Van Dyke v. City of Milwaukee

• Citation: 146 N.W. 812,159 Wis. 460
• Parties: VAN DYKE v. CITY OF MILWAUKEE.
• Decision Date: 09 April 1914
• Court: United States State Supreme Court of Wisconsin

159 Wis. 460

146 N.W. 812

VAN DYKE

v.CITY OF MILWAUKEE.

Supreme Court of Wisconsin.

April 9, 1914.

Appeal from Circuit Court, Milwaukee County; J. C. Ludwig, Judge.

Action by George D. Van Dyke against the City of Milwaukee. From an order overruling a demurrer to the complaint, defendant appealed. Reversed and remanded for further proceedings.

Barnes, J., dissenting.Daniel W. Hoan, City Atty, and Garfield S. Canright, Asst. City Atty., both of Milwaukee, for appellant.

Van Dyke, Rosecrantz, Shaw & Van Dyke, and Geo. D. Van Dyke, all of Milwaukee, for respondent.

VINJE, J.

The demurrer to the complaint raises a number of important questions relative to the construction of our income tax law. Some of these questions, it is deemed, can be briefly, yet adequately, stated in abstract form.

1. In the case of a going corporation engaged exclusively in mining and marketing ore from its property, are ordinary dividends declared by its directors taxable as income, without reference to how much of them is derived from capital, and how much from profit, in the strict sense of those terms? In the present case the complaint alleges that, if the reasonable value of the ore in the mine, together with the cost of mining and marketing, is deducted from the amount received for the ore, there remains no profit or income from the business of the corporation; hence it is claimed the corporation is distributing only its capital among its stockholders in the form of dividends.

[1] The subject of what constitutes income in the technical or true economic sense of the word is an interesting one, and also one upon which few economists and courts agree. Fortunately we are not called upon to enter that wide and somewhat vague field in the present inquiry. The word “income,” as used in the constitutional amendment and in the statute enacted in pursuance thereof, must be held to have been used in its common, ordinary meaning, and not in its strict, technical, or true economic sense. For it is a familiar rule of construction that ordinary words used in Constitutions and statutes must be given their usual and common significance, if such meaning harmonizes with the evident intent of the language employed, and with the purpose to be accomplished. Ordinary dividends declared by going corporations, including mining corporations, are and always have, in the common acceptation of the term, been regarded as income, spoken of and understood to be such by people generally. It was therefore competent for the Legislature to declare as income all dividends or profits derived from stock or from the purchase and sale of any property or other valuables acquired within three years previous.

[2] To give the term “income” its technical meaning would not only violate the evident intent of the constitutional amendment and of the Legislature, but it would practically render the income tax act impossible of administration. The task of tracing dividends declared by all sorts of corporations to their source to determine how much came from capital, and how much from income, strictly speaking, or how much from an enhancement of capital value, would be colossal in the amount of labor required, preplexing in character, and productive of almost endless litigation. No such construction should be given it, unless absolutely demanded by the language of the act. On the contrary, its language requires that the word “income” be given its general and usual meaning. It follows that ordinary dividends declared by a going corporation, including mining corporations, will be conclusively presumed as against stockholders to be from earnings or profits for purposes of income taxation. Howes, Income and Principal, p. 18; Black, Income Taxes, § 41; Com. v. O. Oil Co., 59 Pa. 61. This does not debar corporations from declaring dividends in cancellation of stock liability where they are in fact distributing capital. Whether such dividends are taxable need not now be decided. The dividends received by plaintiff from the Pewabic Company, which was engaged in mining and marketing iron ore, were properly taxed as income.

[3] 2. If dividends are taxable as income, can the stockholder, under section 1087m4, subds. (a) and (b), deduct therefrom the depreciation in the value of the stock caused by such distribution of dividends? Subdivision (a) refers to the cost of carrying on the business from which the income is derived, and that is clearly not applicable. Subdivision (b) provides for a deduction of losses during the year not compensated for by insurance or otherwise. In the first place, the distribution of dividends is not a loss within the meaning of the statute. In the second place, the book value of stock equals the value of the capital of the corporation, plus the value of its undistributed surplus or profits. The depreciation in the book value of its stock is therefore in direct proportion to the distribution of surplus, and, if that were allowed to be deducted, there would be no income, for the book value of each share of stock before distribution exceeds its book value after distribution exactly by the amount distributed to it. No deductions can therefore be made.

[4][5] 3. Are dividends declared and distributed during 1911 by a going mining corporation out of surplus on hand prior to January 1, 1911, when the income tax law went into effect, taxable as income for 1911? An affirmative answer must be given to this question, because the statute provides that “there shall be assessed, levied, collected and paid a tax upon incomes received during the year ending December 31, 1911.” The plaintiff received this income during 1911. It was immaterial when it was earned by the corporation. As a stockholder he acquired no right to it until it was distributed in the form of a dividend. The profits of a corporation become income to stockholders when distributed as dividends,...