Title: Lincoln Savings Bank v. Wisconsin Department of Revenue

State: wisconsin

Issuer: Wisconsin Supreme Court

Document:

SUPREME COURT OF WISCONSIN 
 
 
Case No.: 
96-0135 
 
 
Complete Title 
of Case: 
 
 
Lincoln Savings Bank, S.A., f/k/a Lincoln 
Savings and Loan Association, 
 
Petitioner-Respondent-Petitioner, 
 
v. 
Wisconsin Department of Revenue, 
 
Respondent-Appellant. 
 
 
REVIEW OF A DECISION OF THE COURT OF APPEALS 
Reported at: 
207 Wis. 2d 360, 558 N.W.2d 902 
 
 
 
 
(Ct. App. 1996) 
 
 
 
 
PUBLISHED 
 
 
Opinion Filed: 
January 27, 1998 
Submitted on Briefs: 
 
Oral Argument: 
October 7, 1997 
 
 
Source of APPEAL 
 
COURT: 
Circuit 
 
COUNTY: 
Milwaukee 
 
JUDGE: 
George A. Burns, Jr. 
 
 
JUSTICES: 
 
Concurred: 
Abrahamson, C.J., (Opinion filed) 
 
 
Bablitch, Bradley & Crooks, J.J., join 
 
Dissented: 
 
 
Not Participating:  
 
 
ATTORNEYS: 
For the petitioner-respondent-petitioner there 
were briefs by Robert A. Schnur and Michael, Best & Friedrich, 
Milwaukee and oral argument by Robert A. Schnur. 
 
 
For the respondent-appellant the cause was argued 
by Laura Sutherland, assistant attorney general with whom on the 
brief was James E. Doyle, attorney general. 
 
No. 96-0135 
 
1 
 
NOTICE 
This opinion is subject to further editing and 
modification.  The final version will appear in 
the bound volume of the official reports. 
 
 
No. 96-0135 
 
STATE OF WISCONSIN               :        
        
 
 
 
 
IN SUPREME COURT 
 
 
Lincoln Savings Bank, S.A., f/k/a Lincoln 
Savings and Loan Association, 
 
 
Petitioner-Respondent-Petitioner, 
 
 
v. 
 
Wisconsin Department of Revenue, 
 
 
Respondent-Appellant. 
 
FILED 
 
JAN 27, 1998 
 
Marilyn L. Graves 
Clerk of Supreme Court 
Madison, WI 
 
 
 
 
 
REVIEW of a decision of the Court of Appeals.  Reversed. 
¶1 
JANINE P. GESKE, J.   This case presents a question of 
statutory interpretation.  The taxpayer, Lincoln Savings Bank, 
S.A., (Lincoln) petitioned for review of a decision of the court 
of appeals,1 which reversed an order of the circuit court for 
Milwaukee County, George A. Burns, Jr., Judge.  The circuit 
court reversed a decision of the Tax Appeals Commission 
(Commission) which interpreted 1987 Wis. Act 27, § 3047(1)(a) to 
permit adjustment of bad debt reserves maintained by the 
taxpayer from 1962 until 1986, but not earlier, as a means of 
transitioning to the federalization of Wisconsin’s income tax 
law.  The Commission's interpretation upheld an assessment by 
the Department of Revenue (DOR) of additional franchise taxes 
                     
1 Lincoln Savings Bank v. Wisconsin Dept. of Revenue, 207 
Wis. 2d 360, 558 N.W.2d 902 (1996).  
No. 96-0135 
 
2 
and interest totalling $23,147.44 against Lincoln for the years 
1987 to 1990, because Lincoln had adjusted for bad debt reserves 
maintained before 1962.  We conclude that the Commission’s 
interpretation of § 3047(1)(a) contravenes the intent of the 
legislature 
as 
evidenced 
by 
the 
plain 
language 
of 
the 
transitional rule, and therefore the court of appeals erred in 
upholding the Commission's interpretation.  We reverse. 
I. 
¶2 
The material facts are not in dispute.2  Lincoln 
Savings 
Bank, 
S.A., 
formerly 
Lincoln 
Savings 
and 
Loan 
Association (Lincoln), is a state chartered savings bank, and 
has been subject to an annual state franchise tax since 1962.  
See Wis. Stat. § 71.23(2)(1995-96).3  Under this provision, every 
                     
2 The Tax Appeals Commission adopted the parties' stipulated 
facts as its findings.  
3 Wis. Stat. § 71.23(2) (1995-96) Franchise tax.  For 
the privilege of exercising its franchise or doing 
business in this state in a corporate capacity, except 
as provided under sub. (3), every domestic or foreign 
corporation, 
except 
corporations 
specified 
in 
s. 
71.26(1), . . . shall annually pay a franchise tax 
according to or measured by its entire Wisconsin net 
income for the preceding taxable year at the rate set 
forth in s. 71.27(2).  In addition, except as provided 
in sub.(3) and s. 71.26(1), a corporation that ceases 
doing business in this state . . . shall pay a special 
franchise tax according to or measured by its entire 
Wisconsin net income of the taxable year during which 
the corporation ceases doing business in this state 
. . . 
at 
the 
rates 
under 
s. 
71.27(2). 
 
