Mid-America Television Co. v. State Tax Com'n of Missouri, MID-AMERICA

• Decision Date: 31 May 1983
• Docket Number: MID-AMERICA,No. 63297,63297
• Citation: 652 S.W.2d 674
• Court: Missouri Supreme Court
• Parties: TELEVISION COMPANY, and Oliver Advertising, Inc., Appellants, v. STATE TAX COMMISSION OF MISSOURI, and Dennis K. Hoffert, Chairman, and Stephen C. Snyder, Commissioner, Respondents.

Page 674

652 S.W.2d 674

MID-AMERICA TELEVISION COMPANY, and Oliver Advertising, Inc., Appellants, v. STATE TAX COMMISSION OF MISSOURI, and Dennis K. Hoffert, Chairman, and Stephen C. Snyder, Commissioner, Respondents.

No. 63297.

Supreme Court of Missouri,

En Banc.

May 31, 1983.

Rehearing Denied June 30, 1983.

Joe L. Anderson, Robert E. Zimmerman, Kansas City, for appellants.

John Ashcroft, Atty. Gen., Richard L. Wieler, Asst. Atty. Gen., Jefferson City, for respondents.

ROBERT E. SEILER, Senior Judge.

We have jurisdiction of this appeal because it involves construction of the revenue laws. Mo. Const., art. V, § 3. The question presented is whether a subsidiary of a parent company is entitled to deduct for Missouri income tax purposes what the subsidiary would have paid in federal income tax had it filed a separate federal return, rather than being included by the parent corporation in the latter's consolidated return. ¹ The same issue and largely the same arguments pro and con are presented in four other cases which were argued and submitted on the same day as the present case and which are being handed down concurrently: No. 63348, Wells Aluminum Inc. v. Administrative Hearing Commission, 652 S.W.2d 687; No. 63660, Cities Service Gas Company v. Administrative Hearing Commission, 652 S.W.2d 684; No. 63667, Bemis Company, Inc., d/b/a Louisiana Plastics, Inc. v. Administrative Hearing Commission and Bemis Company, Inc., d/b/a Western Litho Plate & Supply Company v. Administrative Hearing Commission, 685 S.W.2d 652 and No. 63706, Banquet Foods Corporation v. Administrative Hearing Commission, 652 S.W.2d 689.

In each instance the taxpayer is seeking to deduct on its Missouri income tax return the full amount of what would have been the taxpayer's federal income tax for the year in question had the taxpayer filed an individual, separate federal income tax return. In each instance the director of revenue disallowed the proposed deduction and instead allowed only a proportionate share of the group's federal tax, which, with minor variations, was ascertained by multiplying the total federal income tax paid by the group times a fraction consisting of the taxable income of the member as the numerator and the taxable income of the entire group as the denominator. The effect of this is to allow the member taxpayer to deduct a portion of the federal tax paid by the group based on the relationship of the member's taxable income to the taxable income of the entire group.

During the tax year 1973, appellants Mid-America Television Company (MATV) and Oliver Advertising, Inc. (Oliver) were members of consolidated group of corporations of which Kansas City Southern, Inc. (KCSI) was the parent corporation. Appellants were included in the 1973 federal consolidated income tax return filed by the parent company, KCSI, and its affiliated corporations. The federal income tax paid by the parent corporation under the consolidated return was $14,900.00.

In their Missouri income tax returns, appellants claimed a deduction, respectively, for federal income tax in amounts equal to what the tax would have been had each filed a separate federal income tax return--MATV $63,531.00 and Oliver $50,491.00. These amounts were, in fact, paid by appellants respectively to the parent corporation pursuant to an agreement among the various members of the consolidated group and then by the parent company reimbursed to the loss companies within the group, thereby recognizing the savings to the group of federal tax brought about by the losses incurred by the loss companies. Stated another way, the payments collected from the members of the group in excess of the consolidated federal income tax liability were distributed to those companies whose negative tax liability created the excess.

The department of revenue filed notice of deficiency against appellants, showing additional tax of $2,506.62 and interest against MATV and $2,546.97 and interest against Oliver. The department took the position that appellants would be entitled to deduct only their proportionate share of the actual federal income tax liability of the group. Over appellants' objections, the deficiency notices were sustained and following adverse decisions by the State Tax Commission and the circuit court of Jackson County, appellants appealed here. We affirm.

