Wisconsin Dept. of Taxation v. Siegman

• Decision Date: 02 June 1964
• Citation: 128 N.W.2d 658,24 Wis.2d 92
• Parties: WISCONSIN DEPARTMENT OF TAXATION, Appellant, v. Clarence J. SIEGMAN, Respondent. (1954 Tax.) WISCONSIN DEPARTMENT OF TAXATION, Appellant, v. Clarence J. SIEGMAN, Respondent. (1955 Tax.)
• Court: Wisconsin Supreme Court

Page 658

128 N.W.2d 658

24 Wis.2d 92

WISCONSIN DEPARTMENT OF TAXATION, Appellant, v. Clarence J. SIEGMAN, Respondent. (1954 Tax.)

WISCONSIN DEPARTMENT OF TAXATION, Appellant, v. Clarence J. SIEGMAN, Respondent. (1955 Tax.)

Supreme Court of Wisconsin.

June 2, 1964.

George Thompson, Atty. Gen., Harold H. Persons, E. Weston Wood, Ass't Attys. Gen., Madison, for appellant.

Irving H. Nelson, Milwaukee, for respondent.

WILKIE, Justice.

The sole issue to be determined on this appeal is: Does a transfer by a husband to a wife of full title in two appreciated parcels of real estate held in joint tenancy during the marriage, such transfer being made pursuant to a court-imposed divorce judgment making final division of the marriage estate under the terms of sec. 247.26, Stats., create income taxable to the husband pursuant to the provisions of sec. 71.03(1)(g), Stats.?

The department's rationale for the additional assessment of tax against Siegman is basically this:

Sec. 71.03(1)(g), Stats., defines as a taxable receipt,

'All profits derived from the transaction of business or from the sale or other disposition of real estate or other capital assets; provided, that for the purpose of ascertaining the gain or loss resulting from the sale or other disposition of property, real or personal, acquired prior to January 1, 1911, the fair market value of such property as of January 1, 1911, shall be the basis for determining the amount of such gain or loss; * * *.'

The department reasoned that the transfer of the property pursuant to the divorce decree was a disposition of an appreciated asset in discharge of Siegman's obligation to support his wife at the economic and social status to which she had been accustomed, even though the marital relationship had been terminated. Conceding that the transfer was not made in lieu of alimony, the department reasoned that even if such transfer were properly labeled a final division of the marriage estate, pursuant to sec. 247.26, Stats., functionally such division was in satisfaction of Mrs. Siegman's unliquidated right to support.

Therefore the discharge of the obligation of continuing support was income produced by the disposition of an appreciated capital asset.

The department further reasoned that, given an arm's length exchange of 'property,' where the market value of only one item can be readily ascertained, an equality of exchange value could be assumed, and so the department concluded that the value of the unliquidated right to support 'received' by Siegman was equal to the market value of the property transferred to his wife, and the difference between this figure and his adjusted basis on the properties was taxable income to Siegman, pursuant to sec. 71.03(1)(g) Stats.

We disagree.

What does the term 'income' mean as it is used in sec. 71.03(1), Stats.?

This court has held that "income' as used in the Constitution is to be interpreted in accordance with its common, ordinary meaning as understood in every day life. 'It must be gain or profit and it must be money or something equivalent thereto." ¹

In every-day usage, the phrase 'taxable income' is not coextensive with the notion of economic gain or increment. To be deemed income, for the purpose of sec. 71.03(1), Stats., an economic gain must be utilized by the taxpayer to satisfy some need before such increment is taxable. In short, the income in the sense of economic gain must be 'realized,' before it can be taxed.

But when is economic gain or income 'realized' so that it may be considered 'taxable'? Federal cases construing the federal revenue code, which while not binding on this court are treated as persuasive guides as to the meaning of ch. 71, have evolved a concept of 'realization' for tax purposes. In this respect, the first major federal case was Eisner v. Macomber. ²

Holding a stock dividend issued on common stock not to be income within the meaning of the Sixteenth amendment, the United States supreme court there reasoned:

'Here we have the essential matter: not a gain accruing to capital; not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being 'derived'--that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal--that is income derived from property. Nothing else answers the description.' ³

In Helvering v. Horst, ⁴ the United States supreme court greatly modified the 'fruit and tree' analysis of Macomber.

