Opinion ID: 1717541
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Heading: The Constitutional Issues (Shell's Appeal).

Text: In No. 86-1731, Shell commenced an original action in the district court challenging the constitutionality of section 422.35(10) on several grounds. The district court rejected all of its contentions. We consider both the procedural and substantive issues which are presented. A. Exhaustion of Administrative Remedies. Although not addressed by the parties, we find it necessary to consider the question of exhaustion of administrative remedies as that doctrine affects Shell's right to maintain its original action. We have previously held that, where issues decided by an administrative agency involve potential constitutional questions, these constitutional issues must first be raised before the agency in order to be considered by a court in reviewing the final agency action under Iowa Code section 17A.19. Chauffeurs, Teamsters & Helpers Local Union No. 238 v. Iowa Civil Rights Comm'n, 394 N.W.2d 375, 382 (Iowa 1986); Chicago & N. Transp. Co. v. Iowa Transp. Regulation Bd., 322 N.W.2d 273, 276 (Iowa 1982). This case presents a different issue, i.e., whether, in challenging the constitutionality of a statute affecting agency action, proceedings before the affected agency may be bypassed entirely by bringing an original action in the district court. We believe that, where the constitutional issue sought to be raised directly affects a matter pending before an agency, administrative exhaustion should ordinarily precede a judicial inquiry into the statute's validity. The issue is addressed in K. Davis, Administrative Law § 20.04, at 74-81 (1958). There, the author states: A fundamental distinction must be recognized between constitutional applicability of legislation to particular facts and constitutionality of the legislation. When a tribunal passes upon constitutional applicability, it is carrying out the legislative intent, either express or implied or presumed. When a tribunal passes upon constitutionality of the legislation, the question is whether it shall take action which runs counter to the legislative intent. We commit to administrative agencies the power to determine constitutional applicability, but we do not commit to administrative agencies the power to determine constitutionality of legislation. Only the courts have authority to take action which runs counter to the expressed will of the legislative body. Should one who seeks to challenge the constitutionality of legislation be required to exhaust remedies before an administrative agency which has no authority to pass upon the constitutional issues the plaintiff wants to raise? Id. at 74 (footnotes omitted). Notwithstanding the agency's lack of authority to make constitutional determinations, the authorities suggest that, unless the matter is entirely anticipatory, the case or controversy utilized for purposes of challenging the constitutionality of the statute should be initiated before the affected agency. Aircraft & Diesel Equipment Corp. v. Hirsch, 331 U.S. 752, 67 S.Ct. 1493, 91 L.Ed. 1796 (1947); A Quaker Action Group v. Morton, 460 F.2d 854 (D.C.Cir.1971). In Aircraft & Diesel Equipment Corp., the Court's principal reason for taking this position was that permitting the administrative process to first run its course may eliminate the need for reaching potential constitutional claims. We agree with this reasoning and add yet another reason for imposing the exhaustion requirement. Even facial constitutional issues are more effectively presented for adjudication based upon a specific factual record. The place for such record to be developed is, we believe, before the agency entrusted with the determination of the adjudicative facts. See, e.g., A Quaker Action Group, 460 F.2d at 862. Moreover, it can be expected that facial constitutional challenges will be coupled with claims that the legislation is unconstitutional as applied to the litigant. Efficient and effective judicial administration is therefore better served by having the entire proceeding first determined by the agency. Shell is rescued from the adverse consequences which would otherwise flow from the exhaustion requirement by reason of the language of Iowa Code section 17A.19(1), which provides, [i]f the agency declines to issue ... a declaratory ruling after receipt of a petition therefor, any administrative remedy available under section 17A.9 shall be deemed inadequate or exhausted. Although no formal petition invoking a facial constitutional challenge to section 422.35(10) was filed with the agency in the present case, it appears that in considering the effect of that statute on Shell's Iowa income tax liability IDOR advised Shell in connection with the issues raised in the companion case processed under chapter 17A that it declined to determine the facial constitutional question. The agency acquiesced in the filing of an original declaratory judgment action in the district court for purposes of resolving that question. We deem this to be a sufficient declination to rule on the issue for purposes of satisfying the quoted exhaustion waiver language in section 17A.19(1). B. The Merits of Shell's Constitutional Challenge. Shell asserts that on its face section 422.35(10) violates the equal protection clause, due process clause, and commerce clause of the federal constitution. The basic premise upon which these constitutional claims are postulated is that by applying that statute to Shell the state of Iowa is taxing a measure of value which is not income. In seeking to advance that theory, Shell claims that the taxable incident involved is the severance