Court Opinion

ID: 4682364
Source: CourtListenerOpinion
Date Created: 2021-04-29 16:07:50.435796+00
Date Added: 2024-06-11T08:04:07.822943
License: Public Domain

MAINE SUPREME JUDICIAL COURT                                                Reporter of Decisions
Decision: 2021 ME 26
Docket:   BCD-20-59
Argued:   October 6, 2020
Decided:  April 29, 2021

Panel:        MEAD, GORMAN, JABAR, HUMPHREY, and HORTON, JJ.
Majority:     MEAD, GORMAN, JABAR, and HUMPHREY, JJ.
Dissent:      HORTON, J.

                       SOMERSET TELEPHONE COMPANY et al.

                                               v.

                                  STATE TAX ASSESSOR

HUMPHREY, J.

       [¶1]      Somerset Telephone Company and affiliated corporations

(collectively, Somerset)1 appeal from a judgment entered in the Business and

Consumer Docket (Murphy, J.) in which the court affirmed the State Tax

Assessor’s denial of Somerset’s request for an income tax refund for the 2013

taxable year. Somerset argues principally that the trial court should have

granted its petition because the Assessor’s application of Maine’s corporate

income tax statutes resulted in an unconstitutional indirect tax on

extraterritorial income that was not subject to taxation in Maine. We affirm the

judgment.

   1 See infra n.7. Telephone and Data Systems, Inc., the parent corporation of Somerset Telephone
Company, was also listed on the appellants’ notice of appeal and was a party to the proceedings in
the trial court.
                                                                                                       2

                                         I. BACKGROUND

A.       Legal Background

         [¶2] A brief review of some of the relevant legal concepts and statutory

definitions is helpful in understanding the factual and procedural background

in this case. Beginning broadly, pursuant to the Due Process and Commerce

Clauses of the United States Constitution, “[a]s a general principle, a [s]tate may

not tax value earned outside its borders.”2 ASARCO Inc. v. Idaho State Tax

Comm’n, 458 U.S. 307, 315 (1982); see U.S. Const. amend. XIV, § 1; U.S. Const.

art. I, § 8, cl. 3; Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 164

(1983).      State governments may constitutionally tax—on an apportioned

basis—the income of a business operating in multiple states if the business

activity that generated the income is properly characterized as part of a

“unitary business.” Container Corp., 463 U.S. at 165-70; see Exxon Corp. v. Dep’t

of Revenue, 447 U.S. 207, 223-24 (1980); Mobil Oil Corp. v. Comm’r of Taxes,

445 U.S. 425, 436-39 (1980); Gannett Co. v. State Tax Assessor, 2008 ME 171,

¶¶ 11-12, 959 A.2d 741. Put another way, “[i]f a company is a unitary business,

     This constitutional limitation “derives from the virtually axiomatic proposition that the exercise
     2

of a state’s tax power over a taxpayer’s activities is justified by the protection, opportunities, and
benefits the state confers upon those activities. If the state lacks a minimum connection or definite
link with the taxpayer’s activities, and thus with the property, income, or gross receipts related to
those activities, it has not given anything for which it can ask return.” 1 Jerome R. Hellerstein et al.,
State Taxation § 8.07[1] at 8-72 (3d ed. 2000) (footnote omitted) (quotation marks omitted).
                                                                                 3

then a [s]tate may apply an apportionment formula to the taxpayer’s total

income in order to obtain a rough approximation of the corporate income that

is reasonably related to the activities conducted within the taxing [s]tate.”

Exxon Corp., 447 U.S. at 223 (quotation marks omitted); see Gannett Co., 2008
ME 171, ¶¶ 12, 17, 959 A.2d 741; Irving Pulp & Paper, Ltd. v. State Tax Assessor,

2005 ME 96, ¶ 6, 879 A.2d 15. “[T]he linchpin of apportionability in the field of

state income taxation is the unitary-business principle.”          Mobil Oil Corp.,
445 U.S. at 439.

