Broadwell Realty Corp. v. Coble

• Citation: 231 S.E.2d 656,291 N.C. 608
• Decision Date: 31 January 1977
• Docket Number: No. 155,155
• Court: United States State Supreme Court of North Carolina
• Parties: BROADWELL REALTY CORPORATION, v. J. Howard COBLE, Secretary of Revenue for the State.

Page 656

231 S.E.2d 656

291 N.C. 608

BROADWELL REALTY CORPORATION, v. J. Howard COBLE, Secretary of Revenue for the State.

No. 155.

Supreme Court of North Carolina.

Jan. 31, 1977.

Biggs, Meadows, Batts, Etheridge & Winberry by Frank P. Meadows, Jr., Rocky Mount, for plaintiff appellee.

Atty. Gen. Rufus L. Edmisten by Asst. Atty. Gen. George W. Boylan, Raleigh, for J. Howard Coble, Secretary of Revenue, defendant appellant.

MOORE, Justice.

The sole question for decision is whether the plaintiff, having voluntarily elected the installment method of accounting for income tax purposes, may deduct deferred, potential state and federal income tax liabilities from its franchise tax base under G.S. 105--122(b).

Plaintiff contends that it should be permitted to deduct from its franchise tax base, as computed under G.S. 105--122(b), the amount of state and federal income taxes which may become due as certain installment income is received in the future. This contention is based upon the premise that generally accepted accounting principles would permit such a deduction from surplus. Defendant rejects this contention upon the ground that G.S. 105--122 provides that no reservation or allocation from surplus or undivided profits shall be allowed for items other than those specified in G.S. 105--122(b). Defendant thus argues that since future income tax liability which may or may not arise in the future does not constitute a 'definite and accrued legal liability' or 'taxes accrued' within the meaning of G.S. 105--122(b), the amount claimed by plaintiff is not deductible.

The franchise tax payable by a corporation in this State is determined by G.S. 105--122 through G.S. 105--129.1. G.S. 105--122(b), in pertinent part, provides:

'(b) Every such corporation taxed under this section shall determine the total amount of its issued and outstanding capital stock, surplus and undivided profits; no reservation or allocation from surplus or undivided profits shall be allowed other than for definite and accrued legal liabilities, except as herein provided; taxes accrued, dividends declared and reserves for depreciation of tangible assets as permitted for income tax purposes shall be treated as deductible liabilities. . . .'

Franchise taxes are imposed upon corporations for the opportunity and privilege of transacting business in this State. It is an annual tax which varies with the nature, extent and magnitude of the business conducted by the corporation in this State. Telephone Co. v. Clayton, Comr. of Revenue, 266 N.C. 687, 147 S.E.2d 195 (1966); Stagg v. Nissen Co., 208 N.C. 285, 180 S.E. 658 (1935). See also Texaco, Inc. v. Calvert, 526 S.W.2d 630 (Tex.Civ.App.1975).

In construing taxing statutes, there are several well established rules of construction. Where the statute is ambiguous or there is doubt as to the proper interpretation of a statute which imposes a tax, the statute is construed in favor of the taxpayer and against the State. Food House, Inc. v. Coble, Sec. of Revenue, 289 N.C. 123, 221 S.E.2d 297 (1976); In re Clayton-Marcus Co., 286 N.C. 215, 210 S.E.2d 199 (1974); Pipeline Co. v. Clayton, Comr. of Revenue, 275 N.C. 215, 166 S.E.2d 671 (1969). However, where a statute provides for an exemption from taxation, the statute is construed strictly against the taxpayer and in favor of the State. In re Clayton-Marcus Co., supra; In re Appeal of Martin, 286 N.C. 66, 209 S.E.2d 766 (1974). The underlying premise when interpreting taxing statutes is: 'Taxation is the rule; exemption the exception.' Odd Fellows v. Swain, 217 N.C. 632, 637, 9 S.E.2d 365, 368 (1940). Further, the construction placed upon a Revenue Act by the Commissioner of Revenue will be given due consideration by the court; but such construction is not controlling or binding. Campbell v. Currie,Commissioner of Revenue, 251 N.C. 329, 111 S.E.2d 319 (1959). The above stated rules of construction are relevant, however, only in those instances in which the interpretation of the statute is ambiguous or in doubt. When the statute is clear and not capable of several interpretations, the plain meaning, as gleaned from the words of the statute, controls. In re Clayton-Marcus Co., supra; In re Appeal of Martin, supra; Pipeline Co. v. Clayton, Comr. of Revenue, supra.

