Court Opinion

ID: 9572662
Source: CourtListenerOpinion
Date Created: 2023-08-21 20:43:31.336372+00
Date Added: 2024-06-11T12:33:46.517551
License: Public Domain

ROVIRA, Justice,
dissenting:
At the outset, it is important to keep in mind the precise issue at the heart of this appeal. Hewlett-Packard (HP) does not contest the use by the Colorado Department of Revenue (Department) of the unitary apportionment or combined accounting method of corporate taxation, even if used to reach the foreign subsidiaries of a domestic corporation. As the majority notes, and HP concedes, the United States Supreme Court has on many occasions upheld in the wake of constitutional challenge, the use by a state of unitary apportionment, particularly in the context of a state’s attempt to use a combined accounting method for unitary businesses comprised of both domestic and foreign subsidiaries. See, e.g., Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm’n, 266 U.S. 271, 45 S.Ct. 82, 69 L.Ed. 282 (1924); Mobile Oil Corp. v. Comm’r of Taxes, 445 U.S. 425, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980); Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545, rehearing denied, 464 U.S. 909, 104 S.Ct. 265, 78 L.Ed.2d 248 (1983).
Nor does HP challenge the authority of the Department to apply the unitary apportionment scheme to the activities of a unitary business and thereby require a combined report for the corporate parent and its subsidiaries, which this court has upheld in the past. See, e.g., Lone Star Steel Co. v. Dolan, 668 P.2d 916 (Colo.1983); Joslin Dry Goods Co. v. Dolan, 200 Colo. 291, 615 P.2d 16 (1980); Union Pacific Railroad v. Heckers, 181 Colo. 374, 509 P.2d 1255, appeal dismissed, 414 U.S. 806, 94 S.Ct. 74, 38 L.Ed.2d 42 (1973); Kraftco Corp. v. Charnes, 636 P.2d 1300 (Colo.App.1981).
The sole issue is whether the Department can include in HP’s Colorado tax base the income of HP’s foreign subsidiaries, which is not federal taxable income as defined in the Internal Revenue Code. The majority’s presentation of the basic issue, in effect, begs the question. At 403. Whether the Department is precluded from including income of the foreign subsidiaries of a unitary business in a combined report can only be answered by first considering the definition of net income as set out in section 39-22-304(1), 16 C.R.S. (1973).
The determination of the tax liability of a unitary business under the Colorado Income Tax Act requires a three step process: (1) the Department determines the entire net income of a unitary business; (2) part of the entire net income is apportioned to Colorado; (3) that portion of the net income attributable to Colorado, i.e., Colorado taxable income, is then multiplied by the applicable tax rate. The only question for review concerns the first prong of the analysis: What is the net income to which the apportionment formula is applied?
Section 39-22-301(1), 16 C.R.S. (1973), imposes a tax upon “each domestic corporation and foreign corporation doing business in Colorado annually in an amount equal to five percent of the net income of such corporation during the year derived from sources within Colorado....” Net income is defined in section 39-22-304(1) as “the corporation’s federal taxable income, as defined in the internal revenue code for the taxable year ...,” with certain modifications not relevant here. If the corporation derives income from sources both within and without Colorado, the entire net income is then apportioned as provided in section *40839-22-303, 16 C.R.S. (1973), to arrive at Colorado taxable income.
Under the Internal Revenue Code (IRC), federal taxable income does not include all income of all foreign corporations. Under 26 U.S.C. § 882(b) (1982), gross income of a foreign corporation includes only:
(1) gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and
(2) gross income which is effectively connected with the conduct of a trade or business within the United States.
To the extent that HP’s foreign subsidiaries did no business in the United States in the taxable years in question, they would, therefore, have no gross income within the meaning of IRC section 882(b), and also, no federal taxable income.1 Accordingly, HP’s foreign subsidiaries had no net income for Colorado tax purposes.
