Armco Steel Corp. v. State Tax Commission

• Decision Date: 13 March 1979
• Docket Number: No. 60512,60512
• Citation: 580 S.W.2d 242
• Parties: ARMCO STEEL CORPORATION, Respondent, v. STATE TAX COMMISSION, Appellant.
• Court: Missouri Supreme Court

Page 242

580 S.W.2d 242

ARMCO STEEL CORPORATION, Respondent, v. STATE TAX COMMISSION, Appellant.

No. 60512.

Supreme Court of Missouri, en banc.

March 13, 1979.

As Modified On Court's Own Motion April 10, 1979.

Rehearing Denied May 17, 1979.

John D. Ashcroft, Atty. Gen., Stanley Robinson, Asst. Atty. Gen., Jefferson City, for appellant.

W. H. Bates, William K. Waugh, III, Lathrop, Koontz, Righter, Clagett, Parker & Norquist, Kansas City, for respondent.

SEILER, Judge.

This case involving the construction of revenue laws is a direct appeal pursuant to Mo.Const. art. V, § 3. The question to be determined is whether, under § 143.040-1, RSMo 1969, respondent Armco Steel Corporation was entitled only to a deduction for Missouri state income tax purposes in 1969 of Armco's proportionate share of the federal income taxes for that year actually paid by it and its subsidiaries as shown in their consolidated federal return (which would be $12,010,748.42) or whether Armco was entitled to determine its deduction for federal income tax on the basis of what the federal income tax would have been had Armco reported as a separate entity ($17,358,029.90).

According to the stipulation of facts filed in the circuit court, Armco is an Ohio corporation, authorized to do business in Missouri. None of its subsidiaries do business in Missouri. In 1969, Armco and its subsidiaries filed a consolidated federal tax return. Missouri did not permit the filing of a consolidated return in 1969, and Armco thus filed a tax return in Missouri as a separate corporate entity. In arriving at its Missouri tax liability, Armco, in accordance with its view of § 143.030-1, took a deduction of $17,358,029.90 for federal income tax.

The pertinent portions of § 143.040-1 stated:

"1. Each year, at the times and in the manner now or hereafter provided, a tax shall be levied upon, assessed against, collected from, and paid by every corporation . . . in such percent, as now or hereafter provided, of the net income from all sources in this state during the preceding year . . . From said income shall be deducted all of the ordinary and necessary expenses incurred in this state to produce said income, including . . . such portion of interest paid by the taxpayer and such portion of taxes on income assessed by the United States against the taxpayer as the gross income from all sources within this state shall bear to the gross income of the corporation from all sources."

Armco justifies its action on the theory that while it filed a consolidated federal return, it had an agreement with its subsidiaries by which it was obligated to, and did, reimburse those subsidiaries which sustained losses for federal income tax purposes for 1969 for the tax benefits the inclusion of those loss members in the affiliated group provided the group in filing the consolidated federal return. As a result, Armco says it paid out a total amount equal to what it would have paid had it filed a separate federal return. Thus, it concludes, to disallow a deduction of an equal amount would be to increase its Missouri tax liability simply because members of the affiliated group outside Missouri sustained losses which lowered the amount of the group's consolidated federal return liability.

The director of revenue, however, did not agree that the intercorporate payments constituted taxes assessed by the federal government. The director assessed Armco an additional amount for 1969, contending that Armco was assessed by the United States, and thus was entitled to deduct, only its proportionate part of the $12,010,748.42 consolidated federal liability assessed against the affiliated group. The department of revenue confirmed the director's assessment. Armco appealed to the state tax commission which affirmed, whereupon Armco appealed to the circuit court, which reversed the tax commission, and from this reversal the commission has appealed to this court.

The parties agree that the purpose of § 143.040 is to ascertain and tax the net income derived by a corporate taxpayer from its income producing activities in Missouri and that, since Armco is the only member of the affiliated group doing business in Missouri, Armco's deductions should be the amount of federal taxes assessed against it for its income producing activities in Missouri. The question to be resolved then, is what is meant in § 143.040-1 by "(f)rom said income shall be deducted . . . such portion of taxes on income assessed by the United States against the taxpayer . . ."

Armco primarily contends that "assess" means that amount of federal tax which would be determined on its Missouri income and not the amount actually paid, citing the primary definition of "assess" given in Webster's Third New Int'l Dictionary 131 (1971) as being "to determine the rate or amount of (as a tax, charge or fine)"; that if Missouri is to tax on a separate entity basis, it must permit deductions on that basis. To interpret "assess" to permit Missouri to do otherwise, would be inconsistent; logic requires that income and deductions be computed on the same basis and by the same accounting system.

In support of its interpretation of the statute, Armco cites Cities Service Gas Co. v. McDonald, 204 Kan. 705, 466 P.2d 277 (1970) which involved a similar fact situation. The court therein upheld the taxpayer's claim that payments made to affiliated corporations should be deductible as federal taxes paid or incurred, concluding that as a result the government lost no money and the taxpayer paid no less money than would have been the case had an individual return been filed. However, that case is distinguishable in that a Kansas statute required that the deduction for federal taxes be computed on the same basis as that used to compute net income under the Kansas income tax act, that is, a separate return basis. ¹

In addition, we find the reasoning followed in cases holding that only the amount of federal taxes actually paid may be deducted more persuasive. See Northern Natural Gas...