The threshold question is whether plaintiff's deferred taxes are 'definite and accrued legal liabilities' or 'taxes accrued' under G.S. 105--122(b) as interpreted by the rules of construction stated above. As was stated in Dixie Pine Products Co. v. Commissioner, 320 U.S. 516, 519, 64 S.Ct. 364, 365, 88 L.Ed. 270, 272 (1944), a liability is accrued, and thus deductible, when 'all events (have occurred) in that year which fix the amount and the fact of the taxpayer's liability for items of indebtedness deducted though not paid; and this cannot be the case where the liability is contingent. . . .' Taxes are generally deemed to accrue when all events have occurred which fix the amount of the tax and the taxpayer's liability therefor. VanNorman Co. v. Welch, 141 F.2d 99 (1st Cir. 1944). See also Hart Metal Products, Corp. v. Commissioner of Internal Revenue, 437 F.2d 946 (7th Cir. 1971).

The allowable deductions from the franchise tax base under G.S. 105--122(b) are clear and unambiguous. The permissible deductions, relevant to this case, are 'definite and accrued legal liabilities' and 'taxes accrued.' The amounts which plaintiff is attempting to deduct are not definite and accrued liabilities. The sums are not definitely fixed in amount and plaintiff is not presently liable for the amounts. Likewise, there is no permissible deduction for the amounts sought to be deducted as 'taxes accrued.' Neither the amount of, nor the liability for, such deferred taxes is fixed. Thus, under the plain meaning of G.S. 105--122(b), the deduction claimed by plaintiff for deferred income taxes was properly denied.

In its opinion, the Court of Appeals stated that the deferred taxes were not technically 'accrued' under the wording of G.S. 105--122(b), but further stated that the statute should be strictly construed against the Commissioner because it was a tax levy. That court reasoned that G.S. 105--122 provides for the computation of the franchise tax in accordance with the books and records of the corporation, and that books and records of a corporation should be kept in accordance with the Business Corporation Act, Chapter 55 of the General Statutes of North Carolina. Therefore, the definitions contained in Chapter 55 relating to the computation of 'surplus' should be controlling. Since under the Act these records and computations are to be maintained in accordance with generally accepted accounting principles, the court further reasoned that the franchise tax should also be computed in such manner. Accordingly, since plaintiff's evidence showed that it is a generally accepted accounting principle to deduct deferred income taxes from the income which will be received from the installment sales, the Court of Appeals held the deferred taxes were properly deductible.

The Court of Appeals relied heavily upon American Can Co. v. Director of Div. of Tax., 87 N.J.Super. 1, 207 A.2d 699, Cert. denied, 44 N.J. 587, 210 A.2d 629 (1965). In American Can, the Director audited plaintiff's franchise tax return and included amounts listed as deferred income taxes in the computation of surplus for franchise tax purposes. The New Jersey Superior Court held that this was error. The franchise tax statute in New Jersey states that a franchise tax shall be levied upon the net worth of a corporation as determined from the books and records of the corporation. The statute, however, further provides that the Director is empowered to make his own determination of net worth 'in accordance with sound accounting principles . . .' Since the Director was statutorily required to make his determination in accordance with sound accounting principles, the court held that deferred income taxes were properly deductible from the franchise tax computation.

We are of the opinion that American Can is distinguishable from instant case. G.S. 105--122(a) provides, in addition to that portion of the statute relied upon by the Court of Appeals, that corporations shall:

'(M)ake and deliver to the Commissioner of Revenue in such form as he may prescribe a full, accurate and complete report and statement signed by either its president, vice-president, treasurer, assistant treasurer, secretary or assistant secretary, Containing such facts and information as may be required by the Commissioner of Revenue as shown by the books and records of the corporation at the close of such income year.' (Emphasis added.)

There is no requirement contained in the North Carolina franchise tax statute that the Commissioner of Revenue follow generally accepted accounting principles in making his determination of the franchise tax due from a corporation. Thus, we do not feel that American Can is dispositive of the case at bar.

In National-Standard Co. v. Department of Treasury, 384 Mich. 184, 180 N.W.2d 764 (1970), plaintiff contended that it should be permitted to deduct deferred taxes from its franchise tax base on the ground that this was in accordance with generally accepted accounting principles. Plaintiff made this argument even though there was no statutory requirement that the Commissioner follow generally accepted accounting principles. The Michigan Supreme Court rejected this argument by stating that the Commissioner was required to follow the franchise tax statute even if it contravened generally accepted accounting principles. Further, even though the plaintiff's books treated deferred income taxes as a liability and a certified public accountant concurred in this categorization, the court held that the dictates of the statute were controlling, stating:

'Because of their professional competence, the opinions of certified public accountants are entitled...