Goggin v. State Tax Assessor

• Decision Date: 02 August 2018
• Docket Number: Docket: BCD-17-459
• Citation: 191 A.3d 341
• Parties: James GOGGIN et al. v. STATE TAX ASSESSOR
• Court: Maine Supreme Court

191 A.3d 341

James GOGGIN et al.

v.STATE TAX ASSESSOR

Docket: BCD-17-459

Supreme Judicial Court of Maine.

Argued: May 15, 2018

Decided: August 2, 2018

James G. Goggin, Esq. (orally), Verrill Dana, LLP, Portland, for appellants James and Ann Goggin.

Janet T. Mills, Attorney General, and Thomas A. Knowlton, Asst. Atty. Gen. (orally), Office of the Attorney General, Augusta, for appellee State Tax Assessor.

Panel: SAUFLEY, C.J., and ALEXANDER, MEAD, GORMAN, JABAR, HJELM, and HUMPHREY, JJ.

SAUFLEY, C.J.

[¶ 1] The question presented in this appeal is whether an individual resident of Maine is entitled to a Maine income tax credit for any portion of the business taxes imposed by New Hampshire on a New Hampshire limited liability company of which the Maine resident is a member. In its judgment entered in the Business and Consumer Docket, the court (Murphy, J. ) determined that the Maine resident's proportion of business taxes paid in New Hampshire by the LLC did not qualify that resident for a tax credit against her individual Maine income taxes. We affirm that judgment.

I. BACKGROUND

[¶ 2] James and Ann Goggin appeal from a judgment affirming the State Tax Assessor's denial of a tax credit for a share of New Hampshire business taxes paid by a New Hampshire LLC proportional to the membership interest that Ann had in the LLC. They argue that the court erred in interpreting Maine's individual income tax statutes and that, as applied, Maine's income tax statutes discriminate against interstate commerce in violation of the Commerce Clause of the United States Constitution.

[¶ 3] The facts are drawn from the parties' stipulations of fact and their joint exhibits. The joint exhibits consist, primarily, of Maine and New Hampshire tax documents. James and Ann Goggin lived in Maine at all relevant times, and they filed joint federal and State income tax returns. GHK Company, LLC, is a limited liability company formed in New Hampshire in 1994 to own, develop, maintain, and lease a parcel of commercial real estate in New Hampshire. For federal income tax purposes, the LLC was classified as a partnership for the 2012 through 2014 tax years, which are the years at issue here. In each of those three years, the LLC received rental income from its property. For each of those years, Ann was allocated a percentage interest in the profits and losses of the LLC.

[¶ 4] The State of New Hampshire does not impose income taxes on individuals except on certain "income received from interest and dividends" not at issue here. N.H. Rev. Stat. Ann. § 77:3(I)(a) (2012). The State of New Hampshire imposed on the LLC, however, both a "business profits tax" and a "business enterprise tax." See N.H. Rev. Stat. Ann. §§ 77-A:2, 77-E:2 (2012).¹ On its federal "Return of Partnership Income" forms, the LLC took deductions for the New Hampshire business taxes it paid. Specifically, among other deductions, it deducted the amount of the New Hampshire business taxes from the amounts of rental real estate income that the LLC reported to the federal government. Ann Goggin's share of the rental income was determined as a percentage of those reduced amounts for purposes of the LLC's attached Schedule K-1 forms stating her "Partner's Share of Income, Deductions, Credits, etc."

[¶ 5] For each of the 2012 to 2014 years, the Goggins reported in their joint federal income tax return an amount of income from the LLC that was similar to the amount stated in the corresponding year's federal LLC form reporting Ann Goggin's share of the LLC's rental income.

[¶ 6] When the Goggins filed their joint Maine income tax returns for the 2012 through 2014 tax years, they did not claim a credit for the New Hampshire business taxes paid by the LLC. Because the calculation of the Maine tax obligation was based on the Goggins' federal adjusted gross income, the income that they reported in their Maine tax returns also did not include any income that the LLC had received but then paid in New Hampshire business taxes.

[¶ 7] In January 2016, the Goggins filed an amended Maine return for each of the 2012, 2013, and 2014 tax years seeking a personal income tax credit, and corresponding refund, for the portion of the New Hampshire business tax paid by the LLC that was proportional to Ann's membership interest. The amended Maine returns did not, however, add to the Goggins' Maine adjusted gross income any amount of the LLC's income that went to pay the New Hampshire LLC taxes.

[¶ 8] Maine Revenue Services denied the refund by letter dated May 9, 2016, and the Goggins requested reconsideration. See 36 M.R.S. § 151(1) (2017). In a written decision dated September 21, 2016, the State Tax Assessor upheld the denial of their claims for refunds.

