Taylor v. Conta

Decision Date02 March 1982
Docket NumberNo. 80-2221,80-2221
PartiesHoward U. TAYLOR, Margaret T. Taylor, Wayne Thomas Feyereisen, Frances C. Feyereisen, James W. McCarville, Karen Beth McCarville, Michael E. Fairfield and Donna J. Fairfield, Plaintiffs- Appellants, v. Dennis J. CONTA, individually and as former Secretary of the Wisconsin Department of Revenue, and Mark E. Musolf, individually and as Secretary of the Wisconsin Department of Revenue, Defendants-Respondents.
CourtWisconsin Supreme Court

Theodore C. Widder, III (argued), Madison, for plaintiffs-appellants; Schlotthauer, Johnson, Mohs, MacDonald & Widder, Madison, on brief.

John J. Glinski, Asst. Atty. Gen. (argued), for defendants-respondents; Bronson C. La Follette, Atty. Gen., on brief.

ABRAHAMSON, Justice.

The question presented on appeal is whether secs. 71.05(1)(a)5 and 71.05(1)(a)7, Stats.1975, two provisions of the Wisconsin income tax law, contravene the privileges and immunities clause of the federal constitution. We affirm the judgment of the circuit court for Dane county, William D. Byrne, Circuit Judge, which declared the statutes constitutional and dismissed the action.

I.

The facts are not in dispute. In 1976 the eight taxpayers (four married couples), Mr. and Mrs. Howard Taylor, Mr. and Mrs. Wayne Feyereisen, Mr. and Mrs. James McCarville, and Mr. and Mrs. Michael Fairfield, sold their respective Wisconsin residences, purchased new residences outside Wisconsin and moved from the state in connection with each of the husbands' employment. Each taxpayer realized a gain on the sale of a principal residence located in Wisconsin but qualified for non-recognition of the gain under sec. 1034 of the Internal Revenue Code by purchasing and using a new residence. 1

Additionally, taxpayers Howard Taylor and Michael Fairfield incurred moving expenses in 1976 in connection with the commencement of work at a new principal place of employment outside Wisconsin; these expenses were deductible under sec. 217 of the Internal Revenue Code. 2

Following the law applicable to 1976 federal tax returns, the taxpayers wish to exclude the gains from the sales of their principal residences from their taxable income on their 1976 Wisconsin income tax returns and deduct their moving expenses. 3

Although the Wisconsin income tax laws were "federalized" in 1965, the Wisconsin legislature has departed from the federal code in several respects. For Wisconsin income tax purposes state adjusted gross income is defined as federal adjusted gross income, "with modifications" prescribed in the state statutes. 4 Two statutory modifications of federal adjusted gross income, both relating to persons who "move" outside the state, give rise to this litigation.

Sec. 71.05(1)(a)5, Stats.1975, provides that "gain on the sale or exchange of a principal residence, excluded under sec. 1034(a) of the Internal Revenue Code [is included in income taxable in Wisconsin] if the 'new residence' referred to therein is located outside the state." 5 In contrast, under the 1976 Wisconsin tax laws if the new principal residence were located in Wisconsin the gain would be deferred under federal and Wisconsin law.

Sec. 71.05(1)(a)7, Stats.1975, provides that moving expenses incurred to move from the state of Wisconsin in connection with new employment, deductible under federal tax law, are not deductible for Wisconsin income tax purposes. 6 In contrast, moving expenses incurred to move within or into the state of Wisconsin in connection with new employment, deductible under federal tax law, are deductible for Wisconsin income tax purposes.

Estimates of the additional 1976 income tax owed by the taxpayers to Wisconsin attributable to taxation of the gain realized on the sale of the principal residences are as follows:

                                          Gain
                Taxpayer                Realized     Tax
                ---------------------  ----------  -------
                Howard U. Taylor       $ 8,246.00  $366.00
                Margaret Taylor          8,246.00   426.00
                Wayne T. Feyereisen      6,894.00   150.00
                Frances C. Feyereisen    6,894.00   319.00
                James W. McCarville      2,126.00    48.00
                Karen B. McCarville      2,126.00    48.00
                Michael E. Fairfield     6,479.00   300.00
                Donna J. Fairfield       6,497.00   307.00
                

Estimates of the additional 1976 income tax owed by the taxpayers to Wisconsin attributable to the non-deductibility of the moving expenses are as follows:

                Taxpayer             Expenses    Tax
                -----------------  ----------  -------
                Howard U. Taylor   $ 6,488.00  $300.00
                Michael Fairfield      419.00    60.00
                

On June 8, 1977, the taxpayers commenced an action for declaratory relief in Dane county circuit court. They contend that taxation of their gains and denial of their deductions of moving expenses constitute impermissible discrimination against non-residents. They seek a declaration that sec. 71.05(1)(a)5 and sec. 71.05(1)(a)7, Stats.1975, are in violation of the privileges and immunities clause, Art. IV, sec. 2, of the United States Constitution. 7 Both the taxpayers and the Department of Revenue moved for summary judgment. The circuit court declared the statutes constitutional and dismissed the action. The court of appeals certified the appeal pursuant to sec. (Rule) 809.61, Stats.1979, and we accepted the certification.

