Sharp v. Caterpillar, Inc.

• Decision Date: 18 September 1996
• Docket Number: No. 03-95-00272-CV,03-95-00272-CV
• Citation: 932 S.W.2d 230
• Parties: Pens. Plan Guide P 23926Z John SHARP, Comptroller of Public Accounts for the State of Texas; Dan Morales, Attorney General for the State of Texas; and Martha Whitehead, Treasurer of the State of Texas, Appellants, v. CATERPILLAR, INC., Appellee.
• Court: Texas Court of Appeals

Page 230

932 S.W.2d 230

Pens. Plan Guide P 23926Z

John SHARP, Comptroller of Public Accounts for the State of Texas; Dan Morales, Attorney General for the State of Texas; and Martha Whitehead Treasurer of the State of Texas, Appellants, v. CATERPILLAR, INC., Appellee.

No. 03-95-00272-CV.

Court of Appeals of Texas,

Austin.

Sept. 18, 1996.

Rehearing Overruled Nov. 20, 1996.

Dan Morales, Attorney General, Christine Monzingo, James T. Parsons, Assistant Attorneys General, Taxation Division, Austin, for Appellants.

R. James George, Jr., George, Donaldson & Ford, L.L.P., Austin, for Appellee.

Before CARROLL, C.J., and JONES and B.A. SMITH, JJ.

JONES, Justice.

Appellee Caterpillar, Inc. ("Caterpillar") sued appellants (collectively, "the Comptroller") ¹ in district court for a refund of franchise taxes paid under protest. The district court granted summary judgment in favor of Caterpillar, and the Comptroller now appeals. We will reverse the district court's judgment and remand the cause.

THE CONTROVERSY

The issue at the heart of this appeal is whether Caterpillar must be allowed to deduct from its franchise tax base an estimate of future liability for certain post-retirement employee benefits. Caterpillar provides extensive benefits to its retired employees, including health and life insurance coverage, which are the benefits at issue in this appeal. Caterpillar pays health and life insurance claims out of general revenue as they are incurred; the benefits are not "funded" by a trust or other similarly dedicated asset.

Though Caterpillar's future liability for these benefits may be statistically predictable with reasonable accuracy, the exact amount of payments for future years cannot be precisely determined in advance.

For the 1988-1994 franchise-tax reporting years, the Comptroller did not allow Caterpillar to deduct from its franchise tax base future liability for the benefits at issue. Caterpillar paid its franchise tax under protest and, after exhausting its administrative remedies, filed suit in district court seeking a refund of over $2,400,000. Caterpillar argued that the relevant provisions of the Tax Code should be interpreted to allow a deduction for its future benefits liability. Alternatively, Caterpillar claimed that these provisions are preempted by the federal Employee Retirement Income Security Act ("ERISA") ² and violate the Texas constitutional guarantee of equal and uniform taxation. Both parties moved for summary judgment. The district court granted Caterpillar's motion for summary judgment and overruled the Comptroller's motion. The Comptroller now appeals.

FRANCHISE TAX BACKGROUND

The franchise tax is imposed on corporations for the privilege of doing business in Texas. See Tex.Tax Code Ann. § 171.001(a)(1) (West 1992). A corporation's franchise tax base is determined, in part, by applying a specified tax rate to the corporation's net taxable capital. Id. § 171.002(b)(1). A corporation's net taxable capital is equal to its stated capital plus its surplus, minus any deductions allowed by the Tax Code. Id. § 171.101(a). At issue in this appeal is the surplus component of net taxable capital.

Before 1987, the Tax Code did not define surplus. In 1987, the legislature added section 171.109 to the Tax Code to provide a general definition of surplus. Act of June 1, 1987, 70th Leg., R.S., ch. 324, § 1, 1987 Tex.Gen.Laws 1734, 1734-35 (Tex.Tax Code Ann. § 171.109(a), since amended). ³ Both parties agree that the legislature added the definition of surplus to overturn this Court's holdings in State v. Sun Refining & Marketing., Inc., 740 S.W.2d 552 (Tex.App.--Austin 1987, writ denied), and State v. Sun Oil Co. (Delaware), 740 S.W.2d 556 (Tex.App.--Austin 1987, no writ) ("the Sun cases"). ⁴ In the Sun cases, we held that taxpayers could exclude from surplus reasonable estimates of contingent liabilities, such as self-insurance accounts, bad debt accounts, deferred employee benefits accounts, and various other liabilities connected with the oil and gas industry. The 1987 Act defined surplus as net assets minus stated capital; net assets were, in turn, defined as total assets minus total debts. Id. § 171.109(a)(1)-(2). To effectively overturn the Sun cases, the legislature also provided that surplus specifically includes "unrealized, estimated, or contingent losses or obligations...." Id. § 171.109(a)(1).

