1. Payment made by a corporation of the tax levied by the
Wisconsin Privilege Dividend Tax Act,
held, for federal
income tax purposes, not deductible from gross income of the
corporation either under § 23(c) or § 23(d) of the Revenue Act of
1934. Pp.
322 U. S. 529,
322 U. S.
531.
2. The payments were not deductible under § 23(c) as "taxes
paid," since, within the meaning of applicable Treasury
Regulations, the tax was not "imposed" on the corporation. P.
322 U. S.
529.
3. Nor were the payments deductible under § 23(d) as
"taxes imposed upon a shareholder of the corporation upon his
interest as shareholder which are paid by the corporation without
reimbursement from the shareholder,"
since, within the meaning of the section, the tax was not "paid
by the corporation without reimbursement from the shareholder." P.
322 U. S.
531.
138 F.2d 597 affirmed.
Certiorari, 321 U.S. 757, to review a judgment for the company,
46 F. Supp. 929, in a suit for a refund of federal income tax.
MR. JUSTICE RUTLEDGE delivered the opinion of the Court.
Wisconsin Gas and Electric Company is a Wisconsin corporation
engaged in public utility and associated operations wholly within
that State. In 1935, it declared a dividend from its public utility
earnings, and, in accordance
Page 322 U. S. 527
with the requirements of Wisconsin's Privilege Dividend Tax Act
(Wisconsin Laws of 1935, c. 505, § 3; c. 552), paid to the State
two and one-half percent of the amount of dividends thus declared.
It now claims this sum, $3,750, as a deduction from its gross
income for 1935 for federal income tax purposes.
After the claim was disallowed and a deficiency assessed, the
company paid the tax and brought this suit for refund under 28
U.S.C. § 41(20). The District Court was of the opinion that the
decision in
Wisconsin v. J. C. Penney Co., 311 U.
S. 435, required permitting the deduction under Section
23(c) of the Revenue Act of 1934, 48 Stat. 680, 688. It therefore
gave judgment for the company. 46 F. Supp. 929. The Circuit Court
of Appeals disagreed on this question, and, holding the deficiency
correctly determined, reversed the judgment. 138 F.2d 597. We
granted certiorari, 321 U.S. 757, because of the claimed conflict
with the
Penney case and the importance of the question in
the administration of the revenue laws.
Petitioner's claim for a refund rests on the assertion it was
entitled to deduct the Privilege Dividend Tax payments under either
Section 23(c) or Section 23(d) of the Revenue Act of 1934, 48 Stat.
680, 688, 689.
Section 23(c) allows a taxpayer to deduct from gross income
"taxes paid or accrued within the taxable year." The relevant
Treasury Regulation, which is of long standing, [
Footnote 1] includes among "taxes paid" those
imposed by any State, and provides: "In general, taxes are
deductible only by the person upon whom they are imposed." The
question in this branch of the case, therefore, comes down to
whether the Privilege Dividend Tax is "imposed" upon the
corporation declaring the dividends.
Page 322 U. S. 528
Resolution of that question requires examination of the
Wisconsin statute and its application and interpretation by the
courts of that State.
Keith v. Johnson, 271 U. S.
1;
United States v. Kombst, 286 U.
S. 424;
Magruder v. Supplee, 316 U.
S. 394. In 1935, the state Act [
Footnote 2] provided:
"(1) For the privilege of declaring and receiving dividends, out
of income derived from property located and business transacted in
this state, there is hereby imposed a tax equal to two and one-half
percentum of the amount of such dividends declared . . . and paid
by all corporations (foreign and local) after the passage and
publication of this act and prior to July 1, 1937. Such tax shall
be deducted and withheld from such dividends payable to residents
and nonresidents by the payor corporation."
"(2) Every corporation required to deduct and withhold any tax
under this section shall, on or before the last day of the month
following the payment of the dividend, make return thereof and pay
the tax to the tax commission, reporting such tax on the forms to
be prescribed by the tax commission."
"(3) Every such corporation hereby made liable for such tax,
shall deduct the amount of such tax from the dividends so declared.
