State Bar of Wisconsin Return to Wisconsin Tax Appeals Commission






c/o Firstar Corporation

P.O. Box 532

Milwaukee, WI 53201-0532




P.O. Box 8933

Madison, WI 53708


DOCKET NO. 97-I-333



This matter is before us on stipulated facts and briefs. On briefs for petitioner are Attorneys Ronald L. Walter and Elizabeth Staton Idleman, of Foley & Lardner, and for respondent are Attorneys Lili Best Crane and John Cappellari.

Having considered the entire record, the Commission hereby finds, concludes, and orders as follows:


We adopt the following facts as stipulated by the parties, omitting references to exhibits:

Jurisdictional Facts

1. On May 13, 1992, First Wisconsin National Bank of Milwaukee ("petitioner") made a claim for refund by delivering information to the auditor at the Wisconsin Department of Revenue ("respondent") relating to distributions that petitioner contends should be excluded from Wisconsin taxable income pursuant to the decision in NCR Corporation v. Wisconsin Department of Revenue, CCH ¶ 203-301 (WTAC February 10, 1992).

2. By letter dated June 18, 1992, respondent notified petitioner of certain adjustments to its Wisconsin taxable income for tax years ended December 31, 1983; December 31, 1984; December 31, 1985; and December 31, 1986. As part of that notice, respondent denied petitioner's claims for a reduction of Wisconsin franchise taxes for such years, including the claim that increases petitioner's Wisconsin net operating loss for 1987.

3. Pursuant to § 71.88(1)(a), Wis. Stats. (1989-90), petitioner filed a petition for redetermination on August 13, 1992 for tax years ended December 31, 1983; December 31, 1984; December 31, 1985; December 31, 1986; and December 31, 1987.

4. Respondent denied in part petitioner's petition for redetermination in its notice of action.

5. Petitioner timely filed its petition for review with the Commission.

Period of Time Involved

6. The time period involved is tax years ended December 31, 1983; December 31, 1984; December 31, 1985; December 31, 1986; and December 31, 1987.

Facts Supporting Substantive Legal Issues and Amount of Refund

7. Respondent audited petitioner's Wisconsin income tax returns for tax years ended December 31, 1984; December 31, 1985; December 31, 1986; and December 31, 1987. The tax years 1984 through 1986 were open to adjustment by written agreement between petitioner and respondent until June 30, 1992, pursuant to § 71.77(5), Wis. Stats. (1989-90). The tax year 1987 is open to adjustment pursuant to § 71.77(2), Wis. Stats. (1989-90). The 1983 tax year was open to adjustment for certain Internal Revenue Service adjustments previously not finalized pursuant to § 71.11(21) (g)2, Wis. Stats. (1983-86), and § 71.77(7)(b) (1987 and after).

8. In the notice of action on petition for redetermination, dated August 18, 1997, respondent allowed a deduction for dividends received from the ownership of stock in companies other than governmental entities. Respondent disallowed deductions for distributions from the Federal Reserve Bank ("FRB"), the Federal National Mortgage Association ("Fannie Mae"), and the Student Loan Marketing Association ("Sallie Mae") under § 71.26(3)(j), Wis. Stats. (1987-88), and § 71.04(4), Wis. Stats. (1985-86). Respondent, without conceding the issue, withdrew its disallowance of the deduction for Fannie Mae and Sallie Mae dividends. Therefore, the only action of respondent remaining at issue in this appeal is its disallowance of deductions for distributions received from the Federal Reserve Board.

9. Petitioner is a national bank.

Federal Reserve Bank

10. The distributions received by petitioner from the FRB constitute dividends under 12 U.S.C. § 289 and 26 C.F.R. 1.103-2, and constitute dividends for purposes of § 71.26(2), Wis. Stats., and 26 U.S.C. § 61.

11. Federal Reserve Banks are organized under 12 U.S.C. § 341 and are not organized as corporations under the laws of any state or the District of Columbia.

