Dept. of Rev. V. River City Refuse Rem., No. 2004AP2468.

• Court: United States State Supreme Court of Wisconsin
• Writing for the Court: Jon P. Wilcox
• Citation: 729 N.W.2d 396,2007 WI 27
• Parties: WISCONSIN DEPARTMENT OF REVENUE, Petitioner-Respondent-Petitioner, v. RIVER CITY REFUSE REMOVAL, INC., Respondent-Appellant.
• Decision Date: 08 March 2007
• Docket Number: No. 2004AP2468.

729 N.W.2d 396 2007 WI 27 WISCONSIN DEPARTMENT OF REVENUE, Petitioner-Respondent-Petitioner,
v.
RIVER CITY REFUSE REMOVAL, INC., Respondent-Appellant. No. 2004AP2468. Supreme Court of Wisconsin. Argued October 13, 2006. Decided March 8, 2007.

[729 N.W.2d 399]

For the petitioner-respondent-petitioner the cause was argued by F. Thomas Creeron III, assistant attorney general, with whom on the briefs was Peggy A. Lautenschlager, attorney general.

For the respondent-appellant there was a brief by James R. Lowe, Barbara J. Janaszek, and Whyte Hirschboeck Dudek S.C., Milwaukee, and oral argument by Barbara J. Janaszek.

An amicus curiae brief was filed by Timothy G. Schally, Robert A. Schnur, and Michael Best & Friedrich L.L.P., Milwaukee, on behalf of the Milwaukee Symphony Orchestra, Inc., the Milwaukee Ballet Company, Inc., the Florentine Opera Company, Inc., the Skylight Opera Theatre Corp., and the United Performing Arts Fund, Inc.

¶ 1 JON P. WILCOX, J.

This is a review of a published court of appeals decision, Wisconsin Department of Revenue v. River City Refuse Removal, Inc., 2006 WI App 34, 289 Wis.2d 628, 712 N.W.2d 351. The court of appeals reversed the order of the Dane County Circuit Court, Gerald C. Nichol, Judge. The circuit court had reversed the Tax Appeals Commission (Commission) order and reinstated the assessment made by the Wisconsin Department of Revenue (Department).

¶ 2 Two issues are before this court. First, whether the fixed assets River City Refuse Removal, Inc. (River City) received through intercompany transfers with wholly-owned subsidiaries of its parent company are subject to use tax. We hold that they are not in this case because of the lack of the requisite "retailer" or "purchase" necessary for the transfers to fall within the scope of Wis. Stat. § 77.53(1)(1993-94).¹

729 N.W.2d 400

¶ 3 Second, whether River City satisfied its burden to show that its nonpayment of taxes was due to good cause and not due to neglect, pursuant to Wis. Stat. § 77.60(3). We hold that River City satisfied its burden. River City need not pay a negligence penalty. Accordingly, we affirm the court of appeals.

I. BACKGROUND

¶ 4 River City was a stock corporation organized under Wisconsin law, with its principal place of business in Eau Claire, Wisconsin.² It collected refuse and recyclables in Wisconsin for residences and businesses. River City held a Wisconsin consumer use tax permit, which is required for businesses that regularly acquire taxable items from sellers who do not collect tax.

¶ 5 River City was a wholly-owned subsidiary of Browning-Ferris Industries (BFI).³ BFI was a publicly traded corporation, which had a number of other wholly-owned subsidiaries in a number of different states (BFI subsidiaries), including Browning-Ferris Industries of Wisconsin, Inc. (BFI-Wisconsin); Town & Country Waste, Inc.; Troy Area Landfill; BFI of Illinois; Woodlake Sanitary Service, Inc.; Browning-Ferris Industries of Minnesota, Inc.; and BFI Medical Waste Systems of Minnesota, Inc.

¶ 6 BFI and its subsidiaries were accrual basis taxpayers, meaning they recognized transactions at the time they occurred. Accounting entries for a liability or expense were made irrespective of the receipt or disbursement of a payment.

¶ 7 BFI maintained consolidated financial statements for all of its wholly-owned subsidiaries. Such a practice is in accordance with generally accepted accounting principles (GAAP). BFI also filed a consolidated federal income tax return for all of its wholly-owned subsidiaries. River City filed a separate Wisconsin tax return, pursuant to state law.⁴

¶ 8 BFI would assess the equipment needs of its subsidiaries and direct the transfer of assets accordingly. For accounting purposes, three sets of books would be involved: the sending subsidiary's, the receiving subsidiary's, and BFI's. The subsidiaries each had an intercompany payables account and an intercompany receivables account. The receiving subsidiary would add the net book value of assets to its intercompany payables account. Net book value would be arrived at by subtracting the accumulated depreciation previously taken by the sending subsidiary from the original purchase price. The sending subsidiary would subtract the same value from its intercompany receivables account. Subsidiaries did not exchange money for the intercompany transfers. BFI took responsibility for reconciling each subsidiary's receivables and payables in BFI's books, with the intercompany transfers netting zero on BFI's consolidated financial statement.