Every 
corporation organized under the laws of this state 
shall be deemed to be residing within this state for 
the purposes of this franchise tax.  All provisions of 
this chapter and ch. 73 relating to income taxation of 
corporations shall apply to franchise taxes imposed 
No. 96-0135 
 
3 
domestic or foreign corporation is required to pay an annual 
franchise tax based on its entire Wisconsin net income from the 
preceding taxable year.  See id.  Lincoln became liable to pay 
the franchise tax after Wis. Stat. § 71.01(3)(a) was amended in 
1961 to no longer exempt savings and loan associations from 
taxation.  See 1961 Wisconsin Act 620, § 6a.4   
¶3 
Thrift institutions like Lincoln maintain accounts 
known as bad debt reserves or allowances.  As counsel for 
Lincoln explained at oral argument, maintenance of a bad debt 
reserve is a system of income deferral, and does not constitute 
a permanent income reduction.  A thrift institution makes yearly 
                                                                  
under this subsection, unless the context requires 
otherwise.  The tax imposed by this subsection on 
national banking associations shall be in lieu of all 
taxes imposed by this state on national banking 
associations to the extent it is not permissible to 
tax such associations under federal law. 
 
4 Savings and loan associations had historically received 
favorable treatment under the federal taxation scheme as well, 
due to their role in the national priority of financing new home 
construction.  See Kenneth R. Biederman and John A. Tuccillo, 
Taxation and Regulation of the Savings and Loan Industry 5 
(1976).  Thrifts first became subject to federal income taxation 
on January 1, 1952.  Even after that date, thrift institutions 
still received relatively favorable tax treatment.  See 8 
Mertens Law of Federal Income Taxation § 30.114 at 273 (June 
1997 update).  For a general discussion of federal taxation of 
thrift institutions, see Rook, Federal Income Taxation of Banks 
and Financial Institutions § 13.03(3)(6th ed. 1990 & Supp. 1997 
No. 1).  However, starting in 1996, and pursuant to the Small 
Business Jobs Protection Act of 1996, Pub. L. 104-188, § 
1616(a), 110 Stat. 1755, thrift institutions became subject to 
the same federal tax provisions as commercial banks holding the 
same amount of total assets.  See Ira L. Tannenbaum, Bad Debt 
Legislation Clears Way for Thrifts Converting to Banks 15 No. 16 
Banking Pol'y Rep. 1 (Aug. 19, 1996). 
No. 96-0135 
 
4 
additions or subtractions to its bad debt reserves utilizing a 
formula that accounts for prior writeoffs and reserve additions, 
and its current level of lending activity.  Bad debt reserves 
form the basis for the bad debt deduction, the primary way in 
which thrift institutions have reduced their tax burden since 
1951, when they lost their federal tax-exempt status.5 
¶4 
Both Wisconsin and federal tax laws permit thrift 
institutions to take bad debt deductions.  The deduction amount 
is based on the amount of debt the thrifts can reasonably expect 
to become worthless during the tax year, and consequently lower 
their income tax liability.  See Rook, Federal Income Taxation 
of Banks and Financial Institutions, ch. 13, § 13.03 (6th ed. 
1990 & 1997 Supp. No. 1, § 13.03).  Prior to 1987, Wisconsin tax 
law established a specific mechanism for this deduction.  See 
Wis. Stat. § 71.04(9)(b) (1985-86).6  Section 593 of the Internal 
                     
5 Biederman, at 3.   
6 Wis. Stat. § 71.04(9)(b) (1985-86) 
Savings and loan associations, mutual savings banks, 
production credit associations and credit unions may 
make a deduction for a reasonable addition to reserve 
for bad debts of 2/3 of such sums as they are required 
to allocate to their loss reserves pursuant to 
statutory provisions or rules and regulations or 
orders 
of 
any 
state 
or 
federal 
governmental 
supervisory authorities. 
 
No. 96-0135 
 
5 
Revenue Code contains the federal bad debt reserve deduction 
provision.  See 26 U.S.C. § 593.7 
¶5 
The federal bad debt reserve provisions for the years 
pertinent here allowed for the deduction of reasonable additions 
to the reserve at the discretion of the Internal Revenue 
Service.  See 8 Mertens Law of Federal Income Taxation § 30.98 
at 218: 
 
A deduction for an addition to a reserve was limited 
to an amount that bore a close relation to the 
taxpayer's business transactions in the first taxable 
year for which it was deducted, so that income for 
that year could not be established merely by showing 
that the balance in the reserve at the end of the year 
was reasonable. . . .  The addition to the reserve for 
bad debts was not necessarily equivalent to the amount 
of debts that had become worthless within the taxable 
year.  Where a specific account or accounts of a 
taxpayer became worthless, the full amount of such 
accounts could be included in the taxpayer's addition 
to its reserve for bad debts and deducted only if the 
aggregate addition to the bad debt reserve was 
reasonable. 
¶6 
Wisconsin's efforts to "federalize" its method of 
corporate income taxation affected the calculation of the bad 
debt deduction.  The specific Wisconsin provision for deducting 
                     
7 Under the federal scheme, there were two methods of 
computing this deduction, the reserve method, and the specific 
charge-off method.  As described in Rook, at § 13.03(1), the 
reserve 
method 
usually 
resulted 
in 
the 
acceleration 
of 
deductions.  A thrift that met the 60 percent qualifying asset 
test of § 7701(a)(19)(C) could compute its bad debt reserve 
under 26 U.S.C. § 593.  Two types of reserve methods were 
applicable to qualifying real property loans: the experience 
method and the percentage of taxable income method.  As provided 
by Pub. L. 104-188, the reserve method under 26 U.S.C. § 593(a)-
(d) does not apply to any taxable year beginning after December 
31, 1995.  See 26 U.S.C. § 593(f)(1997 West. Supp.) 
No. 96-0135 
 
6 
additions to bad debt reserves, Wis. Stat. § 71.04(9)(b) (1985-
86), was repealed effective for the taxable year 1987 as part of 
the legislature's federalization of Wisconsin tax law.  See 1987 
Wis. 
Act 
27, 
§ 3203(47)(y). 
 
