Comptroller v. Gannett
| Decision Date | 09 December 1999 |
| Docket Number | No. 49,49 |
| Citation | 741 A.2d 1130,356 Md. 699 |
| Court | Maryland Court of Appeals |
| Parties | COMPTROLLER OF the TREASURY v. GANNETT CO., INC. |
John K. Barry (Gerald Langbaum, Asst. Atty. Gen., and J. Joseph Curran, Jr., Atty. Gen. of Maryland, on brief), Annapolis, for appellant.
Kenneth H. Silverberg (Christian M. McBurney, Nixon, Hargrave, Devans & Doyle, LLP, on brief), Washington, DC, for appellee.
Argued before BELL, C.J., and ELDRIDGE, RODOWSKY, RAKER, WILNER, CATHELL and HARRELL, JJ.
The Comptroller of the Treasury, appellant, appeals a ruling from the Circuit Court for Montgomery County that appellant lacked the authority to assess additional income tax against Gannett Company, Inc., appellee, by imputing interest income from certain intercompany debt not reported on appellee's federal income tax returns. We agree with the circuit court and, accordingly, affirm the lower court.
Appellee is a Delaware corporation, headquartered in Virginia, with computer support facilities in Silver Spring, Maryland. A leading corporation in the media industry, appellee is the parent company to many wholly-owned subsidiary media companies. Appellee maintains four centralized, intercompany accounts with its subsidiaries.1 The subsidiaries deposit their proceeds in the appropriate account and then draw on that account to pay their related individual expenses. If a subsidiary deposits more proceeds than it withdraws, appellee maintains an interest-free debit with the subsidiary. If the subsidiary spends more money than it deposits, appellee maintains an interest-free credit with the subsidiary. For the tax years 1990-92, appellee maintained with its subsidiaries a credit in three of the four intercompany accounts. The parties stipulated to the Maryland Tax Court below, in writing, that these credits were a form of interest-free debt. Appellant claims that, under two federal tax code provisions, it may assess income tax against these credits by imputing interest income from them.
The first provision, I.R.C. § 482 (1999), states in relevant part:
§ 482. Allocation of income and deductions among taxpayers
In any case of two or more ... businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such ... businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such ... businesses.
The second provision, I.R.C. § 7872 (1999), states in relevant part:
§ 7872. Treatment of loans with below-market interest rates
(1) In general.—For purposes of this title, in the case of any belowmarket loan to which this section applies and which is a gift loan or a demand loan, the foregone interest shall be treated as—
(A) transferred from the lender to the borrower, and
(B) retransferred by the borrower to the lender as interest.
....
(1) In general.—For purposes of this title, in the case of any belowmarket loan to which this section applies and to which subsection (a)(1) does not apply, the lender shall be treated as having transferred on the date the loan was made (or, if later, on the first day on which this section applies to such loan), and the borrower shall be treated as having received on such date, cash in an amount equal to the excess of—
(A) the amount loaned, over
(B) the present value of all payments which are required to be made under the terms of the loan.
(2) Obligation treated as having original issue discount.—For purposes of this title—
(A) In general.—Any below-market loan to which paragraph (1) applies shall be treated as having original issue discount in an amount equal to the excess described in paragraph (1).
(B) Amount in addition to other original issue discount.—Any original issue discount which a loan is treated as having by reason of subparagraph (A) shall be in addition to any other original issue discount on such loan (determined without regard to subparagraph (A)).
(1) In general.—Except as otherwise provided ... this section shall apply to—
....
(C) Corporation-shareholder loans.—Any below-market loan directly or indirectly between a corporation and any shareholder of such corporation.
(D) Tax avoidance loans.—Any below-market loan 1 of the principal purposes of the interest arrangements of which is the avoidance of any Federal tax.
(E) Other below-market loans.— To the extent provided in regulations, any below-market loan which is not described in subparagraph (A), (B), (C), or (F) if the interest arrangements of such loan have a significant effect on any Federal tax liability of the lender or the borrower.
....
(h) Regulations.—
(1) In general.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including—
....