We have stated on numerous occasions that to ascertain the intent of the General Assembly in enacting a statute, words and phrases should be given effect according to their plain and obvious meaning. Engelbrecht v. Hartford Acc. & Indem., 680 P.2d 231, 233 (Colo.1984); see also Trinity Universal Insurance Co. v. Hall, 690 P.2d 227, 230 (Colo.1984) (responsibility of the supreme court “is to give effect to a legislative enactment according to its plain and obvious meaning.”). Moreover, taxing powers and taxing acts will not be extended beyond the clear import of the language used, nor will their operation be enlarged by analogy. Assoc. Dry Goods v. City of Arvada, 197 Colo. 491, 496, 593 P.2d 1375, 1378 (1979).
In spite of the express statutory limitations, the Department included the income of HP’s foreign subsidiaries in computing HP’s entire net income. The majority opinion would uphold that determination by, in effect, writing section 39-22-304(1) out of the Colorado Income Tax Act.
Thus, the majority holds that a reliance on section 39-22-304(1) “ignores other statutory sections which provide for a much broader view of taxable income,” citing §§ 39-22-301(1) and 39-22-303(5), 16 C.R. S. (1973). In so holding, the majority misreads the statutory provision imposing a tax and confuses the determination of net income with the apportionment of income, a separate stage in the determination of the tax liability of a unitary business under the Colorado Income Tax Act.
Section 39-22-301(1), which imposes a corporate tax of 5 percent of net income, states that income includes “income from any activities carried on in this state, regardless of whether carried on in intrastate, interstate, or foreign commerce.” But section 39-22-301(1) is qualified by section 39-22-304(1), which provides a definition of net income.
In holding that section 39-22-303(5) lends support to the Department’s claim that Colorado taxable income may be determined without regard to the statutory reference to federal taxable income, the majority ignores the crucial distinction between the statutory authorization for apportionment and the definition of what income is subject to combination and apportionment.
Section 39-22-303(6) provides in relevant part:
In case of two or more corporations, whether domestic or foreign, owned or controlled directly or indirectly by the same interest, the executive director may distribute or allocate the gross income and deductions between or among such corporations or may require returns on a consolidated basis, if deemed necessary, in order to prevent evasion of taxes and to clearly reflect income.2
*409This section does not give the Department the right to exceed the authority granted under Colorado law to “ascertain the net income attributable to sources within Colorado in order to effectuate the intent of the legislature.” Joslin, 200 Colo. at 297, 615 P.2d at 20. Section 39-22-303(5) merely provides that the Department may distribute or allocate the gross income and deductions in the case of two or more corporations owned or controlled by the same interest or may require consolidated returns in order to clearly reflect income.
Although section 39-22-303(5) speaks of gross income, this section does not authorize a separate method for determining taxable income when two or more controlled corporations are involved. First, Colorado gross income is defined in section 39-22-103(3), 16 C.R.S. (1973), as “federal gross income plus or minus [certain] modifications.” If the income from foreign subsidiaries is not federal gross income, then the foreign subsidiaries have no gross income to be distributed or allocated under section 39-22-303(5). Second, even if the gross income of a foreign subsidiary were within the purview of section 39-22-303(5), such gross income is not subject to taxation, in that the corporate tax is imposed only on that portion of the net income apportioned to Colorado. The section in question does authorize the department to use combined accounting for unitary businesses. That authorization is merely to distribute gross income and deductions to reflect income, i.e., net income. The section does not create any authorization for the inclusion of income which is not federal taxable income for a unitary business covered by a combined report.
The same analysis applies to the 1985 amendments to the apportionment section of the Colorado Income Tax Act, § 39-22-303(8) and (12)(c), 16B C.R.S. (1987 Supp.), also cited by the majority. These two provisions regulate the Department’s use of the combined report in the case of a unitary business, depending upon whether that businesses’ property and payroll is concentrated inside or outside the United States. Again, these two sections fall short of offering definite proof that the legislature wanted to define net income other than in the manner expressed in section 39-22-304(1), for example, by endorsing the use of a worldwide combined report. This is particularly true if, as the majority contends, the purpose of these two provisions was to ameliorate any possible conflict between the tax code’s definition of net income and the language found in the apportionment statutes. In fact, these two provisions exclude from a combined report some foreign income even if it is federal taxable income, and would expressly prohibit the inclusion of the foreign income at issue in this case.
