Kelly-Springfield Tire Co. v. Iowa State Bd. of Tax Review, KELLY-SPRINGFIELD

• Decision Date: 21 October 1987
• Docket Number: KELLY-SPRINGFIELD,86-1565,Nos. 87-278,s. 87-278
• Citation: 414 N.W.2d 113
• Parties: TIRE CO., Appellant, v. IOWA STATE BOARD OF TAX REVIEW, Appellee. SHELL OIL COMPANY, Appellant, v. The IOWA DEPARTMENT OF REVENUE, Appellee.
• Court: Iowa Supreme Court

Page 113

414 N.W.2d 113

KELLY-SPRINGFIELD TIRE CO., Appellant, v. IOWA STATE BOARD OF TAX REVIEW, Appellee.

SHELL OIL COMPANY, Appellant, v. The IOWA DEPARTMENT OF REVENUE, Appellee.

Nos. 87-278, 86-1565.

Supreme Court of Iowa.

Oct. 21, 1987.

Burns Mossman of Nyemaster, Goode, McLaughlin, Emery & O'Brien, P.C., Des Moines, for appellant Kelly-Springfield Tire Co.

J. Lloyd Kennedy and William D. Peltz, Houston, Tex. and James W. Hall of Hall & Irvine, Cedar Rapids, for appellant Shell Oil Co.

Thomas J. Miller, Atty. Gen., Harry M. Griger, Sp. Asst. Atty. Gen., and Gerald A. Kuehn, Asst. Atty. Gen., for appellee.

Considered en banc.

CARTER, Justice.

These consolidated appeals raise two legal issues in regard to income tax assessments by the Iowa Department of Revenue (IDOR) being judicially reviewed under Iowa Code section 17A.19 (1985). These issues are: (1) whether assessment of additional corporation income taxes by IDOR against appellant Kelly-Springfield Tire Co. (Kelly-Springfield) in No. 87-278 and appellant Shell Oil Company (Shell) in No. 86-1565, made more than three years after the filing of the taxpayers' returns, was untimely under Iowa Code section 422.25(1) (1977) and therefore invalid; and (2) whether assessment of additional income taxes against Shell in No. 86-1565 was in violation of the Outer Continental Shelf Lands Act (OCSLA), 43 U.S.C. § 1333(a). For reasons hereafter stated, we answer the first question in the affirmative and the second question in the negative, thus, affirming in part and reversing in part the decisions of the district court.

I. Timeliness of Assessments Under Iowa Code Section 422.25(1) (1977).

The record supports the taxpayers' contention that assessment of additional corporate income taxes by IDOR against Kelly-Springfield for the years 1971-78, inclusive, and against Shell for the years 1975-77, inclusive, were initiated more than three years after those taxpayers had filed corporate income tax returns for the years in question. Consequently, both Kelly-Springfield and Shell have contended both before the agency and throughout these judicial review proceedings that these assessments were untimely under Iowa Code section 422.25(1) (1977) and thus invalid.

Section 422.25(1) provides:

As soon as practicable and in any event within three years after the return is filed the department shall examine it and determine the correct amount of tax, and the amount so determined by the department shall be the tax; provided that if the taxpayer omits from income such an amount as will, under the Internal Revenue Code of 1954, extend the statute of limitations for assessment of federal tax to six years under said Code, the period for examination and determination shall be six years; and provided further that the period for examination and determination shall be unlimited in the case of a false or fraudulent return with intent to evade tax or in the case of failure to file a return. Notwithstanding the periods of limitation for examination and determination heretofore specified, the department shall have six months to make an examination and determination from the date of receipt by the department of notice from the taxpayer of the final disposition of any matter between the taxpayer and the internal revenue service with respect to the particular tax year.

For each of the tax years in controversy, the Internal Revenue Service (IRS) had audited the taxpayers' returns. The additional assessments of Iowa income taxes were made within six months of receipt by IDOR of notice of the final disposition of the federal audit for the particular tax year. These additional assessments of Iowa income taxes, except for certain adjustments in Kelly-Springfield's tax liability for 1971, were unrelated to and not affected by any changes made in connection with the audit of the taxpayers' federal income tax liabilities.

The issue which was framed at the contested case hearing was whether IDOR's right of examination and determination of additional state tax liability during the extended six-month period following the conclusion of a federal audit is unlimited in scope or is limited to corrections resulting from action taken in the federal audit. Following the contested case hearing, IDOR concluded that its right of examination and determination for six months following a federal audit is unlimited in scope. The district court agreed with that conclusion.