(C) regulations exempting from the application of this section any class of transactions the interest arrangements of which have no significant effect on any Federal tax liability of the lender or the borrower.
For the tax years in question, 1990-92, appellee, as it was allowed to do, filed a consolidated federal tax return on behalf of itself and all of its subsidiaries with the Internal Revenue Service (IRS). Appellee did not report the intercompany account credits on its federal tax return because any interest income that could have been imputed from the credits under I.R.C. §§ 482 and 7872 would have been offset by the reciprocal imputed interest deduction attributed to each subsidiary. In other words, any interest income appellee would have had to report on its consolidated federal tax return would presumably have been eliminated by any interest expense deduction that appellee could have claimed on behalf of its subsidiaries. The IRS, which conducted an audit on other grounds, accepted the returns as filed.2
The Maryland income tax code bases "the Maryland modified income of a corporation" on "the corporation's federal taxable income for the taxable year as determined under the Internal Revenue Code...." Md.Code (1988, 1997 Repl.Vol.), § 10-304(1) of the Tax-General Article.3 The Maryland Code, however, does not allow related corporations to file consolidated returns. See id. § 10-811. The Maryland income tax code thus required appellee to base its Maryland modified income on the portion of its reported federal consolidated taxable income earned by it in Maryland. Because appellee did not report the three intercompany account credits on its consolidated federal return, it did not report them on its individual Maryland tax form.
Appellant alleges that not reporting the intercompany credits allowed appellee to understate its portion of the consolidated federal taxable income on its separate Maryland income tax return.4 Believing that I.R.C. §§ 482 and 7872 allowed it to impute interest income from appellee's intercompany credits, appellant recalculated appellee's Maryland modified income. It originally assessed $2,216,066 in additional income tax against appellee. Appellee sought a revision of the assessment before an administrative hearing officer, who upheld the assessment but reduced it to $1,279,785. Appellee appealed that ruling to the Maryland Tax Court, arguing that the intercompany account credits were not debt and that, if they were, appellant had no authority to impute interest income from that debt unless the IRS had required it on appellee's federal tax return. The Maryland Tax Court disagreed and affirmed. Appellee sought judicial review in the Circuit Court for Montgomery County, which reversed, ruling that appellant did not have the authority to impute interest income based on the I.R.C. provisions. Appellant appealed that ruling to the Court of Special Appeals and this Court granted a writ of certiorari prior to that court's hearing the matter. Appellant presents the following question:
Does the Maryland requirement of a separate corporate tax return require a restatement of federal taxable income from the amount that appears on a consolidated return to the amount required by I.R.C. § 482 or § 7872 for taxpayers that file a separate federal return?
Appellee presents a slightly different version of the question:
Did the Circuit Court for Montgomery County correctly rule that the Tax Court erred as a matter of law in holding that [appellant] had authority under Maryland's tax laws to impute interest income on intercompany account balances that [appellee] maintained with its subsidiaries?
The facts of this case generally are not in dispute; the issue before us is strictly a question of law. "The lower court's interpretations of law enjoy no presumption of correctness on review: the appellate court must apply the law as it understands it to be." Rohrbaugh v. Estate of Stern, 305 Md. 443, 447 n. 2, 505 A.2d 113, 115 n. 2 (1986) (citing Elza v. Elza, 300 Md. 51, 55-60, 475 A.2d 1180 (1984); Davis v. Davis, 280 Md. 119, 124-31, 372 A.2d 231, cert. denied, 434 U.S. 939, 98 S.Ct. 430, 54 L.Ed.2d 299 (1977); Sica v. Retail Credit Co., 245 Md. 606, 611-21, 227 A.2d 33 (1967)); see also Cassell v. Pfaifer, 243 Md. 447, 453, 221 A.2d 668, 672 (1966)
(); Pallace v. Inter City Land Co., 239 Md. 549, 558, 212 A.2d 262, 266 (1965) (); Porter v. Schaffer, 126 Md.App. 237, 259, 728 A.2d 755, 766 ...
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