My reading of the manner in which these statutory provisions fit together does not compel a distinction between foreign and domestic corporations when defining the limits of a unitary group and calculating a corporation’s net income base. Without examining the entire federal code, it is quite likely that IRC section 882(b) does not provide the last word on the federal tax liability of income from foreign subsidiaries of domestic corporations. But the issue is not our view on the efficacy of certain taxing schemes. As the Nebraska Supreme Court declared in considering this identical issue: “by attempting to combine the ‘piggybacking’ of the federal income tax with the provisions of the [state act], it may be that the state realized the smallest tax possible. This may be unfortunate, and not what the legislature intended, but it is, in fact, what was accomplished.” Kellogg Co. v. Herrington, 216 Neb. 138, 343 N.W.2d 326, 332-33 (1984).
The majority opinion places strong reliance on Joslin Dry Goods Co. v. Dolan, 200 Colo. 291, 615 P.2d 16. In Joslin, the sole issue was “whether the Department could require Joslin to file a combined report in light of the language found in § 39-22-303(5),” 200 Colo. at 294, 615 P.2d at 15. In Joslin, we upheld the Department’s determination that Joslin was part of a unitary business and, in computing Joslin’s corporate taxes, could employ a combined accounting report based upon the unitary operation of Joslin and its parent corporation.
*410Although Joslin provides strong support for the Department’s use of the unitary apportionment method, that case is not controlling precedent for the precise issue in the instant case. In Joslin, we stated that section 39-22-303(5) authorizes the Department to employ methods to “tax all the income that Colorado can constitutionally tax.” Quoting Coors v. Colorado, 183 Colo. 325, 517 P.2d 838, 200 Colo. at 296, 615 P.2d at 19. But the issue in the instant case is the definition of net income, not the constitutional question of whether Colorado can tax corporate entities on sources of income arising outside this state. Joslin was a subsidiary of Mercantile Stores, a Delaware corporation with no foreign subsidiaries. All of the corporations for which the court authorized combined reporting had federal taxable income. No income of a foreign subsidiary was involved.
Joslin does not stand for the proposition that combined reporting and unitary apportionment can be applied in whatever fashion the Department wishes, regardless of the presence of federal taxable income. In fact, in upholding the Colorado statutory scheme against a challenge that the guidelines were unconstitutionally vague, we declared:
The guidelines are found in the obligation of the corporate taxpayer to pay an income tax ‘equal to five percent of the net income from sources within Colorado’ (section 39-22-301(1)) and the duty of the department to ascertain the net income attributable to sources within Colorado in order to effectuate the intent of the legislature.
Joslin, 200 Colo. at 297, 615 P.2d at 20. The precise guideline — net income — which we found sufficient to constrain the Department in Joslin is the same guideline to be used as a starting point for the imposition of the tax liability of a unitary business.
Nor did we consider the inclusion of income not defined as federal taxable income in Lone Star Steel Co. v. Dolan, 668 P.2d at 916 (Colo.1983), also a case involving a United States parent and domestic subsidiaries. In that case, we held it proper to include as net income the dividends paid by Lone Star’s Domestic International Sales Corporation (DISC) to the parent corporation, which was federal taxable income in the hands of the parent, while not so treating the income of the DISC, which was not federal taxable income.
Some of the cases the majority relies upon are similar to Joslin and Lone Star in that they provide support for the concept of unitary apportionment in general, especially on constitutional grounds, without addressing the precise question at issue in this case. As even the majority concedes, the definition of net income is, at the least, the starting point in the analysis. Many of the cases discussed concern a state taxing scheme which defines net income differently than does Colorado, and therefore, do not present the same issue of statutory construction. For example, although in Container Corp. v. Franchise Tax Bd., 463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983), the Supreme Court upheld California’s application of the unitary apportionment method, noting the differences between California and the federal government’s taxing methods, the Court was reviewing statutory provisions which, in defining income, do not restrict the term to federal taxable income as does Colorado. See California Revenue and Tax Code § 25120(a), (West 1979) (“Business income means income arising from transactions and activities in the regular course of the taxpayer’s trade or business ...”).
