Opinion ID: 1717682
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Heading Rank: 1

Heading: Mileage Credits

Text: IMC produces fertilizers and chemicals which it distributes throughout the United States and several foreign countries. IMC ships some of its products by rail. For part of its rail shipments, IMC leases or purchases its own railroad cars, which are then hauled by the rail carriers. IMC has a fleet of 600 private railroad cars and leases an additional 2,500 railroad cars from private carline companies. IMC leases railroad cars two ways: Under a full service lease, the owner is responsible for all maintenance and upkeep, while under a net lease IMC has this responsibility. Rail carriers must compensate shippers, such as IMC, who supply the freight cars to transport their products. See 49 U.S.C. § 11122. [1] This compensation by the rail carrier to the shipper, based upon the number of loaded miles the furnished cars travel, is termed a mileage credit. The rail carrier pays the mileage credit on a net lease to IMC and, on a full service lease, to the railroad car owner, but the credit on a full service lease is then passed on to IMC by the railroad car owner as a credit against the rental charges paid by IMC. Thus, under either lease plan, IMC benefits because the mileage credits offset costs of leasing and shipping. Because IMC conducts its business within and without North Dakota, its business income is apportioned to this state by using the three-factor formula (property, payroll, and sales) prescribed in UDITPA, Chapter 57-38.1, N.D.C.C. The property factor is computed by dividing the average value of real and tangible property owned and rented by the taxpayer in this state during the tax year by the average value of all real and tangible property owned and rented by the taxpayer during the tax year. § 57-38.1-10, N.D.C.C. Section 57-38.1-11, N.D.C.C., spells out the property valuation method: Property owned and rented. Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals. This mileage credit issue concerns valuation of leased cars for the property factor. In valuing leased cars for its property factor, IMC deducted mileage credits from the annual rentals paid before capitalizing at eight times the net annual rental rate. The Commissioner disallowed the deduction for mileage credits. The district court upheld IMC's method of computation, concluding that mileage credits were deductible subrentals under the statute. [2] In this court, IMC concedes that the mileage credits are not subrentals within the meaning of § 57-38.1-11, N.D.C.C. We agree. The word subrental is not defined in Chapter 57-38.1, N.D.C.C., and we must therefore look to its commonly understood meaning. Section 1-02-02, N.D.C.C.; Wills v. Schroeder Aviation, Inc., 390 N.W.2d 544, 545-546 (N.D.1986). Subrent is rent from a subtenant. Webster's Third New International Dictionary 2278 (1971). A subtenant is one who leases all or a part of the rented premises from the original lessee for a term less than that held by the latter. Black's Law Dictionary 1282 (5th ed. 1979). Thus, under the statute, subrentals are the payments a subtenant makes to the original lessee. The mileage credits paid by rail carriers do not fit this definition. IMC does not sublease the railroad cars to the rail carriers. Rather, third parties lease the cars to IMC which, in turn, pays the rail carriers to haul the cars to transport IMC products. The mileage credits are not paid pursuant to any sublease agreement, but are a carrier's rebates to a shipper mandated by federal law. Thus, the mileage credits are not subrentals. IMC asserts that the mileage credits can nevertheless be deducted because they reduce IMC's cost of leasing a railroad car and because the net annual rental rate under § 57-38.1-11, N.D.C.C., must be its net monetary cost. It is the actual rental expense, rather than the gross rental rate, that IMC uses to determine whether to enter into a particular lease with a carline company, and thus, IMC contends, it is the appropriate amount to be capitalized to determine the value of a car. IMC relies upon decisions from other jurisdictions, none of which were decided under the UDITPA property factor provision, for the propositions that capitalization of rentals is an accepted method for valuation of leased property, and that it is always net rentals that are to be capitalized. We might agree with IMC's argument if the term net annual rental rate was not defined by the statute. For Chapter 57-38.1, however, net annual rental rate means the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals. § 57-38.1-11, N.D.C.C. A statutory definition which declares what a term means excludes any meaning that is not stated. 2A Sutherland Statutory Construction § 47.07 at p. 133 (4th ed. 1984); Hermanson v. Morrell, 252 N.W.2d 884, 888 (N.D. 1977); and § 1-02-03, N.D.C.C. It is thus apparent that the term net annual rental rate is not used in its ordinary sense and that the statute does not equate value for property factor purposes with actual value of the property to the taxpayer. As the drafters of UDITPA observed: This section is admittedly arbitrary in using original cost rather than depreciated cost, and in valuing rented property as eight times the annual rental. This approach is justified because the act does not impose a tax, nor prescribe the depreciation allowable in computing the tax, but merely provides a basis for division of the taxable income among the several states.... No method of valuing the property would probably be universally acceptable. Comment to § 11, Uniform Division of Income for Tax Purposes Act, 7A U.L.A. 331, 350 (1985). Under the statutory definition, only subrentals may be deducted from the annual rental rate to arrive at the net annual rental rate capitalized for property factor purposes. Because mileage credits required by law to be paid by rail carriers are not subrentals, we agree with the Commissioner that IMC cannot deduct mileage credits in calculating its net annual rental rate of leased railroad cars capitalized for computing the value of its property for use as one factor to apportion its business income for state taxation.