Kansas City Star Co. v. Wisconsin Dept. of Taxation

• Decision Date: 01 December 1959
• Citation: 99 N.W.2d 718,8 Wis.2d 441
• Parties: KANSAS CITY STAR CO., Respondent, v. WISCONSIN DEPARTMENT OF TAXATION, Appellant (two cases).
• Court: Wisconsin Supreme Court

Page 718

99 N.W.2d 718

8 Wis.2d 441

KANSAS CITY STAR CO., Respondent, v. WISCONSIN DEPARTMENT OF TAXATION, Appellant (two cases).

Supreme Court of Wisconsin.

Dec. 1, 1959.

John W. Reynolds, Atty. Gen., Harold H. Persons, Asst. Atty. Gen., E. Weston Wood, Asst. Atty. Gen., for appellant.

Fairchild, Foley & Sammond, Milwaukee, Russell W. Baker, Kansas City, Mo., for respondent.

CURRIE, Justice.

Secs. 71.01 and 71.07(2), Wis.Stats., provide in part as follows:

Sec. 71.01--'There shall be assessed * * * and paid a tax on all net incomes as hereinafter provided, * * * by every nonresident of the state, upon such income as is derived from property located or business transacted within the state * * *.'

Sec. 71.07(2)--'Persons engaged in business within and without the state shall be taxed only on such income as is derived from business transacted and property located within the state.'

The term 'person' includes corporations. Sec. 71.02, Stats.

In a case of intra-company transfer across Wisconsin boundaries, the price attached to such transfer is crucial in determining the Wisconsin income subject to tax. There is no statute which specifically provides how such price is to be determined. We do have sec. 71.11(7)(a) ¹ which covers a situation where there are transfers made between subsidiary and parent corporations or affiliated corporations. Here we are not faced with a transfer between two different corporations but one occurring within a single entity.

Such sec. 71.11(7)(a) was originally enacted as sec. 71.25, Stats., in 1925, after the inter-corporate transfers had occurred which were the subject of the controversy before the court in Cliffs Chemical Co. v. Wisconsin Tax Commission, 1927, 193 Wis. 295, 214 N.W. 447, 449. The taxpayer in such case contended that this statute should not be applied retroactively. In partial answer to such argument the court stated, 'The legislature, in passing the law, merely directed the tax commission to conform to a method which would have been their duty to adopt without the act.'

We are satisfied that the same test of price of transfer is to be applied between intra-corporation transfers, such as we have in the intant appeal, as in the case of inter-corporation transfers governed by sec. 71.11(7)(a). Furthermore, there is no room for doubt but that such test is one of fair market value.

That fair market value is the proper test to apply is made clear by the opinion of this court in Standard Oil Company of Indiana v. Wisconsin Tax Commission, 1929, 197 Wis. 630, 223 N.W. 85. The plaintiff taxpayer was a foreign corporation doing business both within and without the state. Its Wisconsin business consisted of operating filling stations and maintaining storage tanks to supply its Wisconsin and Minnesota stations. The tax commission assessed the income tax due on the Wisconsin operations by apportionment of the company's total net income using a weighted ratio involving tangible property, cost of sales and sales factors within and without the state. The position of the taxpayer in opposing such method of computing the tax is best stated by quoting from the court's opinion (197 Wis. at page 634, 223 N.W. at page 87):

'The plaintiff contends that its income should be ascertained by the allocation and separate accounting method by which the Wisconsin business is charged at the market price with all products received by it, with the expense of transacting the business, including a proper allocation of general or overhead expenses and office accounting; there should be credited to Wisconsin the gross amount received from sales of goods within the state, and that the difference constitutes the taxable income of the plaintiff company.' (Emphasis supplied.)

This court sustained such contention of the taxpayer, thus putting its stamp of approval on valuing intra-corporation transfers at market prices for purposes of income taxation.

The terms 'market price,' 'market value,' 'fair value,' 'fair price,' 'fair market price,' and 'fair market value' are synonymous and interchangeable. These terms are generally interpreted to mean the price at which the goods would change hands between a seller willing but not compelled to sell, and a buyer willing but not compelled to buy. In re Gooding's Estate, 1955, 269 Wis. 496, 502, 69 N.W.2d 586, and In re Estate of Ryerson, 1941, 239 Wis. 120, 125, 300 N.W. 782. Both the taxpayer and the department agree as to the correctness of such definition but differ radically upon its application to the facts of this appeal.

The department contends that such test of fair market price must be applied to the peculiar situation in which the seller and buyer were placed at the time of transfer. From this premise it proceeds to argue that no seller of newsprint in the position of Flambeau, willing but not compelled to sell, would sell its product at a price less than cost plus a fair profit. One answer to this contention is that, if Flambeau had any choice in the matter, it would not have sold any newsprint because of its slow speed machinery and resulting high cost of manufacture, but would have continued to make and sell high quality paper at a good profit.

The test of fair market price is completely objective and has no reference to the peculiar position of the particular seller making the sale. We consider apposite the following statement appearing in Sloan v. Baird, 1900, 162 N.Y. 327, 56 N.E. 752, 753:

'The market value of property is established when other property of the same kind has been the subject of purchase or sale to so great an extent and in so many intances that the value becomes fixed.'

Both the board of tax appeals and the circuit court declared in their memorandum decisions that the gray market prices, which the Star paid for a portion of its newsprint during 1948-1951, were no criterion of fair market prices. This is because the Star was not in the position of a buyer willing but not compelled to buy; it was compelled to buy. The same is true of the $20 per ton bonus that the Star was compelled to pay to M. & O. for the addition...