United States

Wisconsin: State Supreme Court Rejects Constitutional Challenges to the Application of a Reduced Interest Rate

Jul 18, 2016
From KPMG TaxWatch

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In a lengthy opinion, the Wisconsin Supreme Court recently addressed whether a taxpayer was entitled to interest at the statutory rate in effect when an offer of settlement was made, or the rate in effect when it recovered a judgment from the City with respect to its property tax dispute. When the taxpayer made an offer of settlement, the statutory rate was twelve percent. At the time the taxpayer recovered a judgment, the statutory rate was one percent plus the prime rate (4.25 percent in the instant case). The interest at issue arose out of a nearly decade-long dispute over the property tax value of the taxpayer’s headquarters in the City of Dodgeville, Wisconsin. When the trial court eventually entered judgment in favor of the taxpayer on the substantive tax issue, it applied the lower interest rate. The taxpayer made several arguments in support of its position that it was entitled to the twelve percent rate, including that applying the lower rate was a retroactive application of the law, that it had a vested right in the twelve percent rate, and that applying the lower rate violated the state and federal Due Process and Equal Protection Clauses. The lower court’s action was also directly contrary to a published court of appeals opinion. The matter bypassed the appeals court and went directly to the Wisconsin Supreme Court for review.

Prior to 2011, the statute at issue provided that a party making a settlement offer was entitled to twelve percent interest on the amount recovered from the date of the offer of settlement until the amount is paid, if the party made an offer that was not accepted, and it eventually received a judgment greater than or equal to the amount offered. In 2011, the Legislature amended the statute and reduced the interest in the same circumstances to one percent plus the prime rate.

The Wisconsin Supreme Court addressed each of the taxpayer’s arguments in turn, but ultimately concluded that the lower court did not err when it applied the lower rate of interest in effect when the taxpayer received its judgment. The court first found that there was no retroactive application of the statute because any right to the twelve 2 percent rate was contingent on receiving a judgment in the case, an event that did not occur until after the statute was revised. In the court’s view the legislature had a legitimate purpose for lowering the statutory rate of interest, as market interest rates had decreased significantly since the twelve percent rate had been adopted. The court also held that the taxpayer did not have a “vested right” to receive interest at a twelve percent rate because it did not have a legally enforceable right to recover interest until a judgment had been issued in its favor that was greater to or equal to its prior settlement offer. As such, there was no retroactive effect that violated the taxpayer’s due process rights. Finally, the court rejected the taxpayer’s claim that by amending the statutory interest rate the legislature created two classifications of taxpayers – those that were entitled to twelve percent interest and those that were not – and that these classifications were “arbitrary and irrational” in violation of the Equal Protection Clause. In reaching this conclusion, the court noted that treating parties with a vested right to receive interest differently from others was rational. As to several of these points, the court rejected the taxpayer’s arguments that it was harmed because issuance of its judgment was delayed by an erroneous lower court decision earlier in the litigation. In reaching its conclusion in this case, the Wisconsin Supreme Court overruled the appeals court decision holding that the applicable rate is the rate in effect when the settlement offered is tendered. Please contact Brad Wilhelmson at 312-665-2076 with questions on Land’s End, Inc. v. City of Dodgeville.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.