12. Federal Reserve Banks are exempt from federal, state, and local taxation, except taxes on real estate. 12 U.S.C. § 531.

13. As a national bank, federal law requires petitioner to be a member of the Federal Reserve System and to hold FRB stock.

Tax and Distribution Values

14. On September 4, 1992, petitioner deposited $1,027,671.21 with respondent in connection with the petition for redetermination.

15. Of the $1,027,671.21 petitioner deposited with respondent as part of its appeal, respondent agreed to refund the following amount in its notice of action on petitioner's petition for redetermination:

Deposit refunded $11,652.79

Plus interest from

9/4/92 to 9/10/97 5,260.89

Total refund $16,913.68

16. In its claim for refund, petitioner stated that the following amounts should be excluded from Wisconsin apportionable income:

1983: $264,542

1984: $241,001

1985: $252,864

1986: $262,883

1987: $552,636

The exclusion of such amounts would have resulted in reduced assessments of Wisconsin franchise taxes of the following amounts:

1983: $22,989

1984: $19,039

1985: $18,960

1986: $19,628

As a result of excluding such amounts from petitioner's 1987 Wisconsin taxable income, petitioner's Wisconsin net operating loss for 1987 would increase by $517,550 ($552,636 times the percentage to Wisconsin of 93.651184%).

17. The distributions from FRB that are at issue are as follows:

1983: $233,208

1984: $233,208

1985: $233,208

1986: $233,208

1987: $238,727

18. Petitioner's Wisconsin taxable income for the years at issue if reduced by the distributions received from FRB, Fannie Mae, and Sallie Mae would be as follows:

1983: $23,355,039

1984: $ 8,649,735

1985: $18,364,021

1986: $26,050,108

If such distributions had been excluded from petitioner's 1987 taxable income, petitioner's adjusted net loss would be $6,501,189.

19. Instead of the additional franchise tax shown on respondent's notice of action, the exclusion of all distributions from FRB, Fannie Mae, and Sallie Mae from petitioner's Wisconsin taxable income for the years in question would result in a refund for 1983 of $16,603.73 and additional franchise taxes due for the years 1984, 1985, and 1986 in the following amounts:

1984: $ 72,453.07

1985: $304,171.69

1986: $141,339.52

20. As a result of excluding distributions from FRB, Fannie Mae, and Sallie Mae from petitioner's 1987 Wisconsin taxable income, petitioner's Wisconsin net operating loss for 1987 would increase by $225,712 ($241,014 times the percentage to Wisconsin of 93.651184%). All amounts are before the calculation of interest and before the application of petitioner's deposit of $1,027,671.


Did the respondent properly disallow petitioner's deduction, pursuant to Wis. Stat. § 71.04(4) (1985-86) and § 71.26(3)(j) (1987-88) ("the dividend deduction statute"), of dividends received by petitioner from the Federal Reserve Bank?


71.04 [1983-84 and 1985-86] Deductions from gross income of corporations. Every corporation, joint stock company or association shall be allowed to make from its gross income the following deductions:

* * *

(4) Dividends received, as provided under pars. (a) and (b). If both pars. (a) and (b) apply to dividends received from the same corporation, those dividends may be deducted under only one of those paragraphs.

(a) Dividends, except stock dividends not taxable under s. 71.305, received from any corporation con-forming to all of the requirements of this subsection. The corporation must have filed income tax returns as required by law, the income of the corporation must have been subject to the income tax law of this state, and the dividend must not have been deductible for tax purposes from the gross income of the corporation. The principal business of the corporation must be attributable to Wisconsin, and for the purpose of this subsection any corporation shall be considered as having its principal business attributable to Wisconsin only if 50% or more of the entire net income or loss of the corporation after adjustments for tax purposes (for the year preceding the payment of the dividend) was used in computing the taxable income under this chapter.

71.26 [1987-88] Income computation.

