Opinion ID: 2056165
Heading Depth: 1
Heading Rank: 2

Heading: the wishek steel and mfg. co. issue

Text: The Wishek Steel and Manufacturing Company (Wishek) was incorporated as a North Dakota corporation on August 31, 1969. The taxpayers in the instant case owned shares of Wishek stock which they sold during 1976, and the Commissioner asserts that the taxpayers owe additional state taxes with regard to the sale of their Wishek stock. The decision of the Commissioner to assess additional taxes, dated May 9, 1979, was appealed to the Burleigh County District Court by the taxpayers. In its judgment, dated April 21, 1980, the Burleigh County District Court affirmed the Commissioner's determination, and the taxpayers have filed a cross-appeal from that part of the district court's judgment which affirms the Commissioner's decision. We reverse the district court's decision on this matter. For 1976, Wishek elected to be taxed as a Subchapter S corporation for federal income tax purposes. During that year, Wishek had undistributed earnings for which each shareholder paid his proportionate share of individual federal income taxes, and, pursuant to Section 1376 of the 1954 Internal Revenue Code, each taxpayer's stock basis was increased by the amount of undistributed earnings of the corporation upon which he paid federal individual income tax. Each taxpayer, during 1976, sold his shares of stock in Wishek. For federal individual income tax purposes, each taxpayer reported a gain or loss from the sale of such stock determined by deducting his basis in the stock from the amount received. As noted previously, each taxpayer's basis in the stock had been stepped-up by the amount of corporate undistributed earnings upon which the taxpayer had paid federal income tax. Each taxpayer's reported gain or loss from the sale of the Wishek stock was correspondingly affected by the stepped-up basis. On their North Dakota state individual income tax returns, the taxpayers used federal taxable income as the starting point for computation of their state income tax. The federal taxable income figure used by each taxpayer included the gain or loss, reported by the taxpayer from the sale of his Wishek stock, derived by deducting the taxpayer's stepped-up basis in the stock from the amount received. However, during 1976 Wishek elected, pursuant to Section 57-38-01.4(2), N.D.C.C., to be taxed for North Dakota state tax purposes as a regular corporation and not as a Subchapter S corporation. Consequently, the 1976 undistributed earnings of the corporation were subject to state corporate income taxes but were not taxed on the taxpayer's individual state income tax returns. Upon auditing the taxpayer's state income tax returns, the Commissioner concluded that the taxpayers were not entitled, for state tax purposes, to use the stepped-up basis in determining the gain or loss to be realized on the sale of their Wishek stock. Accordingly, the Commissioner determined that each taxpayer must increase the federal taxable income figure used on the state tax return to reflect the disallowance of the stepped-up basis on the Wishek stock. The Commissioner concluded that because the taxpayers were not subjected to state income tax on the undistributed earnings of the corporation a step-up of their stock basis was unwarranted. The North Dakota tax statutes clearly provide that federal taxable income is the starting point for the computation of state income tax by all taxpayers. Section 57-38-01(20), N.D.C.C.; Section 57-38-01.1, N.D.C.C.; Lanterman v. Dorgan, 255 N.W.2d 891 (N.D.1977). An adjustment to the federal taxable income figure cannot be made on the state tax return unless such adjustment is expressly provided by statute. Section 57-38-01(20), N.D.C.C.; see also, Hardy v. State Tax Commissioner, 258 N.W.2d 249 (N.D.1977). Consequently, the ultimate question to be resolved with respect to this issue is whether or not our statutes provide for an adjustment to federal taxable income to reflect differential treatment of a taxpayer's stock basis in a corporation which elects Subchapter S treatment for federal tax purposes and regular tax treatment for state tax purposes. Upon reviewing our tax statutes, we have found no such provision, nor has the Commissioner directed us to any statutory language which would allow such an adjustment. Accordingly, we reverse that part of the district court's judgment which affirms the Commissioner's determination to assess additional taxes against the taxpayers with respect to their sale of Wishek stock. In accordance with this opinion, the judgment of the district court is affirmed in part and is reversed in part. SAND, PAULSON and PEDERSON, JJ., concur.