Union Pacific R. Co. v. State Tax Com'n

• Citation: 670 P.2d 878,105 Idaho 471
• Decision Date: 03 October 1983
• Docket Number: No. 14024,14024
• Parties: UNION PACIFIC RAILROAD COMPANY, Plaintiff-Respondent, Cross-Appellant, v. The STATE TAX COMMISSION of the State of Idaho, Defendant-Appellant, Cross- Respondent.
• Court: United States State Supreme Court of Idaho

Page 878

670 P.2d 878

105 Idaho 471

UNION PACIFIC RAILROAD COMPANY, Plaintiff-Respondent, Cross-Appellant, v. The STATE TAX COMMISSION of the State of Idaho, Defendant-Appellant, Cross- Respondent.

No. 14024.

Supreme Court of Idaho.

Oct. 3, 1983.

Jim Jones, Atty. Gen., Lynn E. Thomas, Sol. Gen., Theodore V. Spangler, Deputy Atty. Gen., Boise, for defendant-appellant, cross-respondent.

D.A. Bybee, of Green, Service, Gasser & Kerl, Pocatello, F. Kent Kalb, Broomfield, Colo., for plaintiff-respondent, cross-appellant.

DONALDSON, Chief Justice.

This case concerns Union Pacific Railroad Company's (Union Pacific's) 1942 State Income Tax Return. Union Pacific filed the return in a timely manner and at that time no adjustments to the original return were made by the State or Union Pacific. However, federal proceedings and litigation on Union Pacific's 1942 federal income taxes were not concluded until 1977. On June 28, 1977, Union Pacific as required by I.C. § 63-3069, provided the State Tax Commission with notice of the final determination of federal taxes. Such a notice reopens for one year the statute of limitations both for assessment of additional state taxes and for claiming refunds of taxes. Within the one-year period Union Pacific filed a claim for refund of taxes allegedly resulting from the final federal determination. After reviewing the original return, the Tax Commission's audit staff disallowed the claimed refund and issued a Notice of Deficiency Determination asserting additional taxes due.

As permitted by law, Union Pacific sought administrative relief from the Commission by filing a petition for redetermination. Following an informal conference on the matter the Commission generally affirmed the taxes assessed and the deficiency notice subject to a small mathematical correction. Thereafter, Union Pacific filed an action in the district court seeking review of the Tax Commission's decision. The district court determined that (1) the State Tax Commission correctly assessed additional tax to Union Pacific for the year of 1942 and (2) Union Pacific should not be required to pay any interest on the tax assessed. The Commission filed its Notice of Appeal concerning the interest issue and Union Pacific cross-appealed from the court's determination that additional taxes were due.

Before deciding the issue raised on appeal by the Tax Commission of whether or not Union Pacific should be required to pay any interest on the tax assessed, it is necessary for this Court to first determine the cross-appeal concerning whether or not additional taxes are due. The issue set forth by Union Pacific on its cross-appeal raises the question of whether Union Pacific's 1942 federal income tax is to be designated a deduction from apportioned income, allocated income, or both.

In 1942 Union Pacific was subject to the Property Relief Act of 1931. Under § 16 of the Act, a multi-state taxpayer has both apportioned income and allocated income. Apportioned income, as it is currently defined, is income that cannot be specifically attributed to any one state so a formula is used to apportion or divide that income among the various states in which the taxpayer conducts business. Allocated income is that which can be wholly attributed to a specific jurisdiction. According to § 29(3) of the Act, Union Pacific was able to treat the amount of its federal income tax as a deduction on its state income tax return. Union Pacific treated the federal income tax as a deduction solely against apportioned income and requested a $66,826.45 refund. The State Tax Commission instead split the federal income tax, applying a portion of it as a deduction from apportioned income and the other portion of it as a deduction from allocated income. This treatment resulted in an additional tax liability of $47,935 which the State Tax Commission assessed against Union Pacific for the year 1942. In addition, the Commission asserted it was entitled to the interest from 1942 in the amount of $105,495.

