U.S. Supreme Court WELCH v. HENRY, 305 U.S. 134 (1938)

[Page 305 U.S. 134, 143]

ing a substantial part of their income from business carried on within the State, on which the corporations have paid a tax to the State, as a distinct class of income for tax purposes. At first complete tax immunity was granted to them. 1, c. 658, Laws of Wisconsin, 1911. Later the immunity was allowed ratably in the same proportion that the income of the corporation had been subjected to state income tax. 1, c. 318, Laws of Wisconsin, 1923. And, finally, by amendment adopted in 19272 and in force in 1933 complete immunity of dividends from income tax was allowed if 50% or more of the total net income of the corporation paying them was included in the computation of the Wisconsin tax on corporate income. [Footnote 3]

[Page 305 U.S. 134, 152]

is entitled to deduct from gross receipts wages, salaries, and other expenses of conducting a business, occupation, or profession, depreciation, also cost of property sold. In addition each is permitted to deduct certain losses incurred within the year not compensated by insurance, interest paid on indebtedness, state and federal taxes, contributions to the State or its subdivisions or to charitable objects and amounts paid to an unemployment reserve. [Footnote 2] Pensions are exempted, and a specified amount may be deducted from the tax, when ascertained, as a personal exemption. 3 Dividends (with exceptions not material) received from certain corporations filing income tax returns under the law, and paying income tax to the State, are deductible from gross income. [Footnote 4] We were told at the bar that this deduction had been authorized for many years prior to 1933.

[Page 305 U.S. 134, 153]

payment of official salaries. As the Supreme Court of Wisconsin has said: 'Expense for relief of the unemployed is on no different footing than any other governmental expense.' [Footnote 5] And it goes without saying that an emergency does not create power but is merely the occasion for the exercise of existing powers in conformity to constitutional principles. [Footnote 6]

[Page 305 U.S. 134, 154]

is to be assessed, collected and paid in the same manner as the normal income tax for 1934. Under this section the appellant was required to make return and pay on some $12,000 of the dividends which he had been permitted to deduct from gross income in calculating and paying his income tax for 1933 and was assessed thereon $545.71 which he paid under protest and brought this section to recover.

The question is whether Section 6 transgresses the prohibition of the Fourteenth Amendment, U.S.C.A.Const. Amend. 14. The Supreme Court of Wisconsin, although stating that 'While the present tax may approach or reach the limit of permissible retroactivity, it does not exceed it', 223 Wis. 319, 271 N.W. 68, 72, sustained the statute as against challenge under the equal protection and due process clauses of the amendment. [Footnote 8] I think the statute is violative of the guarantees of equal protection and due process.

[Page 305 U.S. 134, 155]

cation as if it were the declaration of a new policy of taxation to be operative in the future. No more will it do to separate the retroactive feature of the law and consider it as if it were a mere amendment of a general income tax system as such applicable to all income of all taxpayers subject to the law as it stood at the date of the amendment. The reason for allowing the deduction is plain. As has been said in this court: 'The purpose of the Legislature was solely to prevent double taxation by the state of Wisconsin, of the income received by individuals in the form of dividends.' [Footnote 9] The same thing may be said as to the reason for other allowable deductions, as, for instance, of taxes paid. Reasons of fairness and public policy moved the State to allow the permitted deductions from gross income.

[Page 305 U.S. 134, 158]

not here under attack. A very different course was adopted with respect to the income of 1933. For that year the statute imposed a special income tax on a class selected because the law in force when they paid their taxes had permitted them to deduct certain items, and ignored all others to whom similar deductions had been granted. Thus the whole scheme of the general income tax was unbalanced and a peculiar and specific burden laid upon a selected few who had theretofore been relieved of the unjust burden of double taxation. What was said in Milliken v. United States, 283 U.S. 15, 21, 51 S.Ct. 324, 326, is peculiarly apposite to the facts here disclosed. There, referring to earlier decisions, condemning, under the due process clause, retroactive taxes, it was stated: 'In both the point was stressed, as the basis of decision, that the nature and amount of the tax burden imposed could not have been understood and foreseen by the taxpayer at the time of the particular voluntary act which was made the occasion of the tax.' Here the nature and amount of this special and peculiar tax could not have been understood and foreseen when the petitioner paid his 1933 income tax.

