Welch v. Henry

• Citation: 118 A.L.R. 1142,59 S.Ct. 121,305 U.S. 134,83 L.Ed. 87
• Decision Date: 21 November 1938
• Docket Number: No. 13,13
• Parties: WELCH v. HENRY et al.
• Court: United States Supreme Court

305 U.S. 134

59 S.Ct. 121

83 L.Ed. 87

WELCH

v HENRY et al.

No. 13.

Supreme Court of the United States.

Argued Oct. 13, 1938.

Decided Nov. 21, 1938.

Rehearing Denied Dec. 19, 1938.

See 305 U.S. 675, 59 S.Ct. 250, 83 L.Ed. —-.

[Syllabus from pages 134-136 intentionally omitted] Mr. John M. Campbell, of Eau Claire, Wis., for appellant.

[Argument of Counsel from pages 136-140 intentionally omitted] Messrs. Leo E. Vaudreuil, Harold H. Persons, and Joseph E. Messerschmidt, all of Madison, Wis., for appellees.

Mr. Justice STONE delivered the opinion of the Court.

This appeal presents the question whether the Act of the Wisconsin Legislature of March 27, 1935, which imposed a tax on corporate dividends received by appellant in 1933 at rates different from those applicable in that year to other types of income and without deductions which were allowed in computing the tax on other income, infringes the equal protection and due process clauses of the Fourteenth Amendment, U.S.C.A.Const. Amend. 14.

The statute of Wisconsin in force in 1933 and since imposes a tax on net income at graduated rates. Wisconsin Stat. 1933, c. 71. Appellant, a resident of Wisconsin, received in 1933 gross income of $13,383.26, of which $12,156.10 was dividends received from corporations whose 'principal business' was 'attributable to Wisconsin' within the meaning of the taxing statute. By § 71.04(4), Wisconsin Stat.1933,¹ such dividends were deductible from gross income in computing net taxable income, together with other items, including taxes, interest paid, business expenses, losses from the sale of securities, and donations, aggregating, in the case of appellant, $11,161.97, so that he had no taxable net income for the year 1933.

Petitioner's income tax return was due and filed March 15, 1934. A year later c. 15 of the Laws of Wisconsin for 1935, effective March 27, 1935, laid new taxes for the years 1933 and 1934 upon various taxable subjects. Sec- tion 6, with which we are alone concerned, imposed a graduated tax, with no deduction except the sum of $750, on all dividends received in 1933 which, when received, were deductible from gross income under § 71.04(4). The statute declared that the levy was an emergency tax to provide revenue for relief purposes and directed that the proceeds should be paid into the state treasury to be used for 'unemployment relief purposes.' Appellant paid the tax, amounting to $545.71, under protest, on May 13, 1935, and brought the present suit to compel its restitution as exacted in violation of the state constitution and the equal protection and due process clauses of the Fourteenth Amendment. From the judgment of the Supreme Court of Wisconsin sustaining the tax, 226 Wis. 595, 277 N.W. 183, the case comes here on appeal. § 237 of the Judicial Code, 28 U.S.C. § 344, 28 U.S.C.A. § 344.

First. Appellant assails the statute as a denial of equal protection because the dividends which it selected for taxation as a special class were subjected ratably to a tax burden different from that borne by other types of income for the same year by reason of the fact that the dividends were taxed at a different rate from that applied to other income and were given the benefit of but a single deduction of $750, while recipients of other types of income in that year were permitted to deduct specified items of interest, taxes, business losses and donations. It is not contended that the receipt of dividends from corporations is not subject to tax, or that apart from the retroactive application of the tax they could not be included in gross income for the purpose of arriving at net taxable income, but it is insisted that disparities in the tax burdens which may result from the different rates and deductions infringe the constitutional immunity.

Wisconsin income tax legislation has from the beginning treated dividends received from corporations deriv- ing a substantial part of their income from business carried on within the State, on which the corporations have paid a tax to the State, as a distinct class of income for tax purposes. At first complete tax immunity was granted to them. § 1, c. 658, Laws of Wisconsin, 1911. Later the immunity was allowed ratably in the same proportion that the income of the corporation had been subjected to state income tax. § 1, c. 318, Laws of Wisconsin, 1923. And, finally, by amendment adopted in 1927² and in force in 1933 complete immunity of dividends from income tax was allowed if 50% or more of the total net income of the corporation paying them was included in the computation of the Wisconsin tax on corporate income.³

When in 1935 the State was confronted with the necessity of raising revenue to meet the demand for unemployment relief, and of distributing the cost among its taxpayers, the legislature found one class of untaxed income, dividends received from a specified category of corporations. It also could have concluded that a substantial part of this income had borne no tax burden at its source in the earnings of the corporations, since, by § 71.02(3)(d), corporations are not required to pay a tax on that part of their income allocable to business carried on or property located without the state.

