Court Opinion

ID: 8191625
Source: CourtListenerOpinion
Date Created: 2022-09-09 23:14:39.750511+00
Date Added: 2024-06-11T16:40:37.781767
License: Public Domain

BarNes, J.
(dissenting). When this case was first decided I intended to state my reasons for dissenting, but pressure from other work was so great that I did not do so. I take this occasion to state my views.
I think the word “income” as used in the constitutional amendment and in the statute refers to net earnings or profits rather than to gross receipts, and that it does not include capital which is taxable under the uniformity rule. If a manufacturing company sells goods to the amount of $100,000 *471in a year for cash, its gross receipts amount to this sum, but we do not ordinarily understand that this sum is income if it has .cost the company $105,000 to manufacture and market the goods which produced the return. It will hardly do to say the illustration is not pat because no distribution is ordinarily made of gross receipts. If the money is not taxable as income in the hands of the corporation, I fail to see how it could become income in the hands of the .stockholders by turning it over to them. If the property of a corporation consists of a building and the grounds on which it stands, that property represents the capital of the company regardless of the amount of outstanding stock. The stock simply evidences ownership of a fractional part of the capital and other assets of the company. Its actual value may differ widely from its face value. If the capital is converted to cash, the proceeds is still capital, and if the money is distributed among the stockholders it is a distribution of capital. The certificates of stock, which had a value before the distribution, cease to have any. They have simply been converted into another species of property. Now if the legislature can declare the dividend so received income, it may also declare that the proceeds derived by an individual from the sale of a farm or a house and lot or any other species of property is income. This would amount to a tax on transfers of property instead of a tax on profits. Income does not mean one thing where a corporation is involved and another where an individual is affected. A corporation the 1st of January in any year may own a large quantity of standing timber. It may cut $50,000 worth of such timber and make a profit of $10,000 on its operations over and above the value of the timber standing. According to the idea of the court, the entire $60,000 if distributed is income to the stockholder. I think only $10,000 is income, because that represents the profits made from capital. The removal of $50,000 worth of timber depreciated the capital of the corporation and the *472actual value of the outstanding stock to just that extent. Tbe property of the stockholder has not been augmented by the transaction beyond his share of the profits actually made. The form only has been changed. Every dollar he receives in cash on a distribution of capital assets diminishes his investment in the corporation correspondingly. I confess I am unable to see any difference in principle between the distribution of capital assets among stockholders and the payment or partial payment of a note to an individual. If the payment on the principal is not income in the case of an individual, the capital of a corporation which may be distributed is not income. Neither do I see how it can be said that where a corporation has reduced part of its capital assets from one form to another the property acquired in the exchange is income where there is no increase in assets. If it is not income in the hands of the corporation, by what species of jugglery does it become such by transferring it to the stockholder? As to him the transaction amounts to taking wheat to the market and selling it and bringing home the money received. The ore in the Pewabic mine was a capital asset having a determinable tonnage value. Any profit made in the process of mining and marketing the ore was income. But I think the value of the ore in the mine was not income. The capital assets of the corporation were reduced to the extent of the value of that ore by taking it out. When the money received was distributed, the stockholders had money in lieu of an individed interest in a quantity of iron ore equal in value to the money received.
The statute, sec. 1087m — 2, sub. 2, defines income as including “all dividends" or profits derived from stock. Whether where the property of a corporation is sold and distributed among the stockholders the capital so distributed can be correctly called a dividend, is not very material. The constitution allows a tax to be assessed on incomes. The word “income” must be taken in the sense in which it was gener*473ally understood when the amendment was adopted, and the legislature cannot, under the guise of attempted definition, proceed to tax something as income which was not such in fact. Income Tax Cases, 148 Wis. 456, 512, 134 N. W. 673, 135 N. W. 164.
As I understand the opinion, it is conceded that if the technical meaning of the word “income” be taken, a distribution of capital assets does not constitute income. But it is said that the word should be given its “general and usual meaning,” and that ordinary dividends of going corporations have, in the common acceptation of the term, been regarded as income whether declared from capital or profits.
It is true that the word “income” is sometimes used as meaning gross income or gross receipts instead of net receipts or profits. But I think it is ordinarily used and understood as being synonymous with gain or profit, and such is the meaning of the word as understood by economists who have written on income taxation and economics. Seligman, Income Tax, § 5 ; McCullough, Prin. of Pol. Econ. ch. 7, p. 530.
If the idea of the Income Tax Law as set forth in the Income Tax Cases, 148 Wis. 456, 505, 134 N. W. 673, 135 N. W. 164, be correct, the purpose was to distribute the burden according to ability to pay. There is no relation whatever between gross income and ability to pay. Imposing an income tax on gross income or receipts might be justified on the ground of overruling necessity if the state were in dire straits, but could be justified on no other ground. As a matter of fact the legislature has not pretended to tax gross income unless it has done so in the case of corporate dividends which are declared to distribute the capital of the corporation. Nearly all corporate dividends are declared to distribute profits or net earnings, and of course in such a case they are taxable. I cannot agree that the distribution of capital assets is generally regarded as income. Herein arises an interesting question. Can the gross income of one tax*474payer be taxed and only the net income of another ? The tax may be graduated and progressive, but does the rule of uniformity apply so that the legislature must tax either gross incomes or else net incomes ? Art. VIII, sec. 1, of the constitution now provides:
“The rule of taxation shall be uniform, and taxes shall be levied upon such property as the legislature shall prescribe. Taxes may also be imposed on incomes, privileges and occupations, which taxes may be graduated and progressive, and reasonable exemptions may be provided.”
In my view of the law a decision of the question is not es--sential to a decision of the present case. It may not be out of place to remark that in a brief recently filed in another case in this court, the attorney general has taken the position that the rule of uniformity applies to income taxes, except that they may be graduated and progressive.
Under none of the definitions of income could the money derived from the sale of ore be considered income while in the hands of the Pewabic Company, unless it can be said that the change of one form of corporate assets into another creates income. This does not seem reasonable. What is capital in the hands of the company does not become profit because the company distributes it among its owners.
I agree that the word “income” as used in the constitution should not be given a narrow or technical construction. I think, however, that it does not mean gross income or gross receipts, but does mean net income or profits. Unless it be given the first meaning, I do not see how the dividend received by the plaintiff in this case was taxable.
It is, of course, easier to tax gross income than it is to tax net receipts or profits, but this is hardly a substantial reason for saying that the legislature must have intended or was even authorized to tax the species of property which it is easiest to reach. It is much easier to ascertain the gross income of a mercantile or manufacturing company than it is the net income, but still only the net income is in fact taxed.