[¶ 9] The Goggins then filed, in the Superior Court, a petition for judicial review of the Assessor's final agency action and de novo determination of all facts and law. See 36 M.R.S. § 151(2)(F)(2), (G) (2017). Upon the parties' agreement and the Goggins' application, the matter was accepted for transfer to the Business and Consumer Docket. The court received briefs and heard arguments from the parties regarding their jointly stipulated facts and supporting exhibits. The court affirmed the judgment of the Assessor, reasoning that no income tax credit applied because (1) the New Hampshire business taxes were imposed on the LLC and were not an "amount of income tax imposed on [an] individual," 36 M.R.S. § 5217-A (2017), and (2) Maine's tax statutes do not violate the Commerce Clause of the United States Constitution. The Goggins timely appealed. See 5 M.R.S. § 11008 (2017) ; M.R. App. P. 2A, 2B(a)(1), (c)(1).

II. DISCUSSION

A. Interpretation of Maine's Income Tax Statutes

[¶ 10] When a taxpayer appeals to the Superior Court from a decision of the State Tax Assessor, the Superior Court "conduct[s] a de novo hearing and make[s] a de novo determination of the merits of the case." 36 M.R.S. § 151(2)(G). "Because the Superior Court is not acting in an appellate capacity, we review its determinations directly." Linnehan Leasing v. State Tax Assessor , 2006 ME 33, ¶ 16, 898 A.2d 408.

[¶ 11] The Goggins contend that the court erred in rejecting their argument that the business taxes imposed on the LLC are functionally income taxes on the individual holders because of the "flow-through" nature of income realized by an LLC. They argue that the court's, and the Assessor's, formalistic interpretation of the statute results in the "double taxation" of Maine entrepreneurs.

[¶ 12] "In interpreting a tax statute, we look first to its plain meaning to give effect to the Legislature's intent." State Tax Assessor v. MCI Commc'ns Servs., Inc. , 2017 ME 119, ¶ 7, 164 A.3d 952. We endeavor to "avoid absurd, illogical or inconsistent results and will not read additional language into a statute or treat words in a statute as meaningless and superfluous." Id. (quotation marks omitted).

[¶ 13] A taxation statute is construed "most strongly against the government and in the [taxpayer's] favor," and we "will not extend its reach beyond the clear import of the language used." Id. (quotation marks omitted). "Statutory exemptions to taxes are construed narrowly, however," and we will not apply an exemption "to situations not clearly coming within the scope of the exemption provisions." Id. (quotation marks omitted).

[¶ 14] A tax credit, like a tax exemption, must be construed narrowly because "[s]uch special privileges are in conflict with the universal obligation of all to contribute a just proportion toward the public burdens." City of Bangor v. Rising Virtue Lodge, No. 10, Free & Accepted Masons , 73 Me. 428, 433 (1882) (quotation marks omitted). Tax credits, like tax exemptions, diminish taxpayers' contributions as a matter of limited legislative allowance. See Gen. Motors Corp. v. Franchise Tax Bd. , 39 Cal.4th 773, 47 Cal.Rptr.3d 233, 139 P.3d 1183, 1193 (2006) (holding that a tax credit, which is a matter of legislative grace, must be strictly construed); Dep't of Revenue, Fin. & Admin. Cabinet v. Roanoke Cement Co. , 443 S.W.3d 1, 3 (Ky. Ct. App. 2014) (holding that a tax credit—like a tax exemption—is narrowly construed); Centex Int'l, Inc. v. S.C. Dep't of Revenue , 406 S.C. 132, 750 S.E.2d 65, 69 (2013) (strictly construing "a tax credit against the taxpayer as it is a matter of legislative grace"); see also MedChem (P.R.), Inc. v. Comm'r of Internal Revenue , 295 F.3d 118, 123 & n.6 (1st Cir. 2002) (stating that a federal tax credit applies only if "there is clear provision therefor," and that a tax credit statute will not be interpreted with all doubts resolved in favor of the taxpayer (quotation marks omitted) ).

[¶ 15] Here, the Maine tax credit at issue applies to income tax that a resident individual has paid in another state:

A resident individual is allowed a credit against the tax otherwise due under this Part, excluding the tax imposed by section 5203-C [alternative minimum tax], for the amount of income tax imposed on that individual for the taxable year by another state of the United States, a political subdivision of any such state, the District of Columbia or any political subdivision of a foreign country that is analogous to a state of the United States with respect to income subject to tax under this Part that is derived from sources in that taxing jurisdiction....

36 M.R.S. § 5217-A (emphasis added). The question is whether the New Hampshire business taxes paid by the LLC constitute an "income tax" imposed on Ann by another state. See id. Although we considered this exact question of statutory interpretation in 2008, we affirmed the decision of the Superior Court in the Assessor's favor without discussion because the Court was evenly divided. See Day v. State Tax Assessor , 2008 ME 39, 942 A.2d 685 ; Day v. State Tax Assessor , Nos. AP-04-58, AP-04-59, 2006 Me. Super. LEXIS 284 (July 21, 2006). Accordingly, we now address the issue for the first time on its merits.

[¶ 16] The...