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MILLER ET AL. v. MILWAUKEE

decided: January 3, 1927.

MILLER ET AL., EXECUTORS
v.
MILWAUKEE



ERROR TO THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF WISCONSIN.

Taft, Holmes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Sanford, Stone

Author: Holmes

[ 272 U.S. Page 714]

 MR. JUSTICE HOLMES delivered the opinion of the Court.

This is a suit to recover the amount of taxes alleged to have been unconstitutionally exacted from the plaintiffs' testator. The facts are agreed and the only question is the validity of the tax under the Constitution of the United States. The testator held stock in Wisconsin corporations that owned United States bonds issued under the Acts of April 24, and September 24, 1917. The interest upon these bonds was credited by the corporations to their surplus, and subsequently was distributed to the stockholders in dividends of stock or cash. The corporations paid a tax upon their income, except, of course, upon that received from the bonds of the United States. But this exemption was met in the laws of Wisconsin by a provision that while the stockholders were not taxed upon dividends received from corporations the income of which was assessed, yet if only part of the income of the corporation was assessed, only a corresponding part of the dividends or income received therefrom should be deducted from the income taxed to the stockholders. The law also provides that taxable income shall include all dividends from the earnings of corporations, whether in cash or stock. The testator was taxed in accordance with the statute, against his protest that the attempt to make up from him what the State could not take from the corporations was forbidden by the Constitution and laws of the United States. The District Court ruled that the action could not be maintained and the case was brought directly to this Court.

There is no doubt that in general a corporation is a nonconductor that cuts off connection between dividends to its stockholders and the corporate funds from which the dividends are paid. Des Moines National Bank v. Fairweather, 263 U.S. 103. A system of taxation that applied to stockholders of all corporations equally might tax, we assume for purposes of argument, the stockholders

[ 272 U.S. Page 715]

     of a corporation that had invested all its property in United States bonds. But it would be a different matter if the State selected such corporations, supposing a number of them to exist, and taxed their stockholders alone. It is a familiar principle that conduct which in usual situations the law protects may become unlawful when part of a scheme to reach a prohibited result. If the avowed purpose or self-evident operation of a statute is to follow the bonds of the United States and to make up for its inability to reach them directly by indirectly achieving the same result, the statute must fail even if but for its purpose or special operation it would be perfectly good. Under the laws of Wisconsin the income from the United States bonds may not be the only item exempted from the income tax on corporations, but it certainly is the most conspicuous instance of exemption at the present time. A result intelligently foreseen and offering the most obvious motive for an act that will bring it about, fairly may be taken to have been a purpose of the act. On that assumption the immunity of the national bonds is too important to allow any narrowing beyond what the Acts of Congress permit. We think it would be going too far to say that they allow an intentional interference that is only prevented from being direct by the artificial distinction between a corporation and its members. A tax very well may be upheld as against any casual effect it may have upon the bonds of the United States when passed with a different intent and not aimed at them, but it becomes a more serious attack upon their immunity when they are its obvious aim. In such a case the Court must consider the public welfare rather than the artifices contrived for private convenience and must look at the facts. See Home Insurance Co. of New York v. New York, 134 U.S. 594, 598; Gillespie v. Oklahoma, 257 U.S. 501, 505; United States Grain Corporation v. Phillips, 261 U.S. 106, 113.

Judgment reversed.

[ 272 U.S. Page 716]

     By agreement, the decision in this case controls the decision in No. 74, Chas. A. Miller, et al. v. City of Milwaukee ; No. 75, Emil P. Miller v. City of Milwaukee, and No. 76, Harry G. John v. City of Milwaukee.

Disposition

Reversed.

MR. JUSTICE BRANDEIS, ...


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