Opinion ID: 2181168
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Heading: NCR's 1976 Gross-Up Income

Text: Federal tax law permits (or at times relevant to this case permitted) a United States corporation owning at least a 10 percent interest in the voting stock of a foreign subsidiary to elect to claim credit for certain foreign taxes paid by that subsidiary. 26 U.S.C. §§ 901(a), 901(b)(1) and 902(a). For the purposes of these provisions, the credit is allowed for that portion of the foreign taxes which the domestic corporation is deemed to have paid. NCR is such a corporation with respect to ten foreign subsidiaries and it elected to take a deemed paid foreign tax credit for the tax year 1976. By virtue of 26 U.S.C. § 78, NCR was required to treat those deemed paid credits as grossed-up dividend income for federal tax purposes (hence the term gross-up). It then claimed a credit against its federal income tax pursuant to § 902(a). [1] On its Maryland return, however, NCR deducted the gross-up from its federal taxable income. The Comptroller disallowed the deduction, on the ground that under Md.Code (1975 Repl.Vol.), Art. 81, § 280A(a), the net taxable income of a corporation, for Maryland tax purposes, is the taxable income of such taxpayer as defined in the laws of the United States.... Thus, the gross-up was returned to NCR's income. The Tax Court agreed that § 280A(a) required this treatment. The Circuit Court for Baltimore City did not; it held that taxation of fictitious gross-up income was not mandated by § 280A(a) and was unconstitutional by virtue of the due process clause of the fourteenth amendment to the United States Constitution. The Court of Special Appeals held the Tax Court to be correct. It reversed the circuit court, but did not pass on the constitutional issue. NCR insists that a proper interpretation of Maryland law results in the exclusion of gross-up in 1976, and that if we read Maryland law otherwise, it is unconstitutional.
As we have seen, § 280A(a) instructs, as it did in 1976, that [t]he net income of a corporation shall be the taxable income of such taxpayer as defined in the laws of the United States ... for the corresponding taxable period.... The purpose of that provision is to bring the State taxation system in conformity with the federal scheme. Comptroller v. American Satellite Corp., 312 Md. 537, 545, 540 A.2d 1146, 1150 (1988). Since NCR's 1976 federal taxable income included the gross-up, and since the Maryland statutes applicable to 1976 contained no authority to adjust or deduct that figure, it should, one would think, be included in Maryland taxable income. See Comptroller v. American Satellite Corp., supra . But NCR, pointing to somewhat unusual legislative history, reaches a contrary conclusion. NCR explains that when § 280A was enacted in 1967, subsection (c) provided that [t]here shall be subtracted from taxable income of ... [the] taxpayer: ... (4) dividend income to the extent included in taxable income.... Thus, all dividend income was effectively excluded from taxation by Maryland. That changed in 1976. By Ch. 904 of the Acts of that year, subsection (c) was amended to repeal the dividend exclusion. The amended version applied to all taxable years of corporate taxpayers beginning after December 31, 1975. Ch. 904, Acts of 1976, § 5. This, of course, required inclusion, for Maryland tax purposes, of dividend income included in federal taxable income. In 1977 the General Assembly revisited § 280A (c) by adding (via Ch. 812 of the Acts of that year) language calling for the subtraction from federal taxable income, to the extent included therein, (4) any amounts included therein by operation of the provisions of § 78 of the Internal Revenue Code of 1954.... Section 78 is, of course, the gross-up provision, and the 1977 amendment effectively produced the result (at least from its effective date of 1 July 1977) for which NCR now contends. As NCR reads this history, the 1976 amendment was not directed to gross-up income; it was simply intended to make actual dividend