Opinion ID: 1918302
Heading Depth: 2
Heading Rank: 2

Heading: Legislative Intent and The Statutory Scheme

Text: The legislative history of the provision in question is relevant both because `the obligation to pay taxes arises only by force of legislative action,' Acme Reporting Co., supra, 530 A.2d at 712 (quoting 3A SUTHERLAND, supra at § 66.03), and because our deference to the agency's interpretation goes only so far as it is consistent with the legislative intent, see Chung v. District of Columbia Dep't of Consumer and Regulatory Affairs, 751 A.2d 989, 991 (D.C.2000). In that light, it is appellants' interpretation of the statute, and not the District's, which appears to reflect fairly the legislative intent, insofar as it can be divined from the available record. As already mentioned, the provision allowing deductions for NOLs was included in an extensive 1987 enactment in an effort to loosely conform the District's tax code to the IRC while simultaneously ensuring that District income taxes would not increase overall. The Committee report on the amendment made clear that conformity to the federal system was not an overarching goal to be gained at the detriment of the local taxpayer: Bill 7-183 ... continues the District's limited conformity with the federal income tax while returning to the taxpayers the revenue gain which would otherwise accrue to the District as a result of such conformity. REPORT OF THE COUNCIL OF THE DISTRICT OF COLUMBIA COMMITTEE ON FINANCE AND REVENUE ON BILL 7-183, at 1 (May 14, 1987) (Committee Report). Specifically, the Committee contemplated specific deductions to decrease the potential tax burden, noting that [c]onformity will also be maintained in the franchise tax area, with the impact of such conformity being reduced by [ inter alia ] ... allowing the use of a net operating loss deduction. Id. at 21. Otherwise put, the legislative history makes clear that one key element of the 1987 enactment was to expand available deductions under District law, with no indication of an intent to be grudging in that regard. Generally throughout the Report, the Committee treats the franchise tax as a single concept, without differentiating between the tax on corporations and that on unincorporated businesses. Most importantly, when discussing the NOL deduction, the Committee uses the generic franchise tax nomenclature to reference its broad applicability. Where the Council intended a distinction between the franchise tax on unincorporated businesses and on corporations, the Report makes that intention clear. See Committee Report, supra, at 21 (The treatment of Subchapter S Corporations will be changed. They will no longer be taxed under the District's unincorporated business franchise tax, but rather will be taxed under the District's corporate franchise tax.). Thus, the Report suggests that the effect of the NOL deduction amendment would be the same in all franchise tax instances, whether unincorporated or otherwise. Furthermore, there is no indication that the Council considered that the NOL deduction would be unavailable per se to any of those entities expressly listed in the amendment, nor did the legislature express a distinction between the application of the deduction to those entities that participated in filing a federal consolidated return, and those that did not. [20] We also can glean from the general prohibition against consolidated returns, see D.C.Code § 47-1805.2(5)(B); 9 DCMR § 109.1, that income, losses and deductions of corporations outside the District's jurisdiction were not intended to have a direct effect on the tax liability of corporations within the District. See Floyd E. Davis Mortgage Corp., supra, 455 A.2d at 911 (a statute is to be construed in the context of the entire legislative scheme). In the same vein, the relevant statutes and regulations reiterate that generally the District expects to treat incorporated and unincorporated businesses alike, including the extent to which unincorporated businesses receive deductions. Under the [District of Columbia income and franchise tax statutes], the net income of an unincorporated business is computed in practically the same manner as the net income of a corporation. Accordingly, an unincorporated business is generally entitled to allowable deductions from gross income to the same extent that would be allowable if the business were incorporated. 9 DCMR § 119.2 (emphasis added); see also, e.g., D.C.Code § 5-1404(a) (1994) (Any incorporated or unincorporated business entity ... shall be qualified for tax incentives if ...); 9 DCMR § 117.1 (The design of the unincorporated business tax ... is to impose a tax ... as though the business were incorporated....). [21] The District points out that business interests made a subsequent unsuccessful attempt to amend the statute in 1994 to make NOL deductions specifically applicable to unincorporated businesses and S-corporations. From this fact, the District infers that the original statute was not meant to provide unincorporated businesses with NOL deductions. Basing an interpretation of the statute on evidence of a proposed amendment, however, is fraught with difficulty. See United States v. Wise, 370 U.S. 405, 411, 82 S.Ct. 1354, 8 L.Ed.2d 590 (1962) (Logically, several equally tenable inferences could be drawn from the failure of the Congress to adopt an amendment in the light of the interpretation placed upon the existing law by some of its members, including the inference that the existing legislation already incorporated the offered change). Even if the legislature intended to rebuff the proffered amendment, we have heeded the admonition of the Supreme Court which stated that `[t]he views of a subsequent Congress form a hazardous basis for inferring the intent of an earlier one.' Needle v. Hoyte, 644 A.2d 1369, 1372 (D.C. 1994) (quoting United States v. Price, 361 U.S. 304, 313, 80 S.Ct. 326, 4 L.Ed.2d 334 (1960)). In particular, we note the hazard of attempting to impute meaning to legislative inaction unless it is absolutely clear the Council can be said to have known about an issue, cared about it, and somehow dealt with it. United States Parole Comm'n, supra, 693 A.2d at 1103. The District also argues that the primary purpose of the legislation was conformity with the federal scheme, and thus the section under consideration should be held in the tightest degree of congruity with the IRC. It is true in our jurisdiction that, were we in doubt as to the meaning of this tax statute, we would endeavor to conform its interpretation to comparable provisions of the federal Internal Revenue Code. District of Columbia v. National Bank of Washington, 431 A.2d 1, 4 (D.C. 1981). However, resort to the IRC for the position that unincorporated businesses do not receive NOL deductions in the District is illogical in light of the continued fundamental difference between the federal and District tax law with respect to the separate tax treatment of unincorporated businesses. The same argument is likewise unpersuasive with regard to the District's refusal to allow corporate NOL deductions where, despite the existence of actual net operating losses, no NOL deduction has been taken on a federal