Simanco, Inc. v. Wisconsin Dept. of Revenue

• Decision Date: 30 January 1973
• Docket Number: No. 333,333
• Citation: 57 Wis.2d 47,203 N.W.2d 648
• Parties: SIMANCO, INC., Respondent, v. WIS. DEPT. OF REVENUE, Appellant.
• Court: Wisconsin Supreme Court

Page 648

203 N.W.2d 648

57 Wis.2d 47

SIMANCO, INC., Respondent, v. WIS. DEPT. OF REVENUE, Appellant.

No. 333.

Supreme Court of Wisconsin.

Jan. 30, 1973.

Rehearing Denied March 27, 1973.

Robert W. Warren, Atty. Gen., Madison, for appellant.

Michael, Best & Friedrich, Milwaukee (Frank J. Pelisek and John R. Sapp, Milwaukee, of counsel), for respondent.

HEFFERNAN, Justice.

During the administrative proceedings contesting the tax and in the circuit court, various defects, mostly of a constitutional nature, were asserted by Simanco. However, in finding the statute to be unconstitutional, the circuit judge addressed himself to and based his decision only on the alleged denial of equal protection to a corporation when taxation is determined by a classification that is proportional to the nonresidency of its stockholders.

On this appeal it appears that the only issue briefed and argued is that of equal protection, and we rest our decision upon the resolution of that issue alone.

Section 71.337(1), Stats., which was held unconstitutional by the circuit court is the successor statute to an earlier version enacted by the legislature in 1955. The 1955 statute (sec. 71.337(1)) provided:

'(1) General Rule. If a corporation adopts a plan of complete liquidation, and within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims, then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.'

The bill jacket for ch. 571 of the Laws of 1955 (sec. 71.337(1)) shows that the statute was enacted to bring the Wisconsin law into conformity with the recently enacted sec. 337(a) of the Internal Revenue Code of 1954. The purposes that the Congress had in mind in enacting this statute are discussed in Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders (3d ed., para. 11.64 et seq. They point out that sec. 337(a) was enacted to provide liquidating corporations a safe procedure for disposing of corporate assets without running the risk of double taxation. They note that prior to the enactment of sec. 337(a) of the Internal Revenue Code of 1954, a corporation which sold assets would be liable for a tax on any gain and that, in addition, since a liquidation redemption of stock is treated as a sale by the stockholders, they would be liable for a second tax as a result of their gain for the redemption.

While there were methods even before 1954 by which a corporation could avoid a double tax, the procedures were cumbersome, and the decision of the United States Supreme Court in Commissioner v. Court Holding Co. (1945), 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981, injected considerable doubt concerning the circumstances under which a corporation and its shareholders could successfully avoid the double taxation. The problems created by the principle of the Court Holding Co. Case were attempted to be set at rest by sec. 337(a) of the Internal Revenue Code. Under that section, when a statutorily prescribed plan of liquidation is adopted, whether the corporation sells its own assets and distributes the proceeds in liquidation or whether the corporation distributes its assets in kind, there will be no gain or loss to the corporation. See 1 Mertens, Law of Federal Income Taxation, p. 210, sec. 9.82. It is apparent that this same salutary result was sought in the enactment of sec. 71.337(1), Stats., in 1955. However, the effect of that statute in Wisconsin was in some instances to prevent the collection of any tax when a liquidating corporation sold its assets.

While the right of Wisconsin to tax the gain by a corporation subject to its laws is without question, it would not in the ordinary case have the jurisdiction to tax a gain in the hands of a nonresident shareholder. Accordingly, the effect of the statute was to deprive the State of Wisconsin of what might be substantial tax revenues. The federal government, of course, does not face a similar problem. Wisconsin's dilemma in this respect appears in the bill jacket for ch. 190, Laws of 1961. Chapter 190 amended the 1955 version of sec. 71.337(1), Stats., to its present form. The following commentary appears in the bill jacket:

'The purpose of this section is to limit the non-recognition of gains and losses to corporations under Section 71.337 to the extent that such gains and losses are participated in by Wisconsin residents.

'Since non-resident stockholders are not taxable by Wisconsin on the gain which they receive when they surrender their stock, the present statute, which was intended to prevent double taxation, permits a total escape of taxation in the event and to the extent that the shareholders are non-residents.'

It is thus apparent that the assimilation of the federal law into the Wisconsin tax structure resulted in the truncation of Wisconsin's acknowledged taxing jurisdiction. It was possible for a corporation in liquidation under the 1955 version of sec. 71.337(1), Stats., to realize substantial gains on the sale of its assets with little tax liability to Wisconsin at any point if all of its shareholders or most of them were nonresidents of the state. Resident shareholders could, of course, be taxed on their gains upon the redemption of the stock.

