Int'l Harvester Co. v. Wis. Dep't of Taxation

• Decision Date: 14 September 1943
• Citation: 243 Wis. 198,10 N.W.2d 169
• Parties: INTERNATIONAL HARVESTER CO. v. WISCONSIN DEPARTMENT OF TAXATION.
• Court: Wisconsin Supreme Court

243 Wis. 198

10 N.W.2d 169

INTERNATIONAL HARVESTER CO.

v.WISCONSIN DEPARTMENT OF TAXATION.

Supreme Court of Wisconsin.

June 16, 1943.

Rehearing Denied Sept. 14, 1943. See 11 N.W.2d 95.

This is an appeal from an order and judgment of the Circuit Court for Dane County; Alvin C. Reis, Judge.

Affirmed.

Appeal to the Circuit Court for Dane County from an order of the Wisconsin Board of Tax Appeals which had affirmed an additional assessment of privilege dividend taxes against appellant, International Harvester Company, a New Jersey Corporation. The order of the Wisconsin Board of Tax Appeals was dated February 13, 1942, and the order and judgment of the Circuit Court was made and entered on September 17, 1942. The material facts will be stated in the opinion.

Edward R. Lewis, of Chicago, Ill., and Stroud, Stebbins & Wingert, of Madison, for appellant.

John E. Martin, Atty. Gen., and Harold H. Persons, Asst. Atty. Gen., for respondent.

WICKHEM, Justice.

Appellant is a New Jersey corporation, having its principal office in Hoboken, New Jersey. Its general executive offices are in Chicago. So far as the record discloses, it has done business in Wisconsin since 1920. The Wisconsin dividend privilege tax law was enacted and went into effect on September 26, 1935. From December 2, 1935, to October 15, 1937, appellant paid numerous dividends totalling $39,028,188.22, but did not pay any privilege dividend tax thereon. As of the end of the year 1934, the amount of surplus accumulated from Wisconsin earnings and constituting Wisconsin surplus on the basis of the formulae and method of computation prescribed by chapter 71 was $803,780.72. The amount attributable to Wisconsin as of December 31, 1935, was $2,227,499.03. The Wisconsin surplus as of October 31, 1936, was $2,608,908.26. On December 2, 1937, the Wisconsin Tax Commission, predecessor of Wisconsin Department of Taxation, notified appellant of an assessment of privilege dividend tax against it in the amount of $68,838.49, exclusive of penalties and interest, computation being based upon the statutory presumption that such dividends were paid out of previous years' earnings. Subsequently thereto, and because of the conceded rebuttal of the presumption, respondent recomputed the privilege dividend tax at $53,713.29, exclusive of penalties and interest. There is a stipulation to the effect that, assuming the law to be valid and the method of computation authorized, the amount of the privilege tax as computed is correct. The contentions made by appellant all present matters of constitutional law and statutory construction. It is contended that the privilege dividend tax contravenes the due process provision of the Wisconsin constitution and of the federal constitution; that the computation adopted by the Wisconsin Department of Taxation is not authorized by the Wisconsin dividend privilege tax law, but on the contrary, that the dividend tax law prescribes a wholly different formula; that this was not followed by the Tax Department; that Wisconsin may not tax the privilege of declaring and receiving dividends derived from earnings accumulated prior to the date when the Wisconsin dividend tax took effect.

This case is another chapter in a long history of litigation concerning the dividend tax law during which this court has passed upon the constitutionality of the law and its proper construction three times, and the United States Supreme Court has considered these matters once. Froedtert G. & M. Co. v. Tax Comm., 221 Wis. 225, 265 N.W. 672,267 N.W. 52,104 A.L.R. 1478;J. C. Penney Co. v. Tax Comm., 233 Wis. 286, 289 N.W. 677;Wisconsin v. Minn. Mining & Mfg. Co. 311 U.S. 452;J. C. Penney Co. v. Tax Comm., 238 Wis. 69, 298 N.W. 186, 134 A.L.R. 908 (upon remand).

