Title: NORTHERN NAT. GAS v. Commissioner of Revenue

State: minnesota

Issuer: Minnesota Supreme Court

Document:

251 N.W.2d 125 (1977) NORTHERN NATURAL GAS COMPANY, Relator, v. COMMISSIONER OF REVENUE, Respondent. No. 46544. Supreme Court of Minnesota. February 18, 1977. *126 Lindquist & Vennum and David E. Krause, Minneapolis, for relator. Warren Spannaus, Atty. Gen., C. H. Luther, Deputy Atty. Gen., Arthur J. Glassman, Spec. Asst. Atty. Gen., Dept. of Revenue, St. Paul, for respondent. Heard before KELLY, TODD and WINTON, JJ., and considered and decided by the court en banc. TODD, Justice. Northern Natural Gas Company (Northern) filed a consolidated Federal income tax return for the tax years in question. Northern and each of its subsidiaries prepared their own separate tax returns. The subsidiaries forwarded their returns to Northern, together with a check payable to Northern in an amount equal to the tax due if the subsidiary had filed separately. Some of the subsidiaries incurred losses which had the effect of reducing the overall tax liability on the consolidated tax return. Therefore, the payments received by Northern from its subsidiaries, when added together, exceeded the amount of actual tax paid by the group on their consolidated return. Northern distributed the "excess payment" to the "loss subsidiaries" in proportion to the amount that each subsidiary's individual loss decreased the group's ultimate tax liability on the consolidated return. On its Minnesota income tax return, Northern claimed its share of the payments made to reimburse the loss subsidiaries for consumption of their individual losses on the consolidated Federal return as a deduction under Minn.St.1969, § 290.09, subd. 4. This claimed deduction was disallowed by both the commissioner of taxation and the Tax Court. We affirm. The matter was submitted to the Tax Court accompanied by a stipulation of facts that provided: It is a well-established rule in the law of income taxation that deductions are a matter of legislative grace and therefore statutes that provide for such deductions should be strictly construed. See, Commr. of Int. Rev. v. Nat. Alfalfa Dehydrating & Mill. Co., 417 U.S. 134, 94 S. Ct. 2129, 40 L. Ed. 2d 717 (1974); Commissioner v. Sullivan, 356 U.S. 27, 78 S. Ct. 512, 2 L. Ed. 2d 559 (1958). A necessary corollary of this general rule is that a taxpayer claiming to be entitled to a deduction is required to demonstrate that his claim is allowable under the terms of the statute. See, Interstate Transit Lines v. Commr. of Int. Rev., 319 U.S. 590, 63 S. Ct. 1279, 87 L. Ed. 1607 (1943). The Tax Court, in disallowing Northern's claimed deductions, concluded that the payments made to the loss subsidiaries were not "taxes" within the meaning of Minn.St. 1969, § 290.09, subd. 4. In reaching this determination, the Tax Court relied on its *129 earlier decision in Minnesota Amusement Co. v. Commr. of Taxation, Docket Nos. 663 and 666, entered September 24, 1957. In Minnesota Amusement, a corporate subsidiary taxpayer sought to deduct on its Minnesota income tax return as "taxes paid" the amount forwarded to the parent corporation which represented the tax liability on its individual return. However, as in the present case, the use of several subsidiaries' net operating losses resulted in a reduction of the group's ultimate liability on the consolidated return. In limiting the subsidiary's deduction to a sum which represented its proportionate share of the tax payment actually transmitted to the Federal government by the consolidated group, the Board of Tax Appeals (now the Tax Court) stated: Although the Tax Court has had the opportunity to interpret the words "taxes paid," this is the first time the question has been presented to this court. Northern argues that the aforementioned decisions of the Tax Court should be disregarded since they did not directly address the issue of the deductibility as "taxes paid" of amounts distributed by a parent corporation to loss subsidiaries. While factual distinctions do exist between the present case and the prior Tax Court decisions, we fail to perceive any reason why the Tax Court's interpretation of the words "taxes paid," appearing in Minn.St.1969, § 290.09, subd. 4, is inapplicable. Other state courts have considered cases involving statutory language similar to our statute