*1 Revenue, Appellant-Petitioner, v. Howick, Respondent.
Romain A. Supreme Court February 2, Argued 79-105. 1980. Decided No. October 381.) (Also reported in 303 N.W.2d (in ap- petitioner a brief court of For the there was attorney general, Follette, peals) La Bronson C. *2 attorney general, oral Hubbard, and Allan P. assistant general. argument by attorney GlinsM, John J. assistant (in ap- respondent a court of For there was brief argument pro se, peals) by Howick, Romain A. oral of Hartland.
COFFEY, This is a review of a decision of the J. affirming appeals1 the circuit court court of an order of dismissing petition Department of (Department) Revenue to set aside a decision and order of Appeals (WTAC). Commission granted (taxpayer) A. The had Romain Howick’s WTAC petition Department’s for of of abatement assessment years through 1973, additional for the income taxes 1970 inclusive. controversy
This involves the treatment corporate loss the sale of stock income tax purposes when a stock is sold Wisconsin resident who purchased it resident while state Iowa. 20, 1970, moved to on June immediately thereafter divested himself of certain acquired shares stock that he while a nonresident. As a result of the 1970, stock sold Wisconsin in he $10,043.82 having purchased suffered loss, the same $56,436.42. Thus, reported he the difference between $56,436.42 price $46,392.60 and the sale $10,043.82 on his 1970 federal income tax return aas net capital loss. reported Howick also this loss on his 1970 Wisconsin tax return $1,000 year and deducted each appeals The decision court of reported at 95 Wis.2d 41, 289 App. (Ct. 1980). N.W.2d 336 ordinary through (3 thereafter from years).2
In 1973 he Howick divested himself more stock purchased while a resident of Iowa. He $13,317.40 $4,875.57 stock for and suffered a loss at the time of sale. this 1973 loss combined carry ($4,875.57) with the balance of a loss over from long-term gain other thus offset a realized from netting (offsetting process 1973 stock transactions. This long-term gains by long-term §1222) losses see: I.R.C. yielded deducted $516.10 ordinary income in 1973.
On October of Revenue made against an additional income tax assessment Howick in plus the amount of interest.3 The $978.96 *3 audited Howick and determined that he had erred in calculating years his for losses 1970 and 1973 for sales acquired of stock while he was nonresident. The De- partment’s following determination was based on the administrative rule set forth Department in a Revenue April 1,1966:4 Memorandum dated n in determining gain capital or loss on assets disposed a resident individual who had prior such assets to the time such individual became a resident, the basis of the asset to be used (1) would be: if realized, the difference between selling price the or the higher and the of the fair market value adjusted basis the asset at the time Wisconsin only Under Howick I.R.C. was $1,000 allowed to take a loss ordinary deduction any given year, and was permitted carry succeeding years. forward unused losses §1211 (1973). See: I.R.C. 3 Originally, claimed additional income taxes in $1,543.59 plus the amount of interest, but this determination was adjusted later figure. to the $978.96 presently This rule is §§2.30 found Tax, at Adm. Wis. Code (1978). and 2.97 sustained, residency established, (2) or if a loss was selling price the difference the fair lower of between the and the adjusted the asset market value or cost basis at the If no residency time Wisconsin was established. gain is (1) determined under no loss determined (2), reportable under no on the would loss be year Wisconsin income tax return in Vol. of sale.” See: 1, Rep. (CCH) Wisconsin Tax ¶10-414.20. essence, adjustment In provides this rule some circumstances to the federal cost basis of a (corporate stock). adjustment asset applicable, If taxpayer based on the value of the on the date the asset established is to residence Its net effect Wisconsin. recognized minimize both on the sale losses purchased of stock before the became resident Only (2) of this De state. subsec. two of the Revenue partment’s 1966, April 1, referred Memorandum dated above, is involved in case.5 The ex plained application its of this rule to the herein as follows: selling price moving If “1. after into Wisconsin original pur- was less than the chased stock when cost out of state and its fair market value on June Wisconsin, when the first moved into recognized selling was the difference between the price original and the lesser of either the fair cost or its Pet.-App’s. market value.” br. at 7.
Thus, application of the rule substitutes a fictitious asset, basis cost if the substitution will *4 reducing result the amount of the loss that the tax- payer recognize is entitled to on the sale of the asset. Department applied
The this rule to each of the tax- payer’s stock result, sales 1970 and 1973. As a reported reduced Howick’s net $10,043.82 loss for the 1970 stock transactions 5 Department’s All further opinion references rule in this (2) are to sub. of the rule.
