FAIRCHILD SEMI. CORP. v. TAX ASSESSOR

• Decision Date: 23 November 1999
• Citation: 740 A.2d 584,1999 ME 170
• Parties: FAIRCHILD SEMICONDUCTOR CORPORATION v. STATE TAX ASSESSOR.
• Court: Maine Supreme Court

740 A.2d 584

1999 ME 170

FAIRCHILD SEMICONDUCTOR CORPORATION v. STATE TAX ASSESSOR.

Supreme Judicial Court of Maine.

Argued September 10, 1999.

Decided November 23, 1999.

James G. Good (orally), Jonathan A. Block, Pierce Atwood, Portland, for the plaintiff.

Clifford B. Olson (orally), Assistant Attorney General, Augusta, for the defendant.

Before CLIFFORD, RUDMAN, DANA, SAUFLEY, ALEXANDER, and CALKINS, JJ.

DANA, J.

[¶ 1] Fairchild Semiconductor Corporation appeals from a judgment entered in the Superior Court (Kennebec County, Marden, J.) affirming a decision of the State Tax Assessor assessing additional taxes against Fairchild for the 1988 tax year. Fairchild argues that the Assessor misapplied 36 M.R.S.A. § 5102(8)¹ in its audit of Fairchild and its "unitary group," resulting in the erroneous denial of a Maine net operating loss (NOL) carry-back deduction from the 1989 tax year to the 1988 tax year.² Fairchild also contends that, because the Assessor's denial of the deduction was based on the lack of a federal NOL deduction for the same year on the federal consolidated return filed by Fairchild and 14 other corporations, it violates both the due process and commerce clauses of the United States Constitution. Because we agree that the Assessor misapplied section 5102(8) of the Maine Tax Code, we vacate the judgment of the Superior Court and do not reach the constitutional issues.

I.

[¶ 2] Fairchild is a corporation organized and existing under the laws of the State of Delaware with a principal place of business in Santa Clara, California. Fairchild was acquired by its parent corporation, National Semiconductor Corporation, on October 1, 1987. In tax years 1988, 1989 and 1990, Fairchild, with three other corporations, was engaged in a "unitary business"³ in Maine. Accordingly, in each of those years, the group filed a Maine income tax return as a "unitary group." During the same period, Fairchild filed a consolidated federal tax return with roughly 14 other corporations (the "consolidated group") that included Fairchild's Maine unitary group as well as corporations that were not members of the unitary group.⁴ [¶ 3] In the 1988 tax year, after adjustments that are not at issue in this case, Fairchild's unitary group had positive income totalling approximately $21 million. The following year, the unitary group sustained losses totalling approximately $115 million. Because the unitary group filed a consolidated return at the federal level, however, these losses were more than offset by the income of the other members of the consolidated group. As a result, no NOL carry-back deduction was available to the consolidated group at the federal level. However, if the members of the unitary group had calculated their taxable income separately at the federal level, the loss incurred in the 1989 tax year would have been available to the unitary group corporations as an NOL carry-back deduction in the 1988 tax year pursuant to 26 U.S.C.A. §§ 63(a) & 172(c) (1988).

[¶ 4] After conducting a field audit that began in 1991, the State Tax Assessor issued a notice of assessment to Fairchild in which $147,850 in tax, interest and penalties was assessed against the corporation for the 1988, 1989 and 1990 tax years. Fairchild thereafter filed a timely petition for reconsideration pursuant to 36 M.R.S.A. § 151 (1991), amended by P.L. 1993, ch. 395, § 2 and P.L.1997, ch. 668, § 11, challenging several aspects of the Assessor's determination that are not relevant to this appeal. Following a reconsideration conference, the Assessor modified its assessment to $51,618. However, in the course of its reconsideration, the Assessor disallowed a NOL carry-back deduction in the 1988 tax year for the loss sustained by the unitary group in the 1989 tax year that the Assessor had initially allowed during its field audit. The Assessor based its disallowance on the lack of a NOL carry-back deduction for the consolidated group at the federal level in the 1988 tax year because, unlike the unitary group, the consolidated group did not sustain a loss in the 1989 tax year.

[¶ 5] Fairchild filed a timely petition for judicial review pursuant to 36 M.R.S.A. § 151 (1996), amended by P.L.1997, ch. 668, § 11; 5 M.R.S.A. § 11002 (1989); and M.R. Civ. P. 80C, challenging the Assessor's disallowance of the 1989 NOL carry-back deduction. The Superior Court affirmed and Fairchild filed this appeal.

II.

