Continental Tel. Co. of Utah v. State Tax Commission of Utah
| Decision Date | 15 August 1975 |
| Docket Number | Nos. 13842,13843,s. 13842 |
| Citation | 539 P.2d 447 |
| Parties | CONTINENTAL TELEPHONE COMPANY OF UTAH, Plaintiff, v. STATE TAX COMMISSION OF UTAH, Defendant. |
| Court | Utah Supreme Court |
Merrill R. Weech, John W. Horsley, of Moyle & Draper, Salt Lake City, for plaintiff.
Vernon B. Romney, Atty. Gen., Salt Lake City, for defendant.
Merrill R. Weech and Larry C. Holman, of Jones, Waldo, Holbrook & McDonough, Salt Lake City, for Walker Bank & Trust Co., amicus curiae.
The plaintiffs, Midland Telephone Company, providing service in Grand County, and Utah Telephone Company, 1 providing service in Box Elder County, are both subsidiaries of Continental Telephone Corporation, a corporation with nationwide operations. They claimed as deductions on their Utah tax returns, payments transferred to Continental in connection with the preparation and payment of consolidated federal tax returns for the tax years 1965 through 1970. The Tax Commission partially disallowed plaintiffs' claimed deductions for payment of federal income taxes, by reducing the deductions allowable for the federal transfer payments to Continental to the proportion that plaintiffs' federal taxable income bears to the total amount of federal taxes actually paid by Continental. Plaintiffs seek reversal of the Tax Commission's decision and full allowance on their state returns of the amounts they paid to Continental.
Plaintiffs contend that the deductions taken by them for payment of federal taxes are expressly authorized by Section 59--13--7, U.C.A.1953, quoted below; and that the deduction and allocation made by the Tax Commission is not justified either under Section 59--13--17, U.C.A.1953, or Utah Corporation Franchise Tax Regulation 13, upon which the Commission based its action.
Continental Telephone Corporation, the parent corporation, is headquartered in Washington, D.C. It has a large number of operating telephone utilities as subsidiaries as well as some non-utility subsidiaries and operates in 42 states and several foreign countries. The subsidiaries here involved, Midland and Utah Telephone Companies, operate within and derive all their income within this State. This is so reported on their tax returns in question. They are also subject to the regulation and supervision of the Utah Public Service Commission and accounting methods approved by it, including the joining with other subsidiaries of Continental in filing its consolidated federal income tax return. The steps taken in computation, payment, and intersystem accounting of the consolidated federal income tax by Continental for each of the years in question are allowable under federal law. Pursuant to a closing agreement with the Internal Revenue Service, (hereinafter called I.R.S.) the consolidated federal return of Continental and its subsidiaries is prepared on a 'separate company' basis, with Continental acting as an agent for each subsidiary in dealings with the I.R.S. Continental files a declaration of estimated taxes, remits quarterly payments, and at the end of the tax year files the return and pays any remaining tax, all on a consolidated basis.
Each of the subsidiaries, including Midland and Utah, computes its declaration of estimated federal taxes separately at the beginning of the tax year and remits its quarterly payments to Continental. At the close of the tax year, the federal taxable income is computed by each subsidiary for itself as a separate corporation, and each subsidiary forwards these figures to Continental for preparation of the consolidated return, together with any further payment that would be due on a separate company basis. Remittances of all members of the Continental group are made by actual transfers of funds and are not merely accounting entries. Continental's preparation of the consolidated return involves combining the separately computed net taxable incomes of each subsidiary with the net operating losses of other subsidiaries. Under present federal law, the filing of a consolidated return permits an economically related group of corporations to report on a basis of transactions entered into with outsiders, which means, in general, gain or loss on intercompany transactions between the related corporations is eliminated from income of the reporting corporation. 2
In the taxable years in issue here, the net amount due the I.R.S. under Continental's consolidated return was less than the sum of all the tax payments remitted separately to that company by the profit producing members of the Continental group. This was because some of the Continental subsidiaries had operating losses, so that the consolidated income of the Continental group totalled less than the incomes reported by the profit making subsidiaries, including these two plaintiffs.
When any current operating loss is utilized, Continental remits funds to that member, to the extent of the tax effect of the loss which could have been carried back to prior years under the Internal Revenue Code of 1954, if that member had filed a separate return with the I.R.S. The effect of any remaining unused portion of net operating loss is offset as to that member in the future and, thereafter, Continental remits funds to such member at the then current tax rate. The result is that any newly acquired loss incurring subsidiary, while its losses are used to offset current total group net taxable income, does not immediately receive a refund from Continental, but only upon establishing a pattern of profits is a refund then remitted to such a subsidiary based on its losses.
In the computation by plaintiffs of their Utah tax for each of the years in question, each deducted federal taxes in an amount computed by multiplying its taxable income, separately computed, by the then current federal income tax rate, less the appropriate amount of Federal investment credit earned, 3 and deducted that amount on its Utah tax return. Upon separate audits by the Tax Commission staff, the following tax deficiencies were assessed:
In order to arrive at an equitable adjustment of the tax deduction allowable to the plaintiffs for payment of federal income taxes, the Commission allowed such deduction on the ratio that the federal taxable income of each profit producing subsidiary bears to the total taxable income of all profit producing subsidiaries.
The Tax Commission is by our constitution endowed with authority to '. . . administer and supervise the tax laws of the State . . . and . . . such other powers as may be prescribed by the Legislature;' 4 and this is implemented by statute, '. . . to perform such further duties as may be imposed upon it by law, and exercise all powers necessary in the performance of its duties.' 5
In dealing with the computation of net income in the determination of corporate franchise taxes, the legislature has provided for several classes of deductions from gross income, Section 59--13--7, U.C.A. 1953:
In computing net income there shall be allowed as deductions:
(b) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed; provided, that so much of taxes are properly allocable to maintenance or interest charges may be deducted.
While the general rule as to taxing statutes is that they are construed strictly against the taxing authority and favorably to the taxpayer, the reverse is true as to provisions allowing deductions. It is usually held that deductions are allowed as a matter of grace and therefore should be strictly construed. 6 In accordance with that rule, the taxpayer is required to show that his claim is fairly and clearly allowable under the terms of the statute. 7
The Tax Commission does not question that Section 59--13--7(3), U.C.A. 1953, just quoted includes whatever federal taxes are paid as a proper deduction to plaintiff corporation. But the dispute here centers upon what constitutes 'taxes paid' for purposes of qualifying for the deduction.
In an effort to deal with the complexities which arise in the allocation of deductions for various types of corporate structures, the Legislature has provided in Section 59--13--17, U.C.A. 1953:
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