White v. Kimberly-Clark Corp.

Decision Date12 March 1986
Docket NumberKIMBERLY-CLARK
Citation503 So.2d 296
PartiesJames C. WHITE, as Commissioner of Revenue of the State of Alabama v.CORPORATION. Civ. 5131.
CourtAlabama Court of Civil Appeals

Charles A. Graddick, Atty. Gen., and B. Frank Loeb, Chief Counsel, and Mark D. Griffin, Asst. Counsel, Dept. of Revenue, and Asst. Attys. Gen., for appellant.

Warren H. Goodwyn and William E. Shanks, Jr. of Balch & Bingham, Birmingham, for appellee.

WRIGHT, Presiding Judge.

This is a corporate income tax case.

James C. White, Commissioner of Revenue of the State of Alabama, appeals the order of the circuit court granting a writ of mandamus requiring him to refund to Kimberly-Clark Corporation (taxpayer) amounts representing overpayments of income tax for the years 1977, 1978, 1979, 1980 and 1981.

In this appeal, the Commissioner alleges that three issues were incorrectly decided by the circuit court. The facts relevant to each issue have been stipulated by the parties and will be related as each issue is discussed.

The stipulated facts relevant to the first issue are as follows:

"1. The taxpayer is a corporation organized and existing under the laws of the State of Delaware, with its principal executive office in Irving, Texas, and is qualified to do business in the State of Alabama.

"....

"3. As a foreign corporation for State of Alabama income tax purposes, the taxpayer apportioned its income to the State of Alabama for the years 1977 to 1981 in accordance with the three-factor formula used in Department of Revenue regulation 810-3-31-.02 which is applicable to foreign corporations with multistate operations.

"4. The taxpayer spent the following amounts for operating and maintaining pollution control equipment or devices (noncapital pollution control expenditures) within Alabama:

                Year      Amount
                ----  ----------
                1977  $  734,448
                1978     992,176
                1979   1,095,521
                1980   1,781,789
                1981   1,385,028
                

.... Pursuant to Ala.Code § 40-18-35(13), the taxpayer elected to deduct all of these amounts invested in pollution control facilities from income apportioned to the State of Alabama.

"5. For Alabama income tax purposes, the taxpayer deducted the noncapital pollution control expenditures from income subject to apportionment."

Section 40-18-35, Code of Alabama 1975, sets out certain deductions that may be taken by a corporation when computing its net income. Generally, if the corporation does business both "within and without" the state of Alabama, these specified deductions are allowed only "to the extent that, such items are referable to or arise in connection with income ... from sources within the state of Alabama." Id. These expenses are therefore apportioned in order to "fairly reflect the net income of the corporation attributable to its operations in Alabama." Id. However, no such apportionment is required when a foreign corporation elects to take a deduction under § 40-18-35(13), Code 1975. This subsection allows a deduction for:

"All amounts invested during the taxable year in all devices, facilities or structures and all identifiable components thereof or materials for use therein, used or placed in operation in the state of Alabama, or to be used or placed in operation in the state of Alabama, acquired or constructed primarily for the control, reduction or elimination of air or water pollution; provided, that in lieu of deducting such amounts, the corporation may elect to amortize all such amounts over such period, not exceeding the useful life of devices, facilities or structures for which such amounts were expended, as it specifies in its tax return respecting the taxable year during which such amounts were expended, in which case it shall be entitled to appropriate deductions for the taxable years so specified; and provided further, that the taking of any deduction authorized by this subdivision shall be optional with the corporation; and that if any such deduction is taken with respect to such devices, facilities or structures, such corporation shall not be permitted any allowance for depreciation or obsolescence thereof otherwise allowable under this section."

On appeal and in the court below, the taxpayer has taken the position that both capital and noncapital pollution control expenditures are deductible under § 40-18-35(13), Code of Alabama 1975. Under this position, the taxpayer argues that the only question remaining is whether these expenses are deductible from apportionable income (income before application of the apportionment fraction) or deductible from apportioned income (income after application of the apportionment ratio). See Department of Revenue regulation 810-3-31-.02; Kimberly-Clark Corporation v. Eagerton, 445 So.2d 566 (Ala.Civ.App.1983). The Commissioner, on the other hand, takes the position that § 40-18-35(13) does not allow for the deduction of any noncapital pollution control expenditures. Instead, he argues that any such noncapital expense is deductible, if at all, only as an ordinary and necessary business expense under § 40-18-35(1). The trial court accepted the taxpayer's position. For a number of reasons, we disagree and reverse on this issue.