Although appellants elected to file a consolidated federal income tax return, they were required to file separate state income tax returns as more than 50 per cent of their income was derived from sources outside the state. Section 143.431.3(1), RSMo 1978. ² Missouri allows the individual members a deduction for their Missouri adjusted gross income equal to the "federal income tax liability" of that member. Section 143.171.1 provides:

"A taxpayer shall be allowed a deduction for his federal income tax liability under Chapter 1 of the Internal Revenue Code for the same taxable year for which the Missouri return is being filed ..."

Appellants, however, as said, did not actually file separate federal income tax returns, so we necessarily must look elsewhere to determine appellants' federal tax deduction in arriving at Missouri taxable income.

Section 143.431.3(4) provides:

"For each taxable year an affiliated group of corporations filing a federal consolidated income tax return does not file a Missouri consolidated income tax return, for purposes of computing the Missouri income tax, the federal taxable income of each member of the affiliated group shall be determined as if a separate federal income tax had been filed by each such member."

Under this statute, a member of a consolidated group determines its "federal taxable income" allocable to Missouri as if it had filed a separate federal return. Another statute, § 143.431.1, defines "Missouri taxable income" for corporations in terms of federal taxable income. The statute provides:

"The Missouri taxable income of a corporation taxable under § 141.011 to 143.996 shall be so much of its federal taxable income for the taxable year, with the modifications specified in subsections 2 and 3 of this section, as is derived from sources within Missouri as provided in section 143.451. The tax of a corporation shall be computed on its Missouri taxable income at the rates provided in section 143.071."

Hence, federal taxable income, determined "as if a separate federal income tax return had been filed", becomes the amount of Missouri taxable income to the extent derived from sources within Missouri, but we note that the hypothetical method of computation is mentioned only with regard to computing the taxpayer's "federal taxable income". No hypothetical method is mentioned as to the Missouri deduction for federal income tax.

Appellants would read the foregoing statutes to allow a member of an affiliated group, filing a separate state return, to deduct on its state return the amount of federal income tax it (the member) would have paid to the federal government had it filed a separate federal income tax return. Appellants argue that inasmuch as § 143.431.3(4), supra, directs a member of an affiliated group filing a separate state return to determine its federal taxable income as if it had filed a separate federal return, it follows that such member should also determine its federal income tax deduction in the same manner, i.e., as if it has actually paid such federal income tax. Appellants contend that the term "federal income tax liability" as contained in § 143.171.1, supra, does not require actual payment of tax to the federal government; that "liability" pertains only to the amount for which they would have been liable had they filed separate federal returns; that the statute does not specify that the "liability" must be payable to any certain entity.

In Armco Steel Corporation v. State Tax Commission, 580 S.W.2d 242 (Mo. banc 1979), this court held that, under the prior law, § 143.030-1, RSMo 1969, which provided for a deduction on the Missouri return for taxes on income "assessed by the United States against the taxpayer as the gross income from all sources within the state shall bear to the gross income of the corporation from all sources", the parent company of a consolidated group filing a consolidated federal income tax return, must determine its deduction for federal income tax on the basis of its proportionate share of the federal income tax for that year actually paid by it and its subsidiaries, not on the basis of what the federal income tax would have been had the parent reported as a separate entity; that taxes on income "assessed by the United States" meant the taxes actually paid.

Appellants contend that the change made in the Missouri income tax laws effective January 1, 1973 requires a different result in this case; that the prior statute allowed a deduction for "taxes assessed", but that under the new statutes, §§ 143.171 and 143.431, a deduction for "federal income tax liability" replaced the "taxes assessed" language; that the change in the statutes was intended to allow for the deduction denied under the prior statute in Armco; that had the legislature intended "taxes assessed" to mean the same thing as "federal income tax liability", it would have left the statutory language the same.

We believe appellants misread the statutes. Since Missouri income tax is based upon federal taxable income, see § 143.431.1, supra, some means was necessary to provide corporations required to file Missouri tax returns with a starting point when those corporations were members of an affiliated group which had filed a consolidated return for federal purposes. Such a member corporation would not have a federal taxable income of its own because an individual return was not filed with the federal government; the only federal taxable income available would be that of the affiliated group of which the corporation was a member. In such cases, § 143.431.3(4), supra, allows the...