It is to be remembered that the Act in question is not a curative statute for the collection of taxes assessed in a prior year and uncollected10 nor one intended to make available taxes which, by reason of illegality in their imposition, were not paid in the year in which they were assessed. [Footnote 11] The Act is not a remedial measure to confirm or ratify a doubtful administrative interpretation of prior legislation. [Footnote 12] It does not lay an excise or a privilege measured by the income of a prior year,13 nor is it a statute to settle doubts as to whether an earlier taxing act had expired by limitation. 14

[Page 305 U.S. 134, 159]

It was suggested at the bar that the exaction is a property tax and bad as such because retroactively imposed. The reply was that retroactive property taxes have been upheld. The cases cited do not touch the validity of an ad valorem property tax retroactively imposed. Some of them involved special assessments for benefits assessed after the completion of the improvement. 15 Another cited to the proposition dealt with an excise for the use, for pleasure, of foreign built yachts either owned or chartered by the user for more than six months during the taxable year. The exaction was held an excise on the privilege of use and not a tax upon ownership, and, moreover, the tax was not retroactive in operation but was assessed upon the taxpayer at a date during which the taxpayer's use of the yacht continued. [Footnote 16] Still another dealt with a curative act passed to reach property illegally assessed. [Footnote 17] But whether viewed as a property or an income tax the exaction is bad. Most, if not all, the states have long maintained the policy of exempting places of religious worship from annual tax levies. Will it be contended that if the state were not to impose a tax on the value of such exempt property for some past year, the action would not be an arbitrary taking of property as well as a hostile discrimination?

If, as this court has repeatedly said, an income tax is an equitable method of distributing the necessary burdens of government, certainly no such discrimination as is evidenced by the challenged act can properly fall within the description. The Act evidences purposeful and arbitrary discrimination and thus violates the guarantee of equal protection.

Mr. Justice McREYNOLDS and Mr. Justice BUTLER join in this opinion. Footnotes

Footnote 1 Sec. 71.04(4) permits the deduction from gross income of dividends received from corporations whose principal business is attributable to Wisconsin; '... any corporation shall be considered as having its principal business attributable to Wisconsin if 50 per cent. or more of the entire net income or loss of such corporation ... (for the year preceding the payment of such dividends) was used in computing the average taxable income provided by chapter 71 ....'

Footnote 2 C. 539, 4, Laws of Wisconsin of 1927.

Footnote 3 See note 1, supra.

Footnote 4 Income Tax Cases, 1912, 148 Wis. 456, 514, 134 N.W. 673, 135 N.W. 164; State ex rel. Globe Steel Tubes Co. v. Lyons, 1924, 183 Wis. 107, 124, 197 N.W. 578; Cliffs Chemical Co. v. Wisconsin Tax Comm., 1927, 193 Wis. 295, 302, 214 N.W. 447; West v. Tax Comm., 1932, 207 Wis. 557, 562, 242 N. W. 165: VanDyke v. Tax Comm., 1935, 217 Wis. 528, 259 N.W. 700, 98 A.L.R. 1332.

[Footnote 1] Laws of Wisconsin 1911, Chap. 658, p. 984.

[Footnote 2] Sec. 71.04.

[Footnote 3] Sec. 71.05.

[Footnote 4] Sec. 71.04(4).

Footnote 5 Scobie v. Tax Commission, 225 Wis. 529, 538, 275 N.W. 531, 535.

Footnote 6 Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 425, 436 S., 54 S.Ct. 231, 235, 239, 88 A.L.R. 1481; Wilson v. New, 243 U.S. 332, 348, 37 S.Ct. 298, 301, L.R.A.1917E, 938, Ann. Cas.1918A, 1924.

Footnote 7 Laws of Wisconsin 1935, Chap. 15, p. 19.

Footnote 8 The judges who heard the cause were equally divided in opinion. Four justices of the Supreme Court voted to sustain the Act. The trial judge and three justices of the Supreme Court were of the opinion that it was unconstitutional.

Footnote 9 Miller v. Milwaukee, 272 U.S. 713, 717, 47 S.Ct. 280, 281.

Footnote 10 Florida Central & P.R. Co. v. Reynolds, , 22 S.Ct. 176.

Footnote 11 Citizens' National Bank v. Kentucky, 217 U.S. 443, 30 S.Ct. 532.

Footnote 12 Hecht v. Malley, 265 U.S. 144, 44 S.Ct. 462.

Footnote 13 Flint v. Stone Tracy Co., 220 U.S. 107, 31 S.Ct. 342, Ann.Cas.1912B, 1312.

Footnote 14 Stockdale v. Insurance Companies, 20 Wall. 323.

Footnote 15 Seattle v. Kelleher, 195 U.S. 351, 25 S.Ct. 44; Phillip Wagner, Inc., v. Leser, Judge of the Appeal Tax Court of Baltimore, 239 U.S. 207, 36 S.Ct. 66.

Footnote 16 Billings v. United States, 232 U.S. 261, 34 S.Ct. 421.

Footnote 17 Citizens' National Bank v. Kentucky, supra.