In 1991, the legislature added subsection 171.109(j), which provides that a corporation may not exclude from surplus liabilities for employee benefits "that are not payable in the current accounting year, including retirement, medical, insurance, post-retirement, and other similar benefits...." Id. § 171.109(j)(1). ⁵ The legislature specifically noted that it intended subsection (j)(1) to be considered as a clarification of the existing law, not as a substantive change. Act of

August 13, 1991, 72d Leg., 1st C.S., ch. 5, § 8.081, 1991 Tex.Gen.Laws 134, 159. Apparently, then, the legislature added subsection (j) to clarify how the general definition of surplus in subsection (a)(1) of the 1987 Act should be applied in the context of estimated employee benefits.

DISCUSSION

In district court, both parties moved for summary judgment. The district court granted Caterpillar's motion, which contained the three independent grounds previously set forth. The district court also denied the Comptroller's motion for summary judgment, which was based on the asserted ground that Caterpillar's liability is estimated and therefore must be included as a part of surplus as a matter of law. Points of error one, three, four, and five complain of the trial court's granting summary judgment for Caterpillar. Points of error two through five complain of the trial court's failure to grant summary judgment for the Comptroller.

Because the district court granted summary judgment in a general order, we must affirm the judgment if it is supported by any of the three legal grounds presented in Caterpillar's motion. See State Farm Fire & Cas. Co. v. S.S., 858 S.W.2d 374, 380 (Tex.1993); Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79 (Tex.1989). We review de novo the district court's determination that Caterpillar was entitled to judgment as a matter of law. Capitan Enters., Inc. v. Jackson, 903 S.W.2d 772, 775 (Tex.App.--El Paso 1994, writ denied).

(i) Statutory Interpretation

The Comptroller argues that the district court erred because the Tax Code does not permit Caterpillar to deduct from surplus its future liability for the employee benefits at issue. Caterpillar's argument implicates two provisions of the Tax Code: (1) section 171.109(a)(3), which defines "debt" as "any legally enforceable obligation measured in a certain amount of money which must be performed or paid within an ascertainable period of time or on demand" (emphasis added), and (2) section 171.109(a)(1), which provides that "surplus" includes "unrealized, estimated, or contingent losses or obligations." See Tex.Tax Code Ann. § 171.109(a)(1), (3) (West 1992). The Comptroller argues that Caterpillar's liability does not meet the definition of "debt" and therefore falls within the category of estimated liabilities that must be included in surplus. Caterpillar argues that its future benefits liability may be statistically calculated with a relatively high degree of accuracy and therefore qualifies as debt and not an "estimated" liability. We find Caterpillar's argument to be unpersuasive.

The Comptroller's position is clearly supported both by the plain language of the statute and the legislature's apparent intent in enacting it. Caterpillar concedes that its future liability for the benefits at issue cannot be precisely determined in advance for any given individual and that any prediction of its liability in the aggregate depends upon assumptions that may or may not prove to be true. Caterpillar argues, however, that sophisticated actuarial methods produce reasonably accurate figures for its liability, providing sufficient certainty under the Tax Code to allow deduction of the liability from surplus. The statute makes clear, however, that a liability may not be deducted from surplus unless it can be exactly determined, no matter how accurately it may be estimated.

Caterpillar's liability cannot qualify as debt because it is not a "certain amount of money." Id. § 171.109(a)(3) (emphasis added). Caterpillar's liability must, of necessity, be forecast; it cannot be determined precisely in advance, even in the aggregate. "Certain" is defined as fixed, exact, or precise. Webster's Third New International Dictionary 367 (Philip B. Gove ed., 1986). Caterpillar's future liability is not fixed, exact, or precise, but instead is an actuarial forecast. Because the liability is not a sum certain, it does not fall within the statutory definition of "debt," which may be deducted from surplus. Caterpillar's liability is, on the contrary, estimated. An estimate is a rough or approximate calculation, or a judgment made from incomplete data. Id. at 779. The eventual accuracy of a prediction does not change its character as being presently uncertain. The Our analysis is further supported by the statute's legislative history. See Code Construction Act, Tex.Gov't Code Ann. §§ 311.023(3), 312.005 (West 1988). Section 171.109(a)(1) was intended to overturn our Sun cases. In the Sun cases, we held that liabilities could be excluded from surplus, if they were reasonably estimated, in order to reflect the true financial condition of the taxpayer. Sun Ref. & Mktg., 740 S.W.2d at 555. We may therefore infer that the legislature, in passing section 171.109(a), intended to include in surplus all estimates of future liability, even reasonably accurate ones. Caterpillar's liability is just this type of reasonable estimate. If we adopted Caterpillar's argument, we would return to our Sun holding in flagrant disregard of the legislature's evident intent to the contrary.

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