Taxation and Revenue Dept. of State of N. M. v. F. W. Woolworth Co.
| Decision Date | 19 January 1981 |
| Docket Number | No. 12876,12876 |
| Citation | 1981 NMSC 8,624 P.2d 28,95 N.M. 519 |
| Parties | TAXATION AND REVENUE DEPARTMENT OF the STATE OF NEW MEXICO, Petitioner, v. F. W. WOOLWORTH COMPANY, a New York Corporation, Respondent. |
| Court | New Mexico Supreme Court |
Woolworth appealed to the Court of Appeals a decision of the New Mexico Taxation and Revenue Department (Department) which assessed additional corporate income taxes for fiscal year 1976-77. The Court of Appeals, 95 N.M. 542, 624 P.2d 51, reversed the Department. We reverse the Court of Appeals.
There are three issues: (1) whether "gross up", meaning the foreign income taxes paid by Woolworth's foreign subsidiaries which Woolworth is required to report as dividend income in its federal income tax return in order to claim a tax credit for those foreign taxes paid, is legitimately a part of the tax base upon which New Mexico income taxes are to be calculated; (2) whether the cash dividends Woolworth receives from its foreign subsidiaries are "business income" and therefore assessable for New Mexico income tax purposes; and (3) whether the facts and law here warrant a modification of the apportionment formula.
Woolworth, a New York corporation engaged in selling general merchandise at retail throughout the United States, has four subsidiary foreign corporations which are relevant here. Its German, Canadian and Mexican subsidiaries are wholly owned by Woolworth; and Woolworth owns 52.7% of its English subsidiary.
One legal writer has depicted the tangle of competing principles involved in these issues as a "lofty plateau of complexity." We agree. The first move to finding a way out of this maze is to isolate the first issue of gross-up from the other two, which the Court of Appeals failed to do.
The literal meaning of the term "gross-up" has been lost in the labyrinth. However, it is used here to refer to the option an American multinational corporation has under the federal income tax law to claim credit for income taxes paid to foreign governments by its foreign subsidiaries. I.R.C. §§ 901-908. It results in a federal tax benefit to the corporation based on an adjustment made to federal taxable income. It must be recognized, however, that the New Mexico tax laws do not specifically confer the same benefit to the taxpayer.
The election with which we are concerned is that foreign taxes paid by a domestic corporation may be either deducted by the taxpayer (I.R.C. § 164(a) (3)) or credited against the tax due to the federal government (I.R.C. §§ 78 and 901-908). "In making these elections, the taxpayer has, presumably, lessened its federal income tax liability." Caterpillar Tractor Co. v. Lenckos, 77 Ill.App.3d 90, 32 Ill.Dec. 786, 395 N.E.2d 1167, 1176 (1979). As stated in F. W. Woolworth Co. v. Commissioner of Taxes of State, 133 Vt. 93, 328 A.2d 402, 404 (1974):
The purpose of "gross-up" is to avoid giving the domestic corporation both a credit and a deduction for the foreign tax deemed paid on its federal income tax return, which would otherwise result from the allowance of a full credit against tax liability computed only on the dividend paid.
We deem it unnecessary to delve into all the intricacies of the federal laws and regulations. Suffice it to say that, since Woolworth decided to use the gross-up option, the income taxes paid by Woolworth's foreign subsidiaries to foreign governments must be deemed to be received as dividends and the amount must be added into gross income and be reflected in the slot on the tax return form from which federal income taxes are calculated. Treas.Reg. § 1.78-1 (1979).
Woolworth does not and cannot quarrel with the soundness of the inclusion of gross-up in the gross income figure on its federal income tax return which, at Woolworth's own deliberate and knowing option, contains a fictional amount representing dividends "deemed to have been received." Gross-up amounts to over $25,000,000 in this case, on which the Department is claiming unpaid taxes on the amount of income apportioned to New Mexico.
Thus, the important starting point is the figure of gross income. This necessarily includes gross-up, which must also be calculated in determining the amount placed on line 30 for "Taxable Income" on Federal Income Tax form No. 1120, filed by Woolworth for the 1976-77 tax year and on which federal taxes were payable.
The next step is to interrelate these federal statutes and rules with the New Mexico law. Section 7-2-2(S), N.M.S.A.1978 establishes a "piggy-back" method of determining state taxable income by reference to federal law. It provides:
"(B)ase income" (on which state taxes are calculated) means that part of the taxpayer's income generally defined as federal taxable income and upon which the federal income tax is calculated;
The New Mexico tax return form calls for the insertion of federal taxable income as the starting point for calculating state taxable income. "This is done for the convenience of the taxpayer, as a savings to the State, and to provide the State with a means of verifying the accuracy and honesty of a taxpayer's return." Getty Oil Co. v. Taxation & Revenue Dept., 93 N.M. 589, 592, 603 P.2d 328, 331 (Ct.App.1979).
It is clear that the taxable income figure entered on line 30 of form 1120, which must reflect the addition of gross-up in gross income, is the only amount that may be used in calculating Woolworth's taxes due in New Mexico. Most states that have enacted income tax laws define taxable income in the identical manner.
Nevertheless, Woolworth in this case did not add gross-up into the New Mexico taxable income amount, upon which Woolworth paid taxes to the State of New Mexico. The Department claimed a deficiency in taxes paid. Woolworth appealed to the Court of Appeals, which erroneously sustained Woolworth's position.
