International Minerals and Chemical Corp. v. Heitkamp

• Citation: 417 N.W.2d 791
• Decision Date: 29 December 1987
• Docket Number: No. 11416,11416
• Parties: INTERNATIONAL MINERALS AND CHEMICAL CORPORATION, Appellee, v. M.K. Heidi HEITKAMP, Tax Commissioner of the State of North Dakota, Appellant. Civ.
• Court: United States State Supreme Court of North Dakota

Page 791

417 N.W.2d 791

INTERNATIONAL MINERALS AND CHEMICAL CORPORATION, Appellee, v. M.K. Heidi HEITKAMP, Tax Commissioner of the State of North Dakota, Appellant.

Civ. No. 11416.

Supreme Court of North Dakota.

Dec. 29, 1987.

Pearce & Durick, for appellee; argued by William P. Pearce.

Albert R. Hausauer, Asst. Atty. Gen., Bismarck, for appellant.

Harold L. Anderson, Bismarck, and Jean A. Walker, Washington, D.C., for amicus curiae Committee on State Taxation of the Council of State Chambers of Commerce.

Eugene F. Corrigan, Boulder, Colo., for amicus curiae Multistate Tax Comn.

MESCHKE, Justice.

The State Tax Commissioner assessed $111,389 in additional North Dakota corporate income and business privilege taxes, interest, and penalties against International Minerals & Chemical Corporation [IMC] for fiscal years ending June 1978 through June 1983. On appeal of the administrative decision, the district court reversed the Commissioner's assessment. The Commissioner seeks further review of two issues: 1) can IMC deduct "mileage credits," paid by rail carriers to IMC as a shipper supplying its own railroad cars for transporting its products, in determining the "net annual rental rate" of leased cars capitalized for computing IMC's property factor for apportioning its taxable income to North Dakota under the Uniform Division of Income for Tax Purposes Act [UDITPA], Chapter 57-38.1, N.D.C.C.; and 2) can IMC constitutionally exclude the amount of its foreign dividend "gross-up" required for federal income tax purposes from its taxable income before apportionment to North Dakota. We hold that IMC cannot deduct mileage credits and cannot exclude the foreign dividend "gross-up." Therefore, we reverse.

The facts are undisputed. Inasmuch as only questions of law are involved, the Commissioner's decision is fully reviewable by this court. Grant Farmers Mutual v. State by Conrad, 347 N.W.2d 324, 327 (N.D.1984).

I. Mileage Credits

IMC produces fertilizers and chemicals which it distributes throughout the United States and several foreign countries. IMC ships some of its products by rail. For part of its rail shipments, IMC leases or purchases its own railroad cars, which are then hauled by the rail carriers. IMC has a fleet of 600 private railroad cars and leases an additional 2,500 railroad cars from private carline companies. IMC leases railroad cars two ways: Under a "full service lease," the owner is responsible for all maintenance and upkeep, while under a "net lease" IMC has this responsibility.

Rail carriers must compensate shippers, such as IMC, who supply the freight cars to transport their products. See 49 U.S.C. Sec. 11122. ¹ This compensation by the rail carrier to the shipper, based upon the number of "loaded miles" the furnished cars travel, is termed a "mileage credit." The rail carrier pays the mileage credit on a net lease to IMC and, on a full service lease, to the railroad car owner, but the credit on a full service lease is then passed on to IMC by the railroad car owner as a credit against the rental charges paid by IMC. Thus, under either lease plan, IMC benefits because the mileage credits offset costs of leasing and shipping.

Because IMC conducts its business within and without North Dakota, its business income is apportioned to this state by using the three-factor formula (property, payroll, and sales) prescribed in UDITPA, Chapter 57-38.1, N.D.C.C. The property factor is computed by dividing the average value of real and tangible property owned and rented by the taxpayer in this state during the tax year by the average value of all real and tangible property owned and rented by the taxpayer during the tax year. Sec. 57-38.1-10, N.D.C.C. Section 57-38.1-11, N.D.C.C., spells out the property valuation method:

"Property owned and rented. Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals."

This "mileage credit" issue concerns valuation of leased cars for the property factor. In valuing leased cars for its property factor, IMC deducted mileage credits from the annual rentals paid before capitalizing at eight times the "net annual rental rate." The Commissioner disallowed the deduction for mileage credits. The district court upheld IMC's method of computation, concluding that mileage credits were deductible "subrentals" under the statute. ²

In this court, IMC concedes that the mileage credits are not "subrentals" within the meaning of Sec. 57-38.1-11, N.D.C.C. We agree.

