Newport Co. v. Wis. Tax Comm'n

• Decision Date: 24 June 1935
• Citation: 261 N.W. 884,219 Wis. 293
• Parties: NEWPORT CO. ET AL. v. WISCONSIN TAX COMMISSION.
• Court: Wisconsin Supreme Court

219 Wis. 293

261 N.W. 884

NEWPORT CO. ET AL.

v.WISCONSIN TAX COMMISSION.

Supreme Court of Wisconsin.

June 24, 1935.

Appeal from a judgment of the Circuit Court for Dane County; A. G. Zimmerman, Circuit Judge.

Reversed, with directions.

The action was commenced on January 26, 1934, to review an order of the Wisconsin Tax Commission, which directed the assessment of additional income taxes in the sum of $147,960.10, plus interest, in respect to income received by the Newport Company, hereafter referred to as the taxpayer, during the years 1926 to 1928, inclusive. The action was tried to the court, and on December 29, 1934, judgment was entered confirming the order and assessment. The taxpayer appeals. Since the questions involved upon this appeal are separate and distinct, it will be convenient to state the facts in the body of the opinion in relation to each separate contention.Fawsett & Shea, of Milwaukee, for appellant.

James E. Finnegan, Atty. Gen., and Herbert H. Naujoks, Asst. Atty. Gen., for respondent.

WICKHEM, Justice.

The taxpayer is a Delaware corporation, organized July 14, 1919, and licensed to do business in Wisconsin on August 25th of that year. The company engages in the manufacture of dyestuffs and chemicals, with factories at Carrollville, Wis., and Passaic, N. J., and also the manufacture of wood distillates, which is carried on in the states of Florida, Alabama, and Louisiana. Prior to 1928, the entire income from the business of the taxpayer was reported on the apportionment basis, and from the totals so reported a portion was allotted to and taxed by the state of Wisconsin as income arising in this state. For the year 1928, and the following years, a separate accounting system was set up for the wood distillate division, and for the purposes of apportionment only the Wisconsin and New Jersey operations were considered. An examination of the books and records of the taxpayer for the years 1926 to 1929, inclusive, resulted in an additional assessment, of which the taxpayer was notified, amounting to $147,960.10. Upon a hearing before the Tax Commission the determination of the auditor was affirmed on December 29, 1933. On December 28, 1933, the taxpayer filed a claim for refund in respect to its income for the years 1927 to 1929, inclusive, based upon alleged capital losses for these years. The validity of this claim was not determined by the Tax Commission, and was expressly reserved in its memorandum constituting a supplementary opinion published on July 2, 1934. At the outset there is a procedural question.

It is contended that the Tax Commission exceeded its lawful powers in determining the taxpayer's income for the years 1927, 1928, and 1929, and in assessing additional taxes thereon prior to a proper determination of the taxpayer's pending claim for refund for taxes overpaid on income for these years.

It is the taxpayer's contention that since the additional assessments were the result of a field audit, and since under section 71.17 (3), Stats. 1927, no refund shall be made for any year, the income of which was assessed as the result of a field audit, the commission had no power to foreclose the taxpayer of a hearing upon his claim for refund by making an additional assessment while such demand was pending. Section 71.12, Stats. 1927, reads: “No additional assessment by office audit or field investigation shall be placed upon the assessment roll without notice in writing to the taxpayer giving him an opportunity to be heard in relation thereto. Such notice shall be served as a circuit court summons or by registered mail. Any person feeling aggrieved by such assessment shall be entitled to a hearing before the tax commission in the case of corporations or the county board of review in the case of persons other than corporations, if within twenty days after receiving notice of such proposed assessment he shall apply for such hearing in writing, explaining in detail his objections to such assessment. If no request for such hearing is so made, such assessment shall be final and conclusive. If a request for hearing is made the taxpayer shall be heard by the tax commission or the board of review as the case may be and after such hearing the tax commission or the board of review shall render its decision regarding such assessment.”

