Court Opinion

ID: 9419516
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:49:54.476118+00
Date Added: 2024-06-11T17:22:18.737802
License: Public Domain

Mr. Justice Jackson,
dissenting:
The facts of one of these eases will make clear the grounds upon which I dissent.
The International Harvester Company is incorporated under the laws of New Jersey. Its head business office *446is in Chicago, Illinois. It has qualified and has been admitted to do business in Wisconsin and in every state in the Union except Nevada. It has sales branches and manufacturing plants in Wisconsin, and in many other states. Proceeds of sales and receipts from operations in Wisconsin and in every other state are sent to the corporation treasury in Chicago and commingled in general funds without segregation or earmarking as to state of origin.
More than 32,000 stockholders are owners of this enterprise. They are domiciled in every state of the Union, less than 2 per cent of them in Wisconsin. Under the corporation’s charter and the applicable law of New Jersey the stockholders may be paid dividends only from its surplus or net profits. Every corporate act connected with payment of dividends takes place in Chicago'. There the directors meet to declare them, there the checks are drawn and mailed. They are paid out of the corporation’s general funds on deposit in Chicago or New York.
In 1935 Wisconsin enacted a “Privilege Dividend Tax.” It provides, with exceptions not material:
“Section 3. Privilege Dividend Tax. (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 3 per cent of the amount of such dividends declared and paid by all corporations (foreign and local). . . . Such tax shall be deducted and withheld from such dividends payable to residents and nonresidents by the payor corporation.

