1. Conduct which in usual situations the law protects may become
unlawful when part of a scheme to reach a prohibited result. P.
272 U. S.
715.
2. Where income from bonds of the United States which, by Act of
Congress, is exempt from state taxation is reached purposely, in
the case of corporation-owned bonds, by exempting the income
therefrom in the hands of the corporation and taxing only so much
of the stockholder's dividends as corresponds to the corporate
income not assessed, the tax is invalid. P.
272 U. S.
714.
Reversed.
Error to a judgment of the district court (January 9, 1925) in
favor of Fred Miller and Elise K. John, as executors of the will of
Ernest G. Miller, in their suit against the City of Milwaukee to
recover the amount of income taxes alleged to have been
unconstitutionally collected under the laws of Wisconsin from their
testator.
Page 272 U. S. 714
MR. JUSTICE HOLMES delivered the opinion of the Court.
This is a suit to recover the amount of taxes alleged to have
been unconstitutionally exacted from the plaintiffs' testator. The
facts are agreed and the only question is the validity of the tax
under the Constitution of the United States. The testator held
stock in Wisconsin corporations that owned United States bonds
issued under the Acts of April 24 and September 24, 1917. The
interest upon these bonds was credited by the corporations to their
surplus, and subsequently was distributed to the stockholders in
dividends of stock or cash. The corporations paid a tax upon their
income, except, of course, upon that received from the bonds of the
United States. But this exemption was met in the laws of Wisconsin
by a provision that, while the stockholders were not taxed upon
dividends received from corporations the income of which was
assessed, yet if only part of the income of the corporation was
assessed, only a corresponding part of the dividends or income
received therefrom should be deducted from the income taxed to the
stockholders. The law also provides that taxable income shall
include all dividends from the earnings of corporations, whether in
cash or stock. The testator was taxed in accordance with the
statute, against his protest that the attempt to make up from him
what the state could not take from the corporations was forbidden
by the Constitution and laws of the United States. The district
court ruled that the action could not be maintained, and the case
was brought directly to this Court.
There is no doubt that, in general, a corporation is a
nonconductor that cuts off connection between dividends to its
stockholders and the corporate funds from which the dividends are
paid.
Des Moines National Bank v. Fairweather,
263 U. S. 103. A
system of taxation that applied to stockholders of all corporations
equally might tax, we assume for purposes of argument, the
stockholders
Page 272 U. S. 715
of a corporation that had invested all its property in United
States bonds. But it would be a different matter if the state
selected such corporations, supposing a number of them to exist,
and taxed their stockholders alone. It is a familiar principle that
conduct which in usual situations the law protects may become
unlawful when part of a scheme to reach a prohibited result. If the
avowed purpose or self-evident operation of a statute is to follow
the bonds of the United States and to make up for its inability to
reach them directly by indirectly achieving the same result, the
statute must fail even if, but for its purpose or special
operation, it would be perfectly good. Under the laws of Wisconsin,
the income from the United States bonds may not be the only item
exempted from the income tax on corporations, but it certainly is
the most conspicuous instance of exemption at the present time. A
result intelligently foreseen and offering the most obvious motive
for an act that will bring it about fairly may be taken to have
been a purpose of the act. On that assumption, the immunity of the
national bonds is too important to allow any narrowing beyond what
the Acts of Congress permit. We think it would be going too far to
say that they allow an intentional interference that is only
prevented from being direct by the artificial distinction between a
corporation and its members. A tax very well may be upheld as
against any casual effect it may have upon the bonds of the United
States when passed with a different intent and not aimed at them,
but it becomes a more serious attack upon their immunity when they
are its obvious aim. In such a case, the Court must consider the
public welfare, rather than the artifices contrived for private
convenience, and must look at the facts.
See Home Insurance Co.
of New York v. New York, 134 U. S. 594,
134 U. S. 598;
Gillespie v. Oklahoma, 257 U. S. 501,
257 U. S. 505;
United States Grain Corp. v. Phillips, 261 U.
S. 106,
261 U. S.
113.
Judgment reversed.
