Court Opinion

ID: 8894672
Source: CourtListenerOpinion
Date Created: 2022-11-26 23:45:35.157937+00
Date Added: 2024-06-11T17:07:24.677231
License: Public Domain

Judge Horton
dissenting.
I respectfully dissent from the conclusion of the majority that the reverted funds from the Union Carbide pension plan are the “non-business” income of Union Carbide and thus not taxable by North Carolina.
Union Carbide has been qualified to do business in North Carolina since 1949. Since 1951, it has maintained a defined-benefit pension plan (the plan) for the benefit of its employees. The plan is non-contributory in that the employees do not contribute a portion of their wages to the plan. Instead, Union Carbide makes substantial annual contributions to the plan entirely from its general business income. For example, during the years 1978 through 1985, Union Carbide contributed a total of $1.1 billion to the plan. The plan is “qualified” under the Internal Revenue Code, so that all contributions to the plan are deductible from corporate income, and thus are not taxed either by the federal or state governments. Although the funds in the plan are held by a trustee, Union Carbide retained the right to make investment decisions as a fiduciary, subject to the limitations imposed by the Employee Retirement and Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001, et seq. Further, under appropriate circumstances, Union Carbide was entitled to the return of excess funds in the plan, either during the life of the plan or upon its termination. As the result of corporate restructuring to avoid a hostile takeover following the Bhopal, India, disaster, Union Carbide recaptured $500 million of its pension plan contributions. It now argues, and the majority.agree, that the reverted pension fund contributions, originally from corporate business income and deducted as business expenses, were somehow transmuted into non-business income on which no income tax is due to North Carolina, one of the states in which Union Carbide does business.
N.C. Gen. Stat. § 105-130.4(a)(l) (Cum. Supp. 1998), which defines business income, contains both “transactional” and “functional” tests which may be applied to determine whether a particular item of income received by a corporation is “business” or “non-business.” Polaroid Corp. v. Offerman, 349 N.C. 290, 295, 507 S.E.2d 284, 289 (1998). The distinction between business and non-business income for tax purposes is critical. A multi-state corporation pays tax on its business income to the several states in which it does business, using a formula based on its contacts with the various states to determine the amount of tax due each. However, where *671income is non-business income, a corporation only pays tax on the income to its home state.
In this case, Union Carbide classified the entire $500 million from its pension plan as non-business income and allocated it to Connecticut. In determining its Connecticut tax liability, Union Carbide treated the income as “apportionable unitary income,” apportioning it among all states in which it does business. Under Union Carbide’s classification of the funds as non-business, no state other than Connecticut was paid state income tax on the reverted funds. Union Carbide did report, however, the entire $500 million as ordinary income for federal income tax purposes.
I do agree with the majority that the reversion of pension funds to Union Carbide does not satisfy the transactional test, because it was not in the “regular course of the corporation’s trade or business.” N.C. Gen. Stat. § 105-130.4(a)(l). Under the functional test, however, the second part of the statutory definition states that business income includes income from property “if the acquisition, management, and/or disposition of the property constitute integral parts of the corporation’s regular . . . business operations.” Id.
In the case before us, Union Carbide argues that the pension plan was not the property of the corporation nor was it integral to its operation. The majority agree, stressing that the business of the corporation was making chemicals; not operating pension plans. That argument loses sight of the fact that it is to the benefit of any business to attract and retain qualified and loyal employees. That goal is clearly an integral part of the successful operation of any business. The pension plan discussed in this case is a part of the Union Carbide employees’ total compensation package, designed not only to compensate employees for their work, but to assist them with retirement planning and to assist the company in retaining its experienced employees. Under any commonly accepted meaning of the term, operation of the Union Carbide pension plan is integral, or essential, to its business operations. Indeed, to use the language of the Internal Revenue Code, Union Carbide deducted its contributions to the plan and the related costs of operation of the plan as ordinary and necessary business expenses. Having certified its contributions and the expenses of operation of the plan as being necessary expenses in the operation of its business in order that such expenses might be deducted from income, Union Carbide may not now contend that the operation of the pension plan was not integral, or necessary, to its business operations.
*672Furthermore, Union Carbide had a sufficient ownership interest in the pension fund to satisfy the “acquisition, management, and/or disposition” portion of the functional test. As required by federal law, the plan funds were held by a trustee. Union Carbide retained certain powers as a fiduciary to direct investment of plan funds, subject to the limitations placed on fiduciaries by ERISA. Union Carbide also had the right under some circumstances to seek a reversion of excess funds in the pension fund. It received permission to exercise that right in this case and did so. A part of the original plan’s assets were removed and a new trust created for a plan to cover some retired employees. After purchasing annuities to guarantee retirement funds for the retired employees at the promised levels, $500 million was left over and was used by Union Carbide for corporate purposes. At all times, Union Carbide had the right' to seek permission to withdraw excess funds from the plan. That contingent right, together with the right of Union Carbide to direct investments in the plan, is sufficient to demonstrate “the indicia of owning corporate property” contemplated by our Supreme Court in Polaroid, 349 N.C. at 301, 507 S.E.2d at 292.
The result I would reach is not fundamentally unfair to this corporate taxpayer. From 1951 to 1985, Union Carbide earned sums from its business operations which were subject to taxation as general business income. It deducted its contributions from business income to the pension plan as business expenses dollar-for-dollar, so that the contributions were not taxed. It has now recaptured a substantial portion of those funds and classified them as non-business income in order to avoid paying state income taxes on the reverted funds to any state except Connecticut. North Carolina seeks only to tax that portion of the reverted funds which represent Union Carbide’s contacts with this state in the same fashion other business income is taxed. That is neither unfair nor unconstitutional. I vote to reverse.