The majority dismisses the decisions of two state courts, Kellogg, and Polaroid Corp. v. Comm’r of Revenue, 393 Mass. 490, 472 N.E.2d 259 (1984), as inapposite and excessively restrictive of the authorization for unitary apportionment.
The relevance of both these cases is the presence of statutory provisions similar to section 39-22-304(1), which the Nebraska and Massachusetts courts held restricted the amount of income which the state could include in the income tax base for purposes of unitary apportionment.
In Kellogg, the court examined Nebraska’s statutory definition of net income, which at the time was almost identical to *411Colorado’s, and concluded that Nebraska could not include in Kellogg’s tax base the income from its foreign subsidiaries. The Nebraska statutes had defined income as “the taxpayer’s federal taxable income derived from sources within the state.” 343 N.W.2d at 331. For its apportionment statute, Nebraska relied upon the Uniform Act (7A ULA 93 et seq. 1978), analogous to section 39-22-303. As the court explained the apportionment procedure, “a franchise tax is imposed on a corporation at a prescribed rate times the corporation’s federal taxable income apportioned in accordance with the Uniform Act.... [T]he tax base in Nebraska is defined by statute to be ‘federal taxable income.’ ” 343 N.W.2d at 331 (emphasis in original). In speaking of the apportionment provisions of the tax code, the court declared that “[t]he Uniform Act merely apportions the tax, and does not impose any tax obligation.” Id.
As the majority notes, Nebraska has amended its statutes in light of the Kellogg decision, see Neb.Rev.Stat. § 77-2734.05(3) (reissue 1986). This change suggests the irreconcilability of the original statutory definition of income with an intent to use an expanded definition of worldwide income as the tax base.
In Polaroid, the Supreme Judicial Court concluded that a provision of the Massachusetts apportionment statute, MGLA ch. 63, § 42 (West 1969), “appears to have nothing to do with determining a corporation’s taxable net income but only concerns the formula used to apportion that income.” 472 N.E.2d at 266. Although the court held in favor of Polaroid on the grounds that the commissioner could only exercise his authority to impose unitary apportionment pursuant to reasonable rules, the court noted in dicta that, in light of the Massachusetts definition of net income as federal gross income, see MGLA ch. 63, § 30(5)(a), “a statutory pattern that determines taxable income by starting with federal gross income casts doubt on the propriety of the adoption of a worldwide unitary approach in determining taxable net income.” 472 N.E.2d at 264 n. 10. The court in Polaroid went on to note the similarities between its statute and the Nebraska statute under review in Kellogg. Id.
The majority opinion will have the effect of lessening the connection between the federal and Colorado tax codes. But specific statutory provisions make clear the legislature’s intent to tie the Colorado Income Tax Act to the Internal Revenue Code. For example, section 39-22-102, 16B C.R.S. (1982), declares:
The general assembly hereby finds and declares that it is implementing section 19 of article X of the state constitution in order to: Simplify preparation of state income tax returns; aid interpretation of the state income tax law through increased use of federal judicial and administrative determinations and precedents; and improve enforcement of the state income tax laws through better use of information obtained from federal income tax audits.
If the legislature intended to depart from this continued reliance on the federal tax code, especially by extending the definition of net income beyond federal taxable income, it seems reasonable that the legislature would have clearly and explicitly changed the definitional sections of the income tax code, rather than drawing upon implications relating to the apportionment of income, which only come into play once taxable income has been determined.
In my judgment, the majority opinion stretches too far to arrive at a conclusion inconsistent with the applicable provisions of the Colorado Income Tax Act.
Accordingly, I would affirm the judgment of the district court.
I am authorized to say that Justice KIRSHBAUM joins me in this dissent.

. The Department concedes that HP's foreign subsidiaries had no federal taxable income within the meaning of 26 U.S.C. § 882(b).

. In 1975, the General Assembly amended section 39-22-303(5) by deleting the words "to prevent evasion of taxes.” See "An Act Concern-tag the Income Tax,” ch. 354, sec. 1, 1975 Colo. Sess. Laws 1493 (codified at § 39-22-303(5), 16 C.R.S. (1976 Supp.)). Other than that deletion, the language of that section has remained the same, except that the provision is now codified at section 39-22-303(6), 16B C.R.S. (1982).