NL Industries, Inc. v. North Dakota State Tax Com'r

• Decision Date: 24 March 1993
• Docket Number: No. 920191,920191
• Citation: 498 N.W.2d 141
• Parties: NL INDUSTRIES, INC., Shaffer, Inc. (as successor in interest to The Rucker Company) an SW Servicing Company, Petitioners and Appellants, v. NORTH DAKOTA STATE TAX COMMISSIONER, Respondent and Appellee. Civ.
• Court: North Dakota Supreme Court

Page 141

498 N.W.2d 141

33 A.L.R.5th 873

NL INDUSTRIES, INC., Shaffer, Inc. (as successor in interest to The Rucker Company) an SW Servicing Company, Petitioners and Appellants, v. NORTH DAKOTA STATE TAX COMMISSIONER, Respondent and Appellee.

Civ. No. 920191.

Supreme Court of North Dakota.

March 24, 1993.

Pearce & Durick, Bismarck, for petitioners and appellants; argued William P. Pearce.

Robert W. Wirtz (argued), Asst. Atty. Gen., Tax Dept., Bismarck, for respondent and appellee.

RALPH J. ERICKSTAD, Surrogate Judge. ¹

NL Industries, Inc., Shaffer, Inc., as successor in interest to The Rucker Company, and SW Servicing Company (hereinafter collectively referred to as NL) have appealed a district court judgment affirming an order of the State Tax Commissioner denying NL's income tax refund claims and imposing additional income tax assessments. We affirm.

NL and its subsidiaries did business in the United States, including North Dakota, and in various foreign countries from 1979 through 1984. Based on net operating losses in 1983 and 1984, NL sought income tax refunds for 1980 and 1981. The Commissioner denied the refund claims and assessed additional taxes for 1979 through 1982. NL filed a complaint with the Commissioner and an administrative hearing was held.

In the administrative hearing, the parties stipulated, among other things, that: (1) On April 15, 1987, NL filed amended income tax returns for 1983 and 1984 that showed net operating losses (NOL's) for those years and, therefore, that no income taxes were payable for those years; (2) On April 15, 1987, NL filed amended returns for 1980 and 1981, showing NOL carrybacks from 1983 and 1984, resulting in a decrease in taxable income in 1980 and 1981, and claiming refunds of a portion of the taxes paid for 1980 and 1981; (3) On November 3, 1987, the Commissioner denied NL's claims for refunds for 1980 and 1981 and issued a notice of deficiency, asserting that additional income taxes were due for 1979 through 1982, "on the grounds that the carryback of the NOL's for federal income tax purposes reduced the federal tax paid for those years and consequently required a decrease in the federal income tax deduction allowable for North Dakota income tax purposes for 1980 and 1981;" (4) On June 7, 1990, the Commissioner issued a notice confirming the previous denial of NL's refund claims and assessing additional taxes; (5)

"When computing a North Dakota net operating loss, it has been the longstanding administrative practice of the Commissioner, beginning prior to the years in question in this case, to:

"a. Require that a corporation increase federal taxable income by the amount of any federal net operating loss deduction; and

"b. Require that a corporation deduct the amount of net operating loss attributable to North Dakota sources only;"

and (6) "It is the position of [NL] that for the years in question there was no North Dakota statutory authority which would require a corporation to increase federal taxable income by the amount of any federal net operating loss deduction."

After the hearing, the hearing officer issued recommended findings of fact and conclusions of law, and a recommended order affirming the Commissioner's June 7, 1990, assessment of additional income taxes and the denial of NL's refund claims. Based upon the hearing officer's recommended findings, conclusions, and order, the Commissioner affirmed the June 7, 1990, assessments and denied the refund claims. The district court affirmed the Commissioner's order.

NL asserts that the methodology required by the Commissioner for the treatment of net operating loss deductions is erroneous as a matter of law. NL also asserts that the methodology required by the Commissioner for determination of the federal income tax deduction in this case is "CONTRARY TO LAW AS ESTABLISHED BY THIS COURT."

"Under North Dakota law, federal taxable income is the simplified starting point for computing state income tax." International Minerals & Chem. Corp. v. Heitkamp, 417 N.W.2d 791, 794 (N.D.1987). Section 57-38-01(8), N.D.C.C., provides that the "taxable income" of a corporation means "the taxable income as computed ... for federal income tax purposes ..., plus or minus such adjustments as may be provided by this act and chapter or other provisions of law."

