Wolff v. Director of Revenue, 72041
| Decision Date | 19 June 1990 |
| Docket Number | No. 72041,72041 |
| Citation | 791 S.W.2d 390 |
| Parties | William and Elaine WOLFF, Appellants, v. DIRECTOR OF REVENUE, Respondent. Gary C. and Marsha J. WOLFF, Appellants, v. DIRECTOR OF REVENUE, Respondent. |
| Court | Missouri Supreme Court |
Douglas D. Hommert, Lawrence H. Weltman, Lori W. Jones, Bernard A. Barker, P.C., St. Louis, for appellants.
William L. Webster, Atty. Gen., Martin D. Kerckhoff, Asst. Atty. Gen., Jefferson City, for respondent.
Wolff Shoe Corporation is a Missouri corporation engaged primarily in the distribution of shoes made in foreign countries. Substantially all of its sales take place outside the state of Missouri. Wolff Shoe Company v. Director of Revenue, 762 S.W.2d 29 (Mo. banc 1988). In 1984 it elected to become an S corporation, as defined by § 1361(a)(1) of the Internal Revenue Code of 1954, and § 143.471, RSMo 1986.
The appellant taxpayers, all residents of Missouri, are the four principal shareholders of Wolff Shoe. For the years 1985 and 1986 they reported on their Missouri income tax returns only that portion of the undistributed income of the corporation which they determined to be "Missouri taxable income", computed by the use of the "single factor formula" of § 143.451.2(2). The taxpayers reported and paid tax on the full amount of the dividends received by them from the corporation. The director assessed deficiencies, contending that each taxpayer was obliged to report as individual income that part of the net income of the corporation which is proportionate to the taxpayer's shareholdings. The director implicitly concludes that the entire net income of an S corporation is attributable to the shareholders, whether distributed to them or not. The Administrative Hearing Commission sustained the director. We affirm.
One of the disadvantages of doing business in corporate form is the phenomenon of "double taxation." A corporation pays a tax on its net income. If any portion of net income is distributed to shareholders in the form of dividends, the taxpayers must pay individual income tax on the dividends. To provide some relief Congress authorized "S corporations." Missouri, in line with its policy of following the federal tax model, enacted § 143.471, reading as follows:
1. An S corporation, as defined by Section 1361(a)(1) of the Internal Revenue Code of 1954, shall not be subject to the taxes imposed by section 143.071.
2. A shareholder of an S corporation shall determine his S corporation modification and pro rata share, including its character, by applying subsections 1 and 2 of section 143.411.
3. A nonresident shareholder of an S corporation shall determine his Missouri nonresident adjusted gross income and his nonresident shareholder modification by applying subsections 1 and 3 of section 143.421. Items shall be determined to be from sources within this state under regulations of the director of revenue in a manner consistent with the division of income provisions of section 143.451, section 143.461, or section 32.200, RSMo (Multistate Tax Compact).
4. In applying sections 143.411 and 143.421 to a shareholder of an S corporation, substitute: (a) "S corporation" for "partnership", (b) "shareholder" for "partner", and (c) "pro rata share" for "distributive share."
This statute adopts the partnership statutes as the model for taxing the shareholders of S corporations. Inasmuch as the taxpayers are all residents of Missouri, the governing statute is § 143.411. We borrow the taxpayers' helpful rephrasing of that statute making use of the substitutions directed by § 143.471.4, in the following language:
2. Each item of [S corporation's] income, gain, loss, or deduction shall have the same character for a [shareholder] under section 143.011 to 143.996 as it has for federal income taxes. Where an item is not characterized for federal income tax purposes, it shall have the same character for a [shareholder] as if realized directly from the source from which realized by the [S corporation] or incurred in the same manner as incurred by the [S corporation].
The S corporation, then, is treated as a partnership for income tax purposes. It is axiomatic that the net income of a partnership equates the net income of the partners, whether or not distributed to them as individuals, and 143.411 so provides. The S corporation, indeed, is colloquially known as an "incorporated partnership." It is Missouri's policy to tax the entire income of individuals who reside in Missouri, subject to credit for income tax paid to other states. This policy is constitutionally...
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