income taxable in Maryland. In 1977 the legislature realized it had made a terrible mistake in the prior year and promptly addressed the gross-up problem by allowing subtraction for Maryland purposes of amounts included in federal income by virtue of § 78. The legislative intent, under this theory, was never to tax gross-up income. Under somewhat similar circumstances, the Supreme Court of Vermont used a subsequent statutory amendment to decipher prior legislative intent in the manner for which NCR now contends. In re Knosher, 139 Vt. 285, 287-288, 428 A.2d 1104, 1105 (1981). See also Winterset, Inc. v. Comm'r of Taxes, 144 Vt. 230, 232-234, 475 A.2d 231, 232-233 (1984). But we do not see the Maryland legislative history that way. When we construe a statute, we seek to ascertain and effectuate the legislative goal or object, and our first recourse in doing so is to the words of the statute, giving them their ordinary and natural import. Comptroller v. American Satellite Corp., 312 Md. at 544, 540 A.2d at 1150. The plain words before us now in no way support NCR's conclusion; to the contrary, they bolster the Comptroller's position. Nevertheless, a statute must be construed in context, and the plainest language may be governed by the context in which it appears. Kaczorowski v. City of Baltimore, 309 Md. 505, 514-516, 525 A.2d 628, 632-633 (1987). Legislative reports and other pertinent legislative history may help to provide the appropriate context. Id. Chapter 812, Acts of 1977, contains only the usual effective date provision  1 July 1977. Unlike the 1976 act, it contains no language carefully spelling out the tax year to which the amendment applies. Statutes are normally prospective in operation absent clear intent to the contrary. See Mason v. State, 309 Md. 215, 219-220 & n. 1, 522 A.2d 1344, 1346 & n. 1 (1987); WSSC v. Riverdale Fire Co., 308 Md. 556, 560-561, 520 A.2d 1319, 1321-1322 (1987). The lack of retrospective wording gives NCR's unintended consequence argument a somewhat hollow ring. Surely had the General Assembly meant to correct an inadvertent error made in 1976, the 1977 law expressly would have applied to the 1976 tax year. That the legislature knew how to write this sort of language appears from the 1976 act itself. And given a filing date of 15 April 1977, for 1976 tax returns [ see Md.Code (1975 Repl.Vol.), Art. 81, § 305], it seems particularly clear that a tax statute taking effect on 1 July 1977 was not designed to apply to the 1976 tax year. Finally, it appears that when the 1976 bill was under consideration in the House Ways and Means Committee, an amendment to allow deduction of gross-up was rejected. See Letter of 5 November 1976 from William S. Ratchford, II, to Senator Roy N. Staten. While a committee's rejection of an amendment is clearly not an infallible indication of legislative intent, it may help our understanding of overall legislative history. See Bd. of Examiners in Optometry v. Spitz, 300 Md. 466, 479-480, 479 A.2d 363, 369-370 (1984); Demory Brothers v. Bd. of Pub. Works, 273 Md. 320, 325-326, 329 A.2d 674, 677 (1974); Bosely v. Dorsey, 191 Md. 229, 240, 60 A.2d 691, 696 (1948); Cohen v. Goldstein, 58 Md. App. 699, 717, 474 A.2d 229, 237-238, cert. denied, 301 Md. 41, 481 A.2d 801 (1984), espousing the proposition that legislative intent cannot be inferred solely from failure of a bill, but failure may be taken into account. But cf. Automobile Trade Ass'n v. Ins. Comm'r, 292 Md. 15, 24, 437 A.2d 199, 203 (1981). The General Assembly is presumed to have had, and acted with respect to, full knowledge and information as to prior and existing law and legislation on the subject of the statute.... Board of Educ., Garrett Co. v. Lendo, 295 Md. 55, 63, 453 A.2d 1185, 1189 (1982). With that in mind, and with all available legislative history before us, we conclude that § 280A, as applied in 1976, required the inclusion of gross-up in NCR's taxable Maryland income for that year. The next question is whether the statute, so construed, is constitutional. It is to that topic that we now turn.