In interpreting a statute, it is the court's duty to ascertain and give effect to the legislative intent as expressed in the words of the statute. Kimberly-Clark, supra; Winstead v. State, 375 So.2d 1207 (Ala.Civ.App.), cert. denied, 375 So.2d 1209 (Ala.1979). Further, when interpreting a taxation statute, exemptions and deductions must be strictly construed against a taxpayer and in favor of the taxing authority. State v. Hunt Oil Company, 49 Ala.App. 445, 273 So.2d 207, cert. denied, 273 So.2d 214 (Ala.1972); State v. Zewen, 270 Ala. 52, 116 So.2d 373 (1959).

Given these rules of construction, we consider that the legislature did not intend to allow for the deduction of both capital and noncapital expenditures under § 40-18-35(13).

It is generally accepted that a capital expenditure is one made for long-term betterments or additions. See I.R.C. § 263. Such an expenditure is in the nature of an investment chargeable to the future and should be added to the basis of the property improved. Id. These expenditures may not be deducted as ordinary and necessary business expenses. Instead, these must be depreciated over the useful life of the asset. See §§ 40-18-16, -35(6), Code 1975. Thus, a logical relationship exists between a capital expenditure and the tax concepts of "amortization," "useful life," "depreciation," and "obsolescence." No such logical relationship exists between these concepts and a noncapital expenditure.

In § 40-18-35(13), the legislature has allowed that a corporation may elect, "in lieu of" taking the allowed deduction, "to amortize all such amounts over such period, not exceeding the useful life of [the] devices, facilities or structures." Further, if the corporation takes the deduction, it "shall not be permitted any allowance for depreciation or obsolescence thereof." From this language we determine that the legislature was only concerned with balancing the effect of a deduction allowed for capital expenditures. We are convinced that the legislature intended that a deduction be allowed under § 40-18-35(13) only for capital pollution control expenditures.

This interpretation of § 40-18-35(13) is supported by the legislature's use of the term "invested" as a description of the expenditure they intend to make deductible under the section. The terms "invest," "invested" or "investment" are generally associated with capital expenditures made to acquire property or other assets. Cf. Hollingsworth & Whitney Co. v. State, 241 Ala. 96, 1 So.2d 387 (1941). See generally Black's Law Dictionary 741 (rev. 5th ed. 1979); Words and Phrases, "Invest, Investment." These terms are generally not associated with noncapital expenditures. Under the strict rules of construction applicable to this case, we cannot, as did the circuit court, construe the word "invested" to mean any expenditure made, whether it be capital or noncapital.

Department of Revenue regulation § 810-3-35-.01(4) presents an interpretation of § 40-18-35(13) that similarly limits the deduction to capital expenditures. This regulation was passed in 1972 and has heretofore stood unchallenged. Under Alabama law, a tax regulation that has stood unchallenged for a long period of time may be given favorable consideration by the courts. State v. Hunt Oil Company, supra; State v. Zewen, supra. We thus find further support for our interpretation of § 40-18-35(13).

Finally, our interpretation of § 40-18-35(13) is not contrary to the supreme court's decision in Eagerton v. Courtaulds North America, Inc., 421 So.2d 104 (Ala.1982).

In Courtaulds, the supreme court upheld the circuit court's decision that fuel oil used in two pollution control devices was a "material" for purposes of applying the sales and use tax exemptions provided by §§ 40-23-4(16) and 40-23-62(18), Code 1975. We do not find this decision controlling on the issue in the current case.

The code sections construed in Courtaulds do not lend themselves to any issue based upon a distinction between a capital and a noncapital expenditure. There is no language even vaguely similar to that contained in § 40-18-35(13) wherein the legislature discusses those tax concepts relating to purely capital expenditures, i.e., "amortization," "useful life," "depreciation" and "obsolescence." Also absent from these sections is any language concerning amounts "invested" or even "expended." There is simply too great a difference in the statutory language of §§ 40-23-4(16), -62(18) and § 40-18-35(13) for the supreme court's decision in Courtaulds to be helpful in construing § 40-18-35(13).

The only stipulated facts relevant to a discussion of the second issue are as follows:

"7. In accordance with the three-factor formula used in Department of Revenue regulation 810-3-31.02, taxpayer's...

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