Goodyear Tire & Rubber Co., Corporate Income Tax 1966, 1967, 1968, In re

• Decision Date: 04 February 1975
• Docket Number: No. 203-72,203-72
• Citation: 133 Vt. 132,335 A.2d 310
• Court: Vermont Supreme Court
• Parties: In re GOODYEAR TIRE & RUBBER COMPANY, CORPORATE INCOME TAX 1966, 1967, 1968.

Page 310

335 A.2d 310

133 Vt. 132

In re GOODYEAR TIRE & RUBBER COMPANY, CORPORATE INCOME TAX

1966, 1967, 1968.

No. 203-72.

Supreme Court of Vermont.

Feb. 4, 1975.

Rehearing Denied March 3, 1975.

Paterson, Gibson, Noble & Brownell, Montpelier, and Black & Plante, White River Junction, for Goodyear Tire & Rubber Co.

M. Jerome Diamond, Atty. Gen., James E. Hirsch, Asst. Atty. Gen., and Charles Edwin Goldkamp, Deputy Commissioner of Taxes, for the Commissioner of Taxes.

Before BARNEY, C. J., SMITH, KEYSER and LARROW, JJ., and SHANGRAW, C. J. (Ret.), Assigned.

SMITH, Justice.

This is an appeal from a decision of the Windsor County Court upholding the determination of the Commissioner of Taxes refusing to modify the apportionment formula provided in 32 V.S.A. § 5833 as requested by Goodyear Tire & Rubber Company. The apportionment formula in question was used to allocate a fair and equitable portion of Goodyear's income derived from business activity conducted both within and without Vermont to be subject to Vermont's corporate income tax for the calendar years 1966 through 1969. Goodyear points out that the Commissioner's refusal to modify the formula resulted in the taxation of foreign dividend income and 'gross-up' in those calendar years. See F. W. Woolworth Co. v. Commissioner of Taxes, 133 Vt. ---, 328 A.2d 402 (1974); F. W. Woolworth Co. v. Commissioner of Taxes, 130 Vt. 544, 298 A.2d 839 (1972).

Goodyear's appellate attack on the Commissioner's refusal to modify the apportionment formula is twofold: the statutory apportionment of Goodyear's income pursuant to 32 V.S.A. § 5833 for the purpose of imposing Vermont's corporate income tax does not fairly represent the extent of the business activities of Goodyear in Vermont, and the taxation of Goodyear's foreign dividend income and 'gross-up' violates the United States Constitution. Goodyear prefaces its arguments with a challenge to the failure of the county court to find that Goodyear's subsidiaries from which it receives its foreign dividend income were independently operated as separate entities.

Goodyear relies upon Hans Rees' Sons v. North Carolina, 283 U.S. 123, 51 S.Ct. 385, 75 L.Ed. 879 (1931), and its interpretations by various state courts to argue that where parent and subsidiary units are not 'component parts of a single unit', dividend income from the foreign subsidiaries cannot be constitutionally included in the parent corporation's taxable net income. However, Hans Rees' Sons v. North Carolina, supra, does not embrace Goodyear's presupposition; its holding merely constitutionally prohibits the following allocation of the income of a non-resident corporation engaged in the business of manufacturing and selling leather goods by a state in which is located only the corporation's manufacturing plant: the allocation of that part of the corporation's income to the state which bore the same ratio to its entire net income as the value of the same corporation's tangible property within the state bore to the value of all its tangible property, where the average percentage of income having its source within the state was 17% and the average allocation percentage of income to the state subject to taxation was 80%.

Goodyear's constitutional argument rests on its allegations that its extra-territorial values are being taxed. This allegation, however, fails to distinguish the foreign dividend income that Goodyear receives from its subsidiaries from the profits those subsidiaries realize from their own business activities conducted without the borders of Vermont. The right to receive dividends is incident to the ownership of stock. LaFountain & Woolson Co. v. Brown, 91 Vt. 340, 342, 101 A. 36 (1917). Profits, on the other hand, are the net proceeds obtained by deducting from the gross proceeds all forms of expense or outlay involved in, or incidental to, the business in question. Stratton v. Cartmell, 114 Vt. 191, 195, 42 A.2d 419 (1945).

The distinction between profits and dividends was made quite clear by the Pennsylvania Supreme Court in City of Allegheny v. Pittsburg, A. & M. Pass. R. Co., 179 Pa. 414, 36 A. 161 (1897), where the question, answered in the negative, was whether a transaction by which a railway company was leased to a traction company, and the stockholders exchanged their holdings of stock in the former for stock in the latter, was equivalent to the declaration of a dividend by the railway company on which a tax would have been due under the railway company's charter and the ordinance of the city where the railway was located.