      [¶3]     Like   many other       states,   Maine   applies    this   “unitary

business/formula apportionment approach” to quantify unitary business

income and identify the portion of that income that is fairly taxable by Maine.

Gannett Co., 2008 ME 171, ¶ 12, 959 A.2d 741. “The ‘hallmarks’ of a unitary

business relationship are ‘functional integration, centralized management, and

economies of scale.’” Id. ¶ 13 (quoting MeadWestvaco Corp. v. Ill. Dep’t of

Revenue, 553 U.S. 16, 30 (2008)); see State Tax Assessor v. Kraft Foods Grp., 2020
ME 81, ¶ 42, 235 A.3d 837. Indeed, “unitary business” is defined by Maine

statute as “a business activity which is characterized by unity of ownership,

functional integration, centralization of management and economies of scale.”

36 M.R.S. § 5102(10-A) (2021). The term “unitary group,” which is not defined

by statute, refers to a group of corporations whose members are engaged
                                                                                                   4

together in a unitary business. See Fairchild Semiconductor Corp. v. State Tax

Assessor, 1999 ME 170, ¶ 2 & n.4, 740 A.2d 584; Great N. Nekoosa Corp. v. State

Tax Assessor, 675 A.2d 963, 964 (Me. 1996).

       [¶4] Maine’s corporate income tax is imposed by a statute that provided,

during the years at issue in this case, that “[a] tax is imposed for each taxable

year . . . on each taxable corporation and on each group of corporations that

derives income from a unitary business carried on by 2 or more members of an

affiliated group.”3 36 M.R.S. § 5200(1) (2011).4 As we have stated, therefore,

“If a group of corporations meets the definition of a unitary business, . . . [it is]

taxed as a single business pursuant to Maine law.” Fairchild Semiconductor

Corp., 1999 ME 170, ¶ 2 n.3, 740 A.2d 584 (quotation marks omitted) (citing

36 M.R.S.A. § 5200 (1990)). For “taxable corporations that derive income from

a unitary business carried on by 2 or more members of an affiliated group with

business activity that is taxable both within and without [Maine], ‘income’

   3 An “affiliated group” is “a group of 2 or more corporations in which more than 50% of the voting
stock of each member corporation is directly or indirectly owned by a common owner or owners,
either corporate or noncorporate, or by one or more of the member corporations.” 36 M.R.S.
§ 5102(1-B) (2021).

   4  Title 36 M.R.S. § 5200(1) has since been amended but not in a way that affects our analysis in
this case. See P.L. 2017, ch. 474, § E-1 (emergency, effective Sept. 12, 2018) (codified at 36 M.R.S.
§ 5200(1) (2021)).
                                                                                                   5

means the net income of the entire group.” 36 M.R.S. § 5200(4) (2011).5 “Maine

net income,” in turn, “means, for any taxable year for any corporate taxpayer,

the taxable income of that taxpayer for that taxable year under the laws of the

United States as modified by” statutory additions and subtractions and

apportionable pursuant to Maine statutes. 36 M.R.S. § 5102(8) (2011);6 see also

36 M.R.S. § 5200(5) (2021). Thus, for purposes of Maine corporate taxation,

“net income” is the federal taxable income for the tax year as modified and

apportioned pursuant to Maine’s statutes. Id. §§ 5102(8), 5200(5).

       [¶5] One of the statutory modifications that must be made to a unitary

group’s federal taxable income is a subtraction of any income that Maine cannot

constitutionally tax, 36 M.R.S. § 5200-A(2)(F) (2021), which includes

“nonunitary” income—income from sources outside the group’s unitary

business activity, see, e.g., Gannett Co., 2008 ME 171, ¶ 17, 959 A.2d 741. After

this and any other modifications to the unitary group’s federal taxable income,

the statutory apportionment formula is applied to the group’s modified federal

taxable income to calculate “Maine net income,” the portion of the group’s

   5  Title 36 M.R.S. § 5200(4) has since been amended but not in a way that affects our analysis in
this case. See P.L. 2017, ch. 474, § E-3 (emergency, effective Sept. 12, 2018) (codified at 36 M.R.S.
§ 5200(4) (2021)).