As 
part 
of 
the 
move 
to 
federalization, the legislature defined corporate "net income" 
for Wisconsin income tax purposes as "gross income, as computed 
under the internal revenue code."  1987 Wis. Act 27, § 1268k, 
amending Wis. Stat. § 71.02(1)(c)(intro.) (1985-86).8  The former 
definition, in pertinent part, had read: "'Net income' means, 
for corporations, 'gross income' less allowable deductions."  
See Wis. Stat. § 71.02(1)(c)(intro.) (1985-86).  As the circuit 
court explained, "[t]he parties agree that 1987 Wisconsin Act 
27, 'federalized' the Wisconsin income and franchise tax law so 
that a corporate taxpayer's federal net taxable income would 
become its Wisconsin net taxable income for years beginning in 
1987, subject to other modifications which are not germane to 
this case."  Mem. Decision at 3, Petitioner's App. at 113.  
¶7 
Prior to federalization, the method of applying bad 
debt reserves authorized by Wisconsin tax law was less favorable 
to the taxpayer than the method under the Internal Revenue Code. 
See Lincoln Savings Bank, 207 Wis. 2d at 363.  The court of 
appeals explained by way of example that in 1962, Lincoln made 
an addition to its bad debt reserve for federal tax purposes of 
                     
8 The new provision was recreated without material change as 
Wis. Stat. § 71.26(2)(a), currently in effect.  See 1987 Wis. 
Act 312 and 1987 Wis. Act 312, § 16.  Amendments not material 
here were made to Wis. Stat. § 71.26(2)(a), by 1987 Wis. Act 
411, § 125.  
No. 96-0135 
 
7 
$31,561; Lincoln's 1962 addition to its bad debt reserve for 
Wisconsin tax purposes was $22,683.  See id.  In 1986, Lincoln 
made an addition to its bad debt reserve for federal tax 
purposes of $599,804; the addition to its bad debt reserve for 
Wisconsin tax purposes in that year was $320,268.  For the years 
1962 through 1986, Lincoln's total bad debt reserve balance for 
federal purposes equaled $3,684,766;9 Lincoln's total bad debt 
reserve balance for Wisconsin tax purposes, for that same 
period, was $2,668,622.  Petitioner's App. at 105.  For the 
years prior to 1962, Lincoln maintained a bad debt reserve only 
for federal purposes. 
¶8 
Wisconsin was not alone in its efforts to harmonize 
state corporate net income determinations with federal taxable 
income.10  According to several commentators, "pressure from 
                     
9 The court of appeals' opinion states that Lincoln's bad 
debt reserve balance for federal purposes, for the period of 
1962-1986, was $3,375,023.  Lincoln Savings Bank, 207 Wis. 2d at 
363.  The court of appeals reached that amount by deducting the 
$309,743 existing as Lincoln's bad debt reserve balance for 
federal purposes in 1961.  That approach, however, begs the 
question.  The Commission, which adopted the facts as stipulated 
by the parties, listed the 1986 balance for federal purposes as 
$3,684,766.  Petitioner's App. at 105.  We agree with the 
Commission's statement. 
10 Further, federalization was not solely a 1986 phenomenon. 
 See, 
e.g., 
Wis. 
Admin. 
Code 
§ Tax 
1.06 
(1995) 
note: 
"Federalization of the computation of Wisconsin gross income for 
individuals and fiduciaries was provided by Chapter 163, Laws of 
1965, effective for taxable year 1965 and thereafter."  See 
also, Cleaver v. Wis. Department of Revenue, 151 Wis. 2d 896, 
902-03, 
447 
N.W.2d 
102 
(Ct. 
App. 
1989), 
describing 
the 
legislative history of the efforts of the Wisconsin legislature 
in 1961 and 1977 to federalize Wisconsin income tax law.  For a 
description of earlier, almost nationwide efforts to conform, 
No. 96-0135 
 
8 
taxpayers for easing compliance and auditing burdens has been 
the prime force responsible for the very wide conformity of the 
State corporate net income measures to Federal taxable income, 
before allocation, apportionment, or other method of division of 
the income."  Jerome R. Hellerstein, et al., State Taxation, 
vol. I, at § 7.02[1] (2d ed. 1993).  According to Hellerstein, 
the most efficient method of achieving conformity with federal 
taxable income is for the state statute to incorporate by 
reference certain federal income tax terms, such as "gross 
income" and "taxable income," and then add certain qualifiers 
based on that state's particular fiscal policies.  Id. 
¶9 
Federalization of the corporate tax liability in 
Wisconsin resulted in changes in the tax treatment of items of 
income, loss, or deduction for all corporations, including 
Lincoln.11 The legislature enacted a transition mechanism to 
                                                                  
see Jerome R. Hellerstein, et al., 1 State Taxation § 7.03 n.38 
(2d ed. 1993): 
 
According to Kenneth Back, Director of the Department 
of Finance and Revenue of the District of Columbia, 
and then President of the National Association of Tax 
Administration, in testimony given in 1973: "Forty 
states have adopted the federal tax base as the 
starting point for determining taxable income for 
state 
corporation 
income 
tax 
purposes 
or 
by 
administrative practice following the federal statute 
for all practical purposes."  Mondale Comm. at 108.  
 