of crude oil by Shell in another jurisdiction or the added value outside of Iowa by which the windfall profits tax is measured. We reject these claims because we disagree with the premise on which they are based. For reasons which we recently discussed in Kelly-Springfield Tire Co., 414 N.W.2d at 116-19, we believe the measure of Shell's liability for the Iowa corporation income tax depends on the nexus of Shell's activities within this state. That nexus is measured by an apportionment formula wherein the part [of Shell's income] attributable to business within the state shall be in that proportion which the gross sales made within the state bear to total gross sales. Iowa Code § 422.33(2)(b)(4). The tax imposed is based on apportioned gross revenues. The extent to which those revenues may be reduced for tax purposes by allowable deductions is a matter of legislative grace. The amount of income upon which a tax is imposed may constitutionally be income prior to payment of certain expenses. As observed in State ex rel. Stern Milling Co. v. Wisconsin Tax Commission, 170 Wis. 506, 175 N.W. 931 (1920): The ultimate object to be attained is not to fix the real net income, which is left for the use and enjoyment of the producer thereof, but to arrive at a basis upon which a tax measured by his ability to pay is to be computed. Id. at 510, 175 N.W. at 932. Shell has cited no authority nor advanced any principled argument which indicates that the aggregate sum which remains subject to tax, absent deduction of its windfall profits tax liability, is an invalid measure of its Iowa income tax liability under either the due process or commerce clauses. Cases which tend to refute that contention include Moorman Manufacturing Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978), and Standard Pressed Steel Co. v. Washington Revenue Department, 419 U.S. 560, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975). In sustaining Iowa's apportioned gross sales formula under the federal due process clause, the Court in Moorman Manufacturing Co. observed that it is evident that appellant [taxpayer] would have no basis for complaint if ... Iowa had imposed a more burdensome gross receipts tax on the gross receipts from sales to Iowa customers. 437 U.S. at 280, 98 S.Ct. at 2348, 57 L.Ed.2d at 209. The more burdensome gross receipts tax to which the Court refers was sustained under both the due process and commerce clauses in Standard Pressed Steel Co. Given the Court's deference to taxes measured by gross revenues, we find no merit in Shell's claims that a state tax deduction for a particular federal excise tax is constitutionally mandated. We also reject Shell's argument that section 422.35(10) violates the federal equal protection clause because it singles out corporations that are producer-marketers for discriminatory treatment. To the extent this occurs it is because nonproducer-marketers, as separate taxpaying entities, have incurred no federal excess profits tax liability which can be taken as a deduction on their federal returns. This lack of similarity precludes a basis for comparison sufficient to launch Shell's equal protection claim. [6] We also reject Shell's argument that the legislative history of 26 U.S.C. section 4986 and 31 U.S.C. section 555 indicates that Congress required the states to permit local deductibility of this federal tax in the imposition of state income taxes. Our reading of the relevant committee reports suggests that the legislative history upon which Shell relies has reference to projected economic impact based upon existing state taxation laws at the time the federal excess profits tax was imposed on oil producers. See S.Rep. No. 394, 96th Cong., 2d Sess. 9 (1979), reproduced in 1980 U.S.Code Cong. & Adm.News, 410, 419; H.Rep. No. 304, 96th Cong., 2d Sess. 9 (1979), reproduced in 1980 U.S.Code Cong. & Adm. News, 587, 595. This legislative history falls far short of supporting a Congressional intent to prohibit the states from thereafter changing their laws so as to deny deductibility of this federal tax. Finally, we consider Shell's argument that the challenged statute is unconstitutionally retroactive. It is well established that under some circumstances it is necessary to act retroactively in seeking a fair apportionment of the cost of government. A leading case on point states: Taxation is neither a penalty imposed on the taxpayer nor a liability which he assumes by contract. It is but a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens. Since no citizen enjoys immunity from that burden, its retroactive imposition does not necessarily infringe due process. Welch v. Henry, 305 U.S. 134, 146-47, 59 S.Ct. 121, 125, 83 L.Ed. 87, 93 (1938). We have previously held that tax laws may be retroactively applied to affect receipt of income during the year of the legislative session preceding that of its enactment. City Nat'l Bank of Clinton v. Iowa State Tax Comm'n, 251 Iowa 603, 607, 102 N.W. 2d 381, 384 (1960). The challenged statute did not impose a completely new tax. It simply added a provision to our taxing laws which disallowed a deduction for an expense which had not previously existed. There was no settled or reasonable expectation on Shell's part that this deduction would be allowed. We have considered all issues and challenges presented in these consolidated appeals whether or not each is specifically referred to in our opinion. The decision of the district court in No. 86-1731 is affirmed and its decision in No. 86-1747 is affirmed as modified. (NO. 86-1731) AFFIRMED; (NO. 86-1747) AFFIRMED AS MODIFIED. All Justices concur except SNELL and ANDREASEN, JJ., who take no part.