The tax is not . . . on profits earned, but on dividends declared. A 'dividend' as defined by Webster's Dictionary (1893), is 'the share of a sum divided that falls to each individual; a distributive sum, share, or percentage, applied to the profits as apportioned among stockholders.' It differs from profits in being taken by competent authority out of the joint property of the partnership or company, and transferred to the separate property of the individual partners or shareholders. Id.

The failure of the county court to make a finding on the issue of whether Goodyear's subsidiaries were operated as separate entities does not constitute error because of the lack of relevance such a finding has to the taxation of foreign dividend income. Vermont's corporate income tax does not seek to tax the profits realized from the business activities of Goodyear's subsidiaries conducted without the borders of Vermont. It is taxing only the dividend income realized by Goodyear itself. F. W. Woolworth Co. v. Commissioner of Texas, supra, 328 A.2d at 405; Gulf Oil Corp. v. Morrison, 120 Vt. 324, 328, 141 A.2d 671 (1958).

Moreover, for this Court to relieve Goodyear from the taxation of its dividend income would run afoul of 32 V.S.A. § 5811(18), which defines 'Vermont net income' as the taxable income of the taxpayer for the taxable year under the laws of the United States', when 26 U.S.C.A. § 61(a)(7) specifically provides for the taxation of dividend income under the laws of the United States. See F. W. Woolworth Co. v. Commissioner of Taxes, supra, 130 Vt. at 550, 298 A.2d 2839. Therefore, we find no error in the county court's affirmance of the Commissioner's refusal to modify the apportionment formula so as to exclude foreign dividend income from Goodyear's Vermont net income subject to Vermont's corporate income tax.

'Gross-up', in contrast to dividend income, is a creation of the federal income tax system. It is directly traceable to the business activities of Goodyear's subsidiaries. F. W. Woolworth Co. v. Commissioner of Taxes, supra, 328 A.2d at 406; F. W. Woolworth Co. v. Commissioner of Taxes, supra, 130 Vt. at 556, 298 A.2d 839. Therefore, to include 'gross-up' in Goodyear's Vermont net income, without reflecting the business activities of Goodyear's subsidiaries conducted without the borders of Vermont in the apportionment formula, would 'constitute an arbitrary and unfair representation of 'the extent of the business activities of (Goodyear) within this state . . .." F. W. Woolworth Co. v. Commissioner of Taxes, supra, 328 A.2d at 406; F. W. Woolworth Co. v. Commissioner of Taxes, supra, 130 Vt. at 557, 298 A.2d 839.

The Commissioner has been presented with the authority by the Legislature to modify the apportionment formula when a corporate taxpayer affirmatively demonstrates that the statutory apportionment of its income pursuant to 32 V.S.A. § 5833 'does not fairly represent the extent of the business activities of a corporation within the state . . ..' 32 V.S.A. § 5833(b). The failure of the Commissioner to modify the formula to reflect the business activities of Goodyear's subsidiaries while at the same time including 'gross-up' in Goodyear's Vermont net income constitutes an abuse of his administrative discretion, and the failure of the county court to so conclude constitutes reversible error. F. W. Woolworth Co. v. Commissioner of Taxes, 130 Vt. at 557, 298 A.2d 839.

Goodyear argues that upon remand of this cause to the Commissioner, he should be compelled to exclude 'gross-up' altogether from its Vermont net income, citing Mr. Justice Larrow's dissenting opinion in F. W. Woolworth Co. v. Commissioner, of Taxes, supra, 328 A.2d at 407-08. However, in the previous Woolworth opinion, supra, 130 Vt. at 554, 298 A.2d at 844, Mr. Justice Keyser pointed out in a unanimous opinion:

There is no finding that by the election to use the gross-up rule the appellant did not realize an economic benefit. It clearly appears from the record, however, that the contrary is shown to be fact. Woolworth's Vermont and federal income tax returns disclose that it gained a decided tax advantage dollar-wise by exercising the option to use gross-up as a credit on its federal tax liability.

'Gross-up' is an accounting device by which a domestic corporation may credit against its federal income tax liability foreign taxes paid by its foreign subsidiaries out of their accumulated profits. F. W. Woolworth v. Commissioner of Taxes, supra, 328 A.2d at 404. In construing Vermont's corporate income tax, the Legislature has directed that it conform with the United States...