11 Lincoln's bad debt reserve for Wisconsin tax purposes of 
$2,668,662 as of December 31, 1986, was replaced by the amount 
of $3,684,766, Lincoln's bad debt reserve for federal purposes 
as of December 31, 1986.  Thus, as a result of federalization, 
Lincoln's bad debt reserve for Wisconsin tax liability purposes 
was increased by over $1,000,000.  The DOR only disputes the 
inclusion of $309,743 of that increase.  
No. 96-0135 
 
9 
allow corporations to equalize those differences, but to avoid 
doing so abruptly.  This non-statutory transition rule, 1987 
Wis. Act 27, § 3047, provides for adjustments over a five-year 
period, beginning with 1987 unless the adjustment involved is 
$25,000 or less: 
SECTION 3047.  Nonstatutory provisions; revenue. 
(1) TRANSITION; CORPORATIONS. 
(a) Each corporation shall calculate, as of the 
close of its taxable year 1986, the amount that, 
because of this act, is required to be added to, or 
subtracted from, income in order to avoid the double 
inclusion, or omission, of any item of income, loss or 
deduction, except that the adjustments required to the 
deductions for depreciation and amortization shall be 
made 
under 
section 
71.02(1)(c)(intro.) 
of 
the 
statutes, as affected by this act.  If the amount 
required to be added or subtracted is $25,000 or less, 
the proper amount shall be added or subtracted for 
taxable year 1987.  If the amount required to be added 
or subtracted is more than $25,000, it shall be added 
or subtracted in amounts as nearly equal as possible 
over the 5 taxable years beginning with 1987, except 
that if the final taxable year that the corporation is 
subject to tax under chapter 71 of the statutes, as 
affected by this act, occurs before the total amount 
is added or subtracted all of the remaining amount 
shall be added or subtracted for that final taxable 
year. 
¶10 The parties agree that Lincoln Savings Bank is a 
"corporation" as that word is used in § 3047(1)(a), and that the 
transitional rule required Lincoln to subtract the excess of its 
federal bad debt reserve over its Wisconsin bad debt reserve 
from Lincoln's Wisconsin tax liability.  The parties only 
disagree as to whether Lincoln may subtract its pre-1962 balance 
of bad debt reserves for federal tax purposes, $309,743, which 
No. 96-0135 
 
10
accumulated 
before 
Lincoln 
was 
subject 
to 
the 
Wisconsin 
franchise tax.  
II. 
¶11 Although in this case we review a decision of the 
court of appeals, we are actually reviewing the decision of the 
Tax Appeals Commission.  See Richland School Dist. v. DILHR, 174 
Wis. 2d 878, 890, 498 N.W.2d 826 (1993).  The Commission's 
decision interpreted 1987 Wis. Act 27, § 3047.  Section 3047 is 
not a statute, but a non-codified legislative rule.  Legislative 
rule interpretation, like statutory interpretation, presents a 
question of law which this court reviews de novo.  See City of 
West Allis v. Sheedy, 211 Wis. 2d 92, 96, 564 N.W.2d 708 
(1997)(explaining 
that 
the 
goal 
of 
Supreme 
Court 
Rule 
interpretation, like the goal of statutory interpretation, is to 
give effect to the intent of the enacting body).  Therefore, we 
will apply the standards for statutory interpretation to this 
case. 
¶12 The purpose of statutory interpretation is to discern 
the intent of the legislature.  See State ex rel. Jacobus v. 
State, 208 Wis. 2d 39, 47-48, 559 N.W.2d 900 (1997).  To discern 
that intent, we first consider the language of the statute.  If 
the language of the statute clearly and unambiguously sets forth 
the legislative intent, we apply that intent to the case at hand 
and do not look beyond the legislative language to ascertain its 
meaning.  See Kelley Co., Inc. v. Marquardt, 172 Wis. 2d 234, 
247, 493 N.W.2d 68 (1992); see also UFE Inc. v. LIRC, 201 
Wis. 2d 274, 281-82, 548 N.W.2d 57 (1996). 
No. 96-0135 
 
11
¶13 The Commission did not determine whether § 3047(1)(a) 
was plain or ambiguous.  The circuit court held the legislative 
rule to be plain and unambiguous.  The court of appeals agreed, 
but interpreted the rule differently than did the circuit court. 
 The parties themselves are inconsistent as to whether they 
perceive § 3047(1)(a) to be clear and unambiguous.12  However, a 
statute is not rendered ambiguous merely because the parties 
disagree as to its meaning.  UFE, 201 Wis. 2d at 281-82.  Nor is 
a statute rendered ambiguous if courts differ as to its meaning. 
 See State v. Moore, 167 Wis. 2d 491, 497 n.6, 481 N.W.2d 633 
(1992).  A statute is ambiguous when it is capable of being 
understood in two or more different senses by reasonably well-
informed persons.  See Wagner Mobil, Inc. v. City of Madison, 
190 Wis. 2d 585, 592, 527 N.W.2d 301 (1995).  Only if it is 
ambiguous do we look to its scope, history, context, subject 
matter, and object to determine legislative intent.  See Cynthia 
E. v. La Crosse County Human Services Dep't, 172 Wis. 2d 218, 
225, 493 N.W.2d 56 (1992). 
                     
