Opinion
Nos. 126, 127.
Argued October 2, 1972. —
Decided October 31, 1972.
APPEALS from judgments of the circuit court for Dane county: RICHARD W. BARDWELL, Circuit Judge. Modified and, as modified, affirmed.
For the appellants the cause was argued by E. Weston Wood, assistant attorney general, with whom on the brief was Robert W. Warren, attorney general.
For the respondent there was a brief by John M. Koeppl and Stafford, Rosenbaum, Rieser Hansen, attorneys, and Robert Horowitz of counsel, all of Madison, and oral argument by Mr. Koeppl and Mr. Horowitz.
These appeals are by the Wisconsin Department of Revenue (hereinafter "department") from the whole of two judgments rendered by the circuit court for Dane county. The first judgment reversed a decision and order of the Wisconsin tax appeals commission (hereinafter "commission"), with a remand to the commission for further proceedings according to law. The second judgment enjoined the department from enforcing 7 Wisconsin Adm. Code, sec. TAX 2.43, Aug., 1960, Register No. 56, with respect to Transamerica Financial Corporation, with direction to the department to promulgate a rule establishing a fair apportionment formula for finance companies. Transamerica has petitioned for a review of that portion of the first judgment which remands the case for further proceedings and of that part of the second judgment which directs the department to establish a fair apportionment formula for finance companies.
The question involved in these two cases concerns the proper apportionment of income for a corporation doing business in several states. Pacific Finance Corporation was merged into Transamerica Financial Corporation. Pacific Finance Corporation was, and Transamerica Financial Corporation is, a Delaware corporation, with its principal place of business in Los Angeles, California. Both the department and Transamerica agree that as a result of this merger, Transamerica now stands in the position of Pacific, and therefore no distinction will be made between the two corporations, hereinafter referred to as the "taxpayer."
During the years involved — 1959-1960 and 1962-1967 — the taxpayer was engaged in the business of consumer credit and installment sales financing in Wisconsin and 16 other states. The taxpayer operates by borrowing money at one rate of interest and then lending that money, together with its equity capital at a higher rate. As a result, interest income and interest expense are the major factors in determining the net income of the taxpayer. The taxpayer also derives dividend income from wholly owned subsidiaries located entirely outside the state of Wisconsin. It must be noted that this is in contrast to the more typical sales or manufacturing corporation where interest income and expense are comparatively unimportant. Indirectly, it is this difference which has given rise to the controversy between the parties.
Because the taxpayer derives income from its operations in numerous states, it is not all subject to taxation in Wisconsin. Sec. 71.07(2), Stats., provides that only income which is derived from business transacted and property located within this state is to be taxed. The statute then goes on to provide two methods for determining what income will be taxed in Wisconsin. The first method involves an allocation and separate accounting to determine the income taxable in Wisconsin. Both the taxpayer and the department are in agreement that this method may not be used here because the taxpayer's business in Wisconsin is an integral part of a unitary business, and therefore the method will not properly reflect income taxable by this state. Thus, according to the terms of the statute, the second method must be used.
The second method involves a formula to determine the income subject to taxation in Wisconsin and is the subject of dispute.
The disputed portion of sec. 71.07(2), Stats., reads as follows:
". . . [I]n the case of income which follows the residence of the recipient, the amount of interest and dividends deductible under this provision shall be limited to the total interest and dividends received which are in excess of the total interest (or related expenses, if any) paid and allowable as a deduction under section 71.04 during the income year. . . ." (Emphasis supplied.)
The taxpayer contends that the statute should be given a literal reading with the result that all of its dividend income is deductible, whether or not apportionable. The department contends that a literal reading of the statute was not proper and that only the taxpayer's nonapportionable dividends and interest are to be used in the calculation of the limitation. According to the department's calculations, none of the taxpayer's dividend income is deductible. That the taxpayer and the department come to radically different results in their interpretations can be seen by the hypothetical example set forth below:
Assume if for a given tax period a taxpayer had:
$250 of apportionable interest income $ 0 of nonapportionable interest income $ 0 of apportionable dividend income $150 of nonapportionable dividend income $250 of deductible interest expense,the methods used to determine the limit of nonapportionable income which the taxpayer may deduct from its total net income would be as follows:
Transamerica's method. ---------------------- Apportionable interest income $250 plus Nonapportionable interest income 0 plus Apportionable dividend income 0 plus Nonapportionable dividend income 150 ----- equals Total interest and dividends received $400 ==== Total interest and dividends received $400 minus Total interest expense (250) ----- equals Limit of nonapportionable dividend and interest income deductible $150 ==== Department's method. -------------------- Nonapportionable interest income $ 0 plus Nonapportionable dividend income 150 ----- equals Total interest and dividends received $150 ==== Total interest and dividends received $150 minus Total interest expense (250) ----- equals Limit of nonapportionable dividend and interest income deductible $ 0 ====Based upon its interpretation, the department made an additional assessment of $3,276.65 in taxes and interest for the years 1959 and 1960. The taxpayer applied for abatement of the additional assessment and subsequently petitioned the commission for review of the denial of that application. The commission concluded the department's computations were correct and denied the application. While this matter was still pending before the commission, the department advised the taxpayer that an additional assessment for 1962 through 1967 would be made in the amount of $11,810.67. Thereupon the taxpayer commenced action in the circuit court for Dane county, seeking a judgment declaring invalid Wis. Adm. Code, sec. TAX 2.43 and enjoining its application to it.