Though conceding that the income derived from foreign subsidiaries is part of its unitary business, NCR argues that taxation of its gross-up income contravenes the due process clause of the fourteenth amendment to the United States Constitution. [2] This is so, NCR contends, because whether or not it was taxed on gross-up depended solely upon its treatment of foreign taxes paid  i.e., as a credit or deduction on its federal return. Hence, NCR asserts that the gross-up amount created by its ... foreign tax credit election bears no `rational relationship' to its `interstate values' in Maryland. Brief at 15. Under both the Due Process and Commerce Clauses of the Constitution, a State may not, when imposing an income-based tax, `tax value earned outside its borders.' Container Corp. v. Franchise Tax Bd., 463 U.S. 159, 164, 103 S.Ct. 2933, 2939, 77 L.Ed.2d 545, 552, reh'g denied, 464 U.S. 909, 104 S.Ct. 265, 78 L.Ed.2d 248 (1983) (quoting ASARCO, Inc. v. Idaho State Tax Comm'n, 458 U.S. 307, 315, 102 S.Ct. 3103, 3108, 73 L.Ed.2d 787, 794 (1982)). Nonetheless, [i]t has long been established that the income of a business operating in interstate commerce is not immune from fairly apportioned state taxation. Mobil Oil Corp. v. Comm'r of Taxes, 445 U.S. 425, 436, 100 S.Ct. 1223, 1231, 63 L.Ed.2d 510, 520 (1980); also see Random House v. Comptroller, 310 Md. 696, 707, 531 A.2d 683, 688 (1987); Xerox Corp. v. Comptroller, 290 Md. 126, 128, 428 A.2d 1208, 1210 (1981). In order to challenge successfully State apportionment of corporate income, the taxpayer [must] ... prove `by clear and cogent evidence' that the income attributed to the State is in fact `out of all appropriate proportions to the business transacted ... in that State, ... or has led to a grossly distorted result....' Container Corp., supra, 463 U.S. at 170, 103 S.Ct. at 2942, 77 L.Ed.2d at 556 (quoting Moorman Mfg. Co. v. Bair, 437 U.S. 267, 274, 98 S.Ct. 2340, 2345, 57 L.Ed.2d 197, 205, reh'g denied, 439 U.S. 885, 99 S.Ct. 233, 58 L.Ed.2d 201 (1978)). NCR's argument that its gross-up meets this test relies principally on language extracted from F.W. Woolworth Co. v. Taxation and Revenue Dept., 458 U.S. 354, 372-373, 102 S.Ct. 3128, 3139, 73 L.Ed.2d 819, 833, reh'g denied, 459 U.S. 961, 103 S.Ct. 274, 74 L.Ed.2d 213 (1982): We need not be detained by New Mexico's reaching out to tax gross-up amounts that even the Supreme Court of New Mexico recognized as fictitious. ... The gross-up computation is a figure that the Federal Government deems Woolworth to have received for purposes of part of Woolworth's federal foreign tax credit calculation.... In this case the foreign tax credit arose from the taxation by foreign nations of Woolworth foreign subsidiaries that had no unitary business relationship with New Mexico. New Mexico's effort to tax this income deemed received  with respect to which New Mexico contributed nothing  also must be held to contravene the Due Process Clause. Id. [citations omitted]. But the reason the Supreme Court of the United States did not need to be detained by New Mexico's efforts to tax Woolworth's gross-up was not because, in that Court's view, State taxation of gross-up was unconstitutional per se. It was because a state cannot tax gross-up dividends, any more than it can tax actual dividends, when the foreign subsidiaries have no unitary business relationship with the state. Since the principle undergirding the holding in Woolworth was the absence of a unitary business relationship, the Court was not required to address the due process argument Woolworth directed at New Mexico's inclusion of gross-up. Woolworth is of no comfort to NCR; the unitary nature of NCR's business is conceded here. There are, of course, gross-up cases (or cases involving analogous principles) in which state courts have reached results favorable to the taxpayer by excluding gross-up (or other income includible in federal taxable income) from income subject to state taxation. See Dow Chemical Co. v. Comm'r of Revenue, 378 Mass. 254, 391 N.E.2d 253 (1979); Commonwealth v. Emhart Corp., 443 Pa. 397, 278 A.2d 916, appeal dismissed, 404 U.S. 981, 92 S.Ct. 451, 30 L.Ed.2d 364 (1971); In re Knosher, supra . There are also similar cases that hold in favor of the taxing authorities. See Ex parte Kimberly-Clark Corp., 503 So.2d 304 (Ala. 1987); Caterpillar Tractor Co. v. Lenckos, 84 Ill.2d 102, 49 Ill.Dec. 329, 417 N.E.2d 1343 (1981), appeal dismissed sub nom. Chicago, Bridge & Iron Co. v. Caterpillar Tractor Co., 463 U.S. 1220, 103 S.Ct. 3562, 77 L.Ed.2d 1402 (1983); Albany Int'l Corp. v. Halperin, 388 A.2d 902 (Me. 1978); Commonwealth v. Westinghouse, 478 Pa. 164, 386 A.2d 491, appeal dismissed, 439 U.S. 805, 99 S.Ct. 61, 58 L.Ed.2d 97 (1978). But the outcome in each of these cases turns on the specific provisions of a state statute, or on a reading of legislative intent in light of a particular legislative history or a given state's general approach to statutory interpretation. None addresses the fourteenth amendment issue that is now before us. One decision that does touch on that issue is Taxation & Revenue Dept. v. F.W. Woolworth, 95 N.M. 519, 624 P.2d 28 (1981), rev'd on other grounds, 458 U.S. 354, 102 S.Ct. 3128, 73 L.Ed.2d 819, reh'g denied, 459 U.S. 961, 103 S.Ct. 274, 74 L.Ed.2d 213 (1982). As is obvious from the citation (and as NCR points out), this decision was reversed by the United States Supreme Court. But as we have just observed, that reversal had nothing to do with any conclusion that a state would violate the due process clause of the fourteenth amendment if it taxed gross-up. The Supreme Court did not deal with that issue. The Supreme Court of New Mexico did at least touch on it, and seemed to find no constitutional impediment because Woolworth had received measurable economic benefit from its election to use the federal tax credit as opposed to a federal deduction for foreign taxes paid. Id. at 522-523, 624 P.2d at 31-32. And the Supreme Court of North Dakota has very recently reached the same conclusion. International Minerals & Chem. Corp. v. Heitkamp, 417 N.W.2d 791 (N.D. 1987). In Heitkamp, International Minerals & Chemical Corp. (IMC), a unitary business operating both within and without North Dakota and which owned a number of foreign subsidiaries, took the federal deemed paid credit. As in Maryland federal taxable income served as a tax base for state taxable income, but IMC tried to exclude the gross-up amount from its taxable North Dakota income. It made essentially the same constitutional argument that NCR submits to us. Observing, as we have, that the Supreme Court's Woolworth did not address the issue, the North Dakota court reasoned: A domestic corporation required to compute gross-up income under [26 U.S.C.] § 78 has received economic benefit from its election to take the § 902 foreign tax credit. By making this voluntary election, IMC has reduced its federal income tax liability.... In this case, it is conceded that IMC's foreign subsidiaries had a unitary business relationship with IMC and North Dakota. Therefore, the due process clause does not preclude North Dakota from taxing actual dividends IMC received from its foreign subsidiaries.... Having elected the benefit of the § 902 deemed paid foreign tax credit, IMC in effect chose not to deduct the foreign taxes paid by its foreign subsidiaries but to instead treat them as dividends and therefore gross income for purposes of the Internal Revenue Code.[ [3] ] We do not believe due process requires that IMC be freed from this choice for state tax purposes.... Because North Dakota does not statutorily recognize a deduction for § 78 gross-up income, IMC may not exclude the gross-up from the amount of federal taxable income reported on its state income tax return. Id. at 796 [citations omitted]. Heitkamp is on all fours with the case before us. We agree with the Supreme Court of North Dakota's reasoning, and for the same reasons, hold that the due process clause of the fourteenth amendment does not preclude Maryland from taxing NCR's gross-up income for tax year 1976.