12  For example, Lincoln argues that the transition 
mechanism is remedial, and thus should be liberally construed.  
Petitioner’s brief at 15.  We do not invoke rules of statutory 
construction, however, unless we first determine that a statute 
is ambiguous.  See Department of Revenue v. Bailey-Bohrman Steel 
Corp., 93 Wis. 2d 602, 607, 287 N.W.2d 715 (1980).  At oral 
argument, the DOR acknowledged that § 3047(1)(a) is plain on its 
face, and urged us to adopt the interpretation given by the 
court of appeals.  Then, despite conceding the unambiguous 
language of the statute, the DOR also invokes rules of statutory 
construction by urging us to conclude that § 3047 provides for a 
tax deduction, and thus should be strictly construed against the 
taxpayer.  Respondent's brief at 10. 
No. 96-0135 
 
12
¶14 In this case we are asked to determine whether the 
legislature 
intended, 
when 
it 
enacted 
this 
non-codified 
transitional rule, to effectively insert the limitation that 
federalized adjustments be taken only for years in which the 
taxpayer was subject to a Wisconsin franchise tax.  The 
Commission and the court of appeals read the transitional rule 
to limit adjustments to reserves accumulated since 1962, when 
Lincoln became subject to the Wisconsin franchise tax.  The 
circuit court read the rule as applying without such limitation. 
¶15 The DOR urges us to accord great weight deference to 
the Commission's interpretation of 
the 
transitional 
rule, 
because the Commission has abundant experience dealing with 
complex tax laws, and because it has "specialized knowledge and 
technical expertise necessary to interpret statutes which are 
designed to match income to expenses or deductions in order to 
avoid double deductions or double inclusions of income," which, 
according to DOR, is the clear intent behind § 3047(1)(a).  
Respondent’s brief at 8.  Lincoln replies that we should not 
accord any weight to the Commission's interpretation, because 
the Commission has not interpreted this particular section 
before.  Petitioner’s brief at 11-12. 
¶16 For a more fundamental reason, we will accord no 
deference to the Commission's interpretation of § 3047(1)(a).  
"[A]dministrative interpretation is only of significance where 
there is an ambiguity in the statute.  It cannot overcome the 
plain wording of a statute where there is no ambiguity."  
National Amusement Co. v. Wis. Dep't of Revenue, 41 Wis. 2d 261, 
No. 96-0135 
 
13
274, 163 N.W.2d 625 (1969)(citation omitted).  "The plain 
meaning of a statute takes precedence over all extrinsic sources 
and rules of construction, including agency interpretations . . 
. [E]ven if an agency interpretation is accorded the highest 
level of deference by a court, great weight, it will not be 
upheld if the interpretation directly contravenes the clear 
meaning of the statute."  UFE, 201 Wis. 2d at 282 n.2.  Also 
see, Carrion Corp. v. Wis. Dep't of Revenue, 179 Wis. 2d 254, 
265-66 n.3, 507 N.W.2d 356 (Ct. App. 1993).  Because we conclude 
that the transitional rule is clear and unambiguous, we will not 
give any deference to the Commission's interpretation of 
§ 3047(1)(a) which directly contravenes that clear meaning. 
III. 
¶17 Lincoln's position can be summarized as follows.  
Lincoln characterizes the transition mechanism as a remedy for 
the effects of Wisconsin’s corporate federalization.  Because 
§ 3047 is a remedial provision, according to Lincoln, it should 
be construed broadly and in a manner designed to eliminate 
distortions that would otherwise occur as a consequence of 
federalization.  Lincoln described those potential distortions 
in its brief to the circuit court as either an unjustified 
increase in a taxpayer's taxes, or an unjustified decrease in 
those taxes, to the extent those changes were caused solely by 
the 1987 federalization of the Wisconsin income tax system. 
¶18 The DOR contends that the legislature never intended 
to remedy differences between federal and state bad debt 
reserves for the years before Lincoln was subject to a Wisconsin 
No. 96-0135 
 
14
franchise tax, because there was no Wisconsin bad debt reserve 
prior to 1962.  Specifically, the DOR refers to the rule's 
language, particularly the legislature's use of the term 
"omission," to assert that Lincoln's pre-1962 bad debt reserve 
difference could not have been omitted as a result of the Act, 
because such a difference did not exist.  
¶19 While this case arises in the context of equalizing a 
particular deduction for a savings bank, the deduction for bad 
debt reserves, § 3047(1)(a) itself is a broad transitional 
mechanism, applicable to all Wisconsin corporations, as an 
attempt to avoid problems of double inclusion, or omission, of 
any item of income, loss or deduction, with limited exceptions 
for depreciation and amortization, arising because of the 
enactment of 1987 Wis. Act 27.  On its face, the section 
contains no limitation as to the amount of an item of income, 
loss, or deduction, nor as to the date of origination of an item 
of income, loss, or deduction.  The transitional rule includes 
only 
the 
already 
noted 
exceptions 
for 
depreciation 
and 
amortization, and specifies the timing for adding or subtracting 
the amounts necessary to achieve equalization. 
¶20 Further, compliance with 1987 Wis. Act 27, § 1268k, is 
mandatory.  Because of the imposition of federalization, 
corporations like Lincoln were required to adjust their bad debt 
reserves maintained for Wisconsin tax purposes, so that they 
equalled the bad debt reserves maintained for federal tax 
purposes.  If a problem of omission, for example, arose from 
that adjustment to reserves, under § 3047(1)(a) the affected 
No. 96-0135 
 
15
corporation 
was 
entitled 
to 
take 
the 
otherwise 
omitted 
deduction. 
¶21 A 
plain 
reading 
of 
§ 3047(1)(a), 
therefore, 
demonstrates that 1987 Wis. Act 27 forced Lincoln to add to its 
bad debt reserve maintained for Wisconsin tax purposes.  The Act 
focused on equalizing the corporate taxable income reported for 
Wisconsin purposes with that reported for federal purposes.  
Section 3047 did not consider what prior taxable events or 
accounting methods generated the differences existing at the 
time federalization went into effect.  Therefore, the DOR's 
argument that Lincoln maintained $309,743 of bad debt reserves 
before it had taxable income for Wisconsin purposes, is beside 
the 
point. 
 