“(3) Every such corporation hereby made liable for such tax, shall deduct the amount of such tax from the dividends so declared.
“(4) In the case of corporations doing business within and without the state of Wisconsin, such tax shall apply only to dividends declared and paid out of income derived *447from business transacted and property located within the state of Wisconsin. . . .” Wis. Stat. (1941) § 71.60.
Under this last provision the State by formula not now important apportions among the states the surplus from which dividends may be paid and thus determines a proportion of the dividend attributable to earnings in Wisconsin. As applied and sustained in this case, the short of the matter is this: Wisconsin says it may tax 32,000 stockholders, 98 per cent of whom reside in other states. It taxes them when and because they receive a dividend from a corporation not in its internal affairs subject to its laws, by acts not one of which is performed within its borders.
After the Supreme Court of Wisconsin held this tax invalid it was reinstated by this Court. Wisconsin v. J. C. Penney Co., 311 U. S. 435. This was done on the theory that the tax was not what Wisconsin called it but was in substance an income tax on the corporation, deferred until the income was distributed and measured by the amount of the distribution. As so interpreted, it was the federal undistributed profits tax in reverse; it was a distributed profits tax. But the Wisconsin court has respectfully but firmly insisted that it knows whom Wisconsin is taxing and why. It says this is not an income tax, that it is no tax on the corporation, but is a tax on the stockholder when and because he receives a dividend.
I think the parties are entitled to have the constitutionality of this far-reaching tax decided on the assumption that it is just what the Wisconsin Legislature and Supreme Court say it is. If we do, the question is whether a state may tax nonresident stockholders for receiving from a foreign corporation a dividend from its surplus or undivided profits merely because some time in the past a portion of the surplus was earned in the state.
We must put out of consideration entirely reasoning by which we sustain state taxation of income of the corpora*448tion. These dividends are not and cannot be regarded as income of the corporation within any legal or accounting definition. These surplus funds constituted income once — at the moment of receipt — and may be counted as income for any period which includes time of receipt. But once received, they became capital funds in the sense that earned surplus becomes capital. When- they were distributed they were not income of the corporation. They were its surplus capital funds. Not even the power of this Court can make income of outgo. To speak of “a tax on corporate income that is paid out” is as self-contradictory as to speak of round squares.
These dividends of course are income to the stockholder, and any state with jurisdiction to tax him may tax them as such. But I am unable to agree that having “afforded protection and benefits” to a corporation gives jurisdiction to tax the incomes of all its stockholders. Nor do I think that because the state has once permitted the corporation to do business and make earnings in the state its taxing power follows those earnings into the hands of third persons to whom they may be paid. A dividend when declared becomes a debt of the corporation, enforceable as any other debt. If there is power in Wisconsin, because funds were earned there, to tax the receipt of a dividend, there is no reason why it should not also' have power to tax the recipients of corporate funds as wages, salaries, or as payment of any other obligation.
Moreover, the Court itself apparently feels obliged to abandon the income-tax-on-the-corporation theory in order to avoid the objection of retroactivity. In considering this aspect of the tax it shifts to a “taxable event” theory which places the event after the enactment of the statute.
I also find it difficult to accept the statement that there is no “constitutional obstacle either to the state’s distributing the burden of the tax ratably among the stockhold*449ers . . . or to the state’s imposing on the corporation the duty of acting as its agent for the collection of the tax. . . The relations between different classes of stockholders is fixed by the corporate charter. If this is a tax on the corporation, it is clear that its burden falls upon the equity stockholders and upon them alone. I do not think the State of Wisconsin would have the power to provide that the preferred stockholders of a New Jersey corporation, despite provisions of its charter, should assume a part of the equity burden.
As supporting this tax, the opinion of the Court says that Wisconsin may impose upon the corporation “a measure of control . . . with respect to its withdrawal” of these earnings, and that their “ultimate distribution ... to stockholders” is “subject to some state control.” I do not understand to what reference is made. These earnings lawfully had been added to surplus of a New Jersey corporation, they were represented by funds lawfully transferred to Chicago or New York. Prom them the corporation made the distribution. What control Wisconsin had over these funds in these circumstances I do not see.
The act in question does not purport to be one for the protection of local creditors against the corporation’s illegal payment of dividends as was the act dealt with by Judge Cardozo in German-American Coffee Co. v. Diehl, 216 N. Y. 57, 109 N. E. 875. This act alters the purely internal relations of different classes of stockholders without in the least affecting their relation to creditors.
It is impossible to reconcile the taxable-event theory with the benefit theory for supporting this tax. The taxable event clearly is the payment of the dividend. The right to make such payment is not derived from Wisconsin law. The ability to do so does not depend on Wisconsin earnings. The existence of earnings for the period, or of an accumulated surplus, from Wisconsin earnings alone *450would not authorize such a dividend. That would depend on net accumulations from all sources and surplus from Wisconsin might be neutralized by losses from operations elsewhere. In such a case it is clear this statute would not even purport to tax, although Wisconsin had extended exactly the same protection to the operations within the state as otherwise. Moreover, if earnings were had in Wisconsin and there were net earnings overall but the corporation should decide to accumulate them, the statute would not purport to lay the Wisconsin tax. These facts make clear that Wisconsin is doing what the Supreme Court of Wisconsin said it was doing. It lays a tax upon the stockholder’s dividend. It does not tax the income of the corporation.
I do not see that the way to tax the dividends of nonresident stockholders can be bridged by “some practically effective device” necessary “in order to enable the state to collect its tax — here by imposing on the corporation the duty to withhold the tax.” Do we mean that the state may empower or obligate a foreign corporation to collect for it taxes it is without power to collect itself? The physical power to get the money does not seem to me a test of the right to tax. Might does not make right even in taxation. To hold that what the use of official authority may get the state may keep, and that if it cannot get hold of a nonresident stockholder it may hold the company as hostage for him, is strange constitutional doctrine tome.
Whatever rights Wisconsin has to reach beyond its borders and tax nonresidents every other state has also. One who puts his savings to work in an enterprise of national scope may be subjected to any number of state taxes on his dividends up to forty-eight. Any number up to forty-seven of them may be levied by states in which he never lived, never went, did no individual business, *451and has no vote. Representation is the ordinary guaranty of fairness in taxation.
I do not think any fact jin this case shows jurisdiction in Wisconsin to lay a tax on a privilege she does not grant and could not deny, which is exercised wholly outside of her borders and by those who are not her citizens or her corporate creatures. I see no foundation for the tax Wisconsin has laid and no better foundation for the substitute tax this Court has laid. I would reverse the judgments below.