On cross-appeal, Union Pacific argues that the district court erred in holding that the federal income tax should be deducted from all income instead of only apportioned income. Union Pacific argues that even though deducting the federal income tax from both apportioned and allocated income may be the better practice and the practice that was followed after 1947, neither the statutes nor the regulations in effect in 1942 mandated such a result. The appellant, Tax Commission, claims that the statute and regulations in use in 1942 contain nothing to indicate that the federal income tax expense deduction should be singled out for any special treatment. A reading of the statute and regulations indicates that if the deductible tax expense can be allocated specifically to a state, it is deductible from the income allocated to that state and not from apportioned income. On the other hand, if the expense is not required to be directly allocated, and the expense cannot be specifically attributed to any one state, it is an apportionable expense, deductible from apportioned income only. Union Pacific claims that it is more reasonable to read the regulations and statute as requiring the federal income tax expense to be deducted only from apportioned income because there is no formula or explanation that can be used to assign a portion, or to determine the appropriate portion, of the federal income tax expense to be deducted from allocated income.

The trial court in its memorandum decision and order found that "reasonableness requires that the position taken by the Tax Commission be upheld. The federal income tax is an expense which is reasonably and unmistakenably related to the earning of income of whatever type and wherever earned. The federal tax obtains regardless of whether it is allocable or apportionable income that generates the tax. The position maintained by the plaintiff is fraught with much uncertainty and subject to too many vagaries depending upon the taxpayer's economic needs to be considered the reasonable intent of the legislature in composing a workable, uniform comprehensive income tax program."

The precise statutory language applicable to the handling of the federal income tax deduction in 1942 reads, in pertinent part, as provided in I.C.A. § 61-2429(3): ¹

"61-2429. Corporations--Deductions allowed.--In computing the net income of a corporation subject to the tax imposed by section 61-2425 there shall be allowed as deductions:

"....

"3. Taxes paid or accrued within the taxable year except (a) income taxes imposed by this chapter, (b) taxes assessed against local benefits of a kind tending to increase the value of the property assessed, (c) any taxes based upon the capital stock of a corporation or association imposed by the State of Idaho under any law now in force or hereafter enacted; provided, that no taxes incurred prior to January 1, 1931, and properly chargeable against business operations of prior years shall be allowed as deductions hereunder. The deduction allowed by this paragraph shall be allowed in the case of taxes imposed upon a shareholder of a corporation upon his interest as shareholder, which are paid by the corporation upon his interest as shareholder, which are paid by the corporation without reimbursement from the shareholder, but in such cases no deduction shall be allowed the shareholder for the amount of such taxes. For the purpose of this paragraph, estate, inheritance, legacy, and succession taxes accrue on the due date thereof except as otherwise provided by law of the jurisdiction imposing such taxes, and shall be allowed as a deduction only to the estate ...."

And I.C.A. § 61-2416 provided in pertinent part:

"61-2416. Net income of non-resident individuals, and any corporation subject to tax under this chapter.

"a. In the case of a non-resident individual to the extent that he has a business situs in the state of Idaho, or any corporation subject to tax under this chapter, the following items of gross income shall be treated as income from sources within the state of Idaho:

"....

"b. From the items of gross income specified in subdivision a, there shall be deducted expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the State.

"c. Items of gross income, expenses, losses and deductions, other than those specified in subdivision a, and b, shall be allocated or apportioned to sources within or without the state under rules and regulations prescribed by the commissioner. Where items of gross income are separately allocated to sources within the state, there shall be deducted (for the purpose of computing the net income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the state. In the case of gross income derived from sources partly within and partly without the state, the net income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses or other deductions which can not definitely be allocated to some item or class of gross income; and the portion of such net income attributable to sources within the state may be determined by processes or formulas of general apportionment...