We think that the selection of such income for taxation at rates and with deductions not shown to be unrelated to an equitable distribution of the tax burden is not a denial of the equal protection commanded by the Fourteenth Amendment, U.S.C.A.Const. Amend. 14. It cannot be doubted that the receipt of dividends from a corporation is an event which may constitutionally be taxed either with or without deductions, Lynch v. Hornby, 247 U.S. 339, 38 S.Ct. 543, 62 L.Ed. 1149; see Helvering v. Inde- pendent Life Ins. Co., 292 U.S. 371, 381, 54 S.Ct. 758, 760, 78 L.Ed. 1311, even though the corporate income which is their source has also been taxed. See Tennessee v. Whitworth, 117 U.S. 129, 136, 6 S.Ct. 645, 647, 29 L.Ed. 830; Klein v. Board of Tax Supervisors, 282 U.S. 19, 23, 51 S.Ct. 15, 75 L.Ed. 140, 73 A.L.R. 679; Colgate v. Harvey, 296 U.S. 404, 420, 56 S.Ct. 252, 254, 80 L.Ed. 299, 102 A.L.R. 54. The fact that the dividends of corporations which have to some extent borne the burden of state taxation constitute a distinct class for purposes of tax exemption, Colgate v. Harvey, supra; compare Travelers' Insurance Company v. Connecticut, 185 U.S. 364, 367, 22 S.Ct. 673, 674, 46 L.Ed. 949; Kidd v. Alabama, 188 U.S. 730, 23 S.Ct. 401, 47 L.Ed. 669; Darnell v. Indiana, 226 U.S. 390, 398, 33 S.Ct. 120, 57 L.Ed. 267, and that in consequence such dividends have borne no tax burden, is equally a basis for their selection for taxation. Watson v. State Comptroller, 254 U.S. 122, 124, 125, 41 S.Ct. 43, 44, 65 L.Ed. 170; Klein v. Board of Tax Supervisors, supra. Any classification of taxation is permissible which has reasonable relation to a legitimate end of governmental action. Taxation is but the means by which government distributes the burdens of its cost among those who enjoy its benefits. And the distribution of a tax burden by placing it in part on a special class which by reason of the taxing policy of the State has escaped all tax during the taxable period is not a denial of equal protection. See Watson v. Comptroller, supra, page 125, 41 S.Ct. page 44. Nor is the tax any more a denial of equal protection because retroactive. If the 1933 dividends differed sufficiently from other classes of income to admit of the taxation, in that year, of one without the other, lapse of time did not remove that difference so as to compel equality of treatment when the income was taxed at a later date. Selection then of the dividends for the new taxation can hardly be thought to be hostile or invidious when the basis of selection is the fact that the taxed income is of the class which has borne no tax burden. The equal protection clause does not preclude the legislature from changing its mind in making an otherwise permissible choice of subjects of taxation. The very fact that the dividends were relieved of tax, when the need for revenue was less, is basis for the legislative judgment that they should bear some of the added burden when the need is greater.

Numerous retroactive revisions of the federal and Wisconsin revenue laws, presently to be discussed, have imposed taxes on subjects previously untaxed and shifted the burden of old taxes by changes in rates, exemptions and deductions. It has never been thought that such changes involve a denial of equal protection if the new taxes could have been included in the earlier act when adopted. If some retroactive alteration in the scheme of a tax act is permissible, as is conceded, it seems plain that validity, so far as equal protection is concerned must be determined, as in the case of any other tax, by ascertaining whether the thing taxed falls within a distinct class which may rationally be treated differently from other classes. If such changes are forbidden in the name of equal protection, legislatures in laying new taxes would be left powerless to rectify to any extent a previous distribution of tax burdens which experience had shown to be inequitable, even though constitutional.

The bare fact that the present tax is imposed at different rates and with different deductions from those applied to other types of income does not establish unconstitutionality. It is a commonplace that the equal protection clause does not require a state to maintain rigid rules of equal taxation, to resort to close distinctions, or to maintain a precise scientific uniformity. Possible differences in tax burdens, not shown to be substantial, or which are based on discrimination not shown to be arbitrary or capricious, do not fall within the constitutional prohibition. Lawrence v. State Tax Commission, 286 U.S. 276, 284, 285, 52 S.Ct. 556, 558, 559, 76 L.Ed. 1102, 87 A.L.R. 374, and cases cited.

Just what the differences are in the tax burdens cast upon the...