Welch v. Henry, 305 U.S. 134 (1938)

Welch v. Henry

No. 13

Argued October 13, 1938
Decided November 21, 1938
305 U.S. 134

APPEAL FROM THE SUPREME COURT OF WISCONSIN

Syllabus

1. Under the income tax law of Wisconsin in force in 1933 and since, the amount of dividends received by a taxpayer from corporations whose "principal business" is "attributable to Wisconsin," i.e., corporations which themselves have paid a Wisconsin income tax upon 50% or more of their total net income, may be deducted from gross income, along with other deductions, in computing his taxable net income. A taxpayer, in his return for the year 1933, filed in March, 1935, made these deductions, the aggregate of which was such that he had no taxable income for that year. A year later, a statute was passed laying a tax on all dividends received in 1933 which, when received, were deductible from gross income. The taxpayer was thus required to pay a tax of $545 on his dividend income in 1933. Held consistent with equal protection and due process under the Fourteenth Amendment. Pp. 142, 146.

2. The fact that the dividends were taxed at a different rate from that applied to other income in 1933 and were given the benefit of but a single deduction of $750, while recipients of other types of income in that year were permitted to deduct specified items of interest, taxes, business losses, and donations, did not render the dividend tax repugnant to the equal protection clause. P. 142.

The dividends constituted a class of untaxed income, received from a specified category of corporations, and the legislature could have concluded that a substantial part of this income had borne no tax burden at its source in the earnings of the corporations, since corporations were not required to pay a tax on that part of their income allocable to business carried on or property located without the State. The selection of such income for taxation at rates and with deductions not shown to be unrelated to an equitable distribution of the tax burden is not a denial of the equal protection commanded by the Fourteenth Amendment. P. 143.

3. The distribution of a tax burden by placing it in part on a special class which, by reason of the taxing policy of the State, has escaped all taxation during the taxable period is not a denial of equal protection; nor is the tax any more a denial of equal protection because retroactive. P. 144.

4. So far as equal protection is concerned, the validity of retroactive alteration of a tax scheme must be determined, as in the case of any other tax, by ascertaining whether the thing taxed falls within a distinct class which may rationally be treated differently from other classes. P. 145.

5. In the absence of facts tending to show that the taxing act is a hostile or oppressive discrimination against the recipients of dividends who have hitherto escaped all taxation of them, it does not deny equal protection. P. 146.

6. A tax is not necessarily in violation of the due process clause because retroactive. In each case, it is necessary to consider the nature of the tax and the circumstances in which it is laid before it can be said that its retroactive application is so harsh and oppressive as to transgress the constitutional limitation. P. 146.

Cases distinguished in which this Court has held invalid the taxation of gifts made and completely vested before the enactment of the taxing statute, decision there having been rested upon the ground that the nature or amount of the tax could not reasonably have been anticipated by the taxpayer at the time of the particular voluntary act which the statute later made the taxable event. Unlike the case of gifts which the donor might have refrained from making had he anticipated the tax, it cannot be assumed that stockholders would refuse to receive dividends even if they knew that the receipt would later be subjected to a new tax or to the increase of an old one, and the objection to the present tax is addressed only to the particular inconvenience of the taxpayer in being called upon, after the customary time for levy and payment of the tax has passed, to bear a governmental burden of which it is said he had no warning and which he did not anticipate.

7. Taxpayers cannot justly assert surprise or complain of arbitrary action in the retroactive apportionment of tax burdens to income when this is done by the legislature at the first opportunity after knowledge of the nature and amount of the income is available. P. 149.

In the present case, the returns of income received in 1933 were filed and became available in March, 1934. The next succeeding session of the legislature at which tax legislation could be considered was in 1935, when the challenged statute was passed. P. 150.

226 Wis. 595; 277 N.W. 183, affirmed.

Appeal from a judgment sustaining an income tax the amount of which the present appellant paid under protest and sued to recover. The trial court had at first overruled a demurrer to the complaint. The ruling was reversed by the Supreme Court of Wisconsin on a first appeal. The trial court then sustained a demurrer to an amended complaint. Judgment of the Supreme Court affirming this action is the subject of the present appeal to this Court.