole.

In the light of these considerations we conclude that the words of the subsection, 'the income of such corporation must be subject to the income tax law of this state' means that the corporation must have income which was required to be included as gross income in its Wisconsin corporate income tax return which it was required to file with the department, regardless of whether or not there was net taxable income, or a net loss, for the tax year in question. This requirement of having income subject to tax was not met by Northern including as gross income in the Wisconsin returns, which it filed for the years in question, such income from intangibles as dividends from Cudahy Brothers Company and Charles Hess Sausage and Provision Company, if such dividends were not actually subject to Wisconsin income tax under the income tax statutes then in effect.

It may be urged that this construction of the statute is directly contrary to the legislative intent of avoiding double taxation of corporate earnings because it may result in the taxpayer having to pay income tax on dividends received from Northern which represent a distribution of earnings of Cudahy Brothers Company and Charles Hess Sausage and Provision Company on which such two corporations had already paid a Wisconsin corporation income tax. Unfortunately, from the standpoint of appellant taxpayer, sec. 71.04(4), Stats.1941, 1943, and 1945, in imposing its three corporate requirements for deductibility of dividends to individual stockholders, did not differentiate between operating companies and holding companies. It would have been a simple matter for the legislature to have provided that dividends, which were paid by a holding company to its stockholders representing the proceeds of dividends paid by an operating company to the holding company, were deductible to the same extent as if they had been paid directly from the operating company to the stockholders of the holding company. This the legislature did not see fit to do. Deductions and exemptions from gross income are matters of purely legislative grace and provisions permitting them are to be strictly construed against persons claiming their applicability and in favor of the tax authority. Comet Co. v. Wisconsin Department of Taxation, 1943, 243 Wis. 117, 9 N.W.2d 620.

It is conceded that all of the income of Northern has been derived from intangible personal property. It being a Delaware corporation the situs of such income for income tax purposes was Delaware under the well accepted maxim 'mobilia sequunter personam', which maxim found legislative sanction in sec. 71.02(3)(c), Stats.1945, and which provided: 'All other income, including royalties from patents, income derived from personal services, professions and vocations and from land contracts, mortgages, stocks, bonds and securities or from the sale of similar intangible personal property, shall follow the residence of the recipient, except as provided in section 71.095.' (This subsection was the same in the 1941 and 1943 Stats.)

Under the provisions of sec. 71.02(3)(c), supra, the income of Northern would be taxable by Delaware and not by Wisconsin. Taxpayer concedes that, inasmuch as Northern is domiciled in Delaware (the state of its incorporation), Delaware has the constitutional right to tax all of the income of the corporation, including income from securities physically located in Wisconsin, but contends that Wisconsin also has the right to tax the income of Northern...