NCR Corp. v. Comptroller of the Treasury, Income Tax Div.

• Decision Date: 01 September 1987
• Docket Number: No. 87,87
• Citation: 313 Md. 118,544 A.2d 764
• Parties: NCR CORPORATION v. COMPTROLLER OF THE TREASURY, INCOME TAX DIVISION. ,
• Court: Maryland Court of Appeals

Page 118

313 Md. 118

544 A.2d 764

NCR CORPORATION v. COMPTROLLER OF THE TREASURY, INCOME TAX DIVISION.

No. 87, Sept.Term, 1987.

Court of Appeals of Maryland.

Argued Jan. 7, 1988.

Decided July 29, 1988.

Motion for Reconsideration Denied Aug. 25, 1988.

Roger D. Redden, E. Stephen Derby, Kurt J. Fischer and Piper & Marbury, Baltimore, and William L. Goldman (argued) James A. Riedy and Lee, Toomey & Kent, Washington, D.C., on the brief, for appellant.

Gerald Langbaum, Asst. Atty. Gen., Annapolis (J. Joseph Curran, Jr., Atty. Gen., Baltimore, and John K. Barry, Asst. Atty. Gen., Annapolis, on the brief, for appellee.

Shapiro and Venable, Baetjer & Howard, Baltimore, on the brief, for amicus curiae The Committee on State Taxation of the Council of State Chambers of Commerce.

Argued before ELDRIDGE, COLE, RODOWSKY, McAULIFFE, ADKINS and BLACKWELL, JJ., and CHARLES E. ORTH, Jr., Associate Judge of the Court of Appeals of Maryland (retired), Specially Assigned.

ADKINS, Judge.

This case involves corporate tax assessments by the Comptroller of the Treasury (Comptroller) against NCR Corporation (NCR) for the tax years 1972 through 1977. NCR contends that:

1. It should have been allowed to deduct gross-up from its federal taxable income for 1976;

2. it should have been allowed to deduct domestic placement interest income from its federal taxable income; and

3. the Comptroller incorrectly applied the Maryland apportionment formula to NCR's foreign-source income when he excluded from the denominators the foreign subsidiaries' property, payroll, and sales that generated the income.

We reject NCR's first two arguments and remand for further fact-finding as to the third. We thus affirm in part and reverse in part the judgment of the Court of Special Appeals in Comptroller v. NCR Corp., 71 Md.App. 116, 524 A.2d 93 (1987).

This case made its way from the Tax Court to the Circuit Court for Baltimore City to the Court of Special Appeals. To the extent that particular happenings at any of these levels are important to our decision, we shall discuss them in that portion of this opinion dealing with the particular issue involved. We preface our discussion by noting that during the tax years in question, NCR engaged in the manufacture of business equipment and machinery. It sold its products and related supplies and services at wholesale and retail levels throughout the world. Its corporate headquarters and principal place of business were in Ohio, but it had several sales and service offices and a marketing administrative office in Maryland. The Tax Court determined that NCR's worldwide operations constituted a unitary business for apportionment purposes. NCR does not contest that finding.

I. NCR's 1976 Gross-Up Income

Federal tax law permits (or at times relevant to this case permitted) a United States corporation owning at least a 10 percent interest in the voting stock of a foreign subsidiary to elect to claim credit for certain foreign taxes paid by that subsidiary. 26 U.S.C. §§ 901(a), 901(b)(1) and 902(a). For the purposes of these provisions, the credit is allowed for that portion of the foreign taxes which the domestic corporation is deemed to have paid. NCR is such a corporation with respect to ten foreign subsidiaries and it elected to take a "deemed paid" foreign tax credit for the tax year 1976. By virtue of 26 U.S.C. § 78, NCR was required to treat those "deemed paid" credits as "grossed-up" dividend income for federal tax purposes (hence the term "gross-up"). It then claimed a credit against its federal income tax pursuant to § 902(a). ¹ On its Maryland return, however, NCR deducted the gross-up from its federal taxable income. The Comptroller disallowed the deduction, on the ground that under Md.Code (1975 Repl.Vol.), Art. 81, § 280A(a), the net taxable income of a corporation, for Maryland tax purposes, is "the taxable income of such taxpayer as defined in the laws of the United States...." Thus, the gross-up was returned to NCR's income.

The Tax Court agreed that § 280A(a) required this treatment. The Circuit Court for Baltimore City did not; it held that taxation of "fictitious" gross-up income was not mandated by § 280A(a) and was unconstitutional by virtue of the due process clause of the fourteenth amendment to the United States Constitution. The Court of Special Appeals held the Tax Court to be correct. It reversed the circuit court, but did not pass on the constitutional issue. NCR insists that a proper interpretation of Maryland law results in the exclusion of gross-up in 1976, and that if we read Maryland law otherwise, it is unconstitutional.

