Wisconsin Dept. of Taxation v. City of La Crosse

• Decision Date: 01 November 1960
• Citation: 11 Wis.2d 345,105 N.W.2d 800
• Parties: WISCONSIN DEPARTMENT OF TAXATION, Appellant, v. CITY OF LA CROSSE, Respondent.
• Court: Wisconsin Supreme Court

Page 800

105 N.W.2d 800

11 Wis.2d 345

WISCONSIN DEPARTMENT OF TAXATION, Appellant, v. CITY OF LA CROSSE, Respondent.

Supreme Court of Wisconsin.

Nov. 1, 1960.

Rehearing Denied Jan. 10, 1961.

John W. Reynolds, Atty. Gen., Harold H. Persons, John H. Bowers, Asst. Attys. Gen., for appellant.

John K. Flanagan, City Atty., William J. Sauer, Asst. City Atty., La Crosse, for respondent.

BROWN, Justice.

The will of Mary E. Sawyer bequeathed the residue of her estate to trustees, in trust to pay to Frank F. La Rowe, brother of the testatrix, an annuity of $5,000 during the brother's lifetime. The will then commands:

'Fourth: Upon the death of my said brother, Frank F. La Rowe, I will and direct that said trust be terminated and that the remainder of my estate be distributed by my said trustees or their successors in trust, as follows:

'All the rest, residue, and remainder of my estate, real, personal, and mixed, wherever situated, of which I may die seized or possessed, I given, devise, and bequeath to the City of La Crosse, Wisconsin for the purpose of erecting a suitable community building and auditorium for said City of La Crosse, to be known as the 'Mary E. Sawyer Auditorium', and the said community building and auditorium to be constructed under the direction of the proper officers of said City of La Crosse on such location as shall be most suitable in the opinion of the Common Council of said City.'

At the time of Mrs. Sawyer's death, January 29, 1941, Mr. La Rowe was seventy-four years of age. His life expectancy was then 6.68 years. Actually, he lived eight years. His death came in 1949 and the trustees then delivered the trust estate of $647,414.66 to the City.

On the average, under the management of the trustees, the estate produced annual income sufficient to pay the expenses of the estate, the $5,000 annuity to La Rowe and a surplus of about $7,750. In every year the net income greatly exceeded the requirements of the payments to La Rowe.

In each year the trustees made annual income tax returns and paid the taxes indicated according to the income tax laws currently in effect. In 1945 the trustees sought a judgment against the Department of Taxation that the net income for 1942 in excess of $5,000 per year was exempt from income taxes. That effort was unsuccessful. The Wisconsin supreme court held that the laws then in effect subjected such income to the tax. First Wisconsin Trust Co. v. Department of Taxation, 1945, 248 Wis. 21, 20 N.W.2d 647. The trustees had cited federal income tax cases to which this court answered, at page 27 of 248 Wis., at page 650 of 20 N.W.2d, supra, that such cases were not in point because ch. 71 of the Wisconsin statutes does not include a provision similar to the U. S. statute to the effect 'that a trustee shall not be taxed for income received by it which, although not distributed to the beneficiary during the tax year, 'is during the taxable year paid or permanently set aside' for charitable, etc., purposes. * * *'

At the 1947 session the legislature amended sec. 71.08(9), Stats., by a declaration whose material part is:

'There shall be exempt from such taxation any part of the gross income, without limitation, which pursuant to the terms of the will, deed or other trust instrument creating the trust, is during the taxable year permanently set aside to be used exclusively by or for the state of Wisconsin or any city, village, town, * * * therein * * *. Such exemption shall be operative retroactively except in those instances in which an assessment has become final and conclusive under the provision of chapter 71.'

Having filed income tax returns and having paid income taxes on the income in excess of the expenses and the $5,000 annuity for the years 1944 and 1945 and those assessments not having become final the trustees filed a claim for refund for the tax on income for those years.

The Department of Taxation denied the refund. While the litigation has been pending the trust has been closed, the residue of the estate has been distributed to the City and the City has been substituted for the trustees in prosecuting the proceeding for refund.

The City appealed from the decision of the Department of Taxation to the Board of Tax Appeals. The Board reversed the Department and directed the abatement of the additional assessment, finding:

'1. That the bequests under the will of Mary E. Sawyer have a presently ascertainable value.