We shall first consider the analytical framework for review under Art. IV, sec. 2, the privileges and immunities clause, and then the constitutionality of each of the statutory provisions challenged.

II.

Article IV, sec. 2, clause 1 of the United States Constitution provides: "The Citizens of each State shall be entitled to the Privileges and Immunities of Citizens in the several States." 8 By this clause the constitution expressly limits a state's power to discriminate against inhabitants of other states. 9 The purpose of the clause is "to place the citizens of each State upon the same footing with citizens of other States, so far as the advantages resulting from citizenship in those States are concerned ... it inhibits discriminating legislation against them by other States ... and it secures to them in other States the equal protection of their laws." Paul v. Virginia, 8 Wall. 168, 180, 19 L.Ed. 357 (1868). The privileges and immunities clause " 'establishes a norm of comity', Austin v. New Hampshire, 420 U.S. 656, 660, 95 S.Ct. 1191, 1194, 43 L.Ed.2d 530 (1975), that is to prevail among the States with respect to their treatment of each other's residents." Hicklin v. Orbeck, 437 U.S. 518, 523-24, 98 S.Ct. 2482, 2486-87, 57 L.Ed.2d 397 (1978). 10

While the privileges and immunities clause speaks in terms of absolute equality between citizen and non-citizen, "it has not been suggested, however, that state citizenship or residency may never be used by a State to distinguish among persons." Baldwin v. Montana Fish and Game Comm'n, 436 U.S. 371, 383, 98 S.Ct. 1852, 1860, 56 L.Ed.2d 354 (1978). The Supreme Court has recognized that because non-residents may present special problems for the administration of state laws, the state need not grant non-residents precisely the same rights it grants to residents. As Justice Blackmun said in Baldwin v. Fish and Game, 436 U.S. 371, 383, 98 S.Ct. 1852, 1860, 56 L.Ed.2d 354 (1978), "[s]ome distinctions between residents and nonresidents merely reflect the fact that this is a Nation composed of individual States, and are permitted; other distinctions are prohibited because they hinder the formation, the purpose or the development of a single Union of those States."

Cases under the privileges and immunities clause, like those under the commerce clause (with which the privileges and immunities clause was joined in the Articles of Confederation), raise not only issues of discrimination but also issues of federalism. Austin v. New Hampshire, 420 U.S. 656, 662, 95 S.Ct. 1191, 1195, 43 L.Ed.2d 530 (1975). The privileges and immunities clause expresses the accommodation of the principle of equality of rights of citizens and non-citizens with the needs and interests of the state as a sovereign entity and helps "fuse into one nation a collection of independent, sovereign states." Toomer v. Witsell, 334 U.S. 385, 395, 68 S.Ct. 1156, 1162, 92 L.Ed. 1460 (1948). 11

The case at bar illustrates the conflicting values present in many disputes arising under the privileges and immunities clause. Wisconsin as an incident of its sovereignty has the power to raise revenue by taxation. But in levying a tax, Wisconsin must stay within the limits set by the federal constitution for the protection of individuals and national unity, e.g., the commerce, due process, equal protection, and privileges and immunities clauses. Western and So. Life Ins. Co. v. State Board of Equalization, 451 U.S. 648, 655, 101 S.Ct. 2070, 2076, 68 L.Ed.2d 514 (1981).

Although the purpose of the privileges and immunities clause is well recognized, "the contours of Art. IV, sec. 2, cl. 1, are not well developed." Baldwin v. Montana Fish and Game Comm'n, 436 U.S. 371, 380, 98 S.Ct. 1852, 1858, 56 L.Ed.2d 354 (1978). While the United States Supreme Court cases interpreting the privileges and immunities clause can be read in several ways, what appears to emerge from these cases is the use of a three-step inquiry when a state statute is challenged under the clause.

First, the court must analyze the distribution of the tax burden between citizens and non-citizens to determine whether the law disadvantages non-citizens. 12 For tax statutes, this means that no discrimination exists if the state secures a reasonably fair distribution of burdens between residents and non-residents. Austin v. New Hampshire, supra, 420 U.S. at 664, 95 S.Ct. at 1196; WKBH Television Inc. v. Dept. of Revenue, 75 Wis.2d 557, 573, 574, 250 N.W.2d 290 (1977).

In 1976 sec. 71.05(1)(a)5 treated former residents differently from continuing residents by requiring the former residents to...

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