The primary argument advanced by IDOR to sustain its interpretation is that the words "examination and determination," which appear several times within section 422.25(1), are in no instance qualified with respect to the scope of the inquiry IDOR is permitted to make. Because the scope of the examination and assessment of additional tax is concededly unlimited in the other circumstances where the phrase "examination and determination" appears in the statute, IDOR argues that consistency in the application of identical statutory language requires an unlimited examination also be permitted in the present situation.

In response to this argument, the taxpayers urge that an exception to a general period of limitation which is triggered by the occurrence of a particular event must be interpreted in some manner which is relevant to that event. The mere occurrence of a federal audit is not, taxpayers argue, relevant to whether the limitation period for imposing state tax liability should be extended. It only becomes relevant, they suggest, if action taken in the federal audit alters some basic premise on which the taxpayer's state tax liability was initially reported.

We find the taxpayers' interpretation to be more plausible than the one proposed by IDOR. A court construing a statute to ascertain legislative intent must not only consider the language used, but must also take account of the object sought to be accomplished or the problems sought to be remedied and arrive at a construction that will best effect its purpose. Matter of Girdler, 357 N.W.2d 595, 597 (Iowa 1984); In Interest of G.R., 348 N.W.2d 627, 631 (Iowa 1984); Lau v. City of Oelwein, 336 N.W.2d 202, 203 (Iowa 1983).

The extended period of examination following the conclusion of a federal audit was inserted in section 422.25(1) by 1957 Iowa Acts chapter 211, section 1. The determination of the primary objective of such an amendment requires reference to the prior state of the law and the circumstances surrounding the amendment's enactment. City of Des Moines v. Public Employment Relations Bd., 275 N.W.2d 753, 760 (Iowa 1979). Applying these principles to the present case it appears that, prior to the enactment of the 1957 amendment, it was established as the legislative policy of this state that examination and determination of the proper amount of tax was to be made by IDOR within three years of the filing of the taxpayer's return except in certain situations of taxpayer omission not relevant here. ¹ The interpretation proposed by IDOR is, we believe, incompatible with the basic premise upon which section 422.25(1) is based, i.e., that unless certain enumerated circumstances have occurred which preclude the agency from making an accurate assessment of Iowa taxes within the three-year period its right of examination is barred.

We find nothing in the 1957 amendment which suggests a retreat from this overriding policy. Rather, the federal audit exception to the three-year limitation appears to be a fair way of dealing with changed circumstances resulting from the federal examination. The exception is therefore available to IDOR only if adjustments made by the internal revenue service create a change of circumstances affecting the taxpayer's Iowa tax liability. The rather short period of time granted IDOR to make adjustments of Iowa tax liability following the conclusion of the federal inquiry supports our conclusion that the examination is limited in scope. ²

In Commonwealth v. Lukens Steel Co., 402 Pa. 304, 167 A.2d 142 (1961), the court interpreted a Pennsylvania statute which provided that,

[I]f at any time the net income as returned by any corporation to the federal government is finally changed or corrected by the commissioner of internal revenue or by any other agency or court of the United States with a result that tax, in addition to the amount paid, is due under this act, the department is hereby authorized and empowered to make a resettlement of the tax due by such corporation, based upon the facts contained in the report, or upon any information within its possession or that shall come into its possession.

Pa.Stat.Ann.Tit. 72, § 3420h(c) (Purdon 1964). Notwithstanding the rather broad language in the final sentence of the statute, the court reasoned that its legal effect was to extend the limitation period only for purposes of making assessments of state income taxes due as a result of federal adjustments. The court indicated a contrary ruling would render absolutely meaningless the provisions of the act establishing a general time limit for resettlement. 402 Pa. at 309-10, 167 A.2d at 145. See also McLean Trucking Co. v. Lindley, 70 Ohio St.2d 106, 111, 435 N.E.2d 414, 417 (1982) (general limitation period absolute bar to assessment of additional state taxes unrelated to corrections made by internal revenue service).

IDOR argues that, notwithstanding the matters which we have discussed, its long-standing interpretation of the statute should be given some weight. Although the interpretation of the statute proposed by IDOR in the present case may have been the department's position for some time, it should be noted that it has issued no published rule or directive codifying that position. As we have stated in another revenue case involving statutory interpretation, "the meaning of a statute is always a matter of law, and final construction and interpretation ... is for this court." Sorg v. Iowa Dep't of Revenue, 269 N.W.2d 129, 131 (Iowa 1978). See also City...