For the tax years in question, there was no express statutory provision for adjusting a corporation's taxable income to reflect a net operating loss. ² In 1989, however Sec. 57-38-01.3(1), N.D.C.C., was amended, at the request of the Commissioner, to add what is now codified as subdivision i to provide that a corporation's federal taxable income shall be:

"i. Increased by the amount of any special deductions and net operating loss deductions to the extent that these items were deducted in determining federal taxable income."

An assistant attorney general, testifying on House Bill 1164 (enacted as S.L.1989, Ch. 708), said that the proposed provision quoted above represented what had been the Commissioner's policy for "[a]t least ten years" and, although not cast in the form of a rule, had been reflected in the tax return forms. She also testified:

"We have had no corporations take us to court on this policy. We are routinely asked my [sic] multi-national corporations what our policy is and where in the law we have the authority to do that. That is why we put this language into it."

She further stated that "[t]he proposed subdivision to subsection 1 of Sec. 57-38-01.3 would clarify the Department's policy and thereby assist the Department in enforcing North Dakota's tax laws." The following written testimony was provided on House Bill 1164:

"1. Purpose: To clarify the law regarding net operating losses and special deductions.

"Current interpretation of the Tax Department is to require corporations to add back net operating losses and special deductions.

"2. If this bill fails, the Tax Department will continue its policy. However, the Tax Department would prefer that the legislature say yes or no not duck the issue.

* * * * * * "Therefore, if legislature agrees with the Tax Department's interpretation of adding back special deductions and net operating losses it should adopt the clarifying language and make it retroactive. If the legislature disagrees with the Tax Department's interpretation, it should state this and find a different revenue source for $6 million and possibly $15 million."

The foregoing testimony and the Legislature's enactment of the new subdivision proposed by the Commissioner lend credence to the Commissioner's present argument that the 1989 amendment "simply affirmed the Commissioner's long standing administrative practice." "A reenacted administrative regulation carries presumptive weight in the construction of a statute. This is especially true where evidence is available that the administrative interpretation was made known to the legislative body or its committees." Norman J. Singer, Sutherland Statutory Construction Sec. 49.09 at 69 (5th ed. 1992). Here, the Commissioner's administrative interpretation was clearly made known to the Legislature.

We have held that adjustments or deductions may only be made or taken in computing taxes if specifically authorized by statute. See, e.g., International Minerals & Chem. Corp. v. Heitkamp, supra; Running v. Tax Commissioner, 313 N.W.2d 772 (N.D.1981); Erdle v. Dorgan, 300 N.W.2d 834 (N.D.1980). NL contends that "[p]rior to 1989 the federal NOL deduction could not be added back to federal taxable income in determining North Dakota taxable income because there was no statutory authorization for such an adjustment."

NL explains in its brief the Commissioner's treatment of NOL's and the treatment NL advocates:

"For a number of years prior to 1989, ... including the years in question in this case, despite the lack of any statutory authorization, the Commissioner required by administrative policy, that the starting point--federal taxable income--be adjusted by adding back any federal NOL deduction. The Commissioner then allowed a 'North Dakota NOL deduction' to be taken after the North Dakota taxable income was determined, for the carryback or carryforward of net operating losses due to North Dakota operations. This is a methodology that is provided by law in some states and has been called the 'method conformity' approach to treating the NOL on the state level, whereas the methodology used by NL, which is the only methodology permitted by North Dakota law prior to 1989, has been termed the 'amount conformity' approach. See J. Michael Yarborough, State Income Tax Treatment of NOL Carryovers: A Framework for Analysis, in Journal of State Taxation, Vol. 10 (Summer 1991), at 3-9."

According to NL, under "the 'amount conformity' method, mandated by North Dakota statute prior to July 1, 1989, there is no addback to federal taxable income for the NOL deduction." On the other hand, according to NL, under the " 'method conformity' approach imposed by the Commissioner, the federal NOL deduction is added back, so that the starting point does not reflect the NOL deduction but the taxpayer receives a separate state NOL deduction." Of this "method conformity" approach, NL concedes that "[t]here is nothing inherently wrong with such a methodology," observes that "it cannot be used unless permitted by the law of the state in question," and argues that, prior to the 1989 amendment, "North Dakota statutes did not permit the use of the 'method conformity' methodology." We disagree.

Prior to 1989, Sec. 57-38-01.3, N.D.C.C., providing for adjustments to a corporation's federal taxable income for computing state income taxes, did not expressly address the subject of net operating losses. The absence of any treatment of net operating losses in a comprehensive state income tax statute, where one would expect to find the subject addressed, created a latent ambiguity. See Thompson v. Thompson, 391...