Georgia Dept. of Revenue v. Trawick Const.

• Decision Date: 23 February 2009
• Docket Number: No. A08A2323.,A08A2323.
• Citation: 296 Ga. App. 275,674 S.E.2d 350
• Parties: GEORGIA DEPARTMENT OF REVENUE v. TRAWICK CONSTRUCTION COMPANY, INC.
• Court: Georgia Court of Appeals

674 S.E.2d 350

296 Ga. App. 275

GEORGIA DEPARTMENT OF REVENUE v. TRAWICK CONSTRUCTION COMPANY, INC.

No. A08A2323.

Court of Appeals of Georgia.

February 23, 2009.

Thurbert E. Baker, Atty. Gen., Warren R. Calvert, Sr. Asst. Atty. Gen., Lourdes Gonzalez, Asst. Atty. Gen., for Appellant.

Baker, Donelson, Bearman, Caldwell & Berkowitz, Robert G. Brazier, Michael Scott Evans, Atlanta, for Appellee.

Alston & Bird, Timothy J. Peaden, John L. Coalson, Jr., Atlanta, Ethan D. Miller, amici curiae.

MILLER, Chief Judge.

In this tax case of first impression, the Commissioner of the Georgia Department of Revenue (the "Commissioner") issued a $224,800 additional tax assessment against Trawick Construction Company, Inc. ("Trawick") on January 13, 2004, as to the short-tax-year January 1, 1999 to October 1, 1999. On August 16, 2004, following Trawick's appeal to the Office of State Administrative Hearings, an administrative law judge ("ALJ") issued his Initial Decision finding that Trawick "demonstrated beyond a preponderance of the evidence that the [Commissioner's] assessment of additional corporate Georgia income taxes on the proceeds of the Trawick stock transfer [at issue] was erroneous." The Commissioner thereafter reversed the Initial Decision of the ALJ. Trawick petitioned for judicial review, and the superior court reversed, returning the case to the status quo ante, reinstating the ALJ's decision. After we granted its application for discretionary review, the Department of Revenue (the "Department") filed its appeal, contending that the superior court erred (i) in rejecting the Commissioner's finding of fact that Trawick had elected tax treatment under 26 USC § 338(h)(10) ("Section 338 election"), such treatment relieving Trawick of federal tax liability as to the gain it realized upon the sale of its stock and characterizing the sale of its stock as a "deemed sale"¹ of all its assets, (ii) in finding that Georgia's statutes do not tax such gain because Trawick's stock was sold pursuant to a Section 338 election made by Trawick's shareholders, and (iii) in finding that the additional tax assessment was constitutionally barred. Finding that the gain realized by Trawick as a result of the deemed sale of its assets is taxable under Georgia law, we reverse.

In broad terms, this case raises a question of law as to whether the Section 338 election at issue relieves Trawick of corporate tax liability under Georgia law as to the gain realized upon the proceeds from the deemed sale of its assets. "[E]rroneous applications of law to undisputed facts, as well as decisions based on erroneous theories of law, are subject to the de novo standard of review. [Cit.]" Trent Tube v. Hurston, 261 Ga.App. 525, 583 S.E.2d 198 (2003).

From its formation in 1960 through October 1, 1999, Trawick was a closely-held Florida corporation, and Trawick's shareholders, directors, and officers were all members of the Trawick family. Trawick was in the telecommunications business and did business in Florida, Alabama, Arkansas, Louisiana, Mississippi, North Carolina, South Carolina, and Georgia.

On October 1, 1999, Trawick's shareholders sold their shares in Trawick and a related company, CMI (collectively "Trawick"),² to Quanta Services, Inc. ("Quanta") for $36,500,000 under a stock purchase agreement. The agreement provided that

[a]t Quanta's option, each of the Companies [(Trawick and CMI)] and the Stockholders will join with Quanta in making an election under Section 338(h)(10) of the Internal Revenue Code (and any corresponding election under state, local and foreign Tax law) with respect to the purchase and sale of the stock of the Companies....

To consummate the sale, each of Trawick's shareholders, among them Jenee Floyd, signed a consent form stating, "I consent to the election between [Quanta] and [Trawick] to treat the acquisition of [Trawick], as an asset purchase and its resulting tax affects [sic] pursuant to [a Section 338 election]." Floyd made the election by signing a second document, Internal Revenue Code ("IRC") Form 8023, in her capacity as Trawick's "Vice President-Finance." Such form is for the use of entities termed a "common parent," a "selling affiliate," or, as here, an "S corporation shareholder[s]" in electing corporate tax treatment for federal purposes under a Section 338 election.

In exchange for their stock, the Trawick shareholders received $29,492,000 in cash and 273,921 shares of Quanta common stock having a fair market value of $7,008,000. After the sale, Trawick continued to conduct business in Georgia as a wholly-owned subsidiary of Quanta, a Delaware corporation, having its principal place of business in Texas. Trawick remains a Florida corporation and operates from its presale address in Chipley, Florida.