The effect of ch. 190, Laws of 1961, was to amend sec. 71.337(1), Stats., to permit the State of Wisconsin to collect taxes from the corporation to the extent that nonresidents participate in the distribution. The gain realized by resident stockholders continues to be taxed to them personally. Simanco argues that the 1961 enactment creates an unconstitutional classification of corporations dependent upon the residency of their shareholders and that such classification constitutes a denial of the equal protection of the laws.

In the trial court's opinion, the operation of the currently effective statute is discussed. The memorandum opinion points out that if corporation A has no nonresident shareholders, it would pay no corporate franchise or income taxes if it liquidates under the terms of sec. 71.337(1), Stats., while corporation B with 25 percent of its stock owned by nonresidents, would pay tax on one-fourth of its gain. Corporation C, with 75 percent of its stock owned by nonresidents, would pay tax on three-fourths of such gain. If corporation D is entirely owned by nonresident shareholders, it would be required to pay tax on the entire amount of such gain.

While strong arguments continue to be made that a corporation is not protected by the equal-protection provision of the United States Constitution (see dissenting opinion of Mr. Justice Douglas, Wheeling Steel Corp. v. Glander (1949), 337 U.S. 562, 576, 69 S.Ct. 1291, 93 L.Ed. 1544), nevertheless, it appears that the judicial resolution of this question is no longer in doubt. Whatever the intent of the original authors of the fourteenth amendment may have been, by judicial gloss the protection of this portion of the fourteenth amendment has been extended to corporations as well as to natural persons. Connecticut General Life Ins. Co. v. Johnson (1938), 303 U.S. 77, 58 S.Ct. 436, 82 L.Ed. 673; Louis K. Liggett Co. v. Lee (1933), 288 U.S. 517, 53 S.Ct. 481, 77 L.Ed. 929.

There is, however, a strong presumption that legislative enactments are constitutional, and the burden on one asserting the unconstitutionality of a properly enacted statute is heavy indeed. Just v. Marinette Co. (1972), 56 Wis.2d 7, 26, 201 N.W.2d 761; State ex rel. Warren v. Reuter (1969), 44 Wis.2d 201, 211, 170 N.W.2d 790.

Moreover, where a tax measure is involved, the presumption of constitutionality is strongest. The courts have given recognition to the essentiality of taxation in preserving an ordered society, and there is implicit recognition in judicial decisions that the principle of absolute equality and complete congruity of the treatment of classifications is impossible and must be sacrificed in the interests of preserving the governmental function.

This court has recognized that the equal-protection clause, unless apparent misclassifications are gross indeed, is of little moment in determining the constitutionality of a state tax. In Hillside Transit Co. v. Larson (1954), 265 Wis. 568, 583, 62 N.W.2d 722, 730, the position of the court was well summarized by Mr. Justice Currie, who stated:

'. . . a legislature has much more leeway in granting exemptions in taxation measures than it does in regulatory measures under its police power without running athwart of the equal protection of the laws clause of the Fourteenth Amendment.'

The same principle was stated in Associated Hospital Service, Inc., v. Milwaukee (1961), 13 Wis.2d 447, 470, 109 N.W.2d 271. The same position has been uniformly taken by the United States Supreme Court. In Walters v. City of St. Louis (1954), 347 U.S. 231, 74 S.Ct. 505, 98 L.Ed. 660, the court upheld a municipal income tax which classified individuals according to whether they were wage earners or self employed. The court, at pages 237, 238, citing from Green v. Frazier (1920), 253 U.S. 233, 239, 40 S.Ct. 499, 501, 64 L.Ed. 878, said:

"When the constituted authority of the state undertakes to exert the taxing power and the question of the validity of its action is brought before this court, every presumption in its favor is indulged, and only clear and demonstrated usurpation of power will authorize judicial interference with legislative action."

In accord are Carmichael v. Southern Coal & Coke Co. (1937), 301 U.S. 495, 509, 57 S.Ct. 868, 81 L.Ed. 1245; Allied Stores of Ohio, Inc., v. Bowers (1959), 358 U.S. 522, 79 S.Ct. 437, 3 L.Ed.2d 480. Allied Stores, pages 526, 527, 79 S.Ct. page 440, points out:

'The States have a very wide discretion in the laying of their taxes. When dealing with their proper demestic concerns, and not...