Myria Holdings Inc. v. Iowa Dep't of Revenue, 15–0296

• Decision Date: 24 March 2017
• Docket Number: No. 15–0296,15–0296
• Citation: 892 N.W.2d 343
• Parties: MYRIA HOLDINGS INC. & Subs, Appellant, v. IOWA DEPARTMENT OF REVENUE, Appellee.
• Court: Iowa Supreme Court

892 N.W.2d 343

MYRIA HOLDINGS INC. & Subs, Appellant,

v.IOWA DEPARTMENT OF REVENUE, Appellee.

No. 15–0296

Supreme Court of Iowa.

Filed March 24, 2017

Kimberley M. Reeder of The Law Office of Kimberley M. Reeder, Morehead, Kentucky, and Christopher L. Nuss and William C. Brown of Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C., Des Moines, for appellant.

Thomas J. Miller, Attorney General, Donald D. Stanley Jr., Special Assistant Attorney General, and Paxton J. Williams, Assistant Attorney General, for appellee.

HECHT, Justice.

The Iowa Department of Revenue (Department) issued a final order concluding a foreign corporation was ineligible to join a consolidated tax return with two of its subsidiaries doing business in Iowa because it did not derive taxable income from within Iowa under Iowa Code section 422.33(1). On judicial review, the district court affirmed the agency's final order. On appeal, the foreign corporation and its subsidiaries contend the corporation properly joined the consolidated return because it derived taxable income in the forms of distributed earnings and each member's allocated share of the group's consolidated tax liability. We conclude the Department correctly concluded the foreign corporation lacked taxable income from within the State of Iowa and affirm the decision of the district court.

I. Background Facts and Proceedings.

Myria Holdings Inc. (Myria) is a Delaware corporation with its primary place of business in Texas. Myria holds an ownership interest in several subsidiaries, including two Delaware limited liability companies (LLCs) doing business in Iowa: Natural Gas Pipeline Company of America LLC (NGPL) and NGPL PipeCo LLC (PipeCo). Myria holds an eighty-percent membership interest in PipeCo, the sole member of NGPL.¹

Myria and its subsidiaries (the Group) are in the business of natural gas pipeline transmission and storage. NGPL is the principal operating subsidiary; it owns and operates a major natural gas transmission and storage system primarily serving markets in Iowa and other Midwestern states. PipeCo is the sole member of NGPL; it owns real and personal property in Iowa and leases it to NGPL. As the parent company, Myria owns the subsidiaries and assists them with setting strategic priorities.

During tax year 2009, Myria received two categories of payments from NGPL and PipeCo: distributions of earnings and payments of each member's allocated tax liability. Myria received the distributions of earnings in accordance with its direct and indirect membership interest in the subsidiaries.² Myria received the allocated tax payments under a February 2008 Tax Allocation Agreement that apportioned the affiliated group's tax liability among its members.³

Under the tax allocation agreement, Myria agreed to join a federal consolidated tax return with PipeCo, NGPL, and other subsidiaries; prepare and file all appropriate documents for the consolidated return; and pay the Group's consolidated tax liability. PipeCo and NGPL agreed to make quarterly payments to Myria equal to their estimated quarterly federal income tax liability at least thirty days before each quarterly installment payment was due to the Internal Revenue Service (IRS). Each entity remained responsible for contributing its proportionate share of the group's overall tax liability but only Myria would make tax payments to the IRS. If the payments to Myria over the course of the tax year exceeded the actual apportioned tax liabilities, Myria promised to refund any overpayment. In addition, PipeCo and NGPL assumed liability for and agreed to indemnify Myria against responsibility for any subsidiary's tax obligations, thus protecting Myria from the risk of underpayment.

Myria filed a federal consolidated return for tax year 2009 on behalf of the Group. In the federal return, both PipeCo and NGPL elected to be treated as corporations. The Group reported a net loss of $62,695,855; only NGPL reported net income.

The Group also filed an Iowa consolidated return for tax year 2009. See Iowa Code § 422.37 (2009). The return reported an apportioned net loss of $10,225,151 and an estimated overpayment of $2,192,762 for tax year 2009, which it applied to its estimated tax liability for tax year 2010. Myria reported no Iowa receipts.

The Department determined Myria was ineligible to be included in the consolidated return because it had not derived taxable income from within the state under Iowa Code section 422.33(1) during tax year 2009. The Department issued a "Notice of Assessment" against the Group assessing it for corporate income tax in the amount of $2,558,989 plus interest and penalties for tax year 2009. With Myria excluded from the consolidated return, the Group's tax liability was substantially greater.