The taxpayer moved the circuit court to consolidate the action for a review of a decision of the commission with the action for declaratory relief. The motion was granted.
Although the trial court accepted the taxpayer's reading of the statute as correct, it pointed out that such a reading of the statute results in none of the taxpayer's dividend income being taxed and therefore ruled that neither the statute as interpreted by the department nor Wis. Adm. Code, sec. TAX 2.43, adopted pursuant thereto, applied to sales finance companies such as Transamerica. The trial court then remanded the first action concerning the 1959-1960 tax, which was a proceeding to review the decision of the commission back to the commission for the imposition of a rule which provides for a fair apportionment of the taxpayer's dividend income. As to the second action which sought to have Wis. Adm. Code, sec. TAX 2.43, declared invalid and enjoining its application to the taxpayer, the trial court entered judgment enjoining application of the regulation to the taxpayer and directed the department to promulgate an apportionment formula for sales finance companies. The department appeals. The taxpayer petitions for review.
Three issues are presented on this appeal:
(1) Is the phrase "total interest and dividends received" as set forth in sec. 71.07(2), Stats., to be read literally as meaning all interest and dividends received, whether or not apportionable, or is the phrase to be read as including only interest and dividends received which are nonapportionable;
(2) Did the circuit court exceed its jurisdiction by directing the department to promulgate an apportionment rule applicable to finance companies; and
(3) Does the interpretation of sec. 71.07(2), Stats., averred for by the department, violate the due process clause of the fourteenth amendment to the United States Constitution?
In a case where the department and a taxpayer cannot agree on the proper interpretation to be accorded a particular statutory section, there are certain fundamental rules of construction which the court may apply.
First, unless a statute is unclear or ambiguous, legislative intent must be found "`by giving the language its ordinary and accepted meaning.'" Similarly, when the legislature does impose a tax, it must do so in clear and express language, with all ambiguity and doubt in the particular legislation being resolved against the one who seeks to impose the tax.
National Amusement Co. v. Department of Revenue (1969), 41 Wis.2d 261, 266, 163 N.W.2d 625.
Plymouth v. Elsner (1965), 28 Wis.2d 102, 106, 135 N.W.2d 799.
Although the benefit of the doubt shall be given to the taxpayer in cases where the language imposing the tax is ambiguous, there is no duty upon the court "`. . . to search for doubt in an endeavor to defeat an obvious legislative intention.'"
National Amusement Co. v. Department of Revenue, supra, at page 267.
The effect of sec. 71.07, Stats., is to divide the income of a taxpayer operating both within and without this state into "apportionable income" and "nonapportionable income." "Apportionable income" is that income which for income tax purposes must be allocated to two or more states in which the taxpayer's business is carried on. Correspondingly, "nonapportionable income" is that income which follows the situs of the property or the residence of the taxpayer and, as a result, is not allocated among two or more states.
The pertinent part of sec. 71.07, Stats., is as follows:
"71.07 Situs of income; allocation and apportionment. (1) For the purposes of taxation income or loss from business, not requiring apportionment under sub. (2), (3) or (5), shall follow the situs of the business from which derived. . . . All other income or loss, including royalties from patents, income or loss derived from land contracts, mortgages, stocks, bonds and securities or from the sale of similar intangible personal property, shall follow the residence of the recipient, except as provided in s. 71.07(7). . . .
"(2) 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. The amount of such income attributable to Wisconsin may be determined by an allocation and separate accounting thereof, when the business of such person within the state is not an integral part of a unitary business, . . . In all cases in which allocation and separate accounting is not permissible, the determination shall be made in the following manner: There shall first be deducted from the total net income of the taxpayer such part thereof (less related expenses, if any) as follows the situs of the property or the residence of the recipient; provided, that in the case of income which follows the residence of the recipient, the amount of interest and dividends deductible under this provision shall be limited to the total interest and dividends received which are in excess of the total interest (or related expenses, if any) paid and allowable as a deduction under section 71.04 during the income year. The remaining net income shall be apportioned to Wisconsin on the basis of the ratio obtained by taking the arithmetical average of the following 3 ratios: . . ." (Emphasis supplied.)
Sec. 71.07(1), Stats., provides that interest from intangibles follows the residence of the recipient and therefore such income is nonapportionable. However, sub. (2) further provides that if the business is conducted within and without Wisconsin, and if the business is unitary, then the business income is apportionable. Here the taxpayer concedes that its interest income is apportionable.
For the court's purposes, the starting point in sec. 71.07(2), Stats., is the provision which states:
". . . There shall first be deducted from the total net income of the taxpayer such part thereof (less related expenses, if any) as follows the situs of the property or the residence of the recipient; . . ." (Emphasis supplied.)
Since income which follows the "situs of the property or the residence of the recipient" is nonapportionable income, the statute is in effect saying, "Deduct nonapportionable income from total net income."