* * *

(3) MODIFICATIONS. The income of a corporation shall be computed under the internal revenue code, ... as modified in the following ways:

* * *

(j) ... [C]orporations may deduct from income dividends received from a corporation with respect to its common stock if the corporation receiving the dividends owns, directly or indirectly, during the entire taxable year at least 80% of the total combined voting stock of the payor corporation and dividends received from a corporation that filed a return under this chapter, that is subject to tax under this chapter, that did not deduct the dividends under this chapter and 50% or more of the net income or loss of which, after adjustments for tax purposes, was used in computing taxable income under this chapter. In this paragraph, "dividends received" means gross dividends minus taxes on those dividends paid to a foreign nation and claimed as a deduction under this chapter.

990.001 [1995-96] Construction of laws; rules for. In construing Wisconsin laws the following rules shall be observed unless construction in accordance with a rule would produce a result inconsistent with the manifest intent of the legislature:

* * *

(11) SEVERABILITY. The provisions of the statutes are severable. The provisions of any session law are severable. If any provision of the statutes or of a session law is invalid, or if the application of either to any person or circumstance is invalid, such invalidity shall not affect other provisions or applications which can be given effect without the invalid provision or application.


1. Wisconsin Statutes § 71.04(4) (1983-1986) and § 71.26(3)(j) (1987-88) were not entirely invalidated by the decision in NCR Corp. v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶ 203-412 (Wis. Cir. Ct. Dane Co., April 30, 1993) (the "NCR case" or "NCR decision"), but are severable pursuant to Wis. Stat. § 990.001(11).

2. The respondent properly denied petitioner's deductions for Federal Reserve Bank dividends received because the Federal Reserve Bank does not meet all of the valid requirements of Wis. Stat. § 71.04(4) (1985-86) and § 71.26(3)(j) (1987-88).

3. The respondent's action under Wis. Stat. § 71.04(4) (1985-86) and § 71.26(3)(j) (1987-88) is not barred by the doctrine of intergovernmental tax immunity or by 31 U. S. C. § 3124(a).


In order to determine whether respondent's action was proper, we must resolve several preliminary issues raised by the parties.

Is the dividend deduction statute severable, or was it entirely invalidated by the Dane County Circuit Court in the NCR case?

The respondent maintains that, because some of the language of the dividend deduction statute is severable from the language which the NCR decision held unconstitutional, the dividends at issue are not deductible because the FRB does not meet the surviving requirements for deductibility. The respondent has conceded that the dividend deduction statute violated the Commerce Clause of the U. S. Constitution to the extent that the statute required 50% of corporate income to be taxed under Chapter 71 as a condition of eligibility for the deduction.(2) The petitioner maintains that § 71.04(4) was invalidated in its entirety by the NCR decision and cannot be partially invoked by respondent to deny the deductions at issue.

Wisconsin Statutes § 990.001(11), supra, provides for severability of a statutory provision which is invalid. The criteria for determining severability are clarified in the case law:

[W]hen the elimination of a void portion leaves a complete law in some reasonable aspect capable of being carried into effect consistent with the intention of the Legislature which enacted it in connection with the void part, the valid portions must stand.

In re Zeimet's Estate, 259 Wis. 619, 623-4 (1951) [Citations omitted].

The intent of the legislature and the viability of the severed portion of the statute when standing alone are the factors to consider when deciding whether a statute should be severed. Material provisions of a statute may be eliminated,

"if the part upheld constitutes, independently of the invalid portion, a complete law in some reasonable aspect, unless it appears from the act itself that the legislature intended it to be effective only as an entirety and would not have enacted the valid part alone." Madison v. Nickel, 66 Wis. 2d 71, 79 (1974).

Chicago & N. W. Transp. Co. v. Pedersen, 80 Wis. 2d 566, 575 (1977). In the NCR decision, the Court found the dividend deduction statute "on its face" to be a discrimination against interstate commerce(3) and concluded "that § 71.04(4), Stats., is violative of [the Interstate Commerce clause] and cannot stand."(4) The Court also concluded that the 50% concentration language violates the Constitution's Equal Protection clause.(5)

An examination of the NCR decision reveals that the only language in § 71.04(4) addressed by the Court was the actual concentration language, which is contained in the last sentence of § 71.04(4)(a).(6) Therefore, because no other language in that subsection was at issue or addressed by the Court, we must conclude that only the concentration language itself was invalidated.

