Brown Group, Inc. v. Administrative Hearing Com'n

• Decision Date: 26 April 1983
• Docket Number: No. 64130,64130
• Citation: 649 S.W.2d 874
• Parties: BROWN GROUP, INC., Petitioner, v. ADMINISTRATIVE HEARING COMMISSION and Ray S. James, Director of Revenue, Respondents.
• Court: Missouri Supreme Court

Page 874

649 S.W.2d 874

BROWN GROUP, INC., Petitioner, v. ADMINISTRATIVE HEARING COMMISSION and Ray S. James, Director of Revenue, Respondents.

No. 64130.

Supreme Court of Missouri En Banc.

April 26, 1983.

Rehearing Denied May 31, 1983.

Juan D. Keller, St. Louis, for petitioner.

John Ashcroft, Atty. Gen., Jay Daugherty, Asst. Atty. Gen., Jefferson City, for respondents.

GUNN, Judge.

This appeal involves construction of the revenue laws; therefore, jurisdiction is vested in this Court pursuant to Mo. Const. art. V, § 3. Petitioner raises four issues on appeal: (1) Whether federal taxable income under § 143.431, RSMo 1978 ¹ may be less than zero; (2) whether additional assessments may be made by subordinates of the Director of Revenue; (3) whether royalties paid by a foreign corporation to petitioner may be excluded from the multiplicand of the single factor formula; and (4) whether the applicable statute of limitations is four years under § 143.240, RSMo 1969 or three years under § 143.711.1.

Petitioner, a manufacturer and wholesaler of shoes, is the parent company of an affiliated group and is incorporated under the laws of New York. Its principal place of business is Clayton, Missouri.

For the years in question, petitioner elected to use the single factor formula for apportioning income and in so doing excluded certain royalties from the multiplicand of the formula. ² The royalties concerned had been paid to petitioner by Nippin, Inc., a Japanese corporation, for the use of trade names, shoe designs and shoe patterns developed by Wohl Shoe Company, a wholly owned subsidiary of petitioner. On petitioner's 1975 federal income tax return it recorded a loss of $5,000,532 and entered that amount, representing its federal taxable income, on line 1 of its Missouri income tax return.

Upon audit of 1973, 1974 and 1975 tax returns, the Department of Revenue included the royalties in petitioner's base income, (i.e., the multiplicand of the formula) for all three years and disallowed petitioner's entry of a negative figure on line 1 of the Missouri tax return, increasing the amount to zero. On June 13, 1977, the Department issued final notices of income tax deficiency for fiscal years ending November 3, 1973, November 1, 1974, and November 1, 1975.

Petitioner unsuccessfully protested the additional assessments ³ to the Director of Revenue (Director). Appeal to the Administrative Hearing Commission (Commission) resulted in affirmance of the Director's decision, and this appeal followed.

Petitioner first alleges that the Commission erred in holding that federal taxable income for purposes of line 1 on the Missouri income tax return may not be a negative number. Section 143.431.1 provides that Missouri taxable income of a corporation shall be so much of its federal taxable income for the taxable year as is derived from sources within this state. The Director contends that in administering the Missouri income tax statutes the amount entered on line 1 of the Missouri tax return cannot be less than zero. Petitioner argues that I.R.C. § 63(a) (1954) defines federal taxable income as "gross income, minus the deductions allowed by this chapter," which at times may be a negative number. The Director argues that allowance of a negative number on line 1 would result in multiple benefits to petitioner, as the loss would be available to offset any positive Missouri modifications and provide a carry back on petitioner's federal tax return to offset taxable income in prior years.

I.R.C. § 172(c) (1954) defines net operating loss as "the excess of the deductions allowed by this chapter over the gross income." This section indicates that when deductions exceed gross income yielding negative taxable income, the result is a net operating loss. It is apparent that while negative taxable income may exist in a technical sense, it is actually a net operating loss. This interpretation comports with the practical connotation of taxable income as "income which may be taxed after all exemptions and deductions have been allowed from the total income." State ex rel. Buder v. Hackmann, 305 Mo. 342, 265 S.W. 532, 535 (banc 1924). If exemptions and deductions exceed total income, a loss results.

A taxpayer with a loss on its federal tax return is able to offset income from prior years ⁴ pursuant to § 172 net operating loss provisions resulting in less federal taxable income in those prior years. Under the current Missouri income tax statutes, this change requires the taxpayer to file an amended Missouri corporate tax return pursuant to § 143.601. ⁵ This statutory scheme permits a taxpayer to receive a Missouri benefit from the federal tax net operating loss provisions. Therefore, if a taxpayer were allowed to include a negative amount on line 1 of the Missouri return the result would be multiple benefits arising from a single loss. For example, the loss would offset positive modifications prescribed by § 143.431.2 for the computation of Missouri taxable income and still be available to reduce federal taxable income in prior years.

