Opinion
October 13, 1942 —
November 10, 1942.
Appeal from a judgment of the circuit court for Dane county: ALVIN C. REIS, Circuit Judge. Affirmed.
For the appellant there was a brief by the Attorney General and Harold H. Persons, assistant attorney general, and oral argument by Mr. Persons.
For the respondent there was a brief by Shea Hoyt of Milwaukee and George E. Frazer of Chicago, Illinois, attorneys, and Ralph M. Hoyt of Milwaukee of counsel, and oral argument by Mr. Hoyt and Mr. Frazer.
Action commenced December 4, 1939, by Northwest Engineering Corporation to review an order of the Wisconsin board of tax appeals dated November 7, 1939, affirming an assessment of a privilege dividend tax for the period of September 26, 1935, through December 31, 1937. From a judgment reversing the order of the board of tax appeals the Wisconsin Department of Taxation appeals.
The taxpayer, a Wisconsin corporation engaged in manufacturing shovels, cranes, and draglines, is owned wholly by Northwest Engineering Company, a Delaware corporation. The Delaware company sells and distributes a large part of taxpayer's products. The Department of Taxation alleges the sales to the parent corporation during the period in question were at less than normal market prices, resulting in a benefit which appellant claims is taxable as a dividend under sec. 71.60, Stats. 1937 (ch. 505, Laws of 1935). The taxpayer has already paid an additional income tax on its allegedly unduly depressed income resulting from such sales, under the provisions of sec. 71.25 (1), Stats.
The question presented on this appeal is whether there is any evidence that the taxpayer made any transfer of earnings, profits, property, or assets to a customer, such a character as to be a dividend. It is true that the customer was the owner of the stock in the taxpayer, but this in and of itself does not change gains of the customer made by buying and selling the product of the taxpayer into dividends. There was an adjustment between the taxpayer and the Department of Taxation under which the proper income was accounted for and duly taxed as income.
The department now contends that this difference between the income actually received and what it would have been if the taxpayer had sold its products to its parent corporation at their full market value amounts to a dividend, and that it is taxable as a dividend under sec. 71.60, Stats. 1937 (ch. 505, Laws of 1935). This contention is based on facts referred to in the statement of facts by buying the products below market prices. But every benefit obtained by a stockholder from a corporation in which he owns stock is not a dividend. Baker v. Tax Comm. 210 Wis. 557, 246 N.W. 695; Zimmers v. Milwaukee, 189 Wis. 269, 206 N.W. 178. The stockholder in this case allegedly secured a profit which resulted from the difference between the market value of the products and the amount it actually paid the taxpayer for the goods. The department argues that the existence of the supposed profit which it seeks to tax as a dividend is established by the method used in the adjustment of the income tax assessment, but that does not amount to a concession on the part of the taxpayer that it declared and paid a dividend, or to constructive evidence of a transfer of corporate property as a dividend, even though that controversy terminated in an agreement between the department and the taxpayer for paying an additional income tax.
The learned trial judge in ruling that a dividend had not been declared said: "It would seem to us impossible for a company to `declare' a dividend by merely selling below cost or above cost or at less than a certain price."
The transactions under consideration do not disclose the attributes of a dividend. The legislature, in providing a remedy for securing the assessment of a proper income tax where dealings with a favored customer have resulted in the depression of a taxpayer's income, enacted sec. 71.25 (1), Stats., and thereby prevented such transactions from escaping their fair share of the tax burden. The legislature was there giving consideration to sales of this sort, but it did not include the profits to the buyer in the definition of a "dividend." The term "dividend" has a well-settled meaning, and it does not extend to commercial benefits to a stockholder who buys the company's product at a discount for the purpose of dealing in that merchandise.
We see no escape from the conclusion of the court below that there was no dividend. Hence there is no question here of whether there may be instances of a constructive declaration of a dividend so as to meet the requirements of sec. 71.60, Stats. 1937.
By the Court. — Judgment affirmed.