Farmers' and Laborers' Co-op Ins. Ass'n v. Director of Revenue, State of Mo.

• Decision Date: 15 December 1987
• Docket Number: CO-OPERATIVE,No. 69213,69213
• Parties: FARMERS' AND LABORERS'INSURANCE ASSOCIATION, Appellant, v. DIRECTOR OF REVENUE, STATE of MISSOURI, Respondent.
• Court: Missouri Supreme Court

Page 141

742 S.W.2d 141

FARMERS' AND LABORERS' CO-OPERATIVE INSURANCE ASSOCIATION, Appellant, v. DIRECTOR OF REVENUE, STATE of MISSOURI, Respondent.

No. 69213.

Supreme Court of Missouri En Banc.

Dec. 15, 1987.

Rehearing Denied Jan. 20, 1988.

Charles M. Lock, St. Louis, for appellant.

William L. Webster, Atty. Gen., Richard L. Wieler, Asst. Atty. Gen., Jefferson City, for respondent.

HIGGINS, Judge.

Pursuant to receipt by the Missouri Department of Revenue of a Form, 4549L, Income Tax Examination Changes, from the Internal Revenue Service, the Director of Revenue assessed the Farmers' Co-operative Insurance Associations' taxpayers $11,995.90 for income tax and interest for the tax year 1981. The taxpayers protested the Director's assessment arguing that farm mutual companies were exempted from the state corporate income tax under section 143.120, RSMo 1969, ¹ repealed by L.1972 in 1973, effective January 1, 1973, replaced by section 143.321, RSMo 1978.

Appellant did not file a Missouri corporate income tax return but did pay a tax to the federal government for the 1981 tax year as computed by the I.R.S. The federal return showed a tax liability of $291,602.77 and tax due of $114,887.27. $209,137.36 of the total represented investment income. A subsequent adjustment to the return by federal authorities raised the tax due from appellant for 1981 to $115,524.59, resulting in a Missouri corporate income tax and interest totalling $11,995.90. On appeal to the Administrative Hearing Commission, appellant sought a determination that the $11,995.90 of income tax and interest for the tax year 1981 be set aside as contrary to the law. The Administrative Hearing Commission affirmed the Director's decision and this appeal followed. The decision is affirmed.

The Administrative Hearing Commission found that the statutes required that all corporations doing business in Missouri must pay an income tax to the state on the same income for which they pay income tax to the federal government with certain modifications, unless: 1) specifically exempted from the Missouri corporate income tax, such as insurance companies paying premiums tax; or 2) specifically exempted from federal income tax by reason of its purposes and activities. See section 143.441.2, RSMo 1978.

Appellant does not claim an exemption from the Missouri corporate income tax. Appellant alleges it is not liable for payment of any state income tax and therefore has no need for an exemption. Appellant claims it has no federal taxable income as defined by the Internal Revenue Code of the United States. Section 143.091, RSMo 1978. ² Section 143.431.1, RSMo 1978, expressly states that a Missouri corporation is taxed only to the extent it has federal taxable income. Appellant argues that because it has no federal taxable income it cannot be liable for Missouri corporate income tax.

Appellant also contends that article X, section 4(d) of the Missouri Constitution does not allow the Missouri corporate income tax to be based on the federal tax liability of appellant.

In the alternative, appellant argues that a correct interpretation of chapter 380 requires express reference to a farm mutual company in corporate income tax law before such law can be applied to a farm mutual company and that because no such express reference exists, the corporate income tax cannot be applied to a farm mutual insurance company.

A proposal by the Director for resolving the dispute with the mutual insurance companies in Missouri over their failure to pay Missouri income tax from the year 1973 through 1984 was set forth in a letter to the Missouri Association of Mutual Insurance Companies dated July 17, 1984. The Department proposed that all mutual insurance companies file Missouri forms and pay all applicable taxes and interest for the tax years ending in 1980, 1981, 1982 and 1983. In return the Department would waive all penalties and additions for returns filed on or before September 17, 1984, and would not assess any tax for the tax years prior to 1980. For those companies which did not voluntarily file and pay, the Department proposed to audit for all years back to and including 1973. Appellant protested the tax assessment and rejected the proposal by the Department. The Director reconsidered the matter and upheld the "Notice of State Income Tax Deficiency issued against Taxpayer" as correct and outstanding.

