State Dept. of Revenue v. Sonat, Inc.

• Decision Date: 21 February 1997
• Parties: STATE DEPARTMENT OF REVENUE v. SONAT, INC. 2950865.
• Court: Alabama Court of Civil Appeals

Page 412

690 So.2d 412

STATE DEPARTMENT OF REVENUE v. SONAT, INC.

2950865.

Court of Civil Appeals of Alabama.

Feb. 21, 1997.

Dan E. Schmaeling, Asst. Atty. Gen. and Asst. Counsel, Alabama Dept. of Revenue, for appellant.

Roy J. Crawford and L. Murray Alley of Cabiness, Johnston, Gardner, Dumas & O'Neal, Birmingham, for appellee.

SAM A. BEATTY, Retired Justice.

The Alabama Department of Revenue ("the Department") appeals from a judgment in favor of Sonat, Inc. We affirm.

Sonat, Inc., a Delaware corporation that does business in Alabama, appealed to the circuit court from the Department's denial of Sonat's claims for refunds of foreign corporation franchise tax paid for tax years 1991, 1992, and 1993, and from the entry of a final assessment of additional franchise tax due. Sonat paid the disputed franchise tax and timely filed its notice of appeal and complaint, thereby complying with the provisions of § 40-2A-7, Ala.Code 1975. At issue in this appeal is the interpretation of § 40-14-41(d)(1), Ala.Code 1975 ("the (d)(1) exclusion").

A foreign corporation's Alabama franchise tax is based upon the "actual amount of its capital employed in this state." § 40-14-41(a), Ala.Code 1975. The (d)(1) exclusion provides:

"There shall be excluded from the amount of capital as determined in subsection (b) of this section the investment by the taxpayer in the capital of other corporations organized under the laws of Alabama, or under the laws of any other state if such other corporations also pay a franchise tax to the State of Alabama, unless the taxpayer is a dealer in stocks or securities...."

"Capital" is defined in § 40-14-41(b) as follows:

"(1) The outstanding capital stock;

"(2) Surplus and undivided profits ...;

"(3) The amount of bonds, notes, debentures, or other evidence of indebtedness maturing and payable more than one year after the first day of the franchise tax year; [and]

"(4) The amount of the bonds, notes, debentures, or other evidences of indebtedness maturing and payable at the time to ... another corporation owning more than 50 percent of the capital stock of such corporation ... and which other corporation ... is not also required to pay a franchise tax to the State of Alabama...."

Sonat sought to exclude from its capital base long-term debt (§ 40-14-41(b)(3)) owed to it by two of its wholly owned subsidiary corporations, Sonat Exploration Company ("SEC") and Sonat Offshore Drilling, Inc. ("SODI"), both of which also pay Alabama franchise tax. Sonat contends that, according to the definition of "capital" in § 40-14-41(b), long-term debt is an investment in the "capital" of SEC and SODI and qualifies for the (d)(1) exclusion. The Department contends that only an investment in the "capital stock" of another corporation qualifies for the (d)(1) exclusion. The Department also contends that two of Sonat's subsidiaries, SODI and Citrus Corporation ("Citrus"), in which Sonat owned a 50% interest, were not doing business in Alabama during the tax years at issue, and, therefore, that Sonat's investment in their capital stock would not qualify for a(d)(1) exclusion.

Sonat is a holding company that acts by and through subsidiary corporations. It is engaged in the production, storage, transmission, and marketing of natural gas and oil field services. SEC, SODI, and Citrus are all Delaware corporations that are qualified to do business in Alabama. It is undisputed that SEC did business in Alabama during the tax years at issue. Citrus, owned 50% by Sonat and 50% by Enron Corporation, qualified to do business in Alabama in 1987. The trial court found that Citrus's board of directors, the membership of which is equally divided between Sonat employees residing in Alabama and Enron employees residing in Texas, met in Alabama on numerous occasions to conduct corporate business and to make management decisions regarding a subsidiary corporation, and that Citrus conducted several corporate training sessions at Sonat's training facility in Tuscaloosa. SODI qualified to do business in Alabama in 1978. The trial court found that SODI's board of directors, some of whom are Sonat employees residing in Alabama, met in Alabama on numerous occasions to conduct corporate business and to make management decisions regarding its business, and that SODI conducted several corporate training and planning sessions at Sonat's training facility in Tuscaloosa. Since 1981, SODI has owned tangible personal property located in Alabama from which it receives rental income. Both Citrus and SODI filed foreign corporation franchise tax returns and corporate income tax returns with the Department for tax years 1989-93, and paid all applicable taxes due.