278 $4,875.57 converted the $596.806 realized 1973 stock sales he while a nonresident to a gain.7 The de $123.18 disallowed the loss ordinary through ductions from income in 1971 1973 and portion of the loss offset for 1973 as well as $403.20 Therefore, the loss deduction taken in 1970. the De- 6 Department’s following calculations are set in the forth table: Fair Market Selling Value on Price June in 1970 After Moving Moving Federal When Into
Cost Basis Gain or Loss 5,691.01 2,913.75 2,404.82 ! (508.93) $ $ $ 4,175.63 4,531.50 69.00 4.462.50 1,762.05 3,717.04 779.54 2.937.50 1,660.88 1,649.65 2,044.97 384.09 1,297.23 1,450.77 1.562.50 2,499.06 2,650.00 2,896.19 246.19 4,893.25 6,625.70 424.20 6.201.50 27,243.45 21,262.50 19,928.47 (1,334.03) 2,745.66 (105.64) 487.50 381.86 1,152.45 (149.90) 900.00 750.10 2,379.60 1,600.00 1,327.82 (272.18) (129.14) 991.15 462.50 333.36 (596.80) Loss Net $ regarding calculations the 1973 were sales as follows: Fair Market Selling Federal Value on Price Wisconsin Gain Cost Basis June in 1973 or Loss 3,037.50 6,222.00 $2,707.39 (303.11) 1. $ $ $ 4,089.25 2,275.00 1,758.14 (516.86) 2. 3,006.15 3,000.00 3,976.30 970.15 Gain
Net 123.18 *5 279 noted taxes partment assessed the additional above.8 appealed the WTAC Howick
On November assess Department’s income tax of the for abatement taxpayer’s against granted the ment him. The WTAC .. stating assessment. application [Department’s] “The creating an ar effect under review has the ultimate actually can incurred. We was where a loss tificial such statuttory authorizes law that or case find no and thus from a [creating loss] transformation application for a Department’s reject it.” must court circuit rehearing petitioned the and it was denied secs. decision, pursuant for review of WTAC’s dismissed 227.16, court 73.015(2) The circuit Stats.9 stating unaware Department’s petition that it was Department’s action any supporting the law “. . . Department’s application that this of the rights contrary danger being to the Constitutional to the U. S. under the Amendment of the XIV equal protection It is obvious of the laws. Constitution theory could application that liability upon result in tremendous difference everything if transactions identical Wisconsin nonresident of except that one was a else identical were property acquisition of the state at the time of sold.”'10 appeals circuit deci- affirmed the court’s
The court of ruling it upholding action of could sion WTAC authority in or case law Statutes find no the Wisconsin 8 accompanying supra p. at 276 and text. See: n. parties stipulated Washington County to review Circuit 227.16(1) (a) 801.54(3), Stats. Court. See: sec. Department’s petition The circuit court’s dismissal proeedurally judgment setting aside order of WTAC was determining right, that the After WTAC the circuit incorrect. judgment granted affirming the should have WTAC. See: court 227.20(2), Stats. sec. *6 Department’s for the Revenue rule that had “ultimate creating effect” an artificial where a loss was actually granted Department’s incurred. petition We appellate for review of the decision. court’s Issue Department
Did making power exceed its rule set (24) establishing forth in sec. (a), Stats., 71.11 in provides adjustment administrative rule that for an to stock, calculating the basis of a loss on the sale thereof taxpayer acquired where the while a stock resident state, of another so toas reduce the to reflect a de- during crease in the value of the stock the time the tax- payer resided out of state? legislature delegated has unqualified broad but not making powers Department
rule to the of Revenue for purposes administering the Wisconsin income Department’s making authority law. The rule is found (24) (a), Stats.,11 sec. provides: 71.11 which department “The may of revenue make such rules and regulations necessary as it shall carry deem order chapter.” out this Recognizing making power rule unqualified, is not this court in Harder, Plain v. 268 Wis. 507, 511, 68 (1955), N.W.2d 47 held that the adopt cannot a rule legis- independent amounts to lation. Id. at 511. Thus: “An rule, long administrative even of duration, may
not stand at variance unambiguous with an statute. State 11 applicable The income tax during statutes year peri the four od involved are those contained in compilations the 1969 and 1973 However, the Wisconsin Statutes. since there is no material difference between the 1969 and 1973 income tax regard laws with particular to the opinion, statutes cited in this all references 71, Stats., ch. are to the 1969 chapter. version of that
281 Irany County Comm. ex rel. v. Milwaukee Civil Service v. 137; Plain (1962), 135, 132, 18 Wis.2d N.W.2d In the (2d) 47. Harder (1955), 507, 68 N.W. Wis. page 511, case, at said: latter court “ beyond rule-making power not extend ‘The does expressed in power carry purpose as into effect harmony “A out legislature. enactment ’ ” nullity” sup (emphasis with the statute is a mere Taxation, Corp. plied) Basic Products v. (1963). 19 Wis.2d N.W.2d Stats., pro- (2) (d) (e), We that sec. 71.02 believe controversy. key to resolution of this See. vide the 71.02(2) (d), Stats., taxable defines Wisconsin adjusted gross income “. . . for individuals as *7 standard less or itemized deductions less Wisconsin gross adjusted income means deduction.” Wisconsin gross adjusted income, the modifica- “. . . with federal 71.02(2) 71.05(1) (4).” prescribed tions and Sec. in s. (e), Thus, (1) how federal must determine: Stats. we any adjusted gross calculated, (2) is and whether income Stats., ap- 71.05(1) (4), of and are the sec. modifications plicable turn to the issue in this case. first We computation adjusted gross of income.” “federal provides of
