This is an appeal by the Wisconsin Department of Taxation from a judgment of the circuit court which approved the deduction of interest payments on the corporate income-tax returns of the respondent taxpayer.

In 1945, Basic Products Corporation issued 40,000 shares of cumulative preferred stock and established a sinking fund for the redemption of said stock. Between 1946 and 1954, 17,656 shares of the preferred stock were redeemed, leaving a balance of 22,344 shares outstanding as of August 1, 1954.

In 1954, the taxpayer borrowed $3,500,000 from the Mutual Life Insurance Company of New York. This loan, together with other corporation assets, was used for the following purposes: (1) To purchase the balance of the shares of preferred stock then outstanding in the amount of $1,117,000; (2) to retire an $800,000 debt of respondent's subsidiary, the Bauer-Schweitzer Malting Company; and (3) to pay the balance owed upon the 1945 loan.

Between 1955 and 1957, the taxpayer accrued a total of $338,447.15 as interest on its 1954 note to the Mutual Life Insurance Company of New York. This amount was deducted by the taxpayer from its gross income over this period.

The appellant disallowed $113,433.95 of the $338,447.15 as a deduction from gross income for Wisconsin income-tax purposes on the ground that the above figure represented interest paid on money borrowed to retire respondent's preferred stock. In addition, the taxpayer incurred total expenses in the amount of $13,965.46 in connection with the negotiation of the 1954 loan. Of this amount $1,349.82 was disallowed as a deduction.

The disallowance of the claimed deductions has resulted in increasing the tax in the amount of $6,073.36, and that is the amount in dispute in this case.

In reversing the board of tax appeals, the trial court held that the interest paid on the money borrowed in 1954 by the taxpayer in order to retire the preferred stock and the expenses incurred in negotiating the 1954 loan were deductible from gross income under sec. 71.04 (2), Stats. The Department of Taxation appeals from the judgment entered by the circuit court.

Statute Involved.

Sec. 71.04, Stats., so far as here material, provides:

"DEDUCTIONS FROM GROSS INCOME OF CORPORATIONS. Every corporation . . . shall be allowed to make from its gross income the following deductions:

"(2) Other ordinary and necessary expenses actually paid within the year out of the income in the maintenance and operation of its business and property . . . including . . . interest . . . paid during the year in the operation of the business from which its income is derived; . . ."

Departmental Rule Involved.

6 Wis. Adm. Code, sec. Tax 3.20, so far as here material, provides:

"INTEREST PAID. (Sections 71.04 (2) and 71.05 (3), Wis. Stats.)

"(2) Interest paid on money borrowed by a corporation to purchase its own capital stock is not deductible."

GORDON, J.

The question which we must resolve in this case may be stated as follows: When a publicly held corporation borrows money for the purpose of retiring an entire issue of its preferred stock, is the corporation's payment of interest on such money to be considered ordinary and necessary expenses in the operation of the business of the corporation from which its income is derived, so as to be deductible for Wisconsin income-tax purposes under the provisions of sec. 71.04 (2), Stats.?

The department rule (6 Wis. Adm. Code, sec. Tax 3.20) was adopted by the Department of Taxation as its interpretation of the court's holding in Wisconsin Ornamental Iron Bronze Co. v. Wisconsin Tax Comm. (1930), 202 Wis. 355, 229 N.W. 646, 233 N.W. 72. As applied to the Wisconsin Ornamental Case, the department rule is appropriate; however, the rule goes considerably further than the statute, and, in our opinion, goes too far when applied to the instant case. An administrative rule, even of long duration, may not stand at variance with an unambiguous statute. State ex rel. Irany v. Milwaukee County Civil Service Comm. (1962), 18 Wis.2d 132, 135, 118 N.W.2d 137; Plain v. Harder (1955), 268 Wis. 507, 68 N.W.2d 47. In the latter case, at page 511, this court said:

"The rule-making power does not extend beyond the power to carry into effect the purpose as expressed in the enactment of the legislature. `A rule out of harmony with the statute is a mere nullity.'"

The department rule was upheld in Pelton Steel Casting Co. v. Department of Taxation (1954), 268 Wis. 271, 276, 67 N.W.2d 294, which case was very similar to the Wisconsin Ornamental Case. In both cases interest was paid on money used to purchase the corporation's own shares, but the purpose in each case was to realign the interests of certain individual stockholders.

In the Wisconsin Ornamental Case interest was paid by the corporation on the deferred portion of the purchase price under a contract made by the corporation with a single stockholder. This prompted the supreme court to observe, at page 363:

"The purchase of this stock on the part of the corporation was but a mere readjustment of its internal affairs, bearing no relation whatever to its activities giving rise to income."

Similarly, in the Pelton Steel Case the corporation borrowed money to purchase the common stock held by two shareholders with the result that a third shareholder would remain the owner of all the common stock of the corporation. The court found that the Wisconsin Ornamental Case was directly in point, adding, at page 276:

"The rule is based on the obvious difference between a corporation borrowing money to buy material or to finance operating expenses and borrowing money to centralize control of the corporation for the direct benefit of an individual or certain individuals, . . ."

If interpreted in the light of the Wisconsin Ornamental Case and the Pelton Steel Case and limited to comparable factual situations, the department rule is valid. In other words, if interpreted to preclude the deduction of interest paid on money borrowed by a corporation to purchase its own capital stock for the purpose of readjusting the ownership interest of specific individuals, it is a rule consistent with the statute.

In the case at bar, however, we are confronted with a different situation. The stock of the corporation in question is publicly held. Also, the entire outstanding issue of preferred stock was retired by the corporation, and there is no suggestion in the record that individual shareholders or a special group thereof were favored by the transaction. On the contrary, the motivation for the transaction was to improve the status of the body corporate. It is our conclusion that the department rule may not apply when the interest is paid on money borrowed under the circumstances of the case at bar.

The issuance of the preferred stock in question created equity capital, as opposed to a debt. This is true even though preferred stock may have many of the characteristics of a subordinated debenture. Nevertheless, the retirement of the preferred stock did not relieve the corporation of an "indebtedness." However, it can be argued that the retirement of the preferred stock resulted only in a readjustment of ownership rights. Such analysis ignores the significant role played by a corporation's financial structure in connection with the corporation's overall well-being. In a very real sense the realignment of a corporation's financial structure can play a role "in the operation of the business from which its income is derived."

In the instant case, the readjustments were not made for private purposes as they so obviously were in the Wisconsin Ornamental Case and the Pelton Steel Case. The taxpayer in this case revised its stock structure for the purpose of strengthening the corporation and thereby better enabling it to produce income. The learned trial judge reflected this view when he stated:

". . . it is apparent that it may be in the business interests of the corporation to adjust its financial structure to retire such preferred stock just as soon as it can refinance through a bond issue with a resultant reduction in the cost of money and, in fact, tax savings, particularly federal tax savings."

Whether the retirement of the preferred stock actually proved to be financially profitable is not a controlling consideration. The view of the taxing authorities is not to be substituted for the judgment of the corporate management. In realigning the corporate stock interests for the benefit of all the common stockholders the corporation was pursuing a valid and regular business purpose; in the absence of a showing that this was done for the benefit of a few as opposed to the benefit of the corporation, we consider that interest paid in the course thereof is deductible within the statute. This is particularly true as to a publicly owned corporation. In a closely held corporation it is more difficult to demonstrate that the readjustment of stock holdings is in the interest of the corporation. Any suggestion of manipulation is nonexistent in the instant case, and the deduction must be allowed.

By the Court. — Judgment affirmed.

WILKIE, J., took no part.