This conclusion is buttressed by our application of § 990.001(11) and the case law. It is clear that the remaining statutory language is reasonably viable standing alone, and there is no indication that the legislature intended otherwise. Indeed, without the remaining statutory language there would be no deduction at all for dividends received by corporations, and the income would then be taxed twice at the corporate level, a result the statute was obviously designed to address.(7) The dividend deduction statute is therefore severable in the wake of the NCR decision, pursuant to § 990.001(11).

Does the Federal Reserve Bank qualify under the

surviving four requirements of the statute?

The surviving statutory language allows a deduction for dividends received from 1) a corporation that 2) filed a return under Chapter 71, 3) is subject to tax under Chapter 71, and 4) did not deduct the dividends under Chapter 71.(8)

In the NCR case, there was no question that the taxpayer, NCR Corporation, qualified under the requirements of the deduction statute other than the concentration language. The respondent did not challenge NCR's meeting those requirements, and, once the concentration language was invalidated, respondent conceded that NCR and other qualifying corporations were entitled to the deduction.

Here, respondent challenges the FRB dividend deduction on the basis that the four surviving valid statutory requirements are not satisfied.

1. Is the Federal Reserve Bank a "Corporation?"

The respondent contends that, because the FRB is not a "corporation," dividends received from it are not deductible.(9) In support of this assertion, respondent engages in a lengthy argument to the effect that the FRB is not "similarly situated" to other Wisconsin corporations and does not compete in the same capital markets. We find this argument superfluous.

The language of the dividend deduction statute does not limit the definition of "corporation" in any way. To the contrary, the legislature used the phrase "any corporation" in the 1985-86 Statutes -- which is as broad a term as we can imagine -- and simply "a corporation" in the 1987-88 version. In both cases, "corporation" clearly encompasses the FRB, which is a federal "body corporate" under the language of 12 U.S.C. § 341, empowered to use a "corporate" seal. It is a "corporation" within the unambiguous meaning of the concentration statute as well as within the definition in Black's Law Dictionary, 307 (5th Ed. 1979).(10) The respondent may not create its own narrower definition to deny petitioner's deduction and thereby collect more taxes.

2. Did the FRB file a return under/as required by Chapter 71?

Not even petitioner claims that the FRB filed a Chapter 71 tax return. Petitioner attempts to bootstrap this by arguing that the FRB filed all returns that were required under Chapter 71, which was none because federal law precludes such filing. We reject petitioner's argument and conclude that the FRB did not meet this statutory requirement during the period under review.

3. Is the FRB subject to tax under Chapter 71?

This is another statutory requirement petitioner tries unsuccessfully to finesse by claiming that the FRB is indeed subject to Chapter 71 like any other domestic corporation, but is preempted by federal law from paying the tax. Our conclusion is that, because the FRB is exempt under 12 U.S.C. § 531 from paying all taxes imposed by Chapter 71, it fails this statutory requirement as well.

4. Did the FRB not deduct the dividends under Chapter 71?

This requirement is rendered moot in light of the FRB's failure to meet the preceding two requirements. Obviously, because the FRB was not subject to Wisconsin's income or franchise tax and filed no tax returns, it could not have deducted under Chapter 71 the dividends it paid to petitioner.

We therefore conclude that, because the FRB met only one of the four valid statutory requirements for deductibility of its dividends, respondent properly denied petitioner deductions for them for the period under review.

Intergovernmental Tax Immunity

The petitioner also challenges respondent's action under the dividend deduction statute as barred by the constitutional doctrine of intergovernmental tax immunity, first articulated in McCullough v. Maryland, 17 U.S. 316, 1819 U.S. Lexis 320 (1819), and more recently in Davis v. Michigan Dept. of Treasury, 489 U.S. 803 (1989). The doctrine bars only those taxes imposed directly on one sovereign by the other or that discriminate against a sovereign or those with whom it deals. Id., at 811.