Section 
3047(1)(a) 
imposes 
no 
condition 
or 
prerequisite as to why differences in reserves or other items of 
income, 
loss, 
or 
deduction 
existed 
at 
the 
time 
of 
federalization.  The section simply states that if such a 
difference exists, because of this act, the corporation may take 
steps over a five-year period to equalize the amounts, and 
thereby eliminate those differences. 
¶22 The circuit court found the plain language of the 
transitional rule to convey the intent of the legislature: 
 
As I read the section, the Petitioner is required to 
subtract from income, ". . . any item of income, loss 
or deduction . . ." I find no ambiguity in the section 
as a whole and particularly no ambiguity in giving to 
the words "required" and "any" their plain meaning as 
they are synonymous with "mandated" or "directed" and 
"every item" or "all items" within the context of the 
section . . . I find absolutely no language in the 
section even remotely suggesting that the federal 
No. 96-0135 
 
16
basis is to be altered under any set of circumstances, 
which the Commission's decision clearly requires. 
Mem. Decision at 3-4, Petitioner's App. at 114-115. 
¶23 The DOR argues that § 3047(1)(a) should be read to 
effectively include the limitation, "only for years in which a 
taxpayer was subject to a Wisconsin franchise tax."  Certainly, 
other corporations to which § 3047(1)(a) applies were subject to 
Wisconsin franchise tax before 1962.  But to read in the 
limitation 
the 
DOR 
proposes 
would 
frustrate 
the 
express 
legislative goal of equalizing the differences between items of 
income, loss, or deduction for Wisconsin and federal corporate 
income tax liability.  To judicially insert such a limitation 
would impermissibly rewrite an already plain legislative rule. 
¶24 Counsel for Lincoln pointed out in oral argument that 
the method of taxing bad debt reserves for savings and loans is 
distinct, and does not apply to all corporations, or even to all 
institutions with reserves.  This distinct feature, however, 
does not receive special treatment under the broad language of 
§ 3047(1)(a) 
as 
the 
section 
applies 
to 
all 
Wisconsin 
corporations, regardless of type and regardless of the date on 
which they became subject to Wisconsin income tax law. 
¶25 Lincoln also argues that some event, such as a change 
in its organizational status, may occur at some time in the 
future.  If Lincoln is not permitted to equalize its entire 
federal bad debt reserve to its Wisconsin bad debt reserve, it 
may lose certain tax deductions in the course of a federal 
reserve "recapture."  This result, according to Lincoln, would 
No. 96-0135 
 
17
be contrary to the intent of the legislature when it enacted 
§ 3047(1)(a).  The DOR characterizes this argument by Lincoln as 
a hypothetical, designed to create a windfall for the taxpayer, 
and therefore not a sufficient basis on which to interpret the 
transitional rule in Lincoln's favor.  The circuit court did not 
address Lincoln's prospective application arguments, and the 
court of appeals specifically declined to consider them.  See 
Lincoln Savings Bank, 207 Wis. 2d at 367 n.7.  Because we decide 
this case based on a plain reading of the transitional rule, we 
likewise need not hypothesize as to Lincoln's future business 
decisions and resulting tax treatment. 
¶26 We do recognize, however, that recapture of income 
formerly held as a reserve is a prospect faced by many 
corporations when, for example, they change their organizational 
status or their method of accounting.  Approaches to, and the 
effect of, recapture are featured in many articles, and have 
been the subject of congressional attention.  See, e.g., Thomas 
P. Vartanian, et al., Tearing Down the Tax Wall Between Banks 
and Thrift Institutions, 14 No. 20 Banking Pol'y Rep. 1, *16 
(Oct. 16, 1995): 
 
Under the proposed income tax regulations, every 
thrift would be required to recapture prior Section 
593 benefits upon conversion to a bank charter.  The 
converted thrifts would face the choice of one of the 
bad debt reserve deductions available to banks and a 
reported total tax bill of between $2 billion and $3 
billion over the six-year recapture period. 
 
When coupled with the additional charges for 
deposit insurance that proposed legislation would levy 
on thrifts, the current recapture rules could cause 
severe fiscal problems for the savings industry.  The 
No. 96-0135 
 
18
$6 billion or so needed to fully capitalize the SAIF 
represents about one year's net earnings for the 
thrift industry. 
 
