214 Wis. 85 | Wis. | 1934
The following opinion was filed December 5, 1933:
The Curtis Companies, Inc., is a holding company, owning all the capital stock, except directors’ qualifying shares, of the Curtis & Yale Company and of several other companies engaged in a similar business. The Curtis & Yale Company is a producing company, manufacturing and jobbing sash, doors, and miscellaneous mill-work. Its plant is at Wausau, is owned by Curtis Companies, Inc., and is leased by that corporation to the Curtis & Yale Company. Both the Curtis & Yale Company and Curtis Brothers' & Company, another subsidiary, with a plant at Clinton, Iowa, do extensive manufacturing and sell their products to outside dealers as well as to distributing subsidiaries of Curtis Companies, Inc.
Since 1920, Curtis Companies, Inc., and Curtis & Yale Company have filed returns of income with the Wisconsin Tax Commission, and reported Wisconsin income upon a separate accounting basis.
In December, 1929, a field audit of the books and records of both companies for the years 1925 to 1928, inclusive, was made. Upon the basis of this audit assessments were made for additional income tax for these years, exclusive of interest, amounting to $6,319.90, against Curtis & Yale
The first contention of the plaintiffs is that there was no notice as required by sec. 71.12 of the statutes, which pro
Proceeding to the merits, it is the claim of the state that the Tax Commission was justified, upon the facts, in finding that the separate accounting method of reporting the income
Sec. 71.02 (3) (d) in substance provides that persons engaged in business within and without the state shall be taxed only on such income as is derived from business transacted and property located within the state. It is further provided that the amount of such income apportionable to Wisconsin may be determined by an allocation and separate accounting thereof, when, in the judgment of the Tax Commission, that method will reasonably reflect the income properly assignable to this state. The statute further provides, in case the commission concludes that this method does not properly so reflect the income; that the determination shall be as follows; Deduct from the total net income of the taxpayer such part as follows the situs of the property or the residence of the recipient. The remaining net income shall be apportioned to Wisconsin on the basis of the ratio obtained by taking the arithmetical average of the following three ratios: (1) the ratio of the tangible property owned by the taxpayer in Wisconsin in connection with his trade or business during the income year to the total of such property owned and used elsewhere in his trade or business; (2) in the case of persons engaged in manufacturing or in any form of collecting, assembling, or processing goods and materials within the state, the ratio of the total cost of manufacturing, etc., within this state to the total cost of manufacturing, etc., elsewhere; (3) in the case of trading, mercantile, or manufacturing concerns, the ratio of the total
Sec. 71.25 (1) provides:
“ (1) When any corporation liable to taxation under this act conducts its business in such a manner as either directly or indirectly to benefit the members or stockholders thereof or any person interested in such business, by selling its products or the goods or commodities in which it deals at less than the fair price which might be obtained therefor, or where a corporation, a substantial portion of whose capital stock is owned either directly or indirectly by another corporation, acquires and disposes of the products of the corporation so owning a substantial portion of its stock in such a manner as to create a loss or improper net income, the commission may determine the amount of taxable income of such corporation for the calendar or fiscal year, having due regard to the reasonable profits which but for such arrangement or understanding might or could have been obtained from dealing in such products, goods or commodities.”
Sub. (2) provides:
“(2) For the purpose of this chapter, whenever a corporation which is required to file an income tax return, is affiliated with or related to any other corporation through stock ownership by the same interests or as parent or subsidiary corporations, or whose income is regulated through contract or other arrangement, the Tax Commission may require such consolidated statements as in its opinion are necessary in order to determine the taxable income received by any one of the affiliated or related corporations.”
The commission relies upon the combined effect of these three sections to justify its procedure and the assessment. Having determined that the allocation of corporate income to Wisconsin, as arrived at by the separate accounting method, is controlled by four arbitrary factors, to wit: (1) the eleven and one-half per cent, margin allowed to the factories on sales to the distributing subsidiaries; (2) the distribu
At the outset it seems clear that sec. 71.02 (3) (d) relates to the situation presented by a single taxpayer who does business within and without the state. He is permitted separately to account when that method reasonably reflects the income properly attributable to activities in this state, and' if it does not, the statute contains a precise and detailed description of the manner in which the Wisconsin income is to be determined. This method involves the application to the total income of such a taxpayer, of the average of certain ratios described in the section. Assuming that Curtis & Yale Company was a wholly independent corporation and
It is argued by the commission that while the description in sec. 71.25 may not appear to fit the instant case, the commission’s findings that there was present here an arbitrary income regulating device which in fact did operate to the benefit of the stockholder, in this case the parent company,
In dealing with a somewhat similar question the court, in United States v. Philadelphia Knitting Mills Co. 273 Fed. 657, said, referring to the government:
“It has a right, therefore, to attack the action of a board of directors and show by evidence, not that a given salary is too much, but that, in the circumstances, the whole or some part of it is not salary at all but is profits diverted to a stockholding officer under the guise of salary and as such is subject to taxation.”