The word "subrental" is not defined in Chapter 57-38.1, N.D.C.C., and we must therefore look to its commonly understood meaning. Section 1-02-02, N.D.C.C.; Wills v. Schroeder Aviation, Inc., 390 N.W.2d 544, 545-546 (N.D.1986). "Subrent" is "rent from a subtenant." Webster's Third New International Dictionary 2278 (1971). A "subtenant" is "one who leases all or a part of the rented premises from the original lessee for a term less than that held by the latter." Black's Law Dictionary 1282 (5th ed. 1979). Thus, under the statute, subrentals are the payments a subtenant makes to the original lessee.

The mileage credits paid by rail carriers do not fit this definition. IMC does not sublease the railroad cars to the rail carriers. Rather, third parties lease the cars to IMC which, in turn, pays the rail carriers to haul the cars to transport IMC products. The mileage credits are not paid pursuant to any sublease agreement, but are a carrier's rebates to a shipper mandated by federal law. Thus, the mileage credits are not subrentals.

IMC asserts that the mileage credits can nevertheless be deducted because they reduce IMC's cost of leasing a railroad car and because the "net annual rental rate" under Sec. 57-38.1-11, N.D.C.C., must be its net monetary cost. It is the actual rental expense, rather than the gross rental rate, that IMC uses to determine whether to enter into a particular lease with a carline company, and thus, IMC contends, it is the appropriate amount to be capitalized to determine the value of a car. IMC relies upon decisions from other jurisdictions, none of which were decided under the UDITPA property factor provision, for the propositions that capitalization of rentals is an accepted method for valuation of leased property, and that it is always net rentals that are to be capitalized.

We might agree with IMC's argument if the term "net annual rental rate" was not defined by the statute. For Chapter 57-38.1, however, "net annual rental rate" means "the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals." Sec. 57-38.1-11, N.D.C.C. A statutory definition which declares what a term means excludes any meaning that is not stated. 2A Sutherland Statutory Construction Sec. 47.07 at p. 133 (4th ed. 1984); Hermanson v. Morrell, 252 N.W.2d 884, 888 (N.D.1977); and Sec. 1-02-03, N.D.C.C. It is thus apparent that the term "net annual rental rate" is not used in its ordinary sense and that the statute does not equate value for property factor purposes with actual value of the property to the taxpayer. As the drafters of UDITPA observed:

"This section is admittedly arbitrary in using original cost rather than depreciated cost, and in valuing rented property as eight times the annual rental. This approach is justified because the act does not impose a tax, nor prescribe the depreciation allowable in computing the tax, but merely provides a basis for division of the taxable income among the several states.... No method of valuing the property would probably be universally acceptable."

Comment to Sec. 11, Uniform Division of Income for Tax Purposes Act, 7A U.L.A. 331, 350 (1985).

Under the statutory definition, only subrentals may be deducted from the annual rental rate to arrive at the net annual rental rate capitalized for property factor purposes. Because mileage credits required by law to be paid by rail carriers are not subrentals, we agree with the Commissioner that IMC cannot deduct mileage credits in calculating its net annual rental rate of leased railroad cars capitalized for computing the value of its property for use as one factor to apportion its business income for state taxation.

II. Foreign Dividend "Gross-Up"

In computing its federal income tax liability, a corporate taxpayer which pays income tax to a foreign country may either deduct the tax paid to the foreign country under I.R.C. Sec. 164(a)(3) or credit that amount under I.R.C. Sec. 901 against its tax liability. While Sec. 901 provides a credit for foreign taxes a corporation actually paid, I.R.C. Sec. 902 additionally allows a domestic corporation, owning at least ten percent of the voting stock of a foreign subsidiary from which it receives a dividend, a derivative credit for the foreign income taxes paid by its foreign subsidiary on its accumulated profits. In effect, under Sec. 902 the domestic corporation is "deemed" to have paid a portion of the foreign taxes actually paid or accrued by the foreign subsidiary. See B. Bittker and J. Eustice, Federal Income Taxation of Corporations and Shareholders p 17.11 (4th ed. 1979); 34 Am.Jur.2d Federal Taxation p 8412 (1987).

If a corporate taxpayer elects to take the Sec. 902 "deemed paid" foreign tax credit rather than the deduction, I.R.C. Sec. 78 requires that the domestic corporation add to its gross income the amount of the "deemed paid" foreign taxes. This amount, commonly referred to as "gross-up," is treated under Sec. 78 as a "dividend" received by the domestic corporation from the foreign subsidiary. See B. Bittker and J. Eustice, supra.

The purpose of the "gross-up" provision was to eliminate "an unjustified tax advantage" for domestic corporations choosing to conduct foreign business through...