Subdivision (3), § 71.17, Stats. 1927, provides: “No refund shall be made and no credit shall be allowed on any item of income or deduction, assessed as a result of an office audit, the assessment of which shall have become final and conclusive under the provisions of sections 71.12, 71.13, 71.14, 71.15 or 71.16; and no refund shall be made and no credit shall be allowed for any year, the income of which was assessed as a result of a field audit, and which assessment has become final and conclusive under the provisions of sections 71.12, 71.13, 71.14, 71.15 or 71.16.”

[1][2] It will be noted that the finality of assessments made as the result of an office audit has to do with particular items of income or deductions, whereas with reference to assessments made in consequence of a field audit, the finality attaches to the entire assessment for the year. The purpose of these provisions is clear. If, after due notice, additional assessments are made, the taxpayer should not be permitted to keep open indefinitely questions as to its income and liability for taxation by persistent applications for refunds. It was the intention of the statute to foreclose the applications for refund to the same extent that the office or field audit had arrived at final determinations with respect to the taxpayer's income. Since an office audit is the result of an examination of the returns by the taxpayer, and for its purposes accepts the truth of the return, an additional assessment based upon the disallowance of a deduction, or upon a ruling on any other item of the return of the taxpayer, is treated as precluding a refund or credit only on the items so dealt with in the audit. The field audit, however, contemplates a verification of the facts as reported in the return of the taxpayer, and a complete review of the taxpayer's books for the purpose of establishing accurately and finally the facts with respect to its income. The field audit was therefore intended to foreclose any further inquiry into the facts relative to the taxpayer's income for the year or years under audit. This being true, every item or fact bearing either upon the propriety of an additional assessment or of a refund is material and should be examined in the course of a hearing. The taxpayer may take issue directly with the assertion of the taxing authorities that portions of its income were not reported, not fully reported, or not properly reported, and that therefore an additional assessment should be levied. If the taxpayer is unable to meet these issues successfully, it may establish, if it can do so, that it has over-reported its income, and this should be taken into account as bearing upon the propriety or amount of an additional assessment. This procedure is contemplated by section 71.12, which requires as a condition to a hearing, not merely that a demand for such hearing be made within a specified time, but that objections to the assessment be set forth in detail. When a hearing is had upon an assessment proposed as the result of a field audit, the taxpayer must establish its right to a refund as defensive matter tending to show that no additional tax should be assessed, or that the additional tax claimed to be due by reason of new discoveries upon the audit should be reduced by the amount claimed as a refund. The statute makes no specific regulation of the procedure in this respect, but this is necessarily the conclusion when the nature of the field audit is considered. In this case the taxpayer did not make the facts, upon which a claim for refund depends, a ground for objecting to the additional assessment, nor were these facts put forward on the hearing as defensive matter bearing upon the propriety or amount of the additional assessment. The taxpayer took the position that the refund involved wholly separate procedure, and that a separate application for a refund should follow the hearing upon the additional assessment. To sustain the taxpayer's contention would permit the taxpayer to introduce intolerable delays into the process of ascertaining its proper tax. The hearing having proceeded without a consideration of the matters relating to a refund, the jurisdiction of the Tax Commission to come to a decision upon the basis of the audit, objections, and hearing, is not affected by an application for a refund. When, on December 29, 1933, the commission made a determination and additional assessment, the taxpayer's right to a refund terminated under the provisions of section 71.12. So, likewise, did the jurisdiction of the commission to consider the claims for refund as applied to any of the years for which an additional assessment was made. As we read the record, no additional assessment was made for 1929, as the result of the field audit, and what has heretofore been said has no application to taxpayer's claim in so far as it relates to that year.

The taxpayer's first contention upon the merits is that a gain realized by it from the sale of certain shares of stock of the Milwaukee Coke & Gas Company, in the year 1927, is not subject to a Wisconsin tax. Between August, 1919, and September, 1923, the taxpayer acquired 19,152 1/2 shares of stock of the Milwaukee Coke & Gas Company, a Wisconsin corporation. From 1919 to 1922, certificates representing the stock then owned by the taxpayer were held by a trust company in Cleveland as collateral security for bonds issued by the taxpayer. Thereafter, until May 16, 1927, all of the shares, except 1,637 1/2 shares, remained with the trust company. The shares excepted represented a later purchase and were kept in a safety deposit box in...