   6  Title 36 M.R.S. § 5102(8) has since been amended but not in a way that affects our analysis in
this case. See P.L. 2015, ch. 300, § A-38 (effective Oct. 15, 2015) (codified at 36 M.R.S. § 5102(8)
(2021)).
                                                                                                      6

unitary income that is “apportionable to” Maine and subject to Maine corporate

income tax. 36 M.R.S. § 5102(8) (emphasis added); see also id. § 5200(5).

B.       Facts and Procedural History

         [¶6] The facts that follow are drawn from the parties’ stipulations.

See Kraft Foods Grp., 2020 ME 81, ¶¶ 2, 13, 235 A.3d 837. Somerset Telephone

Company is a small landline telecommunications company located in North

Anson. During the 2012 and 2013 tax years, Somerset Telephone Company and

about 180 other corporations were members of a unitary group known as the

TDS Group. All of the TDS Group’s members were engaged together in a unitary

business, although only some of them—Somerset, the affiliated taxpayer group

at issue here—conducted business activity in Maine.7 Income earned by the

TDS Group’s unitary business—unitary income—was generated both within

and outside Maine. Some TDS Group members also earned income from

sources separate from the unitary business.8 This nonunitary income was

   7 This subset includes Somerset Telephone Company; it does not include Telephone and Data

Systems, Inc. The taxpayer entity listed on the Maine tax returns included in the stipulated record is
“SOMERSET TELEPHONE CO & AFFIL.” The record indicates that more than twenty TDS Group
members conducted business activity in Maine during the tax years at issue, 2012 and 2013, and that
for those tax years, a single Maine return, including an attached “combined report,” was filed on
behalf of all of these Maine-nexus TDS Group members. See 36 M.R.S. §§ 5220(5), 5244 (2021);
18-125 C.M.R. ch. 810, §§ .02, .05 (effective Sept. 12, 2010). The Assessor does not dispute that all of
the Maine-nexus TDS Group members were members of the affiliated group and engaged in the
unitary business. See 36 M.R.S. § 5220(5).

    The parties agree that—unlike in Fairchild Semiconductor Corp.—the corporations that earned
     8

nonunitary income were members of the TDS Group, the unitary group at issue here. See Fairchild
Semiconductor Corp. v. State Tax Assessor, 1999 ME 170, ¶¶ 2-3, 740 A.2d 584.
                                                                                                   7

derived entirely from business activities occurring outside Maine and was not

subject to Maine taxation.

       [¶7] In the 2012 tax year, the TDS Group had no unitary income—its

unitary business experienced a loss of approximately $131 million. However,

the nonunitary income earned by its members amounted to approximately

$149 million. The TDS Group’s federal taxable income, which netted the

group’s unitary loss against its nonunitary income, was therefore a positive

number—approximately $18 million. See 26 U.S.C.S. § 63(a) (LEXIS through

Pub. L. No. 116-282).

       [¶8] In October 2013, Somerset, the subset of TDS Group members that

conducted business in Maine during 2012 and 2013, filed a 2012 Maine

corporate income tax return. The return first listed the TDS Group’s federal

taxable income of approximately $18 million. Various modifications in the form

of additions and subtractions were then applied to that figure pursuant to

36 M.R.S. § 5200-A (2011).9 One of the modifications—the subtraction of $149

million representing the nonunitary income received by TDS Group members

in 2012—was applied pursuant to 36 M.R.S. § 5200-A(2)(F). The modifications

   9 Portions of 36 M.R.S. § 5200-A have since been amended but not in ways relevant to the issues

in this appeal. See, e.g., P.L. 2019, ch. 659, § I-2 (effective June 16, 2020) (codified at 36 M.R.S.
§ 5200-A(2)(AA) (2021); P.L. 2019, ch. 527, §§ A-3, A-4 (effective Sept. 19, 2019) (codified at
36 M.R.S. § 5200-A(2)(AA), (FF) (2021)).
                                                                                                     8

resulted in “adjusted federal taxable income” of approximately negative $162

million, and thus Somerset had no Maine corporate income tax liability for the

2012 tax year.

