F. W. Woolworth Co. v. Commissioner of Taxes

• Decision Date: 05 December 1972
• Docket Number: No. 30-71,30-71
• Citation: 298 A.2d 839,130 Vt. 544
• Parties: F. W. WOOLWORTH COMPANY v. COMMISSIONER OF TAXES.
• Court: Vermont Supreme Court

Page 839

298 A.2d 839

130 Vt. 544

F. W. WOOLWORTH COMPANY v. COMMISSIONER OF TAXES.

No. 30-71.

Supreme Court of Vermont.

Dec. 5, 1972.

Paterson, Gibson, Noble & Brownell, Montpelier, and Michael Bray, of Davies, Hardy, Ives & Lawther, New York City, of counsel, for plaintiff; Coffrin, Pierson, Affolter & Amidon, Burlington, and J. Dwight Evans, and Jerome R. Hellerstein, New York City, of counsel, on amicus brief of Mobil Oil Corp.

James M. Jeffords, Atty. Gen., for defendant; Martin K. Miller, Asst. Atty. Gen., and Murray Drabkin, and Lee H. Spence, Washington, D. C., of counsel.

Before SHANGRAW, C. J., and BARNEY, SMITH, KEYSER and DALEY, JJ.

KEYSER, Justice.

The Vermont tax department under 32 V.S.A § 5833 assessed additional corporate income taxes against the appellant, F. W. Woolworth Company, totaling $12,735.85 for the years 1966, 1967, 1968 and 1969. Excepting for minor adjustments these assessments resulted from the disallowance of an exclusion from the company's income of the 'foreign tax credit dividend gross-up' which the appellant had reported as income on its federal income tax return. Upon appeal to and hearing by the Commissioner of Taxes under 32 V.S.A. § 5883, the assessments were upheld by the commissioner's determination. Appeal from the decision of the commissioner to the Washington County Court followed. The lower court found by its Finding No. 12 'That Appellant's taxable income in Vermont is measured by the taxable income as shown on the federal tax return even though it includes the 'deemed paid gross-up' of foreign dividends' and by its order dismissed the appeal. The case is here on appeal from this order of the court.

The issues presented for review by the appellant are threefold:

'1. Is the 'Gross-Up' of foreign dividends income, and therefore, subject to Vermont taxation?

2. Would the treatment of 'Gross-Up' as subject to Vermont income taxation violate the fourteenth amendment to the United States Constitution?

3. Should the apportionment formula be modified as provided by 32 V.S.A. § 5833(b) because that formula is intrinsically arbitrary when applied to taxpayers with extensive foreign subsidiary operations?'

Woolworth is New York corporation and has done business in Vermont since 1912. It operates a chain of retail mercantile stores in the United States, as well as in foreign countries, seven of which are presently located in Vermont. Woolworth's foreign business is through subsidiary corporations which operate like businesses in the United Kingdom, West Germany and Mexico. It received dividends from these subsidiaries in addition to its other income.

The state and federal income tax statutes to be considered for a full understanding of the relationship of the 'gross-up' to Vermont's tax law necessary to pass upon the issues presented brings into focus the various relevant laws and their application to the issues.

Prior to the enactment of Act No. 61 of the Public Acts of the Special Session of 1966, corporations doing business in Vermont were taxed through what was known as the Vermont Franchise Tax. The franchise tax was an annual tax on the privilege of doing business in Vermont, and was not a direct tax on income. However, it did involve a computation of net income of the corporation since the tax was based on the net income of the corporation. Hoosier Engineering C. v. Shea, Commissioner of Taxes, 124 Vt. 341, 342-343, 205 A.2d 821 (1964); Gulf Oil Corporation v. Morrison, 120 Vt. 324, 327-328, 141 A.2d 671 (1958).

Although as originally enacted, the allocation formula used in the computation of the franchise tax did not utilize all the factors found in the present allocation formula, 32 V.S.A. § 5833, an additional factor was later added to better reflect the corporation's business activities in Vermont. Gulf Oil Corporation v. Morrison, supra, 120 Vt. at 328, 141 A.2d 671. The original formula only included property and sales of the corporation, and it did not include the corporation's payroll. Compare Union Twist Drill Co. v. Harvey, Commissioner of Taxes, 113 Vt. 493, 498, 37 A.2d 389 (1944), with Gulf Oil Corporation v. Morrison, supra, 120 Vt. at 326-327, 141 A.2d 671.

The only other case which dealt with the franchise tax was Fairbanks, Morse & Co. v. Commissioner of Taxes, 114 Vt. 425, 47 A.2d 123 (1946), which dealt with an issue other than allocation formula. That issue was whether Fairbanks, Morse & Company could deduct its federal excess-profits taxes in computing its franchise tax.