Appellant contends first that the Commission's decision in applying the plain meaning rule of construction ignored well-settled rules of construction that apply to this case. Appellant claims that tax statutes must be clear and unambiguous in their application and that tax laws are to be construed strictly against the taxing authority and as favorably as possible to the taxpayer. Petition of Union Electric Co. of Missouri, 161 S.W.2d 968, 970 (Mo. banc 1942). Appellant argues that because the Director of Revenue did not enforce the corporate income tax law against chapter 380 companies during the period 1973 until at least 1982 that the Director considered the chapter 380 companies not subject to the state corporate income tax law. Appellant suggests the Department's interpretation of this statute during the nine-year period was clear and unambiguous and now its interpretation is contrary to the law. L. & R. Distributing, Inc. v. Department of Revenue, 529 S.W.2d 375 (Mo.1975).

When a statute is clear and unambiguous, extrinsic aids to statutory construction cannot be used. Knowledge of the change in the Missouri income tax effective January 1, 1973, must be imputed to the taxpayer as well as to the Director of Revenue. Appellant cannot use equitable arguments to evade paying the required income tax to the state. The doctrine of estoppel is normally not applicable to acts of a governmental body. Bartlett & Co. Grain v. Director of Revenue, 649 S.W.2d 220 (Mo.1983). Fundamental to an estoppel claim against the government is that in addition to satisfying elements of ordinary estoppel, governmental conduct complained of must amount to affirmative misconduct. Peoples Bank of Lincoln County v. U.S. 635 F.Supp. 642 (E.D.Mo.1986). The Director's conduct in failure to enforce the statute in question does not amount to misconduct of the kind required to raise an estoppel against a governmental department.

Appellant contends next that the Commission's construction and interpretation of federal taxable income as equivalent to the payment of a federal income tax does not follow the federal law definition of federal taxable income as required by Missouri statute and case law. Appellant asserts it had no federal taxable income in the year 1981, only mutual insurance company taxable income as that term is defined in the Internal Revenue Code.

Section 143.071, RSMo 1978, requires corporations in Missouri to pay a tax of 5 percent upon Missouri taxable income. Section 143.431, RSMo 1978, ³ identifies Missouri taxable income as federal taxable income derived from sources within Missouri.

Appellant is a farmers' mutual insurance company operating under the provision of chapter 380 of the Missouri Revised Statutes. Effective January 1, 1985, mutual insurance companies operating under sections 380.580 to 380.840, RSMo 1978, were required to operate under sections 380.201 to 380.591, RSMo 1978. Also, as of January 1, 1985, mutual insurance companies operating under sections 380.201 to 380.591, RSMo 1978, were subjected to the premium tax in lieu of other state taxes. See section 148.376, RSMo 1986. ⁴

Before January 1, 1973, the effective date of the new comprehensive Missouri income tax statutes, income from a farmers' mutual insurance company was clearly exempt from taxation under the existing Missouri income tax law. Section 143.120(10), RSMo 1969, see footnote 1. Subsequent to January 1, 1985, it is also clear that a farm mutual insurance company subject to premium tax under section 148.376, RSMo 1986, see footnote 4, is exempt from the new Missouri income tax pursuant to section 143.441.2(3), RSMo 1978. ⁵ There is, however, no language in the Missouri statutes which would expressly exempt appellant from Missouri corporate income tax on its federal taxable income from the years 1973 through 1984. Section 143.431, RSMo 1978, footnote 3.

Appellant argues that when federal taxable income is defined according to the Internal Revenue Code it becomes clear that it has no federal taxable income. First, appellant cites section 26 U.S.C.A. § 501(c)(15) which exempts a mutual insurance company having gross receipts under $150,000 from the payment of the corporate income tax. Next, appellant's interpretation of this distinction is that there is one set of rules applying to for-profit corporations and a different set applying to specialized types of corporations such as insurance companies. Under section 26 U.S.C.A. § 63(a), a corporation's taxable income means gross income minus the deductions allowed by this chapter. Then section 26 U.S.C.A. § 11(a) states a tax is payable for each taxable year on the taxable income of every corporation. Because section (c) of 11 makes an exception for subchapter L of the Internal Revenue Code which covers insurance companies, appellant concludes this means the IRS treats mutual insurance companies differently from the ordinary for-profit corporations. The final result of appellant's interpretation is that this means appellant's tax is a mutual insurance company income tax and not a federal income tax as defined in Missouri statute section 143.431, RSMo 1978. See footnote 3.

Appellant's argument does not persuade under interpretation of the various sections of the Internal Revenue Code. This Court has held that the term "federal taxable income" cannot be interpreted with reference to one section only and without consideration of any other federal code provisions. Brown Group, Inc. v. Administrative Hearing Commission, 649 S.W.2d 874, 877 (Mo. banc 1983)...