The controversy has developed into a battle of words and labels and it may be of service to review the litigation and ascertain just what has been authoritatively determined. On September 26, 1935, the privilege dividend tax¹ went into effect and for purposes of reference so much of it as is material here is set forth in the notes. The constitutionality and construction of this law was put in issue in Froedtert G. & M. Co. v. Tax Comm., supra, and this court there held that it levied a tax upon the privilege of transferring from the corporation to the stock holders corporate net income derived from corporate business transacted, or property located in Wisconsin. That case involved a Wisconsin corporation, but upon rehearing, it was stated without elaborate discussion that the tax was constitutional as applied to the dividends of foreign corporations. The matter again came before this court in J. C. Penney Co. v. Tax Comm., 233 Wis. 286, 289 N.W. 677, 126 A.L.R. 1333, and it was there held that in its application to a foreign corporation doing business in Wisconsin and deriving a portion of its surplus from net earnings in Wisconsin, the law was an unconstitutional attempt by Wisconsin to tax a privilege which it neither gave nor protected, and that Wisconsin was consequently without jurisdiction to levy the tax. This court relied principally on the case of Connecticut Gen. Ins. Co. v. Johnson, 303 U.S. 77, 58 S.Ct. 436, 438, 82 L.Ed. 673, where upon facts that appeared to us to be quite indistinguishable the Supreme Court of the United States had held California to be without jurisdiction to levy a privilege tax, and in doing so, had said:

“But the limits of the state's legislative jurisdiction to tax, prescribed by the Fourteenth Amendment, are to be ascertained by reference to the incidence of the tax upon its objects rather than the ultimate thrust of the economic benefits and burdens of transactions within the state.”

Upon appeal to the United States Supreme Court, judgment in the Penney case was reversed by a divided Court. State of Wisconsin v. J. C. Penney Co., 311 U.S. 435, 61 S.Ct. 246, 248, 85 L.Ed. 267, 130 A.L.R. 1229. It was held that the practical operation of the legislation is to impose an additional tax upon corporate earnings within Wisconsin, but to postpone the liability for this tax until such earnings are paid out in dividends.

“In a word, by its general income tax Wisconsin taxes corporate income that is taken in; by the Privilege Dividend Tax of 1935 Wisconsin superimposed upon this income tax a tax on corporate income that is paid out.”

After noting that the act specifically levies the tax upon the privilege of declaring and receiving dividends, that the taxpayer is a Delaware corporation with its principal offices and meeting place in New York, and that this court has held the tax to be one upon a transaction wholly beyond Wisconsin's borders or reach, the Court said:

“The case thus reduces itself to the inquiry whether Wisconsin has transgressed its taxing power because its supreme court has described the practical result of the exertion of that power by one legal formula rather than another-has labeled it a tax on the privilege of declaring dividends rather than a supplementary income tax.

“A tax is an exaction. Ascertainment of the scope of the exaction-what is included in it-is for the state court. But the descriptive pigeon-hole into which a state court puts a tax is of no moment in determining the constitutional significance of the exaction. * * *

“For constitutional purposes the decisive issue turns on the operating incidence of a challenged tax. A state is free to pursue its own fiscal policies, unembarrassed by the Constitution, if by the practical operation of a tax the state has exerted its power in relation to opportunities which it has given, to protection which it has afforded, to benefits which it has conferred by the fact of being an orderly, civilized society.

“Constitutional provisions are often so glossed over with commentary that imperceptibly we tend to construe the commentary rather than the text. We cannot, however, be too often reminded that the limits on the otherwise autonomous powers of the states are those in the Constitution and not verbal weapons imported into it. ‘Taxable event’, ‘jurisdiction to tax’, ‘business situs', ‘extraterritoriality’, are all compendious ways of implying the impotence of state power because state power has nothing on which to operate. These tags are not instruments of adjudication but statements of result in applying the sole constitutional test for a case like the present one. That test is whether property was taken without due process of law, or, if paraphrase we must, whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state.”

Upon remand to determine such questions as were left open by the opinion of the Supreme Court, this court in J. C. Penney Co. v. Tax Comm., 238 Wis. 69, 298 N.W. 186, 134 A.L.R. 908, (1) insisted upon its exclusive power to construe the law; (2) held the law to be a privilege tax and not an income tax; (3) held that the determination of the United States Supreme Court settled all questions as to the jurisdiction of Wisconsin to levy the tax, whatever it be called, and (4) made certain directions as to its computation. The latter point need not be elaborated in this portion of the opinion. From the briefs in this case, and the memorandum of the trial court it appears to be concluded that we have here what the trial court designates an “immaculate dilemma”; that the Supreme Court of the United States has held this to be an income tax and that as such, it is invalid under the Wisconsin constitution; that the Supreme Court of Wisconsin,upon remand has persisted in designating it a privilege tax in which case the privilege being wholly exercised outside of the state, it is unconstitutional under the federal constitution.

We see no such dilemma. As we read the opinion of the United States Supreme Court, we discover no attempt by the court to usurp the function of this court so...