Midland Financial Corp. v. Wisconsin Dept. of Revenue, 82-396

• Decision Date: 29 December 1983
• Docket Number: No. 82-396,82-396
• Citation: 341 N.W.2d 397,116 Wis.2d 40
• Parties: MIDLAND FINANCIAL CORPORATION, Petitioner-Respondent, v. WISCONSIN DEPARTMENT OF REVENUE, Appellant-Petitioner
• Court: Wisconsin Supreme Court

Page 397

341 N.W.2d 397

116 Wis.2d 40

MIDLAND FINANCIAL CORPORATION, Petitioner-Respondent, v. WISCONSIN DEPARTMENT OF REVENUE, Appellant-Petitioner.

No. 82-396.

Supreme Court of Wisconsin

Argued Oct. 31, 1983.

Decided Dec. 29, 1983.

John C. Murphy, Asst. Atty. Gen. (argued), with Bronson C. La Follette, Atty. Gen., on briefs, for appellant-petitioner.

Gerald S. Walsh, Milwaukee (argued), for petitioner-respondent; David C. Keating and Walsh & Nohr, Milwaukee, on brief.

DAY, Justice.

This is a review of a court of appeals decision affirming a judgment of the circuit court for Milwaukee county, Hon. Patrick T. Sheedy, circuit judge. The circuit court judgment reversed a decision and order of the Wisconsin Department of Revenue assessing additional corporate franchise taxes against Midland Financial Corporation. There are three questions on this review: 1) Is dividend income received by a bank holding company and deductible from gross income under section 71.04(4), Stats., required to be included in the company's business loss carry forward under section 71.06; 2) Is the requirement of section 180.787, that in order to preserve its remedy a corporation must commence "action or other proceeding" on any right or claim within two years after dissolution satisfied by initiation of proceedings before the Wisconsin Tax Appeals Commission within the statutory time limit; 3) Is a dissolved corporation which has satisfied the requirement of section 180.787, an "aggrieved person" entitled to sue under section 227.16. We conclude (1) Deductible dividend income is not included in calculating the business loss carry forward under section 71.06; (2) Initiation of proceedings before the Wisconsin Tax Appeals Commission satisfies the requirement of section 180.787, for survival of remedies after dissolution; (3) A dissolved corporation which has capacity to sue under section 180.787, is an "aggrieved person" for the purposes of section 227.16. We therefore affirm the decision of the court of appeals.

The facts are undisputed. In 1971 and 1972, Midland Financial Corporation (Midland), a Wisconsin corporation, operated as a bank holding company. It owned a controlling interest in Midland National Bank, Park State Bank, Midtown State Bank, and Citizens State Bank and Trust Company through an ownership interest in Wausau Financial Corporation and Homassassa Springs Bank. Midland owned the controlling interest in Midland Leasing Services, Inc. and Equity Management Associates, Inc. which performed leasing and consulting services for Midland's bank subsidiaries. Midland also owned two small office buildings, one of which was leased in part to Midland National Bank.

In 1971, Midland received $112,633 of dividend income from its subsidiary corporations which it included as gross income in its Wisconsin corporate tax return. It then deducted that dividend income from its gross income pursuant to section 71.04(4), Stats.1971. ¹ As a result, Midland reported a net loss of $156,534 in 1971. This amount was carried forward as a loss and used as a deduction on its 1972 corporate tax return.

The Wisconsin Department of Revenue (Department) audited Midland's tax returns in September of 1976. As a result of the audit, the Department reduced the 1971 loss of $156,534 by $112,633 of dividend income received in that year under authority section 71.06, Stats.1971. ² That section provides that a corporation may carry forward a "net business loss ... to the extent not offset by other items of income of the same year." The Department regarded the dividends received by Midland as "other items of income." This reduced the loss carry forward to $43,901 which was subtracted from Midland's 1972 business income of $94,741 resulting in an increase in Midland's taxable income for 1972.

Midland petitioned the Department for a redetermination of the 1972 assessment. That petition was denied. In January of 1977, Midland filed for review of the assessment with the Wisconsin Tax Appeals Commission (Commission) which affirmed the decision of the Department in a decision and order dated November 20, 1980. In January of 1978, Midland was liquidated and dissolved. In December of 1980, Midland, suing under its corporate name, brought an action under ch. 227, Stats., in the circuit court for Milwaukee county for review of the Commission's decision. The circuit court reversed the decision of the Commission, holding that the dividends were not "other items of income" under section 71.06, Stats., and should not have been used to reduce the business loss carry forward for 1971. The Department appealed to the court of appeals which affirmed the judgment of the circuit court. Midland Fin. Corp. v. Revenue Dept., 110 Wis.2d 261, 328 N.W.2d 866 (Ct.App.1982). This court accepted the Department's petition for review.

