Commonwealth v. 1887 Holdings, Inc.
| Decision Date | 23 May 2023 |
| Docket Number | 0598-22-2 |
| Parties | COMMONWEALTH OF VIRGINIA, DEPARTMENT OF TAXATION v. 1887 HOLDINGS, INC. (F/K/A THE C.F. SAUER COMPANY) |
| Court | Virginia Court of Appeals |
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND D. Eugene Cheek Sr., Judge
Flora T. Hezel, Senior Assistant Attorney General (Jason S Miyares, Attorney General; Charles H. Slemp, III, Chief Deputy Attorney General; Leslie A.T. Haley, Deputy Attorney General; Joshua N. Lief, Senior Assistant Attorney General & Section Chief, on briefs), for appellant.
Craig D. Bell (Robert W. Loftin; Alec V. Sauble; McGuireWoods LLP on brief), for appellee.
Present: Chief Judge Decker, Judges Huff and Callins Argued at Richmond, Virginia
OPINION BY CHIEF JUDGE MARLA GRAFF DECKER
The Commonwealth of Virginia, Department of Taxation appeals the circuit court's grant of summary judgment to 1887 Holdings, Inc. On appeal, the Department argues a taxpayer cannot elect to use the income apportionment method allowed for manufacturing companies in Code § 58.1-422 for the first time in an amended tax return. We hold, based on a plain reading of the statute, that the option to elect the manufacturer's apportionment method is not limited to original tax returns. Therefore, the circuit court did not err by granting summary judgment, and we affirm the decision.
The material facts of this case are not in dispute. 1887 Holdings, Inc., formerly known as C.F. Sauer Company, is a Virginia corporation. In 2014 and 2015, Virginia was its principal place of business, but the company operated both inside and outside the Commonwealth.
Virginia law requires that "multistate businesses . . . apportion their income to determine the amount of their income [that] is taxable in Virginia." Va. Dep't of Tax'n v. R.J. Reynolds Tobacco Co., 300 Va. 446, 449 (2022). The Code provides a standard formula for determining corporate income for state tax purposes. See Code § 58.1-408. However, manufacturers that meet certain requirements may utilize an alternative apportionment method to determine taxable income. Code § 58.1-422. This alternative method is considered advantageous for eligible taxpayer companies.[1] See Code § 58.1-422(C), (E).
This appeal stems from the Department's audit of the income tax returns that 1887 Holdings filed for the years 2014 and 2015. During the audit process, 1887 Holdings advised the Department that it wished to elect the manufacturer's apportionment method permitted under Code § 58.1-422. After review, the Department denied the request. It based the denial on its conclusion that a corporation cannot make such an election in an amended return. The Department assessed the 2014 and 2015 tax liabilities for 1887 Holdings using the standard apportionment method.[2] Challenging those tax assessments, 1887 Holdings appealed to the tax commissioner. The only issue on appeal was whether it could use amended tax returns to elect the manufacturer's apportionment method under Code § 58.1-422. The tax commissioner concluded that it could not and upheld the Department's assessments.
1887 Holdings then filed a complaint in the circuit court challenging the 2014 and 2015 tax assessments. Agreeing that the material facts were undisputed, both parties filed motions for summary judgment.
After a hearing, the circuit court concluded that 1887 Holdings was entitled to elect the manufacturer's apportionment method in an amended return. In doing so, the court noted that Code § 58.1-422 was "silent" regarding whether a taxpayer must elect the manufacturer's apportionment method in an original corporate income tax return or whether it could "make the election" in "a timely amended" return. Accordingly, the circuit court found that requiring the election to be made in "an original income tax return" would "impose a requirement not articulated by the General Assembly." The court also relied, in part, on the purpose of the manufacturer's apportionment method, "to bolster the fiscal health of the Commonwealth by promoting manufacturing jobs in Virginia." The court held that the statutory purpose of the election is achieved regardless of whether the election is made in an original or amended tax return. Based on this reasoning, the circuit court ordered the tax assessments abated, denied the Department's motion for summary judgment, and granted the summary judgment motion of 1887 Holdings.
On appeal, the Department argues that the circuit court erred by ruling that 1887 Holdings could claim the manufacturer's apportionment method for the first time in an amended return. It contends that the circuit court's construction of Code § 58.1-422 is inconsistent with the language and purpose of the statute.