[
Footnote 3]"
The tax is aimed at corporate earnings "derived from property
located and business transacted in" Wisconsin. Doubtless all taxes
on corporate earnings are, to a greater or lesser extent,
translated into economic burdens upon the shareholder. And not all
such taxes can be said, for
Page 322 U. S. 529
that reason, to be "imposed" upon the shareholder.
Cf.
Biddle v. Commissioner, 302 U. S. 573.
However, here, the burden is placed upon him not derivatively, as
through an income tax upon the corporation, but directly and
exclusively. While corporate earnings are the target of this tax,
its specific thrust, according to the Wisconsin Supreme Court, is
at their transfer as dividends to the shareholder, rather than at
their receipt as income by the corporation.
J. C. Penney Co. v.
Tax Commission, 238 Wis. 69, 298 N.W. 186. It is not imposed
until dividends are declared. When imposed, it is to be deducted
and withheld not from earnings received by the corporation, but
"from the dividends so declared." The sums thus paid to the State
are to be deducted from the fixed dividends owed to the preferred
stockholder who cannot recover his loss from the corporation.
Blied v. Wisconsin Foundry & Machine Co., 243 Wis.
221, 10 N.W.2d 142. And the corporation which seeks to leave the
stockholder's dividend whole by absorbing the tax itself receives
no credit therefor under those provisions of the Wisconsin income
tax law comparable to Section 23(c), because the State "puts the
burden of this tax upon the stockholder, and not upon the
corporation."
Wisconsin Gas Co. v. Wisconsin Department of
Taxation, 243 Wis. 216, 10 N.W.2d 140.
That Wisconsin has made the corporation its tax collector by
requiring it to withhold payment of a portion of the dividends and
to turn that portion over to the State does not make the tax one
"imposed" upon the corporation, at least under Section 23(c) and
the relevant Treasury Regulation.
Compare Eliot National Bank
v. Gill, 218 F. 600;
Porter v. United States, 27 F.2d
882. The fact is that the tax is extracted from fixed dividends
owed to the stockholder, not merely from his common interest in
corporate earnings. Under Wisconsin decisions, the impact of the
tax is focused narrowly, and
Page 322 U. S. 530
falls independently upon each recipient of the dividend without
affecting the tax burden of the corporation or other shareholders.
The operation thus disclosed for the tax amply sustains the
emphatic declaration of the Wisconsin Supreme Court that it is
imposed upon the shareholder, not upon the corporation. This view
is complemented by the interpretation of the Bureau of Internal
Revenue that the tax payments, although formally made by the
corporation, are deductible by the shareholder. [
Footnote 4] We conclude that the Privilege
Dividend Tax is not "imposed" upon petitioner, and therefore
payments of it are not deductible under Section 23(c).
There is, of course, no question in this case that Wisconsin has
the power, under the Federal Constitution, to impose this tax. That
question was involved in
Wisconsin v. J. C. Penney Co.,
311 U. S. 435,
where this Court was concerned with dividends declared by a foreign
corporation doing a local business in Wisconsin. The decision was
that the relationship of the State to the enterprises there shown
to have been carried on within its boundaries and under the
protection of its police power was such that its taxing power could
constitutionally reach earnings derived from those operations,
regardless of how the impost was characterized by the State. The
State's power to tax earnings of that character is not dependent
upon whether the tax is hinged on the receipt of them as corporate
income or on the transfer and receipt of them as dividends. Nor
does it depend upon whether the tax here involved is "imposed" upon
the corporation or upon the stockholder.
International
Harvester Co. v. Wisconsin Department of Taxation, ante, p.
322 U. S. 435;
Minnesota Mining & Manufacturing Co. v. Wisconsin
Department of Taxation, ante, p.
322 U. S. 435. In
this case, where the earnings of a Wisconsin corporation doing
business solely in Wisconsin are the source of the
Page 322 U. S. 531
dividends, the State's power to tax their transfer and impose
that tax upon the stockholder cannot be doubted.