        [¶9] Before filing its Maine corporate income tax return for the 2013 tax

year, Somerset sought a ruling from Maine Revenue Services permitting it to

“carry forward,” as a deduction from the TDS Group’s 2013 federal taxable

income, the $131 million unitary business loss that the TDS Group realized in

2012. Somerset argued that if the TDS Group had hypothetically not received

any nonunitary income in 2012, it would have been entitled to take a net

operating loss carryforward deduction in 2013,10 and that disallowing the

deduction would therefore increase Somerset’s 2013 Maine tax liability due to

the TDS Group’s receipt of extraterritorial nonunitary income in 2012.

Somerset proposed accounting for the 2012 unitary loss by subtracting $131

million from its 2013 federal taxable income for Maine either as a net loss

carryforward deduction or as a modification pursuant to 36 M.R.S.

   10 The Internal Revenue Code permits deduction of net operating losses as part of the calculation
of “taxable income,” 26 U.S.C.S. §§ 63(a), 172(a)-(c) (LEXIS through Pub. L. No. 116-259), and defines
“net operating loss” as “the excess of the deductions allowed . . . over the gross income,” 26 U.S.C.S.
§ 172(c). “In other words, if, after all allowable deductions are taken in a given tax year, a taxpayer
ends up with a negative number, that figure is a ‘net operating loss’ that can be carried over or back
to other tax years and used as a deduction in those other tax years pursuant to section 172 of the
Internal Revenue Code.” Fairchild Semiconductor Corp., 1999 ME 170, ¶ 1 n.2, 740 A.2d 584.
                                                                                                      9

§ 5200-A(2)(F). The Assessor, in a nonbinding advisory ruling, rejected both

alternatives. See 5 M.R.S. § 9001 (2021).

        [¶10] In compliance with the advisory ruling, Somerset filed its 2013

Maine tax return showing positive Maine taxable income and a state income tax

liability. It later filed an amended 2013 return on which it listed an adjusted

federal taxable income that had been reduced by the TDS Group’s 2012 $131

million net operating loss, resulting in a decreased (but still positive) Maine

taxable income and decreased tax liability. Somerset requested a partial refund

to account for the difference. The Assessor denied the refund claim and

Somerset’s subsequent request for reconsideration.

        [¶11] In April 2017, Somerset filed a five-count petition for review and

de novo determination in the Superior Court (Kennebec County).11 See 5 M.R.S.

§§ 11001(1), 11002 (2021); 36 M.R.S. § 151(2)(E)-(G) (2021); M.R. Civ. P. 80C.

After the matter was transferred to the Business and Consumer Docket, the

parties filed exhibits and statements of stipulated facts and, later, a corrected

stipulation of certain facts. Somerset moved for a summary judgment, and the

   11In Count 1, Somerset alleged that the Assessor’s decision ran contrary to the language of Maine’s
corporate income tax statutes; in Counts 2 and 3, it alleged that the decision resulted in a tax scheme
that violated the United States and Maine Constitutions. Somerset has not invoked the Maine
Constitution on appeal. In Counts 4 and 5, Somerset sought relief in the form of alternative
apportionment, see, e.g., State Tax Assessor v. Kraft Foods Grp., Inc., 2020 ME 81, ¶¶ 1 n.2, 14-15, 235
A.3d 837, but on appeal it has not challenged the trial court’s judgment in the Assessor’s favor on
those counts.
                                                                              10

Assessor opposed the motion. The trial court held a nontestimonial hearing

and issued an order denying Somerset’s motion for summary judgment. Based

on the parties’ agreement that no factual or legal issues remained for

adjudication, the court entered a final judgment in the Assessor’s favor.