The I.R.C. that the income tax basis stock by cost at the time purchased is its §§1011, See: I.R.C. purchase. 1012. The loss is difference between the sale stock from the realized, selling taxpayer’s i.e., price, and the amount by long-term computed cost. I.R.C. Net §1001. long-term gains year subtracting the taxable long-term §1222(8). losses. I.R.C. that from the Given resulting calculated the losses Howick years transactions for the and 1973 ac- his stock cording rules, Department and to these that the does not taxpayer’s calculations, question federal contest the statutes, the Wisconsin income whether becomes 71.05(1) (4), permit sec. Revenue specifically modify federal ad- alter Howick’s justed gross taxing purposes reducing by income basis the stock he became resi- before dent. support rule,
The Department, of their claims that it is 71.05(1) 71.07(1), (a) authorized sec. Stats. 71.05(1) (a) 3, Stats., Sec. allows for addition modifi- taxpayer’s adjusted gross cation to the federal where he suffers a loss under the federal income tax provisions apportionable is not allocable or Wis- consin under the situs income rules contained in sec. 71.07, 71.07, Thus, Stats., we Stats. must look to sec. provides to determine whether this for a statute basis accomplished by reduction of the nature rule. claiming inis essence that where stock
acquired in another state is sold at a loss in this state the decrease in the value stock while the apportionable resident another state is not to this portion state. It 71.07(1), contends that sec. Stats., provides that loss derived from sale of supports stock recipient shall follow the residence of the question its 71.07(1), claim. The here is whether sec. Stats., apportionment provision. anis 71.07(1) provides:
Sec. income; Situs of apportionment. “71.07 allocation and *8 (1) purposes the For of taxation income or loss from business, requiring apportionment not (2), (3) under sub. (5), or shall the situs the business which follow of from royal- derived. Income or loss derived from rentals and tangible ties from the personal from real or property, estate or operation any farm, the of quarry, mine or or from property tangible of real or personal property sale property shall the situs the which derived. follow of from Corporation personal by income from performed services employes corporations of shall be deemed business income and shall the situs the business. Income from follow of personal professions, from services and shall the follow including loss, or situs the All income services. other of land royalties from patents, from or loss derived income or contracts, mortgages, and securities stocks, bonds property, personal intangible the sale similar from except as recipient, shall provided residence the follow taxation, 71.07(7). purposes For the s. when refunds tax interest the tax shall be deemed income from business on state and federal received property or income on refunded was business and shall follow (Emphasis situs derived.” the business supplied.) quota- Clearly, language emphasized in the above or situs of income 71.07(1) tion that sec. indicates is provision question speak to loss and it does not apportionment Rather, refers reader of loss. it ap- 71.07(1) on different of sec. rules subsections or portionment, apportionment i.e., of business governed Thus, by (5). 71.07(2), (3) loss is sec. support Department’s claim. (1) sec. 71.07 does not taxpayer’s Indeed, provides as it insofar residence, requires the sale it of stock shall his follow that all stock sales be loss suffered Howick on his recognized purposes as he tax course, at Of Wisconsin resident the time sale. computation governed by of the amount of loss provisions federal income have discussed we above. Thus, 71.07, Stats., recognizes, sec. as the only dealing apportionment statute with of income governs (1) or loss. Sec. the tax 71.07 treatment of stock apportionment This statute does not sales. authorize any part juris- of a loss sustained aon stock sale to a diction other than the residence of the at the time of Those of sec. sale. subsections which do 71.07 apply apportionment loss, authorize to business income or not income or loss which follows the residence of the Therefore, recipient. we hold that the Department’s *9 284 harmony contrary
rule is out of with to the un- and ambiguous statutory scheme. further rule is contends that its
supported by reasoning in deci three of this court’s sions, Appeal 661, to-wit: Seisel, 217 259 Wis. N.W. of (1935); Comm., 839 Falk v. Wisconsin Tax 201 Wis. Bundy (1930), 230 64 State ex rel. v. N.W. Nygaard, 307, 158 (1916). 163 Wis. N.W. Appeal Seisel, supra, Bundy, supra, are not in of