Petitioner also urges that, if the payments are not deductible
from its gross income under Section 23(c), they are deductible
under Section 23(d) as
"taxes imposed upon a shareholder of the corporation upon his
interest as shareholder which are paid by the corporation without
reimbursement from the shareholder. [
Footnote 5]"
The Government responds that the Privilege Dividend Tax is not
the kind of tax "upon his interest as shareholder" which Section
23(d) contemplates, and that, in any event, it is not one which is
"paid by the the corporation without reimbursement from the
shareholder" within the meaning of the section. Since we think the
Government is correct in the latter contention, we have no occasion
to consider whether this tax is one "upon his interest as
shareholder."
The origins of the present Section 23(d) in the Revenue Act of
1921 disclose that its adoption was prompted by the plight of
various banking corporations which paid and voluntarily absorbed
the burden of certain local taxes imposed upon their shareholders,
but were not permitted to deduct those payments from gross income.
[
Footnote 6] This history
suggests it is the voluntary assumption of the burden of the tax,
rather than acting as tax collector and paying it for another on
whom the burden falls, which underpins the
Page 322 U. S. 532
deduction. And this is plainly demonstrated by the requirement
that, to be entitled to the deduction, the corporation must not be
reimbursed by the shareholder for paying the tax. To pay the tax
with sums which have been deducted and withheld from dividends
declared and distributed amounts to obtaining the reimbursement
which renders the deduction unavailable. Hence, petitioner cannot
prevail on Section 23(d).
Accordingly, the judgment is
Affirmed.
MR. JUSTICE ROBERTS took no part in the consideration or
decision of this case.
[
Footnote 1]
Treasury Regulation 86, Art. 23(c)(1);
cf. Treasury
Regulation 65, Art. 131; Treasury Regulation 69, Art. 131; Treasury
Regulation 74, Art. 151; Treasury Regulation 77, Art. 151.
[
Footnote 2]
Wisconsin Laws of 1935, c. 505, § 3 as amended by Wisconsin Laws
of 1935, c. 552. The Act was subsequently amended (Wisconsin Laws
of 1937, c. 233; c. 309, § 3 Wisconsin Laws of 1939, c.198;
Wisconsin Laws of 1941, c. 63, § 3; Wisconsin Laws of 1943, c. 367,
§ 2), but the amendments leave the present question unaffected.
[
Footnote 3]
The Act is set out in full in
Wisconsin v. J. C. Penney
Co., 311 U. S. 435, at
note *.
[
Footnote 4]
I.T. 3002, XV-2 Cum.Bull. 142-143 (1936).
[
Footnote 5]
Section 23(d) provides:
"Taxes of Shareholder Paid by Corporation. The deduction for
taxes allowed by subsection (c) shall be allowed to a corporation
in the case of taxes imposed upon a shareholder of the corporation
upon his interest as shareholder which are paid by the corporation
without reimbursement from the shareholder, but in such cases no
deduction shall be allowed the shareholder for the amount of such
taxes."
[
Footnote 6]
Hearings before Committee on Finance on H.R. 8245, U.S. Senate,
67th Cong., 1st Sess. 250-251.
Compare, e.g., Eliot National
Bank v. Gill, 218 F. 600;
National Bank of Commerce in St.
Louis v. Allen, 223 F. 472;
First National Bank v.
McNeel, 238 F. 559.
MR. JUSTICE JACKSON.
Since I think this tax was not one on the corporation
(
see dissent in
International Harvester Company v.
Wisconsin Department of Taxation, ante, p.
322 U. S.
445), I see no basis for the corporation to claim a
deduction under § 23(c) of the Revenue Act of 1934. The tax was on
the stockholder, and it was paid by the corporation. The Company
would be entitled to deductions under § 23(d) if it were not
reimbursed. The credit given to the corporation against a declared
dividend is, in my opinion, a "reimbursement" of the corporation
for payment of the tax if the Wisconsin Taxing Act is valid.
Notwithstanding dissenting views on that subject, I consider myself
now bound by the conclusion of the Court. Hence, I agree that no
right to a deduction exists.