Isaacson v. Iowa State Tax Commission, 54174

• Citation: 183 N.W.2d 693
• Decision Date: 09 February 1971
• Docket Number: No. 54174,54174
• Parties: Jacob J. ISAACSON and Dossie Isaacson, Appellees, v. IOWA STATE TAX COMMISSION, E. A. Burrows, Jr., Chairman; Lynn Potters, Vice-Chairman; and X. T. Prentis, Commissioner, Appellants.
• Court: United States State Supreme Court of Iowa

Page 693

183 N.W.2d 693

Jacob J. ISAACSON and Dossie Isaacson, Appellees, v. IOWA STATE TAX COMMISSION, E. A. Burrows, Jr., Chairman; Lynn Potters, Vice-Chairman; and X. T. Prentis, Commissioner, Appellants.

No. 54174.

Supreme Court of Iowa.

Feb. 9, 1971.

Richard C. Turner, Atty. Gen., George W. Murray, Sp. Asst. Atty. Gen., and Harry M. Griger, Asst. Atty. Gen., for appellants.

Thoma, Schoenthal, Davis, Hockenberg & Wine, Donald J. Brown and Leon R. Shearer, Des Moines, for appellees.

MOORE, Chief Justice.

This appeal is from the trial court's judgment interpreting Iowa's income tax law. The court found the state income tax assessments against plaintiffs for 1962, 1963 and 1964, totaling $645.15, null and void and cancelled them. As successor to the named defendants, Iowa State Department of Revenue (hereinafter referred to as defendant) appeals pursuant to Code section 422.29. We reverse.

The facts were stipulated and are not in dispute. Plaintiffs Jacob J. and Dossie Isaacson are husband and wife. At all pertinent times they were residents of Omaha, Nebraska. Jacob owned 160 shares of capital stock of Lewis System of Iowa, Inc., during 1962, 1963 and 1964. Lewis System by unanimous agreement of its shareholders elected prior to November 1961 not to be subject to federal income taxes in accordance with section 1372 of the Internal Revenue Code, 1954 as amended in 1958. Lewis System thereby became what is commonly referred to as a subchapter S corporation.

Lewis System of Iowa, Inc., is an Iowa corporation which did all its business within the State of Iowa during the calendar years 1961 through 1964. Its fiscal year ended on October 31, of each year.

During the years in question Mr. Isaacson was a Vice President and Director of Lewis System of Iowa, Inc. His only activities on behalf of the corporation consisted of attending Board of Directors meetings held in Omaha, Nebraska. He did not engage in activities within the State of Iowa which would constitute a business, trade, profession or occupation.

The corporation during 1961 through 1964 made monthly distributions of earnings as dividends to all shareholders with the result that at the close of each fiscal year the corporation's records reflected no accumulated and undistributed earnings or profits within the meaning of section 1373 of the Internal Revenue Code of 1954.

During each year in question here defendants filed a joint federal personal income tax return and an Iowa nonresident personal income tax return. Plaintiffs excluded from their Iowa returns all amounts received from Lewis System of Iowa, Inc.

Thereafter plaintiffs were assessed income tax arising out of their exclusion of income received from the corporation from their Iowa nonresident income tax returns for the three years involved.

Trial of plaintiffs' action in equity resulted in a decree and judgment in the district court holding the assessments null and void. The assessments were ordered cancelled. The question presented on defendant's appeal requires interpretation of our income tax statutes.

I. No dispute exists between the parties here regarding the provisions and effect of section 1372 and other pertinent sections of the Internal Revenue Code of 1954 and the amendment thereto in 1958. Its legislative history is reviewed in Wilhelm v. United States, 257 F.Supp. 16 (D.Wyo., 1966).

The federal legislation seeks to aid small business corporations and authorizes special tax treatment when all the shareholders consent thereto. The election is available only to a domestic corporation which does not have (1) more than 10 shareholders, (2) a shareholder (other than an estate) who is not an individual, (3) a nonresident alien as a shareholder and (4) more than one class of stock.

The effect of the election is that the corporation pays no federal income taxes (with certain exceptions which have no application in the case at bar) and the tax on the income distributed to the shareholders must be paid by each of them according to the amount received. It is different from the usual dividend as a shareholder of a subchapter S corporation is not entitled to the $100 exclusion on the amount distributed to him. Section 1375(b) of the Internal Revenue Code. Under the federal act all shareholders pay income tax on funds distributed to them by a subchapter S corporation.

II. Interpretation of certain sections of the Iowa income tax laws and which control is the real issue presented on this appeal.

Defendant contends plaintiff's should pay Iowa income tax on the sums received as dividends from the subchapter S corporation, Lewis System of Iowa, Inc., for the years involved and the assessment against plaintiffs should be upheld. Defendant relies on Code section 422.36(5) which states: '5. Where a corporation is not subject to income tax and the stockholders of such corporation are taxed on the corporation's income under the provisions of the Internal Revenue Code of 1954, the same tax treatment shall apply to...