Woolworth does not deny that the combined federal and state laws mandate that gross-up be reflected as state taxable income. But, it argues that the figure is artificial, that inclusion of the additional amount in apportionable income is inequitable, and that the tax administrator has the authority to cure the inequity "pending a legislative amendment." (There seems to be a tacit admission in this phrase that legislative action is probably necessary.) Woolworth further states that the administrator's authority is contained in the statute which permits a modification of the apportionment formula. The company also urges that gross-up is not income because that term means the acquisition of an economic benefit. A due process constitutional issue was raised on the theory that if gross-up is included in taxable income, Woolworth is entitled to deduct the amount of any taxes paid or deemed paid. The basis of the Court of Appeals' ruling was that gross-up is not dividend income and could not be classified as "business" income.
These issues have been answered against Woolworth's contentions in a number of cases. Admittedly, the fictitious gross-up, which the state claims is "business income" and which Woolworth deliberately acceded to, does not fit the ordinary definition of "income":
But a state has the power to gauge its income tax by reference to the income on which the taxpayer is required to pay a tax to the United States. The constitutionality of state statutes which refer to the Internal Revenue Code definitions have been upheld by the courts. See, Garlin v. Murphy, 51 Misc.2d 477, 273 N.Y.S.2d 374 (1966), aff'd 34 N.Y.2d 921, 359 N.Y.S.2d 552 (1974); Thorpe v. Mahin, 43 Ill.2d 36, 250 N.E.2d 633 (1969); 85 C.J.S. Taxation § 1096b; Annot., Constitutionality, construction and application of provisions of state tax law for conformity with Federal income tax law or administrative and judicial interpretation, 166 A.L.R. 516 (1947), supplemented in 42 A.L.R.2d 797 (1955) and its supplement.
Champion International Corp. v. Bureau of Revenue, 88 N.M. 411, 416, 540 P.2d 1300, 1305 (Ct.App.1975), cert. denied, 89 N.M. 5, 546 P.2d 70 (1975). In F. W. Woolworth Company v. Commissioner of Taxes, 130 Vt. 544, 298 A.2d 839 (1972), the court held:
Appellant contends that gross-up does not fit into the definition of "income" under the decisions of the United States Supreme Court that there must accrue, at the very least, some economic benefit or accession to wealth to the taxpayer before he can be said to have realized "income." There is no finding that by the election to use the gross-up rule the appellant did not realize an economic benefit. It clearly appears from the record, however, that the contrary is shown to be the fact. Woolworth's Vermont and federal income tax returns disclose that it gained a decided tax advantage dollarwise by exercising the option to use gross-up as a credit on its federal tax liability.
Construing the provisions of the pertinent tax statutes, we conclude it was the clear intent of the legislature that appellant's tax base must include the gross-up.
298 A.2d at 844. There is no claim and no finding that Woolworth did not obtain an economic benefit from the gross-up procedure here.
In Caterpillar, supra, the court examined several of the same complaints made here and found that after making an election which presumably lessened the taxpayer's federal income tax liability, the taxpayer was trying to reverse the effect of that election. The court stated:
Federal net income is certainly a reasonable starting point for determining corporate net income for Illinois income tax. (Citation omitted.) As a result of their own elections, the plaintiffs have not deducted the amount of foreign taxes from and have added certain hypothetical income to their gross income, and for federal income tax purposes, they are bound by those elections. Nothing in our existing Illinois law can be...
To continue reading
Request your trial
-
NCR Corp. v. Comptroller of the Treasury, Income Tax Div.
...the fourteenth amendment issue that is now before us. One decision that does touch on that issue is Taxation & Revenue Dept. v. F.W. Woolworth, 95 N.M. 519, 624 P.2d 28 (1981), rev'd on other grounds, 458 U.S. 354, 102 S.Ct. 3128, 73 L.Ed.2d 819, reh'g denied, 459 U.S. 961, 103 S.Ct. 274, 7......
-
Comptroller of Treasury Income Tax Div. v. NCR Corp.
...it takes the credit. This amount is commonly referred to as "gross-up". See generally Taxation and Revenue Department of New Mexico v. F.W. Woolworth Company, 95 N.M. 519, 624 P.2d 28, 30-31 (1981) (explaining concept of gross-up in which the amount of the credit taken for the taxes paid by......
-
Woolworth Co v. Taxation and Revenue Department of State of New Mexico
... ... Thus, the subsidiaries were not a part of a "unitary business." Exxon Corp. v. Wisconsin Dept. of Revenue , 447 U.S. 207, 100 S.Ct. 2109, 65 L.Ed.2d 66, distinguished. Pp. 364-372 ... 2. New Mexico's efforts to tax the "gross-up" income also contravenes the Due Process Clause. The "fictitious" gross-up figure is treated for federal foreign tax credit purposes as a ... ...
-
Rates and Charges of Mountain States Tel. & Tel. Co., Matter of
...to the income upon which the taxpayer is required to pay a tax to the United States. Taxation and Revenue Department v. F.W. Woolworth Co., 95 N.M. 519, 522-523, 624 P.2d 28, 31-32 (1981), rev'd on other grounds, 458 U.S. 354, 102 S.Ct. 3128, 73 L.Ed.2d 819 (1982); Getty Oil Co. v. Taxation......