point as those cases involved the calculation of a single transaction, corporate stock, from the sale of whereas, contrast, recognition in this case with the deals arising multiple engaged of a loss from transactions by taxpayer during years.12 1970 and 1973 71.02(2) (d), pro- Falk sec. involved Stats. part “. . ascertaining vided gain the purpose . for resulting or loss property, the sale ... real personal, acquired or prior January 1, 1911, the fair property market January 1, 1911, value such as of determining shall be the basis for the amount of such gain or loss.” taxpayer’s
In that case the purchased decedent13 number of capital January shares 1, 1911, stock before the date the Wisconsin income tax law became effective. purchased This stock was $471,310 at a cost and sold $339,408.96 1924 for $131,901.04 or a loss. The Wis- consin Tax Commission found the value of the January 1, 1911, $300,000 stock $39,408.36 was price than less the sales $39,- and assessed a tax on the figure claiming 408.36 represented that it realized authority on the sale. The Commission’s for this assess- question capital We do gains express not discuss the opinion concerning question no same as any not raised at level proceedings in the Appeals Commission, before court, the circuit the court of appeals or court. was the Estate of Charles F. Pfister. *10 (d), 71.02(2) was sec. income taxes of ment additional 1913. Stats. levy a legislature not could that the This court held gain profit income, or $39,408.36 was not tax as it on the meaning terms. ordinary those of within common and the It stated: is in the constitution14 “The ‘income’ as used term ordinary common, its interpreted in accordance with to be
meaning every-day must be life. ‘It as understood something equiva- gain money profit or it be and must Bundy Nygaard, 163 State ex rel. v. Wis. lent thereto.’ 307, nary property the ordi- does not arise 87. Income N.W. property. In order the value fluctuations of give a sale there- income there must he rise to Comm., Tax in excess its cost. Miller v. Wis. of of Falk, supra 219, at 294-95. (Emphasis supplied.) 568.” 217 N.W. The court reasoned that suffered the had price economic loss because the was less than sale purchase price applied so as and the statute could not be convert this economic loss into a fictitious purposes. applicable, Falk is as case herein not present question does not of whether the economic loss suffered on an individual stock con- is transaction gain by application any verted into a fictitious Thus, support statutes. Falk does not applicable it insofar as to the determination losses at issue this case.
Although ap- we affirm the decision of the court of peals, express opinion. we a reservation about that appeals applicable court of announced a rule that the calculation of a on the sale of stock while was a nonresident. This case is con- proper with cerned treatment of a loss on the sale stock, appellate of such and thus analysis court’s Const, VIII, See: Wis. art. see. Therefore, on the sale such stock is obiter dicta. analysis we disavow this dicta and conclude any precedential not does have value.
By the appeals Court. —The decision of the court dismissing is affirmed and the court order the circuit petition of Revenue’s for review is modi- judgment affirming fied to a the decision order Appeals Commission. ABRAHAMSON, (concurring). SHIRLEY S. J. result in this case—that is the bottom line for Howick *11 who moved into while Wisconsin and sold stock pur- nonresident —is for that income tax poses capital long-term by he his determines net loss using long-term capital his federal the six calculations for long-term capital gains.1 losses and for the six I concur disagree majority’s with this result. I the with decision opinion to confine taxpayer’s the the consideration of long-term capital calculation of losses and to omit opinion taxpayer’s the consideration of the calculation long-term capital gains. majority opinion The un- fortunately only deals with six transactions or one-half of the issue before the court. I separately therefore write respond parties’ to the majority contentions which the does not consider. majority
The taxpayer Howick, holds that who re- long-term ported capital a net federal income tax use, purposes must purposes, Wisconsin income tax long-term the federal capital calculation of loss for each of the six sales resulted in a loss and which entered long-term into the federal net capital loss. majority The expressly deciding refrains from whether, for Wisconsin simplicity, For only the sake I refer taxpayer’s to the transactions in 1970. The also had three in transactions gain, two losses one and which raise the same issue as the 1970 transactions. federal use the must purposes, Howick income tax the long-term capital for each calculation state into which entered in and resulted six sales which capital long-term loss.2 calculating net federal the ques- “the by majority is that explanation proffered by taxpayer at not raised capital tion of Appeals Com- Tax proceedings any before level appeals or this court, mission, the court circuit believe, statement, I Supra, p. 12. This note court.” A re- misunderstanding facts law. of the reveals and of procedural posture case view of argument parties demonstrates oral briefs and both dispute parties the calculation gains. losses is a review procedural standpoint, this case From the an reviewed appeals which of the court of of a decision decision reviewed a circuit court which order of the 73.015, Stats. Appeals Sec. Commission. order of the turn, Commission, was review- Appeals 1969. The Tax ing additional assessment of of Revenue’s Depart- taxpayer, on the an assessment based to this taxpayer’s returns. ment’s audit of the triggered reviews successive audit which conducting is authorized statute. When this case *12 required assess audit, statute to part opinion majority of the disavows that Thus the capital gain appeals which discusses the issue court of Supra, p. as obiter dicta. 