A. Gross-up and Article 81, § 280A(a)

As we have seen, § 280A(a) instructs, as it did in 1976, that "[t]he net income of a corporation shall be the taxable income of such taxpayer as defined in the laws of the United States ... for the corresponding taxable period...." The purpose of that provision is "to bring the State taxation system in conformity with the federal scheme." Comptroller v. American Satellite Corp., 312 Md. 537, 545, 540 A.2d 1146, 1150 (1988). Since NCR's 1976 federal taxable income included the gross-up, and since the Maryland statutes applicable to 1976 contained no authority to adjust or deduct that figure, it should, one would think, be included in Maryland taxable income. See Comptroller v. American Satellite Corp., supra. But NCR, pointing to somewhat unusual legislative history, reaches a contrary conclusion.

NCR explains that when § 280A was enacted in 1967, subsection (c) provided that "[t]here shall be subtracted from taxable income of ... [the] taxpayer: ... (4) dividend income to the extent included in taxable income...." Thus, all dividend income was effectively excluded from taxation by Maryland. That changed in 1976. By Ch. 904 of the Acts of that year, subsection (c) was amended to repeal the dividend exclusion. The amended version applied "to all taxable years of corporate taxpayers beginning after December 31, 1975." Ch. 904, Acts of 1976, § 5. This, of course, required inclusion, for Maryland tax purposes, of dividend income included in federal taxable income.

In 1977 the General Assembly revisited § 280A (c) by adding (via Ch. 812 of the Acts of that year) language calling for the subtraction from federal taxable income, to the extent included therein, "(4) any amounts included therein by operation of the provisions of § 78 of the Internal Revenue Code of 1954...." Section 78 is, of course, the gross-up provision, and the 1977 amendment effectively produced the result (at least from its effective date of 1 July 1977) for which NCR now contends.

As NCR reads this history, the 1976 amendment was not directed to gross-up income; it was simply intended to make actual dividend income taxable in Maryland. In 1977 the legislature realized it had made a terrible mistake in the prior year and promptly addressed the gross-up problem by allowing subtraction for Maryland purposes of amounts included in federal income by virtue of § 78. The legislative intent, under this theory, was never to tax gross-up income. Under somewhat similar circumstances, the Supreme Court of Vermont used a subsequent statutory amendment to decipher prior legislative intent in the manner for which NCR now contends. In re Knosher, 139 Vt. 285, 287-288, 428 A.2d 1104, 1105 (1981). See also Winterset, Inc. v. Comm'r of Taxes, 144 Vt. 230, 232-234, 475 A.2d 231, 232-233 (1984). But we do not see the Maryland legislative history that way.

When we construe a statute, we seek to ascertain and effectuate the legislative goal or object, and our first recourse in doing so is to the words of the statute, giving them their ordinary and natural import. Comptroller v. American Satellite Corp., 312 Md. at 544, 540 A.2d at 1150. The plain words before us now in no way support NCR's conclusion; to the contrary, they bolster the Comptroller's position. Nevertheless, a statute must be construed in context, and the plainest language may be governed by the context in which it appears. Kaczorowski v. City of Baltimore, 309 Md. 505, 514-516, 525 A.2d 628, 632-633 (1987). Legislative reports and other pertinent legislative history may help to provide the appropriate context. Id.

Chapter 812, Acts of 1977, contains only the usual effective date provision--1 July 1977. Unlike the 1976 act, it contains no language carefully spelling out the tax year to which the amendment applies. Statutes are normally prospective in operation absent clear intent to the contrary. See Mason v. State, 309 Md. 215, 219-220 & n. 1, 522 A.2d 1344, 1346 & n. 1 (1987); WSSC v. Riverdale Fire Co., 308 Md. 556, 560-561, 520 A.2d 1319, 1321-1322 (1987). The lack of retrospective wording gives NCR's "unintended consequence" argument a somewhat hollow ring. Surely had the General Assembly meant to correct an inadvertent error made in 1976, the 1977 law expressly would have applied to the 1976 tax year. That the legislature knew how to write this sort of language appears from the 1976 act itself. And given a filing date of 15 April 1977, for 1976 tax returns [see Md.Code (1975 Repl.Vol.), Art. 81, § 305], it seems particularly clear that a tax statute taking effect on 1 July 1977 was not designed to apply to the 1976 tax year.

Finally, it appears that when the 1976 bill was under consideration in the House Ways and Means Committee, an amendment to allow deduction of gross-up was rejected. See Letter of 5 November 1976 from William S. Ratchford, II, to Senator Roy N. Staten. While a committee's rejection of an amendment is clearly not an infallible indication of legislative intent, it may help our understanding of overall legislative history. See Bd. of Examiners in Optometry v. Spitz, 300 Md. 466, 479-480, 479 A.2d 363, 369-370 (1984); Demory Brothers v. Bd. of Pub. Works, 273 Md. 320, 325-326, 329 A.2d 674, 677 (1974); Bosely v Dorsey, 191 Md. 229, 240, 60 A.2d 691, 696 (1948); Cohen v....