729 N.W.2d 401

¶ 9 After the intercompany transfer, the receiving subsidiary would continue to depreciate the assets. The net book value would be used as the initial cost basis. Any gains over the initial cost basis would be reported as income if the assets were sold.

¶ 10 In BFI's Policy and Procedure Manual, BFI identified tax liability as a potentially adverse effect of intercompany transfers. The manual warned that "such transfers may inadvertently trigger foreign and U.S. tax consequences without careful study."

¶ 11 River City took part in intercompany transfers. When River City received fixed assets from other BFI subsidiaries, it would receive all rights to, and ownership of, the transferred assets. River City would retitle the assets in its name and recognize the transfers in its financial records. It paid no tax at the time of retitling. In recognizing the transfers, River City followed the procedure provided by BFI.

¶ 12 The Department audited River City from October 1, 1993, to September 30, 1997 (period under review). The audit identified five categories of transactions for which River City did not pay use tax: (1) purchases of miscellaneous items; (2) purchases of motor fuel with respect to which the Department had issued Wis. Stat. § 78.75 motor fuel tax refunds; (3) transfers of non-fixed assets from other BFI subsidiaries, including tangible personal property such as books, videos, labels, posters, brochures, florescent bulbs, and containers; (4) purchases of recycling and waste reduction assets; and (5) transfers of fixed assets from other BFI subsidiaries, including trucks, tractors, and tractor-trailers that were between two and four years old. Related to the first category, River City did not appeal the audit. It conceded that it owed tax.

¶ 13 Related to the latter four categories, River City disagreed with the audit. Believing that River City needed to pay use tax, the Department sent River City a notice of field audit action (assessment), which assessed River City a total of $144,010.03. The total included $88,877.86 for unpaid use tax, $32,912.70 for interest, and $22,219.47 as a negligence penalty. The assessment covered the period under review.

¶ 14 After receiving the Department's assessment, River City filed a petition for redetermination with the Department's appellate bureau. In the petition, River City contended that the intercompany transfers were not subject to use tax, the recycling and waste reduction assets were exempt from the use tax, and that the audit had miscalculated the motor fuel sales tax. The Department denied it.

¶ 15 River City then filed a petition for the Commission to review the Department's denial of its petition for redetermination. The petition sought review related to intercompany transfers and the recycling and waste reduction assets. It did not seek review related to the motor fuel.

¶ 16 As litigation related to this case proceeded, BFI-Wisconsin and the Department litigated similar issues. Browning-Ferris Indus. of Wisconsin, Inc. v. DOR, No. 2004AP3091, unpublished slip op., 2001 WL 722126 (Wis. Ct. App. June 28, 2001), aff'g slip op., No. 00-CV-418 (Dane Co. Cir. Ct. Sept. 28, 2000), aff'g Wis. Tax Rptr. (CCH) ¶ 400-469 (WTAC 2000), petition for review denied 2001 WI 117, 247 Wis.2d 1036, 635 N.W.2d 784. In BFI-Wisconsin's case, the Commission reached the following conclusions of law: BFI-Wisconsin's recycling and waste reduction activities were not exempt from use tax, sales tax applied to its sales and rentals of compactors to customers, use

729 N.W.2d 402

tax did not apply to intercompany transfers, and the motor fuel tax applied.

¶ 17 After the Commission issued its order in Browning-Ferris Industries of Wisconsin, Wis. Tax Rptr. (CCH) ¶ 400-469 (WTAC 2000), the Department issued a notice of nonacquiescence related to the Commission's order pertaining to the intercompany transfers. The Department issued the notice pursuant to Wis. Stat. § 73.01(4)(e)2. Its effect was that although the Commission's order related to intercompany transfers was binding in Browning-Ferris Industries of Wisconsin, Wis. Tax Rptr. (CCH) ¶ 400-469 (WTAC 2000), "the [c]ommission's conclusions of law, the rationale, and construction of statutes . . . related to the issue of the intercompany transfers [were] not binding upon or required to be followed by the [Department] in other cases."

¶ 18 BFI-Wisconsin appealed to the circuit court, but related to only the applicability of the recycling and waste reduction use tax exemption.⁵ The circuit court affirmed the Commission's order. Browning-Ferris Indus. of Wisconsin v. DOR, No. 00-CV-418, unpublished slip op., (Dane Co. Cir. Ct. Sept. 28, 2000). BFI-Wisconsin appealed the circuit court's order, which the court of appeals affirmed. Browning-Ferris, 246 Wis.2d 990, 632 N.W.2d 124. BFI-Wisconsin's petition for review was denied by this court on September 19, 2001. Browning-Ferris Indus. of Wisconsin v. DOR, 2001 WI 117, 247 Wis.2d 1036, 635 N.W.2d 784.

¶ 19 Based on the outcome of Browning-Ferris, during the course of the Commission's review of this case, River City agreed to pay tax for both the recycling and waste reduction assets and the non-fixed assets received from intercompany transfers. Therefore, the Commission considered the taxability of only the transferred fixed assets and the applicability of the...