Tower Loan of Mississippi, Inc. v. Mississippi State Tax Com'n, 94-CA-00508-SCT

• Decision Date: 19 October 1995
• Docket Number: No. 94-CA-00508-SCT,94-CA-00508-SCT
• Citation: 662 So.2d 1077
• Parties: TOWER LOAN OF MISSISSIPPI, INC. v. MISSISSIPPI STATE TAX COMMISSION.
• Court: Mississippi Supreme Court

Page 1077

662 So.2d 1077

TOWER LOAN OF MISSISSIPPI, INC. v. MISSISSIPPI STATE TAX COMMISSION.

No. 94-CA-00508-SCT.

Supreme Court of Mississippi.

Oct. 19, 1995.

Leonard D. Van Slyke, Jr., Denise F. Schreiber, Alston Rutherford Tardy & Van, Jackson, for appellant.

Brenda G. Cameron, Bobby R. Long, Jackson, for appellee.

Before HAWKINS, C.J., and PITTMAN and BANKS, JJ.

PITTMAN, Justice, for the Court:

STATEMENT OF THE CASE

The Mississippi State Tax Commission (hereinafter the "Commission") assessed Tower Loan of Mississippi, Inc. (hereinafter "Tower Loan") additional franchise taxes for the years 1985, 1986 and 1987. Tower Loan appealed to the Board of Review of the State Tax Commission which upheld the assessment of additional franchise taxes, interest and penalties by Order dated July 31, 1989. Tower Loan subsequently appealed to the full Commission which affirmed the Board of Review's finding by Order dated April 25, 1990. The total assessment as of June 30, 1990 was $47,965.23. Aggrieved by the Commission's order, Tower Loan appealed to the Chancery Court of the First Judicial District of Hinds County, Mississippi. After a trial on the matter, the chancellor, by a Memorandum Opinion and Order dated April 26, 1994, affirmed the order of the Commission assessing additional franchise taxes to Tower Loan. Thereafter, on May 16, 1994, the chancery court entered its Final Judgement affirming the Commission's Order and awarding a judgment against Tower Loan in the amount of $47,965.23 together with interest until paid in full and taxing all costs against Tower Loan. On May 25, 1994, Tower Loan filed its Notice of Appeal to this Court.

The issues on appeal to this Court are as follows:

I. WHETHER THE TAX COMMISSION CALCULATED TOWER LOAN'S FRANCHISE TAX BASE IN ACCORDANCE WITH MISS.CODE ANN. § 27-13-11.

II. WHETHER THE TAX COMMISSION CAN IMPOSE UPON TOWER LOAN AN INTERPRETATION OF THE FRANCHISE TAX STATUTE WHICH HAS NEVER BEEN SET FORTH IN A RULE OR REGULATION PROMULGATED IN ACCORDANCE WITH THE ADMINISTRATIVE PROCEDURES ACT.

III. WHETHER THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENT IN SUBSIDIARIES IS AN APPROPRIATE METHOD FOR USE IN CALCULATING A CORPORATION'S FRANCHISE TAX BASE.

IV. WHETHER THE TAX COMMISSION, HAVING PREVIOUSLY RESOLVED THE ISSUE OF THE APPROPRIATE METHOD OF ACCOUNTING FOR INVESTMENT IN SUBSIDIARIES IN FAVOR OF THE COST METHOD, IS NOW ESTOPPED FROM INSISTING THAT THE COST METHOD MAY NOT BE USED.

STATEMENT OF THE FACTS

Tower Loan is a Mississippi corporation engaged primarily in the business of making small consumer loans. During the years 1985, 1986, and 1987, Tower Loan had approximately forty branch offices throughout Mississippi and was the sole shareholder of two insurance companies, American Federated Insurance Company (AFIC) and American Federated Life Insurance Company (AFLIC). These subsidiaries were formed by Tower Loan for the purpose of writing insurance to protect Tower Loan's interest in the loans made by it. During the same time period, Tower Loan was also the sole shareholder of a third corporation, Consolidated Capital Investment Corporation (CCIC), which was engaged in the leasing business. CCIC was dissolved in 1987 by merger into Tower Loan.

In its franchise tax returns for the years 1985, 1986, and 1987, Tower Loan deducted the subsidiary insurance companies' capital of retained earnings ¹ based on the cost method of accounting for its investments in the subsidiaries. Under the cost method, the value of a parent corporation's investment in a subsidiary is calculated on the basis of the parent's initial cost for the subsidiary's stock, and subsequent undistributed earnings are considered to be only the subsidiary's retained earnings and not the parent's retained earnings.

The Commission audited Tower Loan's franchise tax returns for 1985, 1986, and 1987 and assessed, after recalculating Tower Loan's capital, additional taxes in the amount of $42,628.11. This assessment was based upon financial statements and balance sheets supplied to the Commission by Tower Loan's accountant which reflected the equity method of accounting. Under the equity method of accounting, a parent corporation's investment in a subsidiary corporation is calculated on the basis of both the initial cost of the subsidiary's stock and the subsidiary's subsequent retained earnings.