[¶ 6] It is an issue of first impression for this Court: whether a NOL carry-back deduction is available to a Maine unitary group for Maine losses when determining "Maine net income" pursuant to 36 M.R.S.A. § 5102(8) despite one not being available at the federal level due to the composition of the group filing a consolidated federal return. Section 5102(8) defines Maine net income for any corporate taxpayer as:

the taxable income of that taxpayer . . . under the laws of the United States . . . [and][t]o the extent that it derives from a unitary business . . . [it] shall be determined by apportioning that part of the federal taxable income of the [unitary] group which derives from the unitary business . . . .

36 M.R.S.A. § 5102(8) (1990). The issue is as simple as this: Does the above language require a reference to the taxpayer's federal tax return or a reference to federal tax law? The Assessor argues that the statute requires a reference to the federal tax return, Fairchild to federal law.

[¶ 7] As a preliminary matter, we note that the Superior Court serves as the "forum of origin for a determination of both facts and law" when reviewing decisions of the Assessor pursuant to 36 M.R.S.A. § 151. Enerquin Air, Inc. v. State Tax Assessor, 670 A.2d 926, 928 (Me. 1996). We review the Superior Court's determinations of law directly, see Koch Refining Co. v. State Tax Assessor, 1999 ME 35, ¶ 4, 724 A.2d 1251, 1252, and conduct a de novo review. See Peterson v. State Tax Assessor, 1999 ME 23, ¶ 6, 724 A.2d 610, 612. When construing a statute, "we look to the plain meaning of the language to give effect to the legislative intent." Koch, 1999 ME 35, ¶ 4,724 A.2d 1251, 1252-53. Additionally, we consider the statutory scheme as a whole in order to reach a harmonious result. See id. (quoting Estate of Whittier, 681 A.2d 1, 2 (Me.1996)). Lastly, "[w]e avoid statutory constructions that create absurd, illogical, or inconsistent results." Darling's v. Ford Motor Co., 1998 ME 232, ¶ 5, 719 A.2d 111, 114.

[¶ 8] The State Tax Code for the tax year in question defined "Maine net income" for corporate taxpayers as the taxable income of that taxpayer pursuant to the United States Internal Revenue Code. 36 M.R.S.A. § 5102(8) (1990). The Internal Revenue Code in turn defined "taxable income" as gross income minus the deductions allowed pursuant to the Code. 26 U.S.C.A. § 63(a) (1988). The deduction at issue in this case for net operating losses was allowed by section 172 of the Code. 26 U.S.C.A. § 172 (1988). We are asked to determine whether the Legislature intended that the income of the Maine unitary group is to be determined by calculating the income of the group separately pursuant to section 63 of the Code, or whether the Legislature intended to merely adopt the treatment of the unitary group's income as reflected on the federal consolidated return filed by the 15 affiliated corporations.

[¶ 9] The plain language of the statute appears clear on this point when section 5102(8) is read in its entirety. We find reflected in that language an intent to determine the Maine "net income" of a unitary group separately pursuant to section 63 of the Internal Revenue Code, as opposed to simply adopting the treatment of the unitary group's income at the federal level which may be the result of the group's membership in a federal consolidated group.

[¶ 10] In order to determine the portion of a unitary group's income that is properly taxable by Maine when the group has non-Maine source income, the Maine Tax Code requires that the apportionment formula be applied to the federal taxable income of the entire unitary group as a single entity. 36 M.R.S.A. §§ 5102, 5211 (1990); see also Tambrands, Inc. v. State Tax Assessor, 595 A.2d 1039 (Me.1991). Specifically, the second sentence of section 5102(8) directs that the "federal taxable income of the entire group" be apportioned, using the apportionment formula, in order to determine the "Maine net income" of the unitary group. 36 M.R.S.A. § 5102(8). Both Fairchild and the Assessor agree that "the entire group" referred to above is the unitary group, and no other. In other words, the group is to be treated as a unit without regard to the status of its member corporations at the federal level, i.e., whether they filed individually, or as members of a consolidated group.

[¶ 11] Because the criteria for membership in a Maine unitary group differs from that for membership in a federal consolidated group, there is no identity relationship necessarily existing between the two groups.⁵Compare 26 U.S.C.A. § 1504 (1988), with 36 M.R.S.A. § 5102(1-B) & (10-A) (1990). As a result, membership in a Maine unitary group does not necessarily entail membership in a consolidated group at the federal level that includes all the corporations in the unitary group. Therefore, an effective determination of the income of the unitary group appears to require a separate determination of federal taxable income pursuant to section 63, especially when the unitary group consists of corporations that are not all members of the same federal consolidated group. For this reason, we believe that the Legislature intended the income of a Maine unitary group to be determined separately pursuant to section 63 of the Code without regard to the group's affiliations at the federal level. In other words, the unitary group is to be treated independently and section 63 is to be applied to it for a calculation separate from that performed for the consolidated group at...