Adding these Section 593 recapture costs to the 
amounts that the savings industry already has paid to 
strengthen the SAIF - an 85 basis point special 
assessment, higher premiums and interest on so-called 
FICO bonds - would cause healthy thrifts to suffer a 
severe competitive disadvantage in the first year or 
two under the new system. 
See also, H.R. Conf. Rep. No. 104-737, at 342-43 (1996), 
reprinted in 1996 U.S.C.C.A.N. 1834-35, discussing effect of 
conference agreement provisions of the Small Business Job 
Protection Act, Pub. L. 104-188, on treatment of recapture of 
bad debt reserves: 
 
[A] thrift institution that is treated as a large bank 
generally is required to recapture its post-1987 
additions to its bad debt reserves, whether such 
additions are made pursuant to the percentage of 
taxable income method or the experience method.  The 
timing of this recapture may be delayed for a one- or 
two-year period to the extent the residential loan 
requirement described below applies. . . . 
The balance of the pre-1988 reserves is subject to the 
provisions of section 593(e), as modified by the 
conference agreement (requiring recapture in the case 
of certain excess distributions to, and redemptions 
of, shareholders).  Thus, section 593(e) will apply to 
an institution regardless of whether the institution 
becomes 
a 
commercial 
bank 
or 
remains 
a 
thrift 
institution.  In addition, the balances of the pre-
1988 reserve and the supplemental reserve will be 
treated as tax attributes to which section 381 
applies. 
 
The 
conferees 
expect 
that 
Treasury 
regulations will provide rules for the application of 
section 593(e) in the case of mergers, acquisitions, 
spin-offs, and other reorganizations of thrift and 
other institutions. 
¶27 The record does not indicate that Lincoln changed its 
status or undertook recapture calculations for the years for 
No. 96-0135 
 
19
which it is subject to the assessment of additional franchise 
taxes and interest at issue here.  But our plain reading of the 
transitional rule, which allows corporations to avoid a double 
inclusion or omission of any item of income, loss, or deduction 
which would occur as a result of this federalization act, is 
consistent with a legislative intent to avoid such double 
inclusions or omissions when the corporation is subject to a 
recapture of reserves.  Whether a Wisconsin corporation would be 
subject to recapture reserves in 1987 or in 1997, if a double 
inclusion or omission of any item of income, loss or deduction 
occurs as a result of 1987 Wis. Act 27, the corporation is 
entitled, and is required, to apply the transition mechanism of 
§ 3047(1)(a). 
¶28 In conclusion, the plain language of the rule gives 
effect to the intent of the legislature.  That intent was to 
create a mechanism whereby all corporations subject to income 
tax in Wisconsin at the time of enactment, could equalize their 
items of income, loss, or deduction as maintained for federal 
tax purposes, with those items as maintained for Wisconsin 
income tax purposes.  For some corporate taxpayers, the 
legislature 
recognized 
that 
equalization 
would 
involve 
substantial sums, so § 3047(1)(a) permitted those corporations a 
transition period in order to acclimate to the changes wrought 
by federalization.  For those corporations, equalization could 
be 
accomplished 
over 
five 
years. 
 
The 
Commission's 
interpretation of the transitional mechanism, which effectively 
No. 96-0135 
 
20
read in a limitation on which deductions13 could be equalized, 
contravenes the intent of the legislature as evidenced by the 
plain wording of the rule.  We therefore cannot sustain the 
Commission's interpretation. 
 
By the Court.The decision of the court of appeals is 
reversed. 
                     
13  We mean deductions other than those for depreciation and 
amortization already excepted by § 3047(1)(a).  
No. 96-0135.ssa 
 
1 
¶29 SHIRLEY S. ABRAHAMSON, CHIEF JUSTICE (concurring).  I 
join the court in its mandate.  I write separately to express my 
disagreement with the majority opinion's reliance on the plain 
meaning canon to interpret 1987 Wis. Act 27, § 3047(1)(a). 
¶30 The 
majority 
begins 
and 
ends 
its 
analysis 
of 
§ 3047(1)(a) by relying on the plain meaning maxim of statutory 
interpretation:  When statutory language is clear on its face, a 
court's sole function is to apply the statute according to its 
plain meaning.   
¶31 I agree with the majority that the primary source of 
statutory interpretation is the language of the statute.  "The 
task of resolving the dispute over the meaning of [a statute] 
begins where all such inquiries must begin:  with the language 
of the statute itself."  United States v. Ron Pair Enters., 
Inc., 489 U.S. 235, 241 (1989)(citing Landreth Timber Co. v. 
Landreth, 471 U.S. 681, 685 (1985)).14  
¶32 The majority opinion concludes that the language of 
the statute is clear on its face, using a rule of construction 
often repeated in prior cases:  "A statute is ambiguous when it 
is capable of being understood in two or more different senses 
by reasonably well-informed persons" but is not rendered 
ambiguous "if courts differ as to its meaning."  Majority op. at 
                     
14 I also agree with the majority that the purpose of 
statutory interpretation is to ascertain the intent of the 
legislature. 
No. 96-0135.ssa 
 
2 
11.15  This rule of construction, if taken at face value, means 
that a court need not consider judges and courts as reasonably 
well-informed persons.  If judges and courts were considered 
reasonably well-informed persons, then under this rule of 
construction when they differ about a law's meaning, the law 
would be considered ambiguous.  
¶33 This rule of construction cannot be taken at face 
value or treated seriously.  The rule is just a means to enable 
a court to ignore another court's or judge's interpretation of a 
statute and to then set forth its interpretation without 
explanation.  Declaring that a statute has a plain meaning and 
then stating what the plain meaning is avoids any discussion of 
how the statute should be interpreted.  
¶34 For many years I have thought this rulenamely that 
just because judges differ about the meaning of a statute, the 
statute is not ambiguousto be plainly foolish.  I conclude that 
when courts or judges disagree about the interpretation of a 
law, the law is, by definition, capable of being understood in 
two or more different senses by reasonably well-informed persons 
                     