After an appeal to the Board of Review of the State Tax Commission which upheld the assessment of additional franchise tax, Tower Loan appealed to the full Commission. The Commission affirmed the finding of the Board of Review and assessed Tower Loan for additional franchise taxes in the amount of $47,965.23, which included interest. Tower Loan, thereafter, timely appealed the decision of the Commission to the Chancery Court of the First Judicial District of Hinds County, Mississippi.

After having heard testimony of both fact and expert witnesses, having received documents, and having reviewed arguments and memorandum briefs of counsel, the chancery court found in its Memorandum Opinion and Order that the Commission properly assessed Tower Loan additional franchise taxes, penalties and interest for the years 1985, 1986, and 1987.

DISCUSSION OF THE LAW

I. WHETHER THE TAX COMMISSION CALCULATED TOWER LOAN'S FRANCHISE TAX BASE IN ACCORDANCE WITH MISS.CODE ANN. § 27-13-11.

Standard of Review

This Court reviews actions of the State Tax Commission under an arbitrary and capricious standard. Mississippi State

Tax Com'n v. Dyer Inv. Co., Inc., 507 So.2d 1287, 1289 (Miss.1987). Furthermore, the federal courts sitting in this state have held that "[a]n agency's interpretation of a regulation it has been authorized to promulgate is entitled to great deference and must be upheld unless it is so plainly erroneous or so inconsistent with either the underlying regulation or statute as to be arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law." Board of Trustees of State Institutions of Higher Learning v. Sullivan, 763 F.Supp. 178, 184 (S.D.Miss.1991).

Analysis

Miss.Code Ann. § 27-13-5 imposes a franchise or excise tax upon corporations organized, created or established under the laws of this state. Tower Loan is statutorily obligated, in the absence of some exemption, to pay the franchise tax. However, the amount of that tax and the measurement thereof is at the heart of the present dispute between Tower Loan and the Commission.

Tower Loan argues that the Commission erroneously calculated the franchise tax owed by it when the Commission included the retained earnings of the subsidiaries in calculating the value of its capital. The Commission contends that Tower Loan made an unauthorized deduction on its franchise tax returns of its retained earnings for that portion of its retained earnings attributable to its interest in its subsidiaries.

To determine if Tower Loan owes the additional franchise tax, it is necessary to interpret two franchise tax statutes and determine the legislative intent expressed in those statutes. During the period of the assessment in question, the first of these statutes, § 27-13-9 read as follows:

The tax imposed, levied and assessed, under the provisions of this chapter, shall be calculated on the basis of the value of the capital employed in this state for the year preceding the date of filing the return, whether a calendar year, or fiscal year, except where otherwise provided in this chapter, measured by the combined issued and outstanding capital stock, paid-in capital, surplus and retained earnings; provided, that in computing capital, paid-in capital, surplus and retained earnings, there shall be included deferred taxes, deferred gains, deferred income, contingent liabilities and all true reserves, including all reserves other than for definite known fixed liabilities which do not enhance the value of the assets; and amounts designated for the payment of dividends shall not be excluded from such calculations until such amounts are definitely and irrevocably placed to the credit of stockholders, subject to withdrawal on demand; provided, however, there shall not be included in the value of the capital stock any sums representing debts, notes, bonds and mortgages due and payable; nor depreciation reserves, bad debt reserves, nor reserves representing valuation accounts, nor redeemable preference shares issued by a railroad pursuant to Section 506 of the Railroad Revitalization and Regulatory Reform Act of 1976. But in no case shall the franchise tax so computed be less than Twenty-five Dollars ($25.00) for the period covering which the return is filed. In no case shall the determined capital in Mississippi be less than the assessed value of the real estate and tangible personal property in Mississippi for the year preceding the year in which the return is due.

1985 Miss.Laws 521, § 4 (emphasis added). In determining the amount of capital as defined in § 27-13-9, Miss.Code Ann. § 27-13-11 must be read in conjunction therewith. During the period of assessment in question, § 27-13-11 read as follows:

For the purpose of determining the amount of capital, as defined in Section 27-13-9, Mississippi Code of 1972, as amended, the book value of accounts as regularly employed in conducting the affairs of the corporation shall be accepted as prima facie correct, except where the commissioner determines that the book value does not properly reflect capital employed in this state and in that situation the commissioner's determination of capital shall be prima facie correct.

If any organization has cause to believe that the calculations required on the return 1985 Miss.Laws 521, § 5 (emphasis added).

prescribed are not sufficiently informative or do not properly reveal the true franchise or excise tax to be due as measured by the value of the capital of the organization, or shall feel aggrieved at the requirements upon it for information or tax, then such...