Welch v. Henry

• Citation: 223 Wis. 319,271 N.W. 68
• Parties: WELCH v. HENRY, State Treasurer.
• Decision Date: 12 January 1937
• Court: Wisconsin Supreme Court

223 Wis. 319

271 N.W. 68

WELCH

v.HENRY, State Treasurer.

Supreme Court of Wisconsin.

Jan. 12, 1937.

Appeal from an order of the Circuit Court for Eau Claire County; James Wickham, Judge.

Reversed.

This was an action commenced on July 23, 1935, by Earle Welch, as plaintiff, against Robert K. Henry, State Treasurer of the state of Wisconsin, defendant, to recover the sum of $545.71 paid by plaintiff under protest as an income tax pursuant to section 6, ch. 15, Laws of 1935. The complaint alleged that during the year 1933, plaintiff received a total income of $13,383.26, of which $12,133.60 was in the form of dividends from Wisconsin corporations; that under the income tax laws then in effect, chapter 71, Stats.1933, plaintiff was entitled to deduct from his gross income the full amount of such dividends; that in addition plaintiff was entitled to deductions from his gross income for 1933 amounting to $11,167.97, plus donations of $100, making a total of $11,261.97; that as a result thereof the plaintiff had no net income for the year 1933 subject to tax; that shortly prior to the 15th day of May, 1935, defendant received from the Wisconsin Tax Commission a bill for emergency relief tax assessed under the provisions of section 6, chapter 15, Laws of 1935, in the sum of $556.84; which amount less a 2 per cent. discount plaintiff paid under protest; that section 6, ch. 15, Laws of 1935, is unconstitutional and invalid. Judgment is demanded against the defendant as State Treasurer of the state of Wisconsin in the sum of $545.71, together with interest. Defendant demurred to the complaint upon the ground that the same does not state facts sufficient to constitute a cause of action against him. On February 7, 1936, the lower court entered an order overruling defendant's demurrer. Defendant appeals.

FOWLER, FAIRCHILD, and NELSON, JJ., dissenting.James E. Finnegan, Atty. Gen., and Herbert H. Naujoks, Asst. Atty. Gen., for appellant.

Bundy, Beach & Holland, and John M. Campbell, all of Eau Claire, for respondent.

Lecher, Michael, Whyte & Spohn, of Milwaukee, amici curiae.

WICKHEM, Justice.

The sole question upon this appeal is the constitutionality of section 6, ch. 15, Laws of 1935, which is entitled, “Emergency Relief Tax on Certain 1933 Dividends.”

The material portions of the statute here in question are as follows:

“(1) For the purpose of this section.

“(a) ‘Person’ shall mean persons other than corporations as defined in subsection (1) of section 71.02.

“(b) ‘Dividends' shall mean all dividends derived from stocks whether paid to shareholders in cash or property received in the calendar year 1933, or corresponding fiscal year, and deductible under subsection (4) of section 71.04.

“(d) ‘Net dividend income’ shall mean gross dividend income less seven hundred and fifty dollars.

“(2) To provide revenues for relief purposes there is levied and there shall be assessed, collected, and paid, an emergency tax upon the net dividend income of all persons in the calendar year 1933 or corresponding fiscal year at the following rates:

“(a) On the first two thousand dollars of net dividend income or any part thereof, at the rate of one per cent.

“(b) On the next three thousand dollars of net dividend income or any part thereof, at the rate of three per cent.

“(c) On all net dividend income above five thousand dollars, at the rate of seven per cent.”

Plaintiff's first contention is that the act is discriminatory and obnoxious to the provisions of the Fourteenth Amendment to the United States Constitution as well as to sections 1 and 22 of article 1, Wisconsin Constitution. These sections read as follows:

“Section 1. All men are born equally free and independent, and have certain inherent rights; among these are life, liberty and the pursuit of happiness; to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed.”

“Section 22. The blessings of a free government can only be maintained by a firm adherence to justice, moderation, temperance, frugality and virtue, and by frequent recurrence to fundamental principles.”

