Opinion ID: 1717541
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Heading: The Statutory Interpretation Issue (IDOR's Appeal).

Text: We first consider IDOR's appeal challenging the district court's interpretation of 1982 Iowa Acts chapter 1206, section 1, currently codified as Iowa Code section 422.35(10) (1987). That statute reads in context as follows: The term net income means a taxable income before the net operating loss deduction, as properly computed for federal income tax purposes under the Internal Revenue Code of 1954, with the following adjustments: [Subtraction of interest and dividends on federal securities and other items exempt from state taxation] [Addition of deductions taken on the federal return which are not deductible under state law including the following:] .... (10) ... the amount of windfall profits tax deducted under section 164(a) of the Internal Revenue Code of 1954. In a petition filed pursuant to Iowa Code section 17A.9 (1983), Shell requested a declaratory ruling from IDOR that the add back provision contained in section 422.35(10) is limited to those situations where an oil producer relied specifically on section 164(a) of the Internal Revenue Code of 1954 as the basis for deducting its federal windfall profits tax liability for federal income tax purposes. [1] Under the interpretation proposed by Shell and adopted by the district court, section 422.35(10) is not applicable if a taxpayer excludes the federal windfall profits tax from gross income on its federal return as an ordinary and necessary business expense deductible under section 162(a) of the Internal Revenue Code of 1954, or as part of the taxpayer's cost of goods sold subtracted from gross receipts in order to obtain gross profit. [2] The formal ruling issued by IDOR in response to the petition for declaratory relief stated, in part, as follows: [I]t is clear that whether the WPT constitutes a deduction for Iowa income tax purposes is a matter of legislative grace and depends upon legislative intent to allow or disallow it as a deduction. Even if a federal tax is paid by a taxpayer from its profits or otherwise constitutes an expense of doing business, for state income tax purposes, such federal tax is not per se deductible unless authorized by statute. To say that, in light of [section 422.35(10)], the WPT is still deductible by [Shell] as a cost of goods sold or a business expense, would result in rendering [the statute] meaningless.... To the extent it is deductible on [Shell's] federal income tax return for tax years 1981 and thereafter, it must be added back upon its Iowa income tax returns for the same tax periods. Such was the clear and obvious intention of the legislature. After hearing Shell's petition for judicial review under section 17A.19, the district court reversed IDOR's declaratory ruling and concluded as follows: [IDOR] argues that [section 422.35(10) ] is ambiguous. It argues that the legislature may have intended to describe the windfall profits tax as an item that must not be considered anywhere in computing Iowa taxable income, regardless of under what section of the Internal Revenue Code the WPT was deducted. The statute, however, contains no such ambiguity. It does not refer to what could be deducted under section 164(a) but in effect what has been deducted under section 164(a). The statute is specific in defining which or what portion of the windfall profits tax must be added back. It is that amount deducted under section 164(a) of the Internal Revenue Code of 1954. Applying basic rules of construction the court concludes that only WPT deducted under section 164(a) of the Internal Revenue Code of 1954 need be added back under the plain language of [the statute]. In seeking to overturn the district court's decision, IDOR argues in this court that application of [422.35(10)] should not depend upon either taxpayer treatment of WPT in the taxpayer's financial reports or taxpayer reliance upon § 164(a)(5) as authority to treat WPT on the federal level. Such application causes inequitable and disparate taxation and frustrates the purpose of the Iowa income tax law. By contrast, [IDOR's] interpretation... treats all corporate WPT taxpayers alike, regardless of how those taxpayers treat the WPT in their financial reports and regardless of whether those taxpayers rely upon IRC §§ 471, 164, or 162 as authority to recognize their WPT for federal income tax purposes. We agree with this argument as to certain issues in the case and not as to others. It should be explicitly stated that in our determination of these issues we make no effort to determine whether Shell is correct in asserting that it may elect, on its federal return, to deduct the federal windfall profits tax liability as an ordinary and necessary business expense instead of a deductible tax. Nor do we determine whether it may elect, under federal law, to schedule the windfall profits tax liability as part of its cost of goods sold. [3] We assume, as did IDOR in the requested ruling, that those elections are available under federal law. In seeking to overturn the district court's decision, IDOR argues that it should make no difference in the application of section 422.35(10) whether the amount of windfall profits tax liability deducted on an oil producer's federal return is shown as taxes on line 17 of federal form 1120 or as scheduled business expenses on line 20. In either instance, it is an amount claimed as a deduction from total income in order to arrive at federal taxable income. Because the point of beginning for reporting income on the Iowa corporation return is net income per federal return, [4] this would result in a deduction of the federal windfall profits tax for Iowa income tax purposes were it not for the add back feature of section 422.35(10). A court construing a statute to ascertain legislative intent must not only consider the language used, but must also take account of the object sought to be accomplished and the problems sought to be remedied and arrive at a construction that will best effect its purpose. Kelly-Springfield Tire Co. v. Iowa State Bd. of Tax Review, 414 N.W.2d 113, 115 (Iowa 1987); In re Girdler, 357 N.W.2d 595, 597 (Iowa 1984); Lau v. City of Oelwein, 336 N.W.2d 202, 203 (Iowa 1983). If the legislation under consideration is viewed in this light, its obvious intent is to deny a deduction for an oil producer's federal windfall profits tax liability in computing its Iowa net income subject to tax. Congress dealt specifically with federal deductibility of that tax in section 164(a) of the Internal Revenue Code of 1954, and, as a logical consequence of that fact, our legislature identified this item of nondeductible expense by referring to that statute. In establishing the nondeductibility of this item, the legislature was not concerned with which line of the federal return the deduction has been listed. We conclude that where payment (or where permitted accrual) of the federal windfall profits tax has been taken by an oil producer as a deduction in arriving at net income on its federal return, it must be added back as an appropriate other addition in computing Iowa corporation income tax liability. The declaratory ruling issued by IDOR was correct on this issue. To the extent that the district court's decision is inconsistent with this conclusion, it is modified. The declaratory ruling also dealt with the hypothetical inclusion of the windfall profits tax as an inventoriable cost. For purposes of applying section 422.35(10), we find this situation to be quite different from the issue previously discussed. The tax reporting consequences of an inventoriable cost are clearly not the same as those which arise from an allowable deduction. Deductions, where allowable, match expenses paid (or where permitted accrued) during a particular taxable year with income attributable to that year. In contrast, the tax benefit derived from scheduling expenses as inventoriable costs may not be determined until the year in which the particular product is sold. In the present case, if the petroleum products on which the windfall profits taxes were imposed remained in the oil producer's inventory, there may be no beneficial tax consequence to the producer in the same taxable year. It would require more than a modest amount of judicial legislation to extend the limitation described in section 422.35(10) to the area of inventoriable costs. We therefore conclude that if the inventory expense route is utilized in lieu of a deduction from gross income nothing has occurred which triggers the application of section 422.35(10). On this issue, the district court's decision is in accord with our conclusions and is affirmed. Because we read Shell's argument as suggesting otherwise, [5] we hasten to add that an oil producer must have in fact claimed the amount of the windfall profits tax as an inventory cost for federal tax purposes and not taken that expense as a deduction in order to avoid the consequences of section 422.35(10). It is not sufficient to show that it could have taken that approach in preparation of the federal return.