Standard Oil Co. v. State
| Decision Date | 05 March 1975 |
| Citation | 55 Ala.App. 103,313 So.2d 532 |
| Parties | STANDARD OIL COMPANY, a Division of Chevron Oil Co., a California Corporation (formerly Standard Oil Company (Incorporated in Kentucky)) v. STATE of Alabama. Civ. 526. |
| Court | Alabama Court of Civil Appeals |
Harry R. Teel and Robert G. Johnson, Birmingham, for appellant.
William J. Baxley, Atty. Gen., Willard W. Livingston, Counsel, Dept. of Revenue and Asst. Atty. Gen., Herbert I. Burson, Jr., Asst. Counsel, Dept. of Revenue and Asst. Atty. Gen., for the State.
The Circuit Court of Montgomery County affirmed an assessment by the State of Alabama of state income taxes due by appellant for the tax year 1967. The amount of the assessment was $9,096.09. Additionally, the circuit court dismissed the appellant's petition for income tax refunds for the years 1965, 1966, and 1967. It is from the above actions by the circuit court that appellant takes this appeal.
Facts pertinent to this appeal reveal that appellant is Chevron Oil Company, successor by merger to Standard Oil Company, and is hereinafter referred to as Kyso. Kyso is a wholly owned subsidiary of Standard Oil of California (hereinafter referred to as Socal). During the years in question Kyso was qualified and did do business in Alabama. Kyso also did business in certain other southern states.
Pursuant to § 1501 et seq., of the Internal Revenue Code 1954, Kyso did not file income tax forms with the IRS. Instead, Kyso filed an accounting statement with Socal containing all relevant information and showing the amount of taxes Kyso would have had to pay the IRS had it filed with them. Additionally, Kyso sent to Socal a check in the amount that would have been due the IRS, less investment credits.
Socal received these accounting statements from all members of an affiliated group of corporations, including, of course, Kyso. Socal then filed an income tax form as per § 1501 with the IRS on the total amount of income reported to them by the affiliates. Socal was therefore the only entity actually filing with the IRS and was responsible for any income taxes due the IRS. The income tax due the IRS on this total amount as reported to Socal was disposed of by Socal by three means: actual cash payments from Socal to the IRS; foreign tax credits; and investment credits.
Tit. 51, § 398, Code of Ala. (1940), imposes a state income tax on foreign corporations doing business in this state. Foreign corporations are allowed certain deductions by virtue of Tit. 51, § 402(3), Code of Alabama (1940), and also by virtue of Amendment CCXII, Constitution of Alabama.
Based upon its interpretation of the deductions to be allowed a foreign corporation
by § 402(3) and Amendment CCXII, appellant claimed the following amounts of deductions for the tax years in question:
1965: $1,086,873
1966: $1,289,252
1967: $1,052,637
The state, however, allowed appellant deductions only for the following amounts:
1965: $876,878.47
1966: $969,369.49
1967: $291,336.79.
The issue to be determined by this court, therefore, is the amount of deductions to be allowed Kyso in computing its Alabama state income tax for the years in question.
In determining this issue we are confronted with two inquiries.
The first is to ascertain the mode of computation to be used in determining the amount of federal income taxes 'paid or accrued', within the meaning of Amendment CCXII, by appellant for purposes of state income tax deductions.
Briefly stated, appellant contends the correct mode of computation is a percentage of the income tax which would have been due by it as designated on its accounting statement filed with Socal, and thereafter paid to Socal. The state policy, however, is that Kyso should be allowed as a deduction a percentage of the actual amount of cash paid by Socal to the IRS.
The second inquiry confronting us is to ascertain the amount of deduction to be allowed appellant for direct taxes paid this state, other than income tax, as allowed by § 402(3). Appellant contends it should be allowed a full deduction, while the policy of the state is to apportion these taxes paid for purposes of state income tax deduction.
The trial court resolved both of these questions in favor of the state.
As previously stated, the state policy in computing the amount of deduction to be allowed appellant for federal income taxes 'paid or accrued' is a percentage of the actual amount of cash paid to the IRS by Socal, the only actual filer of a federal income tax form with the IRS.
