Title: Ex Parte Sonat, Inc.

State: alabama

Issuer: Alabama Supreme Court

Document:

752 So. 2d 1211 (1999)
Ex parte SONAT, INC.
(Re Alabama Department of Revenue v. Sonat, Inc.).
1961585.

Supreme Court of Alabama.
August 27, 1999.
Roy J. Crawford and L. Murray Alley of Cabaniss, Johnston, Gardner, Dumas & O'Neal, Birmingham, for petitioner.
Mark D. Griffin, asst. counsel, Department of Revenue, and asst. atty. gen.; and Jeff Patterson, asst. counsel, Department of Revenue, and asst. atty. gen., for respondent.
PER CURIAM.
We granted the petition of Sonat, Inc., for the writ of certiorari to review the judgment of the Court of Civil Appeals. The Jefferson Circuit Court had ordered the Alabama Department of Revenue (the "Department") to set aside its final assessment of Alabama corporate income tax against Sonat for the calendar year 1988 and to refund $12,153,702, plus interest, in Alabama corporate income tax collected from Sonat. The Court of Civil Appeals reversed that judgment. Alabama Dep't of Revenue v. Sonat, Inc., 752 So. 2d 1206 (Ala.Civ.App.1997). We reverse the judgment of the Court of Civil Appeals and remand.
At issue is the interpretation of Ala. Code 1975, § 40-18-35(a)(14), which permits a corporation, in computing its net income, to deduct dividends received from certain affiliated corporations. For the tax year 1988, § 40-18-35(a)(14) provided in pertinent part:[1]
Act No. 88-954, § 2, 1988 Ala. Acts (Second Extraordinary Session) 669, 677, 679-80 (applicable to all tax years or periods beginning after December 31, 1987). Sonat claims, in computing its net income for 1988 Alabama income-tax purposes, that it is entitled to deduct the dividend of $185,000,000 that it received in 1988 from its wholly owned subsidiary Sonat Offshore Drilling, Inc. ("SODI"). The Department contends that Sonat is not entitled to deduct this dividend and that the Court of Civil Appeals properly held that the trial court's allowance of Sonat's dividend deduction on the basis of § 40-18-35(a)(14) was erroneous.
The trial court's "Order and Opinion" explain the procedural history and facts of this case and the disposition in the trial court:
The Court of Civil Appeals reviewed the trial court's judgment with no presumption of correctness:
Alabama Dep't of Revenue v. Sonat, Inc., 752 So. 2d  at 1208. The Court of Civil Appeals agreed with the Department that the trial court's allowance of Sonat's dividend deduction on the basis of § 40-18-35(a)(14) was erroneous, relying upon Sparks v. West Point Mfg. Co., 274 Ala. 102, 145 So. 2d 816 (1962):
Section 40-18-35(a)(14) authorizes a taxpayer parent corporation, in computing its Alabama net income, to deduct from its net income a dividend received from a wholly owned subsidiary corporation that is taxable under Title 40, Chapter 18, Code of Alabama 1975. In Sparks, this Court construed § 402(6), Title 51, Code of Alabama 1940, the predecessor to § 40-18-35(a)(14), as follows:
Sparks, 274 Ala. at 104-05, 145 So. 2d  at 818. The pertinent language of § 40-18-35(a)(14) as it read in 1988 is substantially the same as the pertinent language of former § 402(6).
Sonat argues that under the plain language of § 40-18-35(a)(14) SODI is taxable upon its net income, and, thus, that Sonat is entitled to deduct the dividend it received from SODI.[2] Sonat also argues that the Court of Civil Appeals erred in construing § 40-18-35(a)(14) on the basis of the holding in Sparks. Sonat contends that that court's reliance upon Sparks is misplaced because, Sonat argues, the statute has been significantly changed since Sparks was decided.[3] However, we find *1218 no substantive difference between the language of § 40-18-35(a)(14) as it appeared in § 402(6) at the time of Sparks and as it existed in 1988 that would render the construction given in Sparks inapplicable.
Sonat may deduct the dividend it received from its subsidiary SODI if SODI is "taxable under this chapter [Chapter 18 of Title 40] upon its net income." Ala.Code 1975, § 40-18-35(a)(14) (1988 version). In relevant part, § 40-18-2, as it read in 1988 and as it reads now, provides that a corporation is "taxable under [Title 40, Chapter 18]" if it is qualified to transact business in Alabama or is doing business in Alabama. It is undisputed that SODI both was qualified to do business in Alabama and was doing business in Alabama in 1988.
The Department argues, however, that Sonat is not entitled to deduct the dividend received from SODI because SODI did not pay Alabama income tax on its "net income," as that term was construed in State v. Chesebrough-Ponds, Inc., 441 So. 2d 598 (Ala.1983), but paid Alabama income tax only on the income derived from the workstation lease and not also the income that generated the SODI dividend. Sonat argues that SODI, as a foreign corporation, is required, under the last sentence of § 40-18-34,[4] to include, in gross income, only its income from sources within Alabama. Sonat further argues that the income that generated the dividend came solely from liquidating distributions SODI received from two of its non-U.S. subsidiaries and that these distributions were exempt from Alabama income tax because they qualify for nonrecognition treatment under former Ala.Code 1975, § 40-18-8(i) (presently codified at § 40-18-8(h)).