286. labels the discussion opinion taxpay- majority’s from the whether It is unclear long-term capital gain reports for federal income tax er a net who calculating long-term cap- purposes must use the federal basis for ital losses. long-term capital gain” “net Revenue Code The Internal defines capital long-term gains year for the taxable over as “the excess year” capital long-term long-term losses for and “net such long-term capital capital losses for the tax- loss” as “the excess long-term capital gains year.” year over for such Sec. able 1222(7), (8), I.R.C. pursuant income taxpayer to law is not over so that the or 71.11(16), (19), (21), (22), under assessed. Sec. obligation statutory Stats. In with accordance its performing audit, Department applied its rule gains purposes that for Wisconsin and losses price are calculated as the difference between the sale taxpayer and the fair market be- value at the time the resident, came a hereafter referred to as long-term taxpayer Wisconsin rule.3 The had calculated gains capital long-term capital losses his 1970 on tax return as the difference between the sale using price basis, and the cost what is hereafter referred to as the federal rule. He netted the and losses ($10,043.82) resulted in a net loss, which the used tax- to reduce Wisconsin subsequent able income in Wisconsin returns. Department’s application of the Wisconsin rule only long-term capital audit reduced not six loss (which changes calculations inured to the detriment of 3 My simplified statement of the is in form. Department explains calculating gains its rule for and losses as follows: selling price moving “1. If the after into Wisconsin was less original purchased than the cost the stock when out of state 20, fair market its value on June 1970, when the Wisconsin, recognized first moved into was the difference selling price between the original and the lesser either the cost or its fair market value. selling price moving “2. If the great- after into Wisconsin was original purchased er than the cost of the stock when out of state and its fair market value on June when the Wisconsin, gain recognized first moved into was the difference selling price greater between the and the original either cost or its fair market value. selling price “3. If moving after into Wisconsin was either greater original prior than the cost moving of the stock into Wisconsin and less its 20, 1970, than fair market value on June greater than less that cost and than value, that fair market then recognized.” no or loss was *13 long-term capital six taxpayer) also five of the but changes inured to the benefit (which calculations Department’s recalculations taxpayer). The detriment gains inured to the losses both the long-term capital taxpayer’s net taxpayer because taxpayer’s and ($596.80). Both reduced loss was gains losses calculations Department’s following table: in the shown are return on Basis: Federal Federal or Loss Gain or Loss Gain Selling Market Price in Fair Coat Basis Moving Value on 1970 After 6/70 Moving' When into Wisconsin 1. 2. 4. 3. 5. 7. 6. 8. 9. 10. 11. $5,691.01 27,243.45 1,660.88 1,297.23 2,444.06 4,893.25 1,762.05 4,175.63 1,152.45 2,379.60 2,745.06 991.75 $2,913.75 21,262.50 1.562.50 1,600.00 1,649.63 2,650.00 6.201.50 2.937.50 4.462.50 487.50 900.00 462.50 19,928.47 $2,404.82 1,450.77 2,044.97 3,717.04 4,531.50 2,896.19 1,327.82 6,625.70 750.10 381.86 333.36 $(3,286.19) (2,363.20) (1,051.78) (7,314.98 1,732.45 1,954.99 (402.35) (658.39) 153.04 452.13 355.87 384.09 (1,334.03) (508.93) (272.18) (149.90) (105.64) (129.14) 384.09 779.54 424.20 246.19 69.00 Totals: $(596.80) $(10,043.82) $46,392. $47,089.88 $56,436.42 (Net
(Net Long-term Long-term Loss) Loss) Capital Capital long-term capital Department’s in net reduction in turn loss increased Howick’s taxable income Howick was as caused an increase the taxes owed. the amount sessed additional $978.96 Department. $978.96, It is this assessment of based calculating applying rule to both the Wisconsin gains, long-term capital to which the losses and sought taxpayer objected in the he review and of which Appeals If calcula Commission.4 as tions were correct as to and losses or both taxes; only, taxpayer would owe additional losses petition Appeals Before the can for review in the Tax apply to the for abate Commission must application ment of the assessment. The made case, application 71.12, his was denied. Sec. Stats. 1969. *14 if Department’s the calculations were correct as to the gains only, might taxpayer the be entitled to additional carryovers liability. Depart and tax If the reduced gains ment’s were erroneous as to and calculations both taxpayer’s accepted losses the return as filed would be he and would neither be entitled owe additional taxes nor liability. to further modifications of his tax returns or In position this case the taken latter has throughout and has maintained it course of this litigation, challenging stage every proceeding at of the Department’s gains well as losses.5 calculations of as