In determining this amount, Alabama tax officials first determined the amount of income tax actually paid in cash to the Internal Revenue Service by Socal which was attributable to Kyso. They then determined the percent of the income tax attributable to Kyso, which was to be allocated to Alabama. Multiplying these together the state was able to determine the amount of federal income taxes paid by Kyso which was to be allocated to Alabama.
The basis of this administrative policy is Tit. 51, § 402(13), Code of Ala. (1940), and Regulation 402.2, Income Tax Law and Regulations State of Alabama 1952 and 1960.
Tit. 51, § 402(13), Code of Ala. (1940), reads as follows, in part:
'In the case of foreign corporations doing business in this state the deductions allowed by this section shall only be allowed if and to the extent that they are connected with income arising from sources within the state of Alabama, and the proper apportionment and allocation of deductions with respect to the sources of income within and without the state of Alabama shall be determined under the rules and regulations prescribed by the department of revenue; . . .'
Regulation 402.2, Income Tax Law and Regulations State of Alabama 1952 and 1960, provided that:
'Reg. 402.2 Deductions of foreign corporations. A foreign corporation doing business in Alabama is entitled to the same deductions allowed a domestic corporation, but only to the extent that they are connected with income arising from sources within the State. A corporation having income from multistate operations may apportion its income in accordance (Emphasis ours)
with Reg. 398.2, in which case allowable deductions must also be apportioned in the same manner; . . .
Appellant, however, contends that the proper mode of computation is to be determined solely by reference to Amendment CCXII and that reliance by the department of revenue, and the trial judge, on the aforementioned statute and regulation is misplaced.
Amendment CCXII, Alabama Constitution, reads in pertinent part:
'However, all federal income taxes paid or accrued within the taxable year by corporations shall always be deductible in computing net income taxable under the income tax laws of this state, provided that in the case of foreign corporations the amount of federal income tax deductible shall be in proportion to income derived from sources within Alabama, to be determined in accordance with such laws as the legislature may enact.'
Appellant argues that when Regulation 402.2, relied upon by the state, was enacted in 1952 and then re-enacted in 1960, that the authority for its enactment was provided by Tit. 51, § 402(3), and subsection (13). At the time of enactment of the regulation, the federal income tax deduction was governed by § 402(3). Thereafter, appellant states that Act 107, Acts of Alabama, Second Special Session 1963, Vol. 1, p. 289, deleted the deduction allowed by § 402(3), so that now the deduction must be determined by the aforementioned constitutional amendment. Appellant points out that the statutory authority for the regulation relied upon by the state, i.e., § 402(13), states that the rules and regulations to be prescribed have reference to the 'deductions allowed by this section.'
It appears appellant is contending that as the deduction is not now allowed by § 402(3), the rules and regulations enacted under authority of § 402(13) prior to the passage of Amendment CCXII have no authority and the deduction is to be allowed according to the mandates of the amendment. Inasmuch as no legislation was passed and in effect during the tax years in question, appellant contends that the amount of deduction to be allowed them is to be determined solely by reference to the amendment.
Thus, appellant contends that the phrase, 'all federal income taxes paid or accrued', means the amount of income tax liability which accrued on Kyso's books and was thereafter satisfied by the cash payment to Socal and the investment credit.
As support for this contention, appellant cites to us the case of Cities Service Gas Co. v. McDonald, 204 Kan. 705, 466 P.2d 277. This was a case involving similar facts and the same legal issue in which the Supreme Court of Kansas held that the subsidiary corporation actually 'incurred and paid' federal income taxes when it filed a statement with the parent and then discharged its tax liability by payment to the parent rather than the IRS.
Appellee, however, contends that appellant is actually trying to take a deduction based on a 'hypothetical' tax return in that appellant did not file an income tax return with nor pay to the IRS any moneys. The only income tax filed was by Socal. As support for this position that the deduction should be based on the amount paid by the parent to the IRS rather than Witnesses on behalf of the state...
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Opinion of the Justices
...[the] state of [the] law when [the] instrument was adopted, and [the] conditions necessitating its adoption." Standard Oil Company v. State, 55 Ala.App. 103, 313 So.2d 532, 537 cert. denied, 294 Ala. 770, 313 So.2d 540 (1975). With these principles in mind, the Court first examines the ques......
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