[1][2][3] Both plaintiff and defendant concede that while the Legislature may classify persons for purposes of taxation, the classification must be based on reasonable differences or distinctions which distinguish the members of a class from those of another in respects germane to some general and public purpose or object of the particular legislation. Louisville Gas & Electric Co. v. Coleman, 277 U.S. 32, 48 S.Ct. 423, 72 L.Ed. 770. This rule is well settled and calls for no further exposition here. Plaintiff's claim is based upon the fact that under the law as it existed in 1933, and upon which plaintiff reported and paid his income taxes for that year, there was allowed to him as a deduction dividends received from Wisconsin corporations. The emergency relief tax enacted in 1935 levied a graduated tax upon dividends from Wisconsin corporations received in 1933 and at that time deductible from plaintiff's gross income. It is contended that there is no difference between plaintiff and persons receiving no income from dividends paid by Wisconsin corporations that reasonably warrants such a classification. It is not contended that the Legislature in 1933 could not have abolished the exemption of this dividend income if the net result had merely been to throw into the total of assessable income for the year 1933 the Wisconsin dividend of a particular taxpayer and subject it to the normal taxes for that year. However, had the Legislature done this, the result would have been a general income tax, and the dividend income would have been treated on a parity with all of the taxpayer's other income. It would have been subject to the same deductions, and he could have subtracted from it the same losses that he could as against any other sort of income and it would have been taxed on an absolute parity with such other income. It is obvious that the question here is quite different. The question is whether the Legislature having theretofore exempted dividends received from Wisconsin corporations from a normal tax may by separate act subject them to a special tax for emergency relief purposes. It is clear to us that there is but a single ground of differentiation, and that the classification must stand or fall upon this ground. Does the fact that the taxpayers who received dividends of Wisconsin corporations were exempt from a normal tax in 1933 so differentiate them from other persons receiving dividends during this year as to justify the subsequent levy upon them of a special income tax to meet a particular public emergency? As thus stated, two questions are involved: (1) Is the classification a valid one, and (2) whatever the answer to this may be, is there in fact any discrimination against a person receiving income from Wisconsin dividends. If the first question receives an affirmative answer, the law is valid so far as its alleged discriminatory features are concerned. If the second question receives a negative answer, plaintiff has no standing to attack it, since his rights are not adversely affected. It is our conclusion that the fact that the income had previously been exempt from a normal tax is a sufficient reason for giving it different treatment upon the emergency tax. It does not impress us as material upon the issue of discrimination whether the previous exemption was accomplished by taxing all income except that derived from dividends of Wisconsin corporations or by taxing all income and allowing the deduction of income from this source. These are mere matters of form. The net result was that this income had not been subjected to a normal tax. In searching for subjects of emergency taxation, the Legislature for this very reason might impose a special tax for emergency relief upon the recipients of this type of income. The reason for imposing a special burden is as valid as that for exempting it from the normal burden. See State ex rel. Atwood v. Johnson, 170 Wis. 218, 175 N.W. 589, 7 A.L.R. 1617;Chicago & N. W. R. Co. v. State, 128 Wis. 553, 108 N.W. 557. Some point is made of the fact that the emergency tax upon this particular type of income is at a rate higher than the normal tax. We are not satisfied that such is the case. While the rates are nominally higher, it may well have been considered that this income, if added to the balance of the taxpayer's income, would normally be taxed in the higher rather than the lower brackets of the normal tax, and this factor could be taken account of in establishing rates for the special tax. Recognition of this principle appears to have been given in the case of Colgate v. Harvey, 296 U. S. 404, 56 S.Ct. 252, 80 L.Ed. 299, 102 A.L.R. 54. Whatever may be the proper conclusion as to the classification, we do not think plaintiff can claim to have been discriminated against, when the whole pattern of tax legislation is considered. It is not apparent to us that one who is exempt from the burden of annually responding to a normal income tax has been injured by requiring him to meet that of an occasional emergency tax. It might with equal or greater force be argued that the original act discriminated against persons receiving income from sources other than dividends of Wisconsin corporations. This being true, plaintiff has no standing to object to the classification adopted.

[4] It is also contended that there is discrimination as between members of the same class for the reason that only a fixed sum is deductible from the net income which does not vary in accordance with the circumstances or amount of the net income of a stockholder receiving dividend income from Wisconsin corporations. We do not consider this objection to be valid. Considering the class to consist of all persons receiving dividends from Wisconsin corporations, all are treated alike, taxed alike, given the same deduction, and...