International Harvester Co v. Wisconsin Department of Taxation Minnesota Mining Mfg Co v. Same

• Decision Date: 29 May 1944
• Docket Number: 621,Nos. 620,s. 620
• Citation: 64 S.Ct. 1060,322 U.S. 435,88 L.Ed. 1373
• Parties: INTERNATIONAL HARVESTER CO. v. WISCONSIN DEPARTMENT OF TAXATION. MINNESOTA MINING & MFG. CO. v. SAME
• Court: U.S. Supreme Court

322 U.S. 435

64 S.Ct. 1060

88 L.Ed. 1373

INTERNATIONAL HARVESTER CO.

v WISCONSIN DEPARTMENT OF TAXATION.

MINNESOTA MINING & MFG. CO.

v. SAME.

Nos. 620, 621.

Argued April 27, 1944.

Decided May 29, 1944.

Appeals from the Supreme Court of the State of Wisconsin.

[Syllabus from page 436 intentionally omitted] Messrs. Ray M. Stroud, of Madison, Wis., and Edward R. Lewis, of Chicago, Ill., for appellant International Harvester Co.

Mr. G. Burgess Ela, of Madison, Wis., for appellant Minnesota Mining & Mfg. Co.

Mr. Harold H. Persons, of Madison, Wis., for appellee.

Mr. Chief Justice STONE delivered the opinion of the Court.

These cases come here on appeal under § 237(a) of the Judicial Code, 28 U.S.C. § 344(a), 28 U.S.C.A. § 344(a), from judgments of the Supreme Court of Wisconsin, reviewing and sustaining assessments by appellee, the Wisconsin Department of Taxation, of the Wisconsin Privilege Dividend Tax imposed with respect to appellants, which are foreign corporations doing business in Wisconsin. 243 Wis. 198, 11 N.W.2d 95; 243 Wis. 211, 10 N.W.2d 174. The appellants present again, but in a new aspect, the substance of the question decided in State of Wisconsin v. J. C. Penney Co., 311 U.S. 435, 61 S.Ct. 246, 85 L.Ed. 267, 130 A.L.R. 1229. In that case we sustained the constitutionality, under the due process clause of the Fourteenth Amendment, of the Wisconsin Privilege Dividend Tax, § 3 of Ch. 505 of Wisconsin Laws of 1935, as amended by Ch. 552, Wisconsin Laws of 1935.¹ The tax is imposed with respect to both foreign and domestic corporations doing business within the state 'for the privilege of declaring and receiving dividends' out of income derived from property located and business transacted in the state. The payor corporation is required to deduct the tax from the dividends payable to both resident and non-resident stockholders.

Appellants are respectively a New Jersey and a Delaware corporation doing business in Wisconsin. Appellee has assessed the Privilege Dividend Tax with respect to dividends declared and paid by appellant Harvester Company to its stockholders, including non-residents, between December 2, 1935 and October 15, 1937, inclusive, and on dividends similarly declared and paid by appellant Minnesota Mining Company in the years 1936 to 1940, inclusive. In the case of each appellant the tax as assessed was measured by so much of the dividends as were derived from the portion of the corporate surplus attributed by the tax authorities to income earned by the corporation in Wisconsin. The dividends were declared at directors' meetings held outside the state, and the dividend checks were drawn on bank accounts outside the state.

In the Penney case we sustained the tax in the case of a Delaware corporation doing business in Wisconsin, but having its principal office in New York, holding its meetings and voting its dividends there, and drawing its dividend checks on New York bank accounts. In considering the incidence of the tax in Wisconsin, which could afford a basis for the taxation there although the declaration and payment of the dividend took place outside the state, this Court pointed out that the practical operation of the tax is to impose an additional tax on corporate earnings within Wisconsin, but to postpone the liability for payment of the tax until such earnings are paid out in dividends, and we added, 311 U.S. at page 442, 61 S.Ct. at page 248, 85 L.Ed. 267, 130 A.L.R. 1229: '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.'

Since our decision in the Penney case, the Wisconsin Supreme Court has said, in both the Penney case on remand, J. C. Penney Co. v. Tax Comm., 238 Wis. 69, 72, 73, 298 N.W. 186, 134 A.L.R. 908, and in the International Harvester case below, 243 Wis. 198, 204—206, 10 N.W.2d 169, 11 N.W.2d 95, that under the Wisconsin constitution, the state has no power to lay an income tax on citizens of other states, who are not doing business in Wisconsin, and that the tax is not on the income of the corporation. And in Wisconsin Gas Co. v. Wisconsin Dept. of Taxation, 243 Wis. 216, 10 N.W.2d 140, 146 A.L.R. 1212; cf. Blied v. Wisconsin Foundry Company, 243 Wis. 221, 10 N.W.2d 142, the Court held that the burden of the tax is imposed upon the stockholders so that the corporation is not entitled to deduct the privilege tax from gross income as a business expense, in arriving at net taxable income under the state's income tax law. In the Wisconsin Gas Company case, supra, the Court said, at page 220, 221 of 243 Wis., at page 141 of 10 N.W.2d:

'We are certain of three things: (1) that the burden of the tax is specifically laid upon the stockholder; (2) that the corporation declaring the dividend must deduct the tax from the dividend and may not under any circumstances treat the tax as a necessary expense of doing business (for state income tax purposes); (3) that the power to levy the tax so construed was authoritatively established in the Penney case.'

From this, appellants argue that the state court has now conclusively declared that the tax is not on income of the corporation, but only on the stockholders' privilege of receiving dividends, and that it must be deducted from the dividends before their payment to the stockholders. Appellants renew the contentions urged in the Penney case that since the declarations of the dividends here in question were made outside the state and the non-resident stockholders received their dividends outside the state, the taxing statute as applied in these cases infringes due process by imposing the tax on stockholders, and on activities and objects outside the territory of the State of Wisconsin, and consequently outside its legislative jurisdiction. Compare Connecticut General Ins. Co. v. Johnson, 303 U.S. 77, 58 S.Ct. 436, 82 L.Ed. 673. To this is added the further argument, not presented in the Penney case, that the tax violates the Four- teenth Amendment because retroactively applied to and measured by Wisconsin income which was earned and carried to appellants' surplus accounts before the enactment of the statute.

For present purposes we assume that the statute, by directing deduction of the tax from declared dividends, distributes the tax burden among the stockholders differently than if the corporation had merely paid the tax from its treasury and that the tax is thus, in point of substance, laid upon and paid by the stockholders, some of whom might not bear the burden on the tax at all if, without more, it were paid out of the corporate treasury. This is obviously the case here with respect to the deductions from dividends on appellant Harvester's preferred stock, since normally the economic weight of taxes paid by the corporation would be borne by its common stockholders.

If such is the nature of the tax, a question preliminary to determining its validity is whether appellants have standing to urge here the constitutional objections of their stockholders, who are not parties to the present suits and who alone may be affected adversely by the tax. For appellants are permitted to reimburse themselves for the amounts, which they must pay to the state, by appropriate deductions from the dividends belonging to the stockholders. Appellants' failure in these cases to make the deductions was by their own choice and not by compulsion of the statute. But as the only way by which appellants can avoid the payment of the tax from their own funds is by collecting it from their stockholders' dividends and as appellants would remain liable to the stockholders, certainly to the preferred stockholders, for the amounts to the deductions if not lawfully taken, they are, in either aspect, adversely affected by obedience to the statute, if it is unconstitutional. We therefore conclude that appellants have standing to challenge the constitutionality of the statute. Cf. Anderson National Bank v. Luckett, 321 U.S. 233, 242, 243, 64 S.Ct. 599.

For the reasons stated in the Penney case we do not doubt that a state has constitutional power to make a levy upon a corporation, measured by so much of its earnings from within the state as it distributes in dividends, and to make the taxable event the corporation's relinquishment of the earnings to its stockholders. That power is not diminished or altered by the fact that the state courts, for purposes of their own, denominate the levy a tax on the privilege of declaring and receiving dividends, or that they decline to call it an income tax. In determining whether a tax is within the state's constitutional power, we look to the incidence of the tax and its practical operation, and not its characterization by state courts. Shaffer v. Carter, 252 U.S. 37, 55, 40 S.Ct. 221, 226, 64 L.Ed. 445, and cases cited; Lawrence v. State Tax Commission, 286 U.S. 276, 280, 52 S.Ct. 556, 557, 76 L.Ed. 1102, 87 A.L.R. 374, and cases cited.

Nor do we perceive any constitutional obstacle either to the state's distributing the burden of the tax ratably among the stockholders, as the ultimate beneficiaries of the corporation's activities within the state, and of the state's relinquishment of control over the Wisconsin earnings, so as to render the tax pro tanto one on the stockholders' income, or to the state's imposing on the corporation the duty of acting as its agent for the collection of the tax, by requiring deduction of the tax from earnings distributed as dividends.

The power to tax the corporation's earnings includes the power to postpone the tax until the distribution of those earnings, and to measure it by the amounts distributed. Compare Curry v. McCanless, 307 U.S. 357, 370, 59 S.Ct. 900, 907, 83 L.Ed. 1339, 123 A.L.R. 162. In taxing such distributions, Wisconsin may impose the burden of the tax either upon the corporation or upon the...