and the position advocated by Northern has been rejected. Representative of these cases is Continental Tel. Co. of Utah v. State Tax Comm., Utah, 539 P.2d 447 (1975), in which the Supreme Court of Utah was faced with the issue of whether subsidiaries can deduct, as "taxes paid" on their Utah income tax returns, payments transferred to the parent corporation in connection with the preparation and payment of a consolidated tax return. The Utah State Tax Commission had reduced the amount of the subsidiaries' claimed deductions to the proportion that their Federal taxable income would bear to the total amount of Federal tax actually paid by the parent corporation on the consolidated return. In affirming the tax commission's determination, the Utah Supreme Court enunciated a statutory interpretation with which we agree (539 P.2d 451): The only case which supports Northern's position is the Kansas decision in Cities *130 Service Gas Co. v. McDonald, 204 Kan. 705, 466 P.2d 277 (1970). In Cities Service, a profitable Kansas subsidiary corporation forwarded to the parent corporation its separate income tax return together with a check for an amount equal to the subsidiary's separate Federal tax liability. However, as a result of several other subsidiaries suffering net operating losses for the tax year in question, the consolidated income tax return filed by the parent on behalf of the group generated a tax refund from the Federal government. The Kansas subsidiary sought to deduct, on its Kansas income tax return, the amount it forwarded to the parent corporation. Despite the fact that the consolidated group never paid the Federal government any tax for the tax year in question, the Kansas Supreme Court allowed a deduction, under its statute, for the amount paid by the subsidiary to the parent corporation. In the present case, the Tax Court was able to distinguish the Cities Service decision based upon a difference in statutory language between the Kansas statute and Minn.St.1969, § 290.09, subd. 4. The Kansas statutory scheme would allow a deduction for Federal income taxes "paid or incurred." Such language does not appear in our statute. The inclusion of this additional language could be construed to allow a deduction of an amount not actually transmitted to the Federal government as a tax payment. However, we have reviewed the Cities Service decision at length and are not persuaded that it represents a proper application of legal principles irrespective of the additional statutory language. Northern sought to bolster its position through the presentation of competent evidence that the accounting procedure involved herein was consistent with generally accepted accounting methods. We do not dispute this testimony. The accounting methods employed by Northern represent the proper management of internal cash flow once the parent elects to file a consolidated income tax return. However, there are no requirements under Federal law that the loss subsidiaries be reimbursed for the consumption of their losses by the group to reduce the overall tax liability of the group on the consolidated income tax return. Thus, we hold that the words "taxes paid" in Minn.St.1969, § 290.09, subd. 4, only allow a deduction for tax payments actually transmitted to the governmental taxing entity. Although Northern's reimbursement procedure may be founded upon an efficient and accepted accounting practice, to treat this voluntary payment in the same manner as funds compelled to be paid to the United States government under its tax laws represents, to this court, an illogical extension of the rather simple term "taxes paid" as it appears in our statute. Affirmed. SHERAN, C. J., took no part in the consideration or decision of this case. [1] This statute was amended by Ex.Sess.L.1971, c. 31, art. 6, § 6, which made Federal income taxes payable by corporations nondeductible in computing Minnesota income tax. [2] Accord, Prom, Inc. v. Commr. of Taxation, Docket No. 755, entered September 22, 1960. [3] Accord, Buick Motor Co. v. City of Milwaukee, 48 F.2d 801 (7 Cir. 1931), certiorari denied, 284 U.S. 655, 52 S. Ct. 34, 76 L. Ed. 556; Standard Oil Co. v. State, 55 Ala.App. 103, 313 So. 2d 532 (1975); State v. Western Grain Co., 55 Ala.App. 690, 318 So. 2d 719 (1975); Trunkline Gas Co. v. Collector of Rev., 182 So. 2d 674 (La.App.1965).