Page 272 U. S. 716
By agreement, the decision in this case controls the decision in
No. 74,
Chas. A. Miller et al. v. City of Milwaukee; No.
75,
Emil P. Miller v. City of Milwaukee, and No. 76,
Harry G. John v. City of Milwaukee.
MR. JUSTICE BRANDEIS, concurring.
I agree that the judgment must be reversed, but on a different
ground. It was stipulated before the state board, which upheld the
tax, that it was levied upon
"that portion of the mentioned dividends which were directly
declared from interest accruing from United States bonds issued
under and by virtue of the Acts of Congress passed April 24, 1917
and September 24, 1917."
A similar stipulation was entered into in the court below. Thus,
the dividends were earmarked as the direct proceeds of the interest
on the war bonds. The later Act provided in terms, the former in
substance, that the bonds
"shall be exempt, both as to principal and interest, from all
taxation now or hereafter imposed by . . . any state . . . upon the
income or profits of individuals, partnerships, associations or
corporations."
The provision creating the exemption was clearly within the
power of Congress "to borrow money on the credit of the United
States," Art. I, § 8, Par. 2, and was also within its war powers.
As a matter of statutory construction, a dividend paid directly
from the interest seems to me within the exemption expressly
conferred. The tax levied was therefore void because it violated
that exemption.
I do not think it can properly be said that the state statute
discriminates against government bonds. The statute makes no
reference to them or to any particular class of securities. The tax
imposed upon the stockholder results not from discrimination
practiced by a state against the federal government, but from the
fact that the corporation happened to earn its dividend from
securities on which, under the Wisconsin law, it was not
required
Page 272 U. S. 717
to pay a tax.
Compare State ex rel. Columbia Construction
Co. v. Tax Commission, 166 Wis. 369. The operation and effect
of the statute would be precisely the same if the dividend had been
paid out of any other corporate income exempt from the state tax,
from interest upon other tax exempt bonds, if any, or out of income
from the part of a business carried on in another state,
United
States Glue Co. v. Oak Creek, 247 U.
S. 321;
State ex rel. Arpin v. Eberhardt, 158
Wis. 20;
Van Dyke v. Milwaukee, 159 Wis. 460, 466; or out
of rentals or mine royalties received from land without the state,
or out of profits received from the sale of property having a situs
out of the state, Wisconsin Statutes, § 71.02(3) (
see State ex
rel. Mariner v. Hampel, 172 Wis. 67), or out of dividends
received from banks, Wisconsin Statutes, § 71.05(1)(e).
The purpose of the legislature was solely to prevent double
taxation by the State of Wisconsin of the income received by
individuals in the form of dividends. The deduction allowed is
limited to that necessary to prevent double taxation. Under the
Wisconsin law as originally enacted in 1911, the individual was
allowed to deduct from the aggregate income on which the tax was
payable all
"dividends or incomes received . . . from stocks, or interest in
any . . . corporation, . . . the income of which shall have been
assessed under the provisions of this act."
The proviso here in question, namely,
"that when only part of the income of any . . . corporation . .
. shall have been assessed under this act only a corresponding part
of the dividends or income received therefrom shall be
deducted,"
was added in 1913, four years before the United States entered
the World War. At that time, there were substantially no government
bonds outstanding except those used by national banks as the basis
for note issues. And, in view of the exemptions enumerated above,
it cannot well be said, even after the war, that the tax upon
dividends paid out of interest on United
Page 272 U. S. 718
States bonds furnishes the most conspicuous instance of the
operation of the section in question.
Moreover, under the Wisconsin law, the source out of which the
dividend was declared is immaterial. The thing received as income
is taxable to him who receives it although the fund or property out
of which it was paid was exempt from taxation in the hands of the
payor.
"It is the relation that exists between the person sought to be
taxed and specific property claimed as income to him that
determines whether there shall be a tax."
State ex rel. Sallie F. Moon Co. v. Wisconsin Tax
Commission, 166 Wis. 287, 290.
Compare Paine v. City of
Oshkosh, 190 Wis. 69.
MR. JUSTICE STONE concurs in this opinion.