The first question is whether dividends received by Midland in 1971 must be subtracted from its net business loss in calculating the business loss carry forward under section 71.06, Stats.1971. In answering that question we must construe that portion of section 71.06, which governs the calculation of business loss carry forward. We must also consider the purposes and effect of section 71.04(4), which provides for a tax deduction for certain dividends.

This court has established a number of rules of construction to be applied when the department of revenue and the taxpayer cannot agree on the proper interpretation of the tax laws. The general rule is that unless the statute is unclear or ambiguous, it is the duty of the court to give words their obvious and ordinary meaning. Transamerica Financial Corp v. Dept. of Revenue, 56 Wis.2d 57, 64, 201 N.W.2d 552 (1972). If the language of the statute is ambiguous, this court will endeavor to ascertain and give effect to the intent of the legislature as disclosed by the scope, history, context, subject matter and object of the statute. Depart. of Transp. v. Transp. Comm., 111 Wis.2d 80, 88, 330 N.W.2d 159 (1983). In general, ambiguity in revenue laws is to be resolved against the taxing government. Marina Fontana v. Fontana-on-Geneva Lake, 111 Wis.2d 215, 227, 330 N.W.2d 211 (1983). However, the business loss carry forward authorized by section 71.06, Stats., falls within the category of tax privileges which, as matters of legislative grace, must be strictly construed against the taxpayer. Hall Chevrolet Co., Inc. v. Dept. of Revenue, 81 Wis.2d 477, 484, 260 N.W.2d 706 (1978). In order to qualify for the carry forward, Midland must bring itself within the terms of the statute. Hall Chevrolet, 81 Wis.2d at 484, 260 N.W.2d 706.

The pertinent portion of section 71.06, Stats., provides that "if a corporation in any year sustains a net business loss, such loss, to the extent not offset by other items of income of the same year, may be offset against the net business income of the subsequent year." Neither "net business loss" nor "other items of income" is defined in the statute. "Net business income" is defined as "all the income attributable to the operation of a trade or business regularly carried on by the taxpayer, less the deduction of business expenses allowed in s. 71.04."

The dispute focuses principally on the interpretation to be given to the phrase "other items of income." Midland argues that the phrase must be understood to mean income that is not business income. It points out that the only income mentioned in the statute to which the word "other" can have reference is the net business income against which the loss carry forward is offset. From this it concludes that the contrast implied in the use of the word other is between business and nonbusiness income. It then cites this court's holding in Hall Chevrolet for the proposition that dividend income received by a bank holding company such as Midland is business income.

The Department argues that the statute does not set up an antithesis between business income and nonbusiness income and therefore the question of whether dividends received by a holding company constitute business income is irrelevant. Such a reading, it is argued, would render the phrase "other items of income" meaningless since business income is all the income of a business. That argument loses most of its force when it is recalled that prior to 1965, section 71.06, Stats., referred to a "taxpayer" rather than to a "corporation." Viewed as applicable to both individuals and corporations, the statute may be reasonably interpreted to allow a carry forward of net business loss reduced by nonbusiness income.

The Department reads "other items of income" to mean all income which was not included in the calculation of the net business loss. Since the dividend income at issue in this case is deductible from gross income under section 71.04(4), Stats., it is not included in the calculation of the loss.

The Department also seeks to have the business loss carry forward reduced by the taxpayer's dividend income by including the dividends in the calculation of the taxpayer's net business loss. The Department argues that net business loss under section 71.06, Stats., is not the same thing as loss for tax purposes. It points out that net business income in section 71.06, is defined as "all the income attributable to the operation of a trade or business regularly carried on by the taxpayer, less the deduction of business expenses allowed in section 71.04." (Emphasis added). It then refers to the statement made in Hall Chevrolet that " 'net business loss' is in some sense the reverse of 'net business income' " (81 Wis.2d at 485), and argues that dividends are not business expenses and therefore are not deductible in calculating net business loss.

Hall Chevrolet does not hold that net business loss is the exact negative image of net business income. The issue in that case was whether a loss sustained by a car dealership in the sale of its principal place of business was includible...