In Missouri ex rel. S. W. Bell Tel. Co. v. Public Service Comm. 262 U. S. 276, 289, 43 Sup. Ct. 544, 547, 67 Lawy. Ed. 981, where a public service commission, in fixing a rate
“Four and one-half per cent, is the ordinary charge paid voluntarily by local companies of the general system. There is nothing to indicate bad faith. So far as appears, plaintiff in error’s board of directors has exercised a proper discretion about this matter requiring business judgment. It must never be forgotten that while the state may regulate, with a view to enforcing reasonable rates and charges, it is not the owner of the property of public utility companies, and is not clothed with the general power of management incident to ownership.”
In Rhode Island Hospital T. Co. v. Commissioner of Internal Revenue, 29 Fed. (2d) 339, bank officials, anticipating heavy losses due to precarious business conditions, set up a $200,000 reserve for bad debts. The board of tax appeals disallowed this deduction on the ground that the petitioner had resorted to guesswork in setting up this reserve. The court of appeals reversed this decision, stating:
“There is in this record no atmosphere of tax-dodging. While the honest judgment of bank officials as to the amount of profits made does not appear to be expressly made by statute prima facie evidence for profits-tax purposes, it is certainly, in the absence of any indication of a tax-dodging intent, to be given very substantial if not controlling weight.”
The question still remains, however, assuming all this to be true, and assuming that the commission has no power under sec. 71.02 (3) (d), except in cases of attempted tax evasion, such as were dealt with in Cliffs Chemical Co. v. Tax Commission, 193 Wis. 295, 214 N. W. 447; Palmolive Co. v. Conway, 43 Fed. (2d) 226, 56 Fed. (2d) 83; Buick Motor Co. v. Milwaukee, 43 Fed. (2d) 385, 48 Fed. (2d) 801, whether the commission, in cases where the income of a wholly owned subsidiary is involved, may, upon that ground alone, entirely disregard corporate agreements as to price, expenses, and other factors which are essential to the
It is not necessary here to consider whether it is within the power of the legislature to provide that the corporate identity of parent and subsidiary companies may or must be disregarded with respect both to returns and imposition of tax, and the two treated as one. The fact is that we find no such legislative grant of such power to the commission, unless it can be read out of the second subdivision of sec. 71.25, which gives the Tax Commission power to require, in the case of affiliated corporations, “such consolidated statements as in its opinion are necessary in order to determine the taxable income received by any one of the affiliated or related corporations.” It is contended that this
In dealing with the same general question, the New York court of appeals, speaking through Judge Cardozo, said:
“Public policy may indeed require that a foreign corporation manufacturing its products elsewhere shall not be at liberty to market them here by subsidiary corporations subject to its complete control without exposing the subsidiary to the same taxation as the parent. Convenience may demand that a corporation supplying a disguise shall be taxed as if it were one with the stockholder by whom the disguise has been assumed. The difficulty is that in the absence of prescribed conditions no such public policy had been declared, when these taxes were imposed, by the only agency of government competent to declare it.” People ex rel. Studebaker Corp. v. Gilchrist, 244 N. Y. 114, 155 N. E. 68.
The same comment is applicable here. It has greater applicability to this case than to cases where the subsidiary, upon the record, may be considered as a mere bookkeeping device. In such a situation there may be merit to the contention that the parent corporation, operating under such a disguise, should be recognized and taxed upon the income of the subsidiary. But mere stock ownership is not enough where the subsidiary has its own officers who actually transact its affairs and the facts do not warrant the conclusion that the subsidiary has completely lost its autonomy. People ex rel. Studebaker Corp. v. Gilchrist, supra; Procter & Gamble Distributing Co. v. Sherman, 2 Fed. (2d) 165.
For the foregoing reasons judgment must be reversed.
. By the Court. — The judgment of the circuit court is reversed, with directions to enter judgment setting aside the
A motion for a rehearing was denied, without costs, on February 6, 1934.