return, because the District's self-imposed practice of requiring individual (as opposed to consolidated) returns, itself, is incongruent with federal law. Rigid uniformity between the District's franchise tax structure and the federal tax structure was neither a stated nor an implied goal of the Council, nor could it have been attainable given the significant differences in the taxation of businesses in the District. [22] Rather, the Committee Report admits only a goal of limited conformity with the federal income tax ... without a District income tax increase, and outlines the District's historic caution against blindly tracking the federal tax structure due to the need to consider the numerous distinctions between federal and District tax law. Committee Report, supra, at 18-19; see also supra note 20. Throughout its discussion of the Act, the Committee recognizes that the District's conformity to federal law is limited. See, e.g., Committee Report, supra at 4 (the District currently does not conform with federal law as it does not subject individuals to taxation on their receipt of Social Security benefits). More importantly, where total conformity with the federal law was intended, the Committee stated so succinctly. See, e.g., id. at 5-6 (Section 2(c)(8) [of the proposed law] amends ... D.C.Code, sec. 47-1803.3(a)(4)(A) and (B) ... so that District law conforms with federal law regarding the deductibility of casualty losses by removing the $100 threshold for deductibility of personal casualty losses.) Tellingly, when discussing the proposed NOL deduction provision, the Committee made no specific reference to strict conformity to the federal tax law. See id. at 7. The limited nature of the conformity intended by the Council is further evidenced by the overall structural differences between federal and District taxation of corporations filing a federal consolidated return. As explained earlier, an individual corporation's net operating losses may be used as a basis for a consolidated NOL deduction on a consolidated federal return. In this manner, however, an individual corporation's NOL could be consumed by offsets to income realized by other corporations outside the District, rather than to deductions from its own positive past or future income. Under the federal consolidated scheme this result makes sense because income, losses and deductions are all aggregated with respect to the filing group as a whole, and the group as a whole is subject to federal taxation on a consolidated basis-hence the appropriate nomenclature. However in the District, where not all members of the consolidated return are subject to the District franchise tax, an individual corporation must file separately. As a result the income, losses and deductions of the other affiliated corporations, which helped form the consolidated return on the federal level, fall by the wayside. Within this context, it seems anomalous to treat NOL deductions as an exception to the District's tax structure, whereby those specific deductions alone would be considered on a consolidated basis (and thus affected by income from outside the District), while income, losses and other deductions are considered only with respect to the individual taxpaying entity subject to District tax. As previously noted, under that reading, an NOL of a corporation taxed by the District that is used to offset the income of a corporation outside the District on a federal consolidated return would become nonexistent for purposes of the local tax. Adopting the District's argument that the statute intended to link strictly the local deduction to a comparable federal deduction would create a system wherein District corporations participating in a federal consolidated return might well be unable to take advantage of their actual NOLs even though such losses at the federal level were fully utilized. As an exception, however, this reading substantially weakens the District's argument for strict uniformity to the IRC and appears inexplicable in light of the general structure of the statute. Moreover, the District's argument that choosing to file a federal consolidated return may act as an election that properly bars taking the NOL deduction in the District finds no support in either the legislative history or the statutory scheme of the franchise tax. [23] In fact, this practice would contravene the implication of the allocation provision of D.C.Code § 47-1803.3(a)(10), which authorizes deductions only for and to the extent that they are connected with income arising from sources within the District .... (emphasis added). Finally, the District expresses concern about the possibility of a double taxpayer benefit from the NOL deduction if allowed to unincorporated businesses. The District suggests that the deduction can already be utilized on the personal tax returns of businesses' owners, perhaps in prior years, because, as already noted, losses (unlike gains) are in current practice passed through to them. We doubt that double benefit is an inevitability. Whatever the current practice of the OTR, [24] both the statute and the regulations appear to provide mechanisms to prevent duplicative use of the same deduction or can be amended to do so. As explained earlier, D.C.Code § 47-1803.2(a)(2)(D) prevents double taxation of unincorporated business income in the same year. If § 1803.2(a)(2)(D)'s reference to share is read to include both positive and negative income of the unincorporated business, losses will never be passed through to individual owners. It may be argued that passage of § 1803.3(a)(14) implicitly suggests such a reading. Further, 9 DCMR § 119.4 states unequivocally: No deduction which is allowed or allowable from the gross income of an unincorporated business... shall be allowed as a deduction in the individual return of any person entitled to share in the net income of the business. By including the term allowable, the regulation may well anticipate and disallow use in one year of a deduction for an owner that will become available to the business in the future. The regulation and statute together should be adequate to prevent double deductions. But we do not rule here definitively on these or any other questions relating to the individual tax returns of the owners. Our focus in this respect is on the taxation of the unincorporated business, which the District has chosen to treat as a separate taxable entity. As a final support for its argument, the District relies on the administrative convenience of applying the NOL deduction provision as it has urged. See Kelly v. United States, 924 F.2d 355, 361 (1st Cir. 1991) (an interpretation [of a statute or regulation] that would overtax enforcement machinery is disfavored as unreasonable). While certainly a meritorious basis for defending its interpretation, the District has not demonstrated here that any strain on the enforcement machinery is of such an overriding consideration that it alone can trump the natural overall reading of the statute in question within the existing tax structure. See Stewart Dry Goods Co. v. Lewis, 294 U.S. 550, 560, 55 S.Ct. 525, 79 L.Ed. 1054 (1935) (Gross inequalities may not be ignored for the sake of ease of collection.).