Somerset timely appealed from the judgment. See 14 M.R.S. § 1851 (2021); M.R.

App. P. 2B(c)(1). After oral argument, we requested supplemental memoranda,

which the parties supplied.

                                II. DISCUSSION

      [¶12] Because the trial court’s review of the Assessor’s decision was

de novo, see 36 M.R.S. § 151(2)(G), we review the court’s interpretation of the

applicable statutes and constitutional provisions directly, without deference to

the Assessor’s legal determinations, Kraft Foods Grp., 2020 ME 81, ¶ 13, 235
A.3d 837. We review questions of constitutional and statutory interpretation

de novo. Goggin v. State Tax Assessor, 2018 ME 111, ¶ 20, 191 A.3d 341

(constitutional provisions); Irving Pulp & Paper, Ltd., 2005 ME 96, ¶ 8, 879 A.2d
15 (statutes).

      [¶13] To address the question at issue on appeal, we review (A) whether

the deduction of a hypothetical federal net operating loss is authorized by

Maine’s statutes and (B) whether the Constitution demands that such a net

operating loss be allowed.
                                                                               11

A.    Statutory Interpretation

      [¶14] We construe Maine’s tax statutes based on their plain language “to

effectuate the intent of the Legislature,” considering “the language in the

context of the whole statutory scheme.” Eagle Rental, Inc. v. State Tax Assessor,

2013 ME 48, ¶ 11, 65 A.3d 1278 (quotation marks omitted). As summarized

above, Maine uses federal taxable income as a starting point for calculating the

income that is taxable in Maine. See 36 M.R.S. §§ 5102(8), 5200(5). The

Legislature did not, by beginning with federal taxable income, adopt and

incorporate theoretical federal loss carryover deductions that are at odds with

explicit statutory language in Maine establishing a tax based on the federal

taxable income of the taxpayer for a taxable year. See id. § 5102(8).

      [¶15]   Although in federal taxation, “a taxpayer may carry its net

operating loss either backward to past tax years or forward to future tax years

in order to set off its lean years against its lush years, and to strike something

like an average taxable income computed over a period longer than one year,”

United Dominion Indus. v. United States, 532 U.S. 822, 825 (2001) (quotation

marks omitted), no such provision was made in the Maine statutes that applied

to the tax years at issue here. In Maine at the relevant time, a corporation was

taxed on its “Maine net income,” meaning the federal taxable income “for that

taxable year . . . as modified by section 5200-A and apportionable to this State
                                                                                                12

under chapter 821 [36 M.R.S. §§ 5210-5212 (2011)12].” 36 M.R.S. § 5102(8)

(emphasis added); see also id. § 5200(5). “To the extent that it derives from a

unitary business carried on by 2 or more members of an affiliated group, the

Maine net income of a corporation is determined by apportioning that part of

the federal taxable income of the entire group that derives from the unitary

business.” Id. § 5102(8).

        [¶16] Section 5200-A prescribes several additions and subtractions as

modifications to the taxable income of the taxpayer for the tax year.

See 36 M.R.S. § 5200-A. Pertinent here, any nonunitary income realized during

the taxable year is subtracted from the federal taxable income as “[i]ncome this

State is prohibited from taxing under the Constitution of Maine or the United

States Constitution to the extent that it is included in the taxpayer’s federal

taxable income.” 36 M.R.S. § 5200-A(2)(F). Only limited subtractions related

to net operating losses were allowed pursuant to Maine’s statute governing

modifications, and those subtractions did not apply for purposes of the taxation

at issue here. See, e.g., id. § 5200-A(1)(H), (2)(H).

