State v. Western Grain Co.

• Decision Date: 11 June 1975
• Citation: 318 So.2d 719,55 Ala.App. 690
• Parties: STATE of Alabama v. WESTERN GRAIN COMPANY, a corp. Civ. 525, 525A, 525B.
• Court: Alabama Court of Civil Appeals

Page 719

318 So.2d 719

55 Ala.App. 690

STATE of Alabama v. WESTERN GRAIN COMPANY, a corp.

Civ. 525, 525A, 525B.

Court of Civil Appeals of Alabama.

June 11, 1975.

Rehearing Denied July 23, 1975.

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.

Sirote, Permutt, Friend & Friedman, Birmingham, for appellee.

WRIGHT, Presiding Judge.

This is an appeal by the Department of Revenue from a decree of the Circuit Court of Jefferson County, which decree set aside an assessment of income taxes against Western Grain Company for the yeas 1964, 1965 and 1966. We reverse.

There are three cases, one for each tax year, which were consolidated for trial and this appeal. Substantially the same issues of law are involved here as were considered by this court in the recent case of Standard Oil of Kentucky (Kyso) v. State, 294 Ala. 3, 313 So.2d 532 (1975). Certiorari was denied by the Supreme Court on May 22, 1975, 294 Ala. ---, 313 So.2d 540. We find that disposition of this case is controlled by our decision in Kyso except for the issue of constitutionality which we will discuss later in this decision.

The facts giving rise to the dispute are as follows: Western Grain Company, hereafter called Western, is a foreign corporation doing business largely in Alabama. The parent corporation of Western is Diversa, Inc. For the years involved Western filed its state income tax return showing taxable income from all sources including that from business done in Alabama. On such returns it deducted from taxable income the amount shown on its books as accrued federal income tax.

There is no dispute as to the correctness of the amount of taxable income or the amount shown as accrued federal income tax thereon.

The dispute involved arose solely over whether the amount shown by the books of Western as accrued federal income tax is deductible from taxable income in determining the income tax due the State.

The taxing authority of the State in this case is derived from Constitutional Amendment CCXII adopted December 10, 1963 which is as follows:

'State Tax on Net Income of Corporations.--The legislature shall have power to levy and provide for the collection of taxes for state purposes on net income of corporations, from whatever source derived, for the calendar year 1963, or for any fiscal year beginning in the calendar year 1963, and each year thereafter, at a rate not exceeding five percent. 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.' (As proposed by Act 91, Laws, 1963, 2nd Spec.Sess., and adopted at the election of December 10, 1963.) (Emphasis supplied.)

Had Western filed an individual federal income tax return there would be no problem before us. It did not do so in fact. It joined with its parent corporation and other affailiated subsidiaries in filing a consolidated federal return under 26 U.S.C.A. §§ 1501--2. The procedure used by the Diversa group in filing such consolidated return may be succinctly described as follows: Each affiliated corporation prepared its statement of taxable income showing federal tax thereon as if it were filing a separate return. This statement was forwarded to the parent corporation together with a consent form for the filing on its behalf by the parent. The parent combined the income statements of the affiliated corporation and determined the tax due on the total. According to treasury regulations, if one or more affiliates have taxable income and others show losses, such income is offset by the losses and tax is paid on any remaining taxable income. Carry-over or carry-back privileges are permitted. The consolidation in this case resulted in loss of taxable income and thus no federal income tax was paid by the parent corporation.

By agreement between the parent, Diversa, and its affiliates, any corporation having taxable income and which would have had a federal income tax liability thereon if filing a separate return, paid the amount of such liability to the parent at the time it filed its income statement with the parent. After payment of the tax, if any, on the consolidated returns, such payment was disbursed to the affiliated corporations in ratio to their losses for the period, if any.

For the years involved, Western paid to the parent corporation the sum which it had calculated was due as tax on its taxable income as if filing a separate return. It showed this sum on its books as accrued tax. Western then claimed such sum as a...