A brief demonstrates review of the file this case taxpayer’s position. petition consistent In his to the Appeals during Tax Commission6 and in his statements hearing Appeals before the Tax Howick Commission objected Department’s to the use rule of the Wisconsin calculating long-term long-term capital gains appeals, losses. in the court Howick’s brief upon court, which he in this relied describes the issue following encompass the court in the before terms which question validity application of the of the long-term capital gains rule to both and losses: Department legal authority “Did the Revenue have the separate create a taxpayers income tax structure for moving purchased prior that stock into becoming then sold the stock after domiciled party position Each in the ease at bar taken a has as cal culating- capital gains against his or its best applicable interests. The insists that the federal rule is long-term capital gain to his reporting which results in his paying higher smaller loss and taxes. The of Revenue applicable taxpayer’s insists that long- Wisconsin rule is to the capital gain term reducing which results in taxable income and taxes. preserve challenge assessment, To to the filed, his required by law, petition as he Appeals with the Tax Com stating objections mission his to the assessment. Sec. 73.01(5), 1969; Appeal Comm’n, Stats. Wis. Admin. Code TA 1.08. argument p. Howick brief, At oral state?” Howick’s power, argued have the did not that cases, to deviate or the under the statutes calculating long-term capital federal proceedings all the maintained at losses. Indeed Howick “former imposing tax law on different Wisconsin’s long residents” “life non-residents” and on of the United contravenes the fourteenth amendment *15 States Constitution. consistently Department main- part, its has
For the Commission, in Appeals the circuit in tained the Tax the court, appeals in this court that and the court determining proper method issue the case is “the by gains acquired capital nonresidents or losses on stock Depart- by . . . .” sold them as residents Wisconsin 2-3, brief, pp. ment’s agree Department of Revenue
Thus
and the
Howick
disagree
question
decided; they
as to the
as to the
to be
argues
Department
taxpayer
has
answer. The
that
the
authority
no
to use the
market value
the asset
fair
the owner
resident of
as
date
became a
Wisconsin
calculating gain
disposition
on
as
basis for
or loss
intangible capital
Department
contends
asset. The
by
court,
constitution,
interpreted
that the state
as
this
requires
Department
gains
to calculate and
or
the
dependent
using
fair
losses
on the
value
basis
market
intangible capital
of an
asset as of the date the
Appeals
established
residence. The Tax
Wisconsin
Com-
mission,
court,
appeals
circuit
court of
the
the
under-
dispute
parties
that
between
stood
is how to
liability
taxpayer arising
calculate the tax
of this
transactions.7
parties’ dispute
clearly
The
is
one of law. This court
by
therefore
not bound
Appeals
determination
of the Tax
Commission,
appeals.
court or
the circuit
the court of
H. Samuels
Dept.
Revenue,
1076, 1083,
v.
Wis.2d
Co.
The Wisconsin statutes set modifica- do not forth tion, relating the six addition or to either subtraction gains long-term capital capital six losses. or authority statutory I therefore conclude that there no requiring for the Wisconsin recalculation rule disposition losses assets a resident Al- had nonresident. who the assets while a though might majority opinion the reader lead otherwise, seriously or Department think not does strenuously authority adopt maintain its statutory any express rests on issue argument language. chief is that required interpreta- court’s rule is under this asserts tion the state constitution. Constitution,8 that sec. art. VIII of the as interpreted by court, requires the state to calculate using only gains taxable which ac- losses crued after the became Wisconsin resident and which do not exceed the economic and losses actually incurred. I turn to the cases which three ad- *16 as vances the source of the rule. Bundy Nygaard,
State ex
v.
307,
rel.
163
158
Wis.
(1917),
87
Bundy
N.W.
the earliest
In
case.
this court
held that the word “income”
1,
as used
in
both
sec.
art.
of
VIII
the
Constitution
and in the statutes
does not include the increase in value of
prior
stocks
to
January 1, 1911, the effective date of the first Wisconsin
income tax law. The court viewed the increase in value
prior to
“capital,
1911 as
or in
words,
other
property;
fixed;
part
its status was
no
of it could be made
in-
into
by legislative
come
enactment.”
293 ing gain court pre-1911 capital, that this had become gain refused to accrued allow the state to tax which had (but realized) prior the effective had not been Bundy date of the law. The effect that, calculating gain, purpose for the the “basis” acquired January prior 1, 1911, stock its fair became January 1,1911. market value as of Bundy After the income tax was amended to statute January 1911, 1, establish the fair market value as as ascertaining gain or loss basis be used resulting acquired property from the before sale of January 1, (g), 71.03(1) 1911. See sec. Stats.