Because Trawick was being taxed as a Subchapter S corporation at the time of the acquisition, its shareholders, rather than the corporation, were required to report and pay, pro rata, the federal business income tax due on the transaction under 26 USC §§ 1366(a) and 1377(a)(1).³ After the deemed sale of its assets, Trawick, having become a subsidiary of Quanta, filed its 1999 Georgia corporate tax return on the transaction as a Subchapter C corporation.⁴ In doing so, Trawick reported federal taxable income of $35,961,518, net Georgia business income of $35,961,518, allocated⁵ $29,689,534 thereof entirely to Florida, and apportioned⁶ the remainder $6,271,984 as attributable to its business in Georgia. Of the income subject to apportionment, Trawick reported taxable business income in Georgia of $799,659. Based on that amount, Trawick arrived at a reported tax due Georgia in 1999 of $47,980 (6% of $799,659).

Upon review, the Commissioner determined that Trawick's correct business income subject to apportionment was $35,661,031, rather than $6,271,984 as calculated by Trawick, applied the same apportionment ratio that Trawick had used (.127497), and determined $4,546,674, rather than $799,659, to be Trawick's taxable business income in Georgia. Based on this finding and after crediting Trawick for certain taxes previously paid, the Department assessed Trawick an additional $224,820 in income tax, plus interest.

1. The Department contends that the superior court erred in rejecting the Commissioner's factual determination that Trawick had joined with its shareholders and Quanta in making the Section 338 election. The Department argues that the Commissioner as the ultimate factfinder was not bound by the ALJ's finding of fact. We agree.

Citing Atkinson v. Ledbetter, 183 Ga.App. 739, 360 S.E.2d 66 (1987), the superior court found that, absent reopening the record and taking additional testimony, the Commissioner was bound by the ALJ's finding of fact that Floyd signed IRC Form 8023 in her individual capacity as a shareholder and not for Trawick as its Vice President-Finance. We reversed the final agency decision in Ledbetter, however, not because the agency substituted its judgment for that of the factfinder ALJ without taking additional evidence, but because the ALJ's initial decision was not supported by any evidence. Id. at 741, 360 S.E.2d 66.

Further, while the any evidence standard of judicial review is applicable to this Court and the superior courts in reviewing an agency's decision (Greene v. Dept. of Community Health, 293 Ga.App. 201, 204, 666 S.E.2d 590 (2008)), it does not apply "to an internal agency appeal." Id. at 201, 666 S.E.2d 590. The ALJ's role at an administrative hearing is to act as the representative of the Department and to make a recommendation. Id. at 203, 666 S.E.2d 590 "[I]t is then up to the Commissioner to either allow the recommendation to become the Department's final decision (by taking no action), or to affirm, modify, or reverse the decision appealed from." (Citation and punctuation omitted.) Id.; see OCGA § 50-13-17(a) ("On review from the initial decision of [the ALJ], the agency shall have all the powers it would have [had] in making the initial decision and, if deemed advisable, the agency may take additional testimony or remand the case to the [ALJ] for such [additional] purpose.") (emphasis supplied); see also OCGA § 50-13-41(d) ("In reviewing initial decisions by the Office of State Administrative Hearings, the reviewing agency shall give due regard to the ALJ's opportunity to observe witnesses. If the reviewing agency rejects or modifies a ... proposed decision, it shall give reasons for doing so in writing in the form of findings of fact and conclusions of law.") (emphasis supplied).

The Commissioner's finding, as a matter of fact, that Trawick joined in making the Section 338 election by signing the Form 8023 as Trawick's Vice President-Finance is supported by some evidence. Consequently, the superior court erred in rejecting such finding and adopting the contrary finding of the ALJ.

2. Further, the Department claims that the superior court erred in holding that Georgia statutes do not tax any of the gain recognized by Trawick pursuant to the deemed sale of its assets because: (i) a corporation's Georgia taxable net income is derived directly from its federal taxable income pursuant to OCGA § 48-7-21 (a) and the portion thereof that is attributable to property owned or business done in Georgia as determined by application of the statutory rules of allocation and apportionment; (ii) a Section 338 election is not one involving a Subchapter S corporation within the meaning of OCGA § 48-7-21(b)(7); (iii) Trawick's status as a Subchapter C corporation in Georgia did not foreclose Georgia tax liability because it was neither the parent of a selling consolidated group nor a selling affiliate of a corporation; and, in any event (iv) the deemed sale of Trawick's assets as to goodwill was apportionable to Georgia under OCGA § 48-7-31(d) for such purposes. Again we agree.

(a) Trawick's argument to the contrary notwithstanding, the Department...