At issue in Chesebrough-Ponds, Inc. was whether intercompany dividends received by a foreign parent corporation from subsidiaries not domiciled in Alabama should be included as "net income ... from business done both within and without the state of Alabama" under § 40-18-35(3) (now § 40-18-35(a)(3)), which provided for a deduction from "net income," for purposes of computing Alabama income tax, an amount of total federal income tax paid by a foreign corporation doing business in Alabama. The amount of federal income tax deductible by a foreign corporation was determined by an apportionment ratiothe ratio that the net income from business done in Alabama bears to net income from business done both within and without Alabama. This Court interpreted "net income," for purposes of the phrase in § 40-18-35(3), to mean "gross income, as set out in § 40-18-14, from whatever source both within and without the state." Chesebrough-Ponds, Inc., 441 So. 2d  at 604. This Court explained that its interpretation of the term "net income" to mean gross income derived from Alabama and non-Alabama sources was necessary to give effect to legislative intent and to avoid a "nonsensical result." Id. For if a foreign corporation's net income were limited to gross income derived from sources within Alabama, for purposes of the numerator in the apportionment ratio of § 40-18-35(3), then, the Sparks Court said:
Id. Accordingly, this Court held that the intercompany dividends were includable in the parent corporation's gross income for the purpose of calculating the amount of federal income tax deductible under § 40-18-35(3), and, since the intercompany dividends were not deductible under § 40-18-35, they were includable in the parent corporation's net income. Id. at 603.
Thus, the interpretation of "net income" in Chesebrough-Ponds, Inc., is necessarily limited to the particular language and purpose of § 40-18-35(3). That interpretation does not apply to the dividend deduction under § 40-18-35(a)(14), where there is no conflict between the requirement that the subsidiary be taxable upon its net income and the limitation given by the last sentence of § 40-18-34, which provides that in the case of a foreign corporation "gross income" includes only the gross income from Alabama sources.
The Department further argues that SODI's workstation lease was made for the purpose of qualifying Sonat for the deduction under § 40-18-35(a)(14) and thereby avoiding the payment of Alabama income tax by both Sonat and SODI. However, the motivation for the workstation lease does not affect the deductibility of the SODI dividend under § 40-18-35(a)(14). "A taxpayer may resort to any legal method available to it in an effort to diminish the amount of its tax liability." West Point Pepperell, Inc. v. State Dep't of Revenue, 624 So. 2d 579, 582 (Ala.Civ.App. 1992), writ quashed as improvidently granted, 624 So. 2d 582 (Ala.1993) (citing State v. Pullman-Standard Car Mfg. Co., 235 Ala. 493, 179 So. 541 (1938)). Regardless of the purpose of the workstation lease, the fact remains that it was a bona fide leasethe workstation was situated in Alabama and rent was paid to SODI for its use.
Section 40-18-33 defines "net income" as gross income less any allowable deductions. Under § 40-18-34, the income that generated the dividend was not includable in SODI's 1988 gross income because it came from sources outside of Alabama, two of SODI's non-U.S. subsidiaries.[5] Consequently, the only income included in SODI's gross income was the rent it received from the workstation lease. This rental income also constituted SODI's net income. SODI's net income was subject to Alabama corporate income tax and SODI paid Alabama corporate income tax on that net income. Therefore, SODI was "taxable under this chapter upon its net income." Accordingly, Sonat is entitled to deduct the dividend it received from SODI, under Ala.Code 1975, § 40-18-35(a)(14).
REVERSED AND REMANDED.
HOOPER, C.J., and MADDOX, HOUSTON, COOK, SEE, LYONS, BROWN, and JOHNSTONE, JJ., concur.
[1]  Section 40-18-35(a)(14) has been amended twice since 1988, once in 1990 and most recently in 1998, after this Court had granted certiorari review in this case. See Act No. 90-583, § 9, 1990 Ala. Acts 988 (effective for tax years or periods beginning after December 31, 1989); Act No. 98-502, § 1, 1998 Ala. Acts 1083 (effective for all tax years beginning after December 31, 1997).
[2]  On appeal to the Court of Civil Appeals, Sonat argued alternatively that it was entitled to use "combined reporting" of income received by it and its direct and indirect subsidiaries for the tax year 1988 because, it said, it and its direct and indirect subsidiaries are a "unitary business." See Multistate Tax Compact, Ala.Code 1975, § 40-27-1 et seq. Sonat contends that this method of reporting would reduce its overall income-tax liability by $1,898,882. The trial court's judgment did not address the issue of combined reporting, and the Court of Civil Appeals declined to address the issue. We pretermit discussion of the issue, because of our ultimate conclusion that Sonat is entitled to deduct the dividend it received from SODI.
[3]  Sonat reads Sparks as holding that a corporation is entitled to deduct the dividends it receives from its subsidiary only when the subsidiary has paid Alabama income tax on the income from which the dividends were derived. In Sparks, the commissioner of revenue argued for such a construction, but this Court did not so hold in that case. Instead, this Court construed the statute in Sparks to mean that in computing its net income for Alabama income-tax purposes, a corporation is permitted to deduct dividends received from a subsidiary if the subsidiary pays Alabama income tax on its net income. See Sparks, 274 Ala. at 104, 145 So. 2d  at 817-18.
[4]  The last sentence of § 40-18-34, as it read in 1988, provided that "[i]n the case of a foreign corporation, gross income includes only the gross income from sources within this state." In 1998, this sentence was deleted. Act No. 98-502, 1998 Ala. Acts 1083, 1109.
[5]  We need not address whether this income from SODI's non-U.S. subsidiaries, which was in the form of liquidating distributions, was exempt from Alabama corporate income tax under Ala.Code 1975, § 40-18-8(i). If the distributions were exempt, then they would, of course, be included neither in SODI's gross income nor in its net income.