'2. That the income of the trust created by the will of Mary E. Sawyer, after the payment of the bequest to Frank F. La Rowe and the cost of operation was pursuant to the terms of said will during the years in question permanently set aside for the City of La Crosse for the use set forth in said will.'

Concluding:

'That such income of the trust was not taxable under section 71.08(9) as amended by chapter 236, Laws of 1947.'

And Ordering 'That petitioner's application for abatement of the additional assessment appealed from be granted; that the additional assessment be and the same is hereby cancelled.'

The Department of Taxation appealed from the decision of the Board of Tax Appeals to the circuit court for La Crosse county. That court affirmed the decision of the Board. The judgment of the circuit court has now been appealed to the supreme court by the Department of Taxation.

The Department contends that the facts do not fit the requirements of the statute because the 1944 and 1945 surplus income was not committed to the City by Mrs. Sawyer's will and the surplus to be paid to the City is purely speculative. Furthermore, the Department says the retroactive provision of the statute, which is the basis of the taxpayer's claim for refund, is unconstitutional, as making an unreasonable classification between assessments which are final and those which are not final at the time the amendment was enacted. And, still further, the Department says the amendment violates the constitutional prohibition against the use of public funds for a private purpose.

For the moment we will consider the amended statute 71.08(9) aside from the objections to its retroactive feature.

A statute which exempts property from taxation is to be strictly construed in favor of the state. Coulter v. Department of Taxation, 1951, 259 Wis. 115, 47 N.W.2d 303, 305.

The statute which is before us now is the one which we examined in the Coulter case. We noted there that a federal statute is couched in substantially the same words as those used in the Wisconsin amended statute, sec. 71.08(9), that the federal statute antedated the enactment of ours and the courts had interpreted it. Consequently the construction of the federal statute by the United States supreme court has great weight in our own construction of the Wisconsin statute.

The provisions of the Sawyer will seem clear that it permanently sets aside for the exclusive use of the City all of the trust estate minus $5,000 per annum. There are no other contingencies to defeat or divert the bequest to the City. The Department contends that the antecedent charge upon the estate of $5,000 per year for La Rowe may exhaust all income earned by the estate in any year, and may even compel an invasion of the corpus. Theoretically, that is so. We have adopted the federal court's rule that the tax deduction 'will not be permitted unless it can be readily ascertained what amount will ultimately reach the type of institutions mentioned in the statute.' Coulter v. Department of Taxation, supra. But in applying that rule the United States court has eliminated consideration of contingencies which, though theoretically possible are remote. Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647; Merchants National Bank of Boston v. Commissioner, 320 U.S. 256, 64 S.Ct. 108, 88 L.Ed. 35, cited in both Coulter, supra, and by the Board of Tax Appeals in its present opinion. In the Ithaca Trust Company case, supra, the United States supreme court said:

'* * * The case presents two questions the first of which is whether the provision for the maintenance of the wife made the gifts to charity so uncertain that the deduction of the amount of those gifts from the gross estate under section 403(a)(3), supra, in order to ascertain the estate tax, cannot be allowed. Humes v. United States, 276 U.S. 487, 494, 48 S.Ct. 347, 72 L.Ed. 667. This we are of opinion must be answered in the negative. The principal that could be used was only so much as might be necessary to continue the comfort then enjoyed. The standard was fixed in fact and capable of being stated in definite terms of money. It was not left to the widow's discretion. The income of the estate at the death of the testator and even after debts and specific legacies had been paid was more than sufficient to maintain the widow as required. There was no uncertainty appreciably greater than the general uncertainty that attends human affairs.'

The Ithaca Trust Company and the Merchants National Bank cases decided inheritance tax cases, whereas the one now before us is an income tax case, but the statutory provisions affecting each are so similar that they are appropriate to a determination of the effect of sec. 71.08(9). We applied them so in the income tax case of Coulter v. Department of Taxation, supra.

In both the Coulter and the Merchants National Bank cases, supra, the court was faced with numerous very evident possibilities which, not at all, remotely might affect the amounts to be received by the charities, and which those courts held were too great to be tolerated by the statute. On the other hand, in the Ithaca Trust Company case, supra, the provision for the maintenance of a wife in an undetermined amount taking precedence over the gifts to charity did not render those gifts too uncertain to qualify for the tax exemption. Now, the Sawyer will subordinates the gift to the City only to the certain, specified annual sum of $5,000. As in Ithaca Trust...