15 The majority opinion also states that "a statute is not 
rendered ambiguous merely because the parties disagree as to its 
meaning."  Majority op. at 11.  When parties disagree, I would 
adopt the approach urged by Professor Hurst:  "If on its face 
the text supports the position of one contestant, due regard to 
the text suggests that a substantial burden of persuasion should 
rest on the opponent to prove that the statute had a different 
meaning."  J. Willard Hurst, The Legislative Branch and the 
Supreme Court, 5 U. Ark. L.J. 487, 789 (1982).  See also J. 
Willard Hurst, Dealing With Statutes 49-50 (1982).  
No. 96-0135.ssa 
 
3 
even though one interpretation might on careful analysis seem 
more suitable to this court. 
¶35 Section 3047(1)(a) does not explicitly govern bad debt 
reserve of a savings and loan association, the issue presented 
in this case.  The Tax Appeals Commission, the circuit court and 
the court of appealsall impartial, well-informed adjudicative 
bodiesdisagreed over the meaning of § 3047(1)(a) with respect 
to the bad debt reserve in question.  The Tax Appeals Commission 
and court of appeals interpreted § 3047(1)(a) against Lincoln 
Savings.  The circuit court interpreted § 3047(1)(a) in Lincoln 
Savings's favor.  Both the circuit court and the court of 
appeals declared § 3047(1)(a) to be plain and unambiguous but 
disagreed over what the plain meaning of § 3047 (1)(a) is.  
¶36 In my view this case cannot be resolved through 
reliance on the plain meaning rule alone, as the majority 
opinion suggests.  I would instead decide this case by 
determining which interpretation of § 3047(1)(a) most clearly 
achieves the legislative goal of changing from Wisconsin's old 
tax system to a federalized tax regime.16 
                     
16 Extrinsic matters such as the statute’s context, subject 
matter, legislative history and the object to be accomplished 
assist in ascertaining legislative intent.  This court has 
recognized that "'[i]t would be anomalous to close our minds to 
persuasive evidence of intention [of the legislature] on the 
ground that reasonable men could not differ as to the meaning of 
the words. . . .  The meaning to be ascribed . . . can only be 
derived from a considered weighing of every relevant aid to 
construction.'"  State v. Hervey, 113 Wis. 2d 634, 641 n.9, 335 
N.W.2d 607 (1983) (quoting United States v. Dickerson, 310 U.S. 
554, 562 (1940)).  
No. 96-0135.ssa 
 
4 
¶37 Prior to 1962 Lincoln Savings was subject to federal 
but not Wisconsin income tax.  Between 1962 and 1987 both 
Wisconsin and federal tax law permitted savings and loans 
associations to set aside reserves to cover bad debts and to 
take deductions for bad debts.  Each tax system used different 
calculations for the deductions, and the Wisconsin tax law was 
less favorable to taxpayers than the federal tax law in 
calculating the deductions.  
¶38 The 
1987 
Wisconsin 
federalization 
act 
required 
Wisconsin taxpayers to compute their taxable income based on 
federal tax law rather than Wisconsin tax law.  The state 
legislature recognized that under federalization some taxpayers 
might lose deductions while others would escape taxation on 
income.  Thus in 1987 the legislature enacted § 3047(1)(a), a 
transition rule to provide for adjustments over a five-year 
period.  It is against this backdrop that this court must 
analyze the parties' interpretations of § 3047(1)(a).   
¶39 Each 
party's 
interpretation 
focuses 
on 
different 
language of § 3047(1)(a). 
¶40 One interpretation of § 3047(1)(a) is that it applies 
to any double inclusion or omission of income or deduction 
arising "because of this act," that is, because of the 1987 
federalization act.  Under this interpretation § 3047(1)(a) is 
directed at remedying post-1986 tax distortions caused by the 
1987 
federalization 
act. 
 
Lincoln 
Savings 
urges 
this 
interpretation by arguing that an adjustment in its bad debt 
No. 96-0135.ssa 
 
5 
reserve is required to eliminate post-1986 distortions caused by 
federalization. 
¶41 Another 
interpretation 
of 
§ 3047(1)(a) 
is 
that 
taxpayers are required to subtract from income any item of 
income, loss or deduction "in order to avoid the double 
inclusion, or omission, of any item of income, loss or 
deduction" (emphasis added).  Under this reasoning Lincoln 
Savings's pre-1962 federal deductions were not omitted for 
Wisconsin tax purposes because Lincoln Savings was not subject 
to Wisconsin income tax before 1962.  Under this view of 
§ 3047(1)(a) 
Lincoln 
Savings 
cannot 
recoup 
the 
pre-1962 
Wisconsin tax deductions.  
¶42 While 
both 
interpretations 
of 
§ 3047(1)(a) 
are 
reasonable, I conclude that Lincoln Savings's interpretation of 
§ 3047(1)(a) is more consistent with the state legislature's 
ultimate goals of federalization of Wisconsin corporate taxes 
and ameliorating the impact of changing to the post-1986 system 
of computing Wisconsin taxable income.  I would therefore adopt 
Lincoln Savings's interpretation of § 3047(1)(a). 
¶43 For the foregoing reasons I join the court's mandate 
and write separately.   
¶44 I am authorized to state that Justice William A. 
Bablitch, Justice Ann Walsh Bradley and Justice N. Patrick 
Crooks join this opinion.