In examining this case, the Court is guided by well-established legal principles. On review, courts presume that tax assessments are correct. Code § 58.1-205(1); accord LZM, Inc. v. Va. Dep't of Tax'n, 269 Va. 105, 109 (2005). Even so, interpretation of a tax statute is a question of law reviewed de novo on appeal. R.J. Reynolds, 300 Va. at 454. The first step in interpreting a statute is to look at its language. If the statutory language "is unambiguous," the reviewing court is "bound by the plain meaning of that language." Va. Elec. & Power Co. v. State Corp. Comm'n, 300 Va. 153, 161 (2021) (quoting Va. Elec. & Power Co. v. State Corp. Comm'n, 295 Va. 256, 263 (2018)). This maxim controls statutory construction unless "applying the plain language would lead to an absurd result." JSR Mech., Inc. v. Aireco Supply, Inc., 291 Va. 377, 383 (2016) (quoting Baker v. Commonwealth, 284 Va. 572, 576 (2012)).
Turning to the statute at issue here, a company, in order to qualify for the manufacturer's apportionment method, must meet certain thresholds for the number of full-time employees and average wage.[3] Code § 58.1-422(C). If a company elects to use this alternative apportionment method, it "may not revoke the election for a period of three taxable years." Code § 58.1-422(B). If the company falls below these limits during the minimum three-year period, "the Department . . . shall assess [it] with additional taxes." Code § 58.1-422(C). Those added taxes equal the difference between what the company would have paid under the standard income apportionment method and what it paid under the alternative, and more advantageous, manufacturer's apportionment method. Id. Further, the company must pay the interest accrued on the additional taxes. Id.
The straightforward issue presented here is whether a taxpayer company can elect the manufacturer's apportionment method in an amended return or whether it can do so only when filing an original return. The tax code liberally permits the filing of amended income tax returns after the filing deadline, generally allowing them within certain time periods.[4] See Code § 58.1-1823; see also 23 Va. Admin. Code § 10-20-180. Although the Code broadly permits amended returns, it does have some limitations on what elections can be made in them. For example, Code §§ 58.1-322.04(4) and -402(F) specify that elections to "recognize[]" income from certain dispositions of real property under the installment method must be "made on or before the due date prescribed by law (including extensions)." The statutory requirement that these installment elections be made on or before the due date excludes the possibility of making them in amended returns filed after the due date.
The statutory language in Code § 58.1-422 at issue here, by contrast, does not require that the election of the manufacturer's apportionment method be made on or before the due date or otherwise bar a taxpayer from electing this alternative apportionment method in an amended return. It does contain specific related limitations. For example, the statute expressly commits a taxpayer company electing the method to adhere to that choice for a period of three taxable years. Code § 58.1-422(B). It also accounts for the possibility that a company may elect to use the manufacturer's apportionment method but fail to meet the requirements over the mandatory three-year period. Code § 58.1-422(C). Notably, the statute does not address the converse circumstance in which a company uses the standard apportionment method in the original return but later realizes that it meets the thresholds for the alternative manufacturer's apportionment method and wishes to make that election retroactively in an amended tax return. See Code § 58.1-422.
A reviewing court assumes "that the legislature chose, with care, the specific words of the statute." Va. Elec. & Power Co., 300 Va. at 163 (quoting Wal-Mart Stores E., LP v. State Corp. Comm'n, 299 Va. 57, 70 (2020)). And, "[a] court may not 'add to the words' of a statute." Berglund Chevrolet, Inc. v. Va. Dep't of Motor Vehicles, 71 Va.App. 747, 753 (2020) (quoting Baker v. Commonwealth, 278 Va. 656, 660 (2009)); see also Commonwealth v. Amos, 287 Va. 301, 307 (2014) . Here, the plain language of Code § 58.1-422 does not prevent a company from electing to use the manufacturer's apportionment method through an amended return, and it is not the role of the reviewing court to add such a restriction.[5]
For comparison, it is useful to reference other parts of Virginia's tax code. See generally Thomas v Commonwealth, 59 Va.App. 496, 500 (2012) (). As discussed above, Code §§ 58.1-322.04(4) and -402(F)...
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