Falk Commission, v. Wis. (1930), upon Depart- N.W. the second case which the relies, disposition ment involved a of stock which was January 1,1911, price $471,310, before for the January 1, which had a fair market value on $300,000, $339,408.96. which was sold in 1924 Bundy Applying statute, rule and new state $39,408.96, price concluded there was a the sale January 1, the fair less market value as of 1911. This court, however, imposition refused to allow the of an concluding “gain”, income tax on that had derived no economic income in this transaction. The correctly court profit said that there was no bought loss, having sale —there was a the individual $471,310 having stock at $339,408.96. sold it at constitution, term “income” as used reasoned the court, interpreted common, is to be with its accordance meaning. ordinary us, court, Common sense tells said the profit. that effect, did not make In court held income “in the constitutional sense” re- property acquired sults from a only sale of before property when the is sold in 1911 or thereafter for more purchase price. than the The court said that the value *17 property January 1, of the on 1911 “becomes material only comparison when a income is revealed a Fain purchase price (prior 1911) price.” the to the sale with reasoning based, The apparently court’s in Falk was not statutes, meaning on the but on of the word as in used the Wisconsin Constitution. Department case to third which the refers Appeal (1935). Seisel, In Wis. N.W. donor, acquired
Seisel Pennsylvania, a resident of had $7,428.46 gift stock at a cost of had made a gift stock to a On of the Wisconsin resident. the date donee, $25,908.30, the stock was worth a and the Wiscon- resident, sin immediately the stock sold for this amount. sought impose tax on state the donee on a $18,579.84 (the cost), price relying sale less the Wis- provided consin statute which that a donee has same prior basis as owner. This court held that “Wisconsin jurisdiction had property no or the at the time donor in increase value above the donor’s occurred. It cost jurisdiction had no attempt to reach that as income in any way .... Since at the donor all of the times question Pennsylvania, awas resident of the State question since she was the owner stock in when attached, disputed its value increase we hold that the properly $18,579.84 item of was not taxable income _” at 217 Wis. Bundy application and Falk are concerned with the of a tax law events which occurred before the effective law, date of gift while Seisel involved a situation. gain. All three involve the calculation and taxation of In each power case court limited the state’s to tax by interpreting narrowly the word “income” as used interprets Wisconsin Constitution. The these broadly three cases and fashions from them constitu- theory applicable tional of taxation to the who intangible capital moves into and sells an asset while nonresident. The reads the *18 have does not that the of Wisconsin to mean State cases gain that allow part of the to jurisdiction tax that to or decrease an increase part the loss attributable taxpayer occurring before the property in value of the Depart- Consequently the resident.9 became Wisconsin dispute to presently in perfected ment Wisconsin gains long-term capital and allow- avoid both taxation either to the extent that losses ance of nonresident. was a accrued while interpreted principles set of Revenue has adopting by Bundy, its rule Falk Seisel in forth this court nonresident,” calculating gains rea the “former and losses for soning along these lines: (1) Bundy has court the State of Wisconsin In said jurisdiction gain arising no the effective date to tax before accruing only gain can tax after income tax law. state effective date of the tax law. gain (2) taxed Falk the court that the maximum be In said using gain a basis actual economic when is recalculated adjusted to the effective date of the tax law. person Wisconsin, (3) the effec- When moves into the State of tive date of the income tax laws for the date of establishment residence. adjustments gains accruing Therefore the made- to calculate be- Bundy fore and after 1911 used to under and Falk should be gains calculate and losses taxed to the “former nonresident” on property acquired moving before after into Wisconsin and sold the date of residence. (4) In court Seisel this said that the State of has no jurisdiction gain arising to tax a Wisconsin resident donee intangible property increase in value held outside the by state a nonresident donor. person moving A intangible into the State of with property appreciated analogous in value is to the resident donee gift property appreciated being who receives a while by adjustments owned a nonresident. Therefore the made under taxing gain accruing property Seisel to eliminate before the by a owned donee Wisconsin resident should be used to calculate property and losses taxed to a “former nonresident” on the moving before into Wisconsin sold after date residence. accept Even if I were to as correct the applicable assertion that three these cases are long-term capital disposition calculation intangible capital of an asset who moved disposition, I into the state would conclude before not supports the that either the constitution or the case law *19 Department’s adoption of the rule as it relates capital Department’s application to the losses or the capital gains as Wisconsin rule it relátes to to this tax- payer long-term reported capital a who has net federal loss. the con- asserts that because state’s power gains
stitutional to is to tax limited accrue taxpayer state, while the is a resident the long-term capital must limit losses to deductions intangible those which accrue while the owner the reasoning capital asset is a resident of state. This this equitable symmetrical it; has an sound if to the state gains taxes, is limited in the it it seems fair limit it to similarly in the losses it allows. gains
Parallel is, however, treatment of and losses not required by by these cases Wisconsin Constitution. Generally legislative deductions are said to be matters grace. prerogative It is Wisconsin’s to tax less income than it by allowing has the power constitutional to tax taxpayer long-term larger a capital to deduct the using by calculated the federal rule. Because neither requires cases nor recog- the constitution taxpayer to only nize taxpayer losses accrued resident, while the is a I Department’s conclude that modifying long-term capital federal calculation of losses is re- not quired by the by statutes, constitution or authorized applicable therefore long- Wisconsin rule as capital term losses is invalid. asserts that because power the state’s by gains limited the constitution to which accrue taxpayer
while state, resident of the must exclude from Wisconsin taxable portion income that long-term gain attributable to the which is period taxpayer state. when the was not a resident Department’s say rea Some would that the defect soning is that the use the federal rule to calculate long-term capital gain taxpayer a net when the incurs capital loss not result in taxation of does which accrued before the became a Wisconsin resident. Instead the which accrued while the tax payer portion nonresident are used to offset a long-term capital the out-of-state losses which state ° has allowed the to claim.10 importantly, reject however, More I applicable assertion that the three cases are to the calcu- long-term capital gain disposition lation of on the of an intangible capital by asset into who moved disposition. the state before the The three cases do not necessarily applicable establish a definition of income long-term capital gain realized a former nonresident. distinguishable Each of the three cases is on its facts from the transactions involved the instant case. *20 Bundy taxability accruing relates to the of income before law, the effective date of an income tax instant while the case deals taxpayer with taxation of income of a who moves subject into this state and becomes to the Wiscon- sin tax law.