The Group protested the Department's assessment, arguing Myria was eligible to be included in the consolidated return because it derived taxable income from within Iowa.⁴ The Department informally rejected the Group's protest, and the Group sought a contested hearing. The Department filed an answer, and the matter proceeded to a hearing before an administrative law judge (ALJ).

At the hearing before the ALJ, the Group presented testimony from Jason Francl, tax director of SteelRiver Infrastructure Management U.S., LLC, an investment advisory and management-services company that manages an investment fund holding a twenty-three percent ownership interest in Myria. Francl, who is also an officer and vice president of Myria, testified that SteelRiver has a management-services agreement with Myria under which Myria pays it to manage tax-filing obligations and provide executive and leadership services. He testified that he spends ten to twenty percent of his time performing this work and that he works closely with legal, treasury, and accounting colleagues to manage intragroup cash distributions, make interest payments to lenders, prepare financial reports, and manage the tax-compliance process for the Group. Francl further testified that Myria provides long-term financing for its subsidiaries' business activities and—as the parent company—sets strategic priorities for its subsidiaries.

In its posthearing brief, the Group argued Myria was properly included in the consolidated return because it derived income in tax year 2009 from its subsidiaries doing business in Iowa. Specifically, the Group asserted Myria received distributions of earnings—a portion of which were traceable to the subsidiaries' business activities in Iowa—and payments under the tax allocation agreement.

An ALJ issued a proposed decision upholding the Department's assessment. The Group appealed, and the director of the Department issued a final order adopting the proposed decision with certain amendments and clarifications.

The Department's final order concluded Myria was ineligible to join in the Group's consolidated tax return because Myria did not derive taxable income under Iowa Code section 422.33(1). The order concluded that the distributed earnings Myria received incident to its ownership interest in the subsidiaries amounted to an activity of "[o]wning and controlling a subsidiary corporation" and therefore did not constitute "doing business in the state or deriving income from sources within the state" within the meaning of section 422.33(1). See id. § 422.34A(5). Although PipeCo and NGPL are limited liability companies, the Department concluded they must be treated as corporations for purposes of Iowa's tax laws since they elected to be taxed as corporations in the Group's federal consolidated return. See id. § 422.32(4) (defining "corporations," for business tax purposes, to include "partnerships and limited liability companies taxed as corporations under the Internal Revenue Code").

The Department's final order also determined the payments Myria received from NGPL and PipeCo under the tax allocation agreement did not constitute income to Myria because those payments amounted to "pass-through tax expenses of the subsidiaries based on the subsidiaries' income." The director concluded the payments were not a monetary advance to the subsidiaries or a "working capital cushion" supplied by Myria, contrary to the Group's assertions; they were instead payments equal to the subsidiaries' allocated share of the Group's overall tax liability. Myria received no interest, fees for service, or any other fees under the tax allocation agreement in connection with its payment of the Group's tax liabilities. Thus, the Department concluded KFC Corp. v. Iowa Department of Revenue , 792 N.W.2d 308 (Iowa 2010) —which determined certain intercompany payments were taxable even though they also would be offset or eliminated in a consolidated return—was distinguishable.

The Group filed a petition for judicial review. On September 10, 2014, the district court issued a ruling affirming the Department's decision, concluding Myria did not "deriv[e] income from sources within this state" under Iowa Code section 422.33(1). The Group appealed, and we retained the appeal.

II. Scope and Standards of Review.

Section 17A.19 of the Iowa Administrative Procedures Act (IAPA) governs judicial review of final agency decisions. See Iowa Code § 17A.19 ; KFC Corp. , 792 N.W.2d at 312. Under section 17A.19, we must determine "[t]he validity of agency action ... in accordance with the standards of review" set forth in that provision. Iowa Code § 17A.19(8)(b ). Under Iowa Code section 17A.19, we only grant deference to an agency's interpretations of law if the particular matter is clearly vested by statute in the agency's discretion. Id. § 17A.19(10)(c ), (l ) ; see also Renda v. Iowa Civil Rights Comm'n , 784 N.W.2d 8, 12–14 (Iowa 2010). Even if interpretative authority has been clearly vested in the agency, we give no deference to an interpretation of law that is "irrational, illogical, or wholly unjustifiable." Iowa Code § 17A.19(10)(l ).

In this case, we must determine whether to uphold the...