Petitioner argues that in this case the loss would not be subject to multiple use because the entire loss was used to offset federal taxable income in 1972, a year when Missouri taxable income was not derived with reference to federal taxable income. See § 143.040, RSMo 1969. Because the tax laws in 1972 did not determine Missouri taxable income with reference to federal taxable income, the change in 1972 federal taxable income resulted in no Missouri tax benefit from the 1975 federal loss.

While there is no salutary result for petitioner in this particular instance, "[a]n allowance for deductions from gross income does not turn on general equitable considerations. Deductions depend upon legislative grace and are allowable only to the extent authorized by statute." M.F.A. Central Cooperative v. Bookwalter, 427 F.2d 1341, 1344 (8th Cir.1970), cert. denied, 405 U.S. 1045, 92 S.Ct. 1303, 31 L.Ed.2d 588 (1972), quoting from Greenspon v. Commissioner of Internal Revenue, 229 F.2d 947, 954, (8th Cir.1956). Accord : Armco Steel Corp. v. State Tax Commission, 580 S.W.2d 242, 245 (Mo. banc 1979); Mobile Oil Corp. v. State Tax Commission, 513 S.W.2d 319, 322-23 (Mo.1974). The definition of federal taxable income cannot fluctuate according to whether a taxpayer receives the full benefits of the federal net operating loss provisions. The fact that petitioner derived no Missouri benefit from the federal loss does not require this court to ignore the provisions of § 172 and their effect on federal taxable income. Certainly, any tax exemption must clearly appear in the statute, State ex rel. Conservation Commission v. LePage, 566 S.W.2d 208, 211 (Mo. banc 1978), and none exists here for petitioner to grasp.

Tebon v. Commissioner of Internal Revenue, 55 T.C. 410 (1970), considers this point. In Tebon, the tax court considered the question of whether in computing averagable income within the meaning of §§ 1301 through 1305, base period income could be less than zero. The Commissioner issued a regulation which stated that " * * * [b]ase period income for any taxable year may never be less than zero." The taxpayer asserted that the regulation was invalid because the unqualified use of the term "taxable income" in the statute must be deemed to include negative taxable incomes. The tax court, finding the taxpayer's recourse was to § 172, upheld the regulation, as it was related to the overlapping character of the net operating loss provisions and its provisions were predicated upon the reasonable proposition that where negative taxable income is involved, the net operating loss section should take precedence over the averaging provisions.

In this case, the stance taken by petitioner is that because § 143.431.1 uses the term "federal taxable income," that phrase must be interpreted with reference to § 63 only and without consideration of any other federal code provisions. However, the Revenue Act "must be construed as an entirety with the purpose of giving as full meaning to all expressions therein as harmony will allow." Dubinsky v. Becker, 64 F.2d 601, 602 (8th Cir.1933).

When a taxpayer incurs a federal loss its sole recourse is to § 172. That is the only reasonable consequence of construing § 63 in harmony with § 172. Any other holding would subject a single loss to multiple use in Missouri without the requisite statutory authority. Accordingly, the Administrative Hearing Commission properly held in this case that the amount entered on line 1 of the Missouri corporate income tax return may not be a negative figure.

Point II

The second point involves petitioner's allegation that the additional assessments of tax were void as not being personally made by the Director of Revenue. Petitioner contends that § 143.611 ⁶ requires the personal consideration and action of the Director. However, other statutes pertaining to the powers and duties of the Director exist and must be considered to determine whether certain authority may be delegated.

Subdelegation is the transmission of authority from the heads of agencies to subordinates. 1 K. Davis, Administrative Law Treatise § 9.01 at 616 (1958). And various statutes may be read as authorizing the Director to delegate certain authority to his subordinates. For example, § 143.971.2 provides in pertinent part:

2. The director of revenue for the purpose of ascertaining the correctness of any return, or for the purpose of making an estimate of taxable income of any person, shall have power to examine or to cause to have examined, by any agent or representative designated by him for that purpose, any books, papers, records, or memoranda bearing upon the matters required to be included in the return, ....

(Emphasis added.)

Furthermore, § 32.050.2(2) provides:

2. With respect to all divisions in the department, the director shall:

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* * *

(2) Coordinate, consolidate and...