However, sub. (2) of sec. 71.07, Stats., goes on to limit the amount of nonapportionable income that can be deducted when it states:
". . . provided, that in the case of income which follows the residence of the recipient, the amount of interest and dividends deductible under this provision shall be limited to the total interest and dividends received which are in excess of the total interest (or related expenses, if any) paid and allowable as a deduction under section 71.04 during the income year. . . ." (Emphasis supplied.)
The reference in the immediately preceding portion of the statute to "the amount of interest and dividends deductible under this provision" refers to nonapportionable interest and dividend income because no apportionable income of any type is ever deductible under the provision. The entire provision relates only to income which follows the situs of the property or the residence of the taxpayer.
The statute next limits the amount of what must be nonapportionable interest and dividends which can be deducted to "the total interest and dividends received which are in excess of the total interest . . . paid." (Emphasis supplied.)
The department argues that the phrase should be interpreted as meaning only "the total [nonapportionable] interest and dividends received which are in excess of the total interest . . . paid." We do not agree. The use of the word "total" in "total interest and dividends received" is clear and unambiguous and does not require construction. "Total" means all interest and dividends received whether or not apportionable. In the case of Armour Co. v. Department of Taxation (1948), 252 Wis. 468, 32 N.W.2d 324, this court held "total" as used in the phrase "in excess of total interest . . . paid" means just what it says — all, not part.
The department further argues that the assessments made here are in accord with the interpretation of the statute for many years, since 1932, and is entitled to great weight in construing the statute. We think administrative construction is not to be given force where it is inconsistent with an unambiguous statutory provision. Department of Taxation v. Aluminum Goods Mfg. Co. (1957), 275 Wis. 389, 82 N.W.2d 349, 84 N.W.2d 67.
Adoption of the department's interpretation would result in all of the taxpayer's dividend income, even though it has no relation to Wisconsin, being taxed.
Aside from the constitutional problems such interpretation would raise, the taxing of dividends which, as here, are derived from wholly owned subsidiaries having no relation to Wisconsin whatsoever, would "fly in the face" of that part of sec. 71.07(2), Stats., which provides:
"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. . . ." (Emphasis supplied.)
The fact that the legislature never recognized the obvious infirmities of the statute when applied to a financial corporation such as the taxpayer is borne out by its recent passage of sec. 373 of ch. 125, Laws of 1971, whereby sec. 71.07(2), Stats., was repealed and recreated to expressly exempt financial organizations from its operation. Newly created sec. 71.07(2)(e) states:
"The net business income of financial organizations; and public utilities requiring apportionment shall be apportioned pursuant to rules of the department of revenue, but the income taxed is limited to the income derived from business transacted and property located within the state." (Emphasis supplied.)
Jurisdiction to order the promulgation of an apportionment formula.
While the trial court initially accepted the taxpayer's construction of sec. 71.07(2), Stats., it ruled that the statute was inapplicable to finance companies since the taxpayer's application was unfair to the state of Wisconsin. For this reason the court remanded the 1959-1960 assessment to the commission for the imposition of a fair apportionment formula, and as to the 1962-1967 assessment, it directed the department to promulgate a more equitable apportionment formula for sales finance companies. From these directions both parties have appealed.
Sec. 71.07(5), Stats., provides:
"If the income of any such person properly assignable to the state of Wisconsin cannot be ascertained with reasonable certainty by either of the foregoing methods, then the same shall be apportioned and allocated under such rules and regulations as the department of revenue may prescribe." (Emphasis supplied.)
There is no doubt that under the above provision the legislature has given the department power to enact rules and regulations. However, by the phrase "as the department of revenue may prescribe," the authority is permissive rather than obligatory and the decision to devise a new allocation formula in any given case rests peculiarly with the department. When the trial court directed that a fair apportionment formula be promulgated, it was in effect amending the statute to read: "as the department of revenue [shall] prescribe," thereby taking away from the department the discretion which sub. (5) dearly gives to it in such matters.
As it is beyond the province of courts to prescribe administrative procedure for agencies in the first instance — State ex rel. Thompson v. Nash (1965), 27 Wis.2d 183, 133 N.W.2d 769 — it could hardly be contended that the power exists to order an administrative agency to do that which the statutes clearly make optional.
In adopting the taxpayer's interpretation of the statute, we do not reach the remaining issue of whether the assessment made by the department violates the taxpayer's rights under the fourteenth amendment because it results in taxing income beyond the jurisdiction of Wisconsin.
We conclude that sec. 71.07(2), Stats., is clear and unambiguous, that the phrase "total interest and dividends received" means all interest and dividends received whether apportionable or nonapportionable and that the trial court was without jurisdiction to order the promulgation of an apportionment formula.
By the Court. — The judgment in Case No. 126 is modified by deleting that portion thereof which directs a remand for further proceedings and is further modified to direct that Transamerica's application for abatement be granted and, as modified, the judgment is affirmed.
The judgment in Case No. 127 is modified to delete that portion thereof which directs the promulgation of an apportionment formula applicable to sales finance companies and, as modified, the judgment is affirmed.