Sonat timely filed Alabama foreign corporation franchise tax returns with the Department for tax years 1989 through 1993 ¹ and paid the franchise taxes due for those years as follows: tax year 1989, $715,759; tax year 1990, $894,256; tax year 1991, $1,094,800; tax year 1992, $1,009,598; and tax year 1993, $854,228. Sonat did not claim a(d)(1) exclusion on those returns for the amount of the long-term debt owed to it by SEC and SODI. The record reflects that the persons responsible for preparing Sonat's returns erroneously believed the debt to be short-term (§ 40-14-41(b)(4)). Sonat did claim a(d)(1) exclusion on those returns for the amount it had invested in the capital stock of Citrus and SODI.

After filing the 1989-93 franchise tax returns, the persons responsible for preparing Sonat's returns learned that the debt owed to Sonat by SEC and SODI was long-term debt that had been included for franchise tax purposes in the capital base of SEC and SODI pursuant to § 40-14-41(b)(3). Sonat then prepared amended franchise tax returns excluding from its capital base the amount of the long-term debt owed to it by SEC and SODI, pursuant to its interpretation of § 40-14-41(d)(1). In October 1993, Sonat filed with the Department petitions seeking refunds of franchise tax paid for tax years 1989 through 1993 as follows: tax year 1989, $409,156; tax year 1990, $748,802; tax year 1991, $1,094,775; tax year 1992, $1,009,573; tax year 1993, $854,203.

In November 1993, the Department asserted that, rather than being entitled to the refunds requested, Sonat owed additional foreign corporation franchise tax of $3,223,889.30. Among other adjustments, the Department disallowed Sonat's exclusion of the amount of the long-term debt owed to it by SEC and SODI from its capital base. After a meeting between representatives of Sonat and the Department, the Department further disallowed Sonat's exclusion of its investment in the capital stock of Citrus from its capital base.

In March 1994, the Department issued a notice of preliminary assessment, asserting that Sonat owed additional foreign corporation franchise tax of $4,485,901.18, a penalty of $1,000,419.36, and interest of $1,042,382.33 computed to April 18, 1994, for a total of $6,528,702.87. After another meeting between representatives of Sonat and the Department, the Department revised the preliminary assessment to assert that Sonat owed additional foreign corporation franchise tax of $4,108,932.86, with interest of $1,097,002.34 computed to August 16, 1994, for a total due of $5,205,935.20, and eliminated the penalty initially imposed. The revised preliminary assessment corrected in Sonat's favor certain adjustments previously made by the Department, but it also disallowed Sonat's exclusion of its investment in the capital stock of SODI from its capital base.

On November 4, 1994, the Department issued a final assessment, asserting that Sonat owed additional foreign corporation franchise tax of $4,108,932.86, with interest of $1,170,625.42 computed to November 4, 1994, for a total of $5,279,558.28. On December 1 1994, Sonat paid the amount due in the final assessment, plus interest computed to December 1, 1994, for a total of $5,314,707.12. On December 2, 1994, Sonat timely filed its notice of appeal with the circuit clerk and with the secretary of the Department.

Alabama's foreign corporation franchise tax statute was initially enacted in 1915 and was reenacted in 1935. It imposed a franchise tax on foreign corporations based on the actual amount of capital employed in the state, but neither enactment defined "capital" or provided how the capital employed was to be determined. The statute was amended in 1961 to address those omissions and to provide for various exclusions and deductions from the capital base. The (d)(1) exclusion read as follows in 1961:

"D. Exclusions and Deductions. (1) There shall be excluded from the amount of capital as determined in Subsection B the amount invested by the taxpayer in the capital stock of other corporations organized under the laws of Alabama, or under the laws of any other State if such other corporations also pay a franchise tax to the State of Alabama, unless the taxpayer is a dealer in stocks or securities...."

(Emphasis added.) The (d)(1) exclusion was amended in 1973 to read as follows:

"D. Exclusions and deductions. (1) There shall be excluded from the amount of capital as determined in subsection B the investment by the taxpayer in the capital of other corporations organized under the laws of Alabama, or under the laws of any other state if such other corporations also pay a franchise tax to the state of Alabama, unless the taxpayer is a dealer in stocks or securities...."

(Emphasis added.) The legislators sponsoring the 1973 amendment included the following synopsis explaining the bill's purpose:

"This Act amends subsection D(1) of section 348 of Title 51 [Ala.Code of 1940 (Recomp.1958) ] by substituting the word 'investment' for the words 'amount invested' and by deleting the word 'stock'. These technical changes merely eliminate any possibility of double taxation by removing any ambiguity that may exist in the present statute."

A fiscal note provided by the House Ways and Means Committee ...