In Gulf Oil Corporation v. Morrison, supra, the Court was called upon to decide whether dividends received from wholly owned subsidiary corporations (U.S. and foreign) and from other corporations doing no business in Vermont could be included in the allocation formula and not constitute a deprivation of due process. Gulf attempted to exclude these dividends from its net income from which Vermont's allocation was made, and the Commissioner of Taxes refused to allow the exclusion. In its discussion of the inclusion of dividend income, the Court said:

'The statute law which we have quoted supra did not provide that intangible personal property be considered as a factor in the allocation formula, so the Commissioner had no authority to consider it.' Id., 120 Vt. at 329, 141 A.2d at 674.

In its holding the Court in Gulf Oil Corporation v. Morrison, supra, 120 Vt. at 330, 141 A.2d 671, held the inclusion of dividends in the allocation formula did not serve to make the formula operate in an arbitrary manner.

In Hoosier Engineering Co. v. Shea, Commissioner of Taxes, supra, the taxpayer objected to the inclusion of an item of income representing a capital gain on the sale of shares of stock in Canadian Hoosier Co. Ltd., a Canadian corporation. There the Court was controlled by Gulf Oil Corporation v. Morrison, supra, and held the capital gains was properly includable in the formula as an item of net income based on the federal code. Hoosier Engineering Co. v. Shea, Commissioner of Taxes, supra, 124 Vt. at 344-345, 205 A.2d 821.

This Court's approach towards the inclusion of such items of net income as dividends and capital gains in its allocation formula for franchise taxation purposes has been accepted in other jurisdictions. The basic rationale for their inclusion was stated in F. W. Woolworth Co. v. Director of Div. of Taxation, 45 N.J. 466, 213 A.2d 1, 9 (1965) where that court said: '. . . the realistic value of the exercise of a franchise in a particular state is enhanced and contributed to by the worth or income of the entire enterprise everywhere. . . .' Typically this approach is followed where there is a unity of use and management of the enterprise being taxed. F. W. Woolworth Co. v. Director of Div. of Taxation, supra.

Effective January 1, 1966, Act No. 61 of the Public Acts of the Supecial Session of 1966, replaced the Vermont Franchise Tax on corporations, and enacted the Vermont corporate income tax under which this appeal is brought.

It goes without saying that the ultimate purpose of income tax statutes is to raise revenue for the state. Dostal's Inc. v. Wright, Commissioner of Taxes, 129 Vt. 322, 325, 277 A.2d 125 (1971). The basic structure of the Vermont corporate income tax rests on the use of the taxable income as actually reported to the Federal government under the Internal Revenue Code, which is there defined as gross income minus deductions.

The purpose of Chapter 151, Vermont Statutes Annotated, relating to income taxes is expressed in 32 V.S.A. § 5820(a) as follows:

' § 5820. Purpose.

(a) This chapter is intended to conform the Vermont personal and corporate income taxes with the United States Internal Revenue Code, except as otherwise expressly provided, in order to simplify the taxpayer's filing of returns, reduce the taxpayer's accounting burdens, and facilitate the collection and administration of these taxes.'

The income tax provisions for corporations is under 32 V.S.A. § 5832 which uses as the basis for taxation the 'Vermont net income' of the corporation. At the time in point here, 'Vermont net income' was defined by 32 V.S.A. § 5811(18) as follows:

'(18) 'Vermont net income' means, for any taxable year and for any corporate taxpyer, the taxable income of the taxpayer for that taxable year under the of the United States, excluding income which under the laws of the United States is exempt from taxation by the states.'

Under § 5832 the tax is levied 'upon the income earned or received in that taxable year by every taxable corporation' and, at the time in question, was at the rate of '5 per cent of the Vermont net income of the corporation for that taxable year allocated or apportioned to this state.'

Section 5888, entitled 'Determination of taxable income . . . under the laws of the United States,' provided, in pertinent part:

'(A) taxpayer's taxable income . . . under the laws of the United States shall be determined by reference to the judicial decisions and administrative rulings of the United States.

'(1) A determination by the United States which establishes the amount of a taxpayer's taxable income . . . under the laws of the United States for any taxable year shall be binding on the taxpayer and the state in calculating the taxpayer's liability to Vermont under this chapter. . . .

'(2) For any taxable year, the payment to the United States by any taxpayer of an aggregate amount of income tax . . . shall be prima facie evidence, for purposes of this chapter, that . . . the items of income, deductions, exemptions and credits with respect to which the income tax liability was calculated are the items of income, deductions, exemptions and credits of the taxpayer for that taxable year under the laws of the United States.'

The term 'gross-up' comes from § 78 of the Internal Revenue Code, and it represents one step a corporation with foreign subsidiaries that meet certain conditions found in § 902 takes in the...