The fact situation in Falk involved is not involved in any case, of the transactions in the instant and at oral argument conceded that the Falk case significant was not to the case at bar.11 1 0 argument disingenuous I find this somewhat because the ul taxpayer timate effect on the offsetting gain of which accrued against before a he became resident taxpayer losses is that has taxpayer more reported taxable income than if the only gains accruing after he became a resident. 1 1 In Falk highest the federal cost amount, basis the fair market value amount; price is the lowest figure and the sale falls figures. between the striking two Depart court’s down the calculating capital gain ment’s rule for in the Falk situation is not involved in this case. Falk Department’s involves neither gain capital nor “special loss rule —it involves a circum- 298 distinguishable are from those
The facts of Seisel also (a instant two case. Seisel involved individuals donee), gift (which donor and a a nonresident resident viewed, generally not, an event could be but as of realization), fiction This and the of transferred basis. changed taxpayer, case involves one a his who residence, basis, and a not a who has cost transferred basis. good law, Bundy
Even if Seisel are still the defini- tion of income contained confined those cases should be cases, namely gift, of the facts those retro- and the given law; active to be to a tax need effect these cases govern not be extended who moves 71.03(1) (g), one to another. See sec. state Stats. 1969. Moreover, questionable Department’s it is whether the interpretation broad of these cases and the power narrow view of state’s constitutional good jurisdiction today. to tax are constitutional doctrine Bundy has been criticized courts commentators defining narrowly.12 too In more recent cases, upheld power state courts have state’s to im- pose gain a tax realized after the effective date though represents law even some of the the en- accruing prior hancement value adoption to the jurisdictions tax statute.13 Courts in several have also upheld power the state’s to tax income earned or application stance” that calls part of the third Wis- 3, supra. consin set forth note at See 5 in transaction p. Table on 12 Validity Pennsylvania’s Comment, See Taxation Disposition Net Gains Derived Property, From 76 Dickinson L. 566, (1971). Rev. generally, City See Nat’l Bank Clinton Iowa State v. Comm., 251 Iowa (1960); N.W.2d Kellems v. *21 Brown, 478, 53, 163 Conn. app. dis., 68, (1972), 313 A.2d 69 409 ; Peters, 1099, (1973) U.S. 93 S. Ct. 911 Altsuler v. 113, 190 Neb. Dept. 570, (1973); Leadership 206 N.W.2d Revenue v. 579 of Inc., Housing, (Fla. 343 1977). 611 So.2d
299
taxpayer
of that
a resident
accrued
became
before
state,
taxpayer
after
which was realized
but
theory
taxpayer
of the state.14 The
became a resident
taxpayer
expressed
is
in these more recent cases is
e.g.
particular event,
taxed
on the occurrence of a
intangible capital
disposition
asset
of the asset. When
recognized,
appreciates
realized,
value,
no income
Only
disposes
the assets
taxed.
when the
of
any tax
there
income. Therefore
realized and taxable
imposed
disposes
while a
an asset
on a
who
of
imposed
on the
resident of the state is a tax
imposed on income attributa-
of a resident.
a tax is
Such
imposed
period
residency;
ble to the
it is not a tax
nonresidency.
period
on income
attributable to a
forth,
For the
I
I
hold that
reasons
have set
would
rule,
in the instant case must use the federal
long-term
rule,
not the
the six
to calculate
capital gains
six
losses
purposes.
income tax
am authorized to state that Justice Nathan
I
Hef-
S.
join in this
and Justice
G.
fernan
Callow
William
concurring opinion.
14 See, e.g.,
Dept.
Rev.,
719,
Denniston v.
P.2d
601
287 Ore.
1258,
Hardy
249,
(1979);
Comm’r,
1260
v. State
258 N.W.2d
(N.D.
Comptroller
Treas.,
1977);
172,
253
Evans v.
273 Md.
(Ct. App.
Olvey
1974);
Revenue,