The owner of negotiable bonds had detached interest coupons shortly before their due date and had given the coupons to his son. The son collected the interest at maturity and reported the amount as his income. Both gift and actual payment of the interest occurred during the same taxable year of the donor, who was on a cash-receipts basis. The Commissioner of Internal Revenue contended that the father was liable to tax on the interest and his contention was sustained by the United States supreme court, which reasoned:

'Admittedly not all economic gain of the taxpayer is taxable income. From the beginning the revenue laws have been interpreted as defining 'realization' of income as the taxable event rather that the acquisition of the right to receive it. * * * [311 U.S. p. 115, 61 S.Ct. p. 146]

'* * * The rule, founded on administrative convenience, is only one of postponement of the tax to the final event of enjoyment of the income, usually the receipt of it by the taxpayer, and not one of exemption from taxation where the enjoyment is consummated by some event other than the taxpayer's personal receipt of money or property. * * * [311 U.S. p. 116, 61 S.Ct. p. 147]

'* * * The taxpayer has equally enjoyed the fruits of his labor or investment and obtained the satisfaction of his desires whether he collects and uses the income to procure those satisfactions, or whether he disposes of his right to collect it as the means of procuring them. * * * [311 U.S. p. 117, 61 S.Ct. p. 147]

'* * * Such a use of his economic gain, the right to receive income, to procure a satisfaction which can be obtained only by the expenditure of money or property, would seem to be the enjoyment of the income whether the satisfaction is the purchase of goods at the corner grocery, the payment of his debt there, or such non-material satisfaction as may result from the payment of a campaign or community chest contribution, or a gift to his favorite son. * * * [311 U.S. p. 117, 61 S.Ct. p. 147]

'* * *

'The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment and hence the realization of the income by him who exercises it. * * * [311 U.S. p. 118, 61 S.Ct. p. 147]'

Therefore, the Macomber concept of 'income,' requiring value 'derived from' and 'severed from' property before recognition of income, gave way to the economist's view of income. The satisfaction of non-material desires by the assignment of the right to accrued income was a realization of the benefits of that income for the assignor even though such receipt was never 'received or drawn by the recipient (the taxpayer) for his separate use * * *.' ⁵

Analytically then, any economic gain or increment is income, constitutionally and within the meaning of the federal code. ⁶ However, the receipt is not taxable until 'realized,' that is to say, utilized for some benefit, material or otherwise, by the taxpayer. As Horst suggests, the realization requirement is a matter of administrative convenience. The cost of conducting annual valuations of the appreciation on stock holdings, for example, would exceed the revenue recovered. The critical issue surrounding realization problems is not whether a receipt shall be taxed, but when it shall be taxed.

Subsequent federal cases have affirmed the Horst concept of realization in a variety of contexts. ⁷ In 1962, in the case of Davis v. United States, ⁸ the United States supreme court held that a transfer of appreciated property as a part of a property settlement upon divorce was a taxable event under the federal revenue code. The taxpayer had transferred stock to his former wife pursuant to a stipulated property settlement agreement incorporated in their divorce decree. As consideration for the securities conveyed, his wife released her rights to alimony, dower, and intestate succession under Delaware law. The court held that the transfer was a taxable event under sec. 1001 of the Internal Revenue Code of 1954, which provides that appreciation in the value of property shall be taxed only upon its 'sale or other disposition,' (a provision similar to sec. 71.03(1)(g), Stats.). The taxable income to Davis was the difference between the market value of the stock at the time of transfer, and the adjusted basis of such stock. Holding that the transfer was in discharge of his wife's inchoate marriage rights, and specifically, her right to continuing support, and further holding that it could be assumed that the value of these rights was equivalent to the fair market value of the stock transferred, the court concluded that the husband had realized income through the disposition of an appreciated asset. The decision affirmed the view of several circuit courts of appeal, ⁹ and rejected the view of another. ¹⁰ Subsequently, the same result was achieved in a case in which the property settlement was wholly decreed by the court, without stipulation by the parties as to the terms of such settlement. ¹¹

The department contends that the rationale and result of Davis and Pulliam ought to be applied in the instant case.

Sec. 71.03(1)(g), Stats., provides that '[a]ll profits derived from the transaction of business or from the sale or other disposition of real estate or other capital assets;' are taxable as a capital gain. (Emphasis added.) The...