We reject petitioner's contention. The statute here is not a taxing statute but a deduction statute. Its effect is to uniformly alleviate what would otherwise be double taxation of income, first at the corporate level where the income is taxed by the state and again at the corporate shareholder level upon receipt of a dividend. This is a rational, nondiscriminatory scheme. Income that would otherwise be taxed twice is effectively taxed only once. Because the FRB isn't taxed at all on the income, there is no double taxation to alleviate at the shareholder level, and the deduction is accordingly not available to FRB shareholders.

The dividend deduction statute, therefore, does not impose a tax burden on petitioner that is greater than on others similarly situated, viz., those corporations receiving a dividend from another corporation whose income was not taxed by the state. All such situations are treated the same: the deduction is not available. There is thus no imposition of a heavier burden on those dealing with the federal government, such as was present in Phillips Co. v. Dumas School Dist.(11) (cited in petitioner's brief, p. 27) or Memphis Bank & Trust Co. v. Garner(12) (cited in respondent's brief, p. 21). The burden on all corporate shareholders is relatively equal.

Nor do we find that the statute at issue places any burden on the FRB, which in the first instance is advantaged by presumably having more income available to pay dividends as the result of paying no Chapter 71 taxes, unlike other dividend-paying corporations whose dividends are deductible, such as NCR Corp.'s were determined to be in the NCR case.

In its brief, petitioner also asserts that the dividend deduction statute indirectly taxes the federal government through "the increased taxation of all national banks in Wisconsin" and "adversely affects the ability of the federal government to raise capital." Nothing in the record supports either assertion. As discussed above, all corporations -- including national banks -- receive a deduction for dividends received to alleviate what would otherwise be double taxation of income. There is no "increased taxation" as a result, but reduced taxation. Nor is there anything before us demonstrating, in theory or otherwise, how Wisconsin's dividend deduction statute impedes the federal government's ability to raise capital.

Is this a prohibited tax on federal obligations?

Finally, we address petitioner's contention that the denial of a deduction for dividends received from the FRB amounts to state taxation of a federal obligation, which is prohibited under 31 U.S.C. § 3124(a). This is the same assertion as exemption under the Supremacy Clause/intergovernmental tax immunity doctrine, which we have already addressed above. See, Memphis Bank & Trust Co. v. Garner, 459 U.S. 392, 397 (1983). Our conclusion is that Wisconsin imposes a non-discriminatory franchise tax, sanctioned by federal law, including the dividend deduction statute without the invalid concentration language.


The respondent's action on petitioner's petition for redetermination is affirmed.

Dated at Madison, Wisconsin, this 12th day of March, 1999.



Mark E. Musolf, Chairperson


Don M. Millis, Commissioner

(Not participating)

Thomas M. Boykoff, Commissioner


1 The language of § 71.26 (1987-88) and § 71.04(4) (1983-1986) is substantially the same with respect to the issues involved in this appeal. The NCR Corporation decision addressed the 1983-84 statute. The respondent acted under the 1985-86 and 1987-88 statutes.

2 Respondent's Brief, p. 6.

3 NCR decision, supra, at p. 15,785.

4 Id., at p. 15,789.

5 Id., at p. 15,790.

6 This language is contained in the last clause of the second last sentence in § 71.26(3)(j) (1987-88).

7 Without the deduction, a third level of taxation on the income would occur when the dividend income is distributed from the corporate shareholder as a dividend to an individual subject to the individual income. See, Respondent's Reply Brief, pp. 5-6.

8 These three requirements were substantively the same during the period under review and at the time of the NCR decision.

9 Respondent's brief, p. 6.

10 "Corporation. An artificial person or legal entity created by or under the authority of the laws of a state or nation..."

11 361 U.S. 376, 383 (1949).

12 459 U.S. 392, 397 (1983).