        [¶17] After the additions and subtractions are made, “[i]n order to

determine the portion of a unitary group’s income that is properly taxable by

   12 These statutes have since been amended or repealed, though the statutes in chapter 821 still
require apportionment. See P.L. 2019, ch. 401, §§ C-9, C-10 (effective Sept. 19, 2019) (codified at
36 M.R.S. §§ 5210-5211 (2021)).
                                                                                                  13

Maine when the group has non-Maine source income, the Maine Tax Code

requires that the apportionment formula be applied to the federal taxable

income of the entire unitary group as a single entity.” Fairchild Semiconductor

Corp., 1999 ME 170, ¶ 10, 740 A.2d 584; see 36 M.R.S. § 5211.13

         [¶18] Considering these statutes together, although Maine relies on a

federal taxable income figure as a starting point for the calculation of the

taxable income in Maine for a tax year, Maine’s statutes express no purpose or

requirement that the Tax Assessor look behind a taxpayer’s federal taxable

income in other tax years to determine whether a carryforward or carryback

should be permitted for the tax year in question. Somerset’s argument that

Maine is indirectly taxing nonunitary income is based primarily on a United

States Supreme Court opinion in which, unlike the circumstances here, the

taxpayer challenged a statute affecting a deduction from income received

within a tax year. Hunt-Wesson, Inc. v. Franchise Tax Bd., 528 U.S. 458, 460-63

(2000). Specifically, the Supreme Court reviewed a California statute that

   13   As the apportionment statute provided, and still provides,

         Any taxpayer, other than a resident individual, estate, or trust, having income from
         business activity which is taxable both within and without this State, other than the
         rendering of purely personal services by an individual, shall apportion his net income
         as provided in this section. Any taxpayer having income solely from business activity
         taxable within this State shall apportion his entire net income to this State.

36 M.R.S. § 5211(1) (2011); 36 M.R.S. § 5211(1) (2021).
                                                                              14

permitted a deduction of interest expenses from gross income only to the

extent that the expenses exceeded the taxpayer’s nonunitary income within the

tax year. Id.

      [¶19] In contrast, here the taxpayer is seeking an income modification

based on a loss taken on its federal return in another tax year. The group was

not eligible for a net operating loss carryforward on its 2013 federal tax return

because it had already accounted for the loss in calculating its federal taxable

income in 2012. Whether Somerset was eligible for a carryforward in Maine on

its 2013 tax return must be determined by the application of Maine statutes

governing income modifications and apportionment, see 36 M.R.S. §§ 5200-A,

5211, based on the actual figures reported for the year 2013, beginning with

the amount of the TDS Group’s federal taxable income for that year. To create

a hypothetical scenario in which the TDS Group did not have any nonunitary

income in 2012 and therefore the amount of the federal taxable income for

2013 would have been different, as Somerset urges us to do so, does not

comport with the plain mandates of Maine’s statutory scheme.

      [¶20] No statute was in place that required or allowed any addition or

subtraction of a carryover that could have been taken if the unitary group

subject to federal taxation had received only unitary income—for instance, if

its members had reorganized themselves such that all nonunitary business was
                                                                              15

conducted by separate, nonmember entities. When the Maine Legislature has

addressed net operating loss carryforwards through the statute governing

modifications, it has done so explicitly; for instance, as to the tax years 2009,

2010, and 2011, the Legislature required the amount of the federal loss

carryforward to be added to the federal taxable income for purposes of

calculating Maine net income for those years. See 36 M.R.S. § 5200-A(1)(V).

Any losses carried forward to 2009, 2010, or 2011 could then, in certain

circumstances, be deducted in Maine beginning in 2012.             See 36 M.R.S.

§ 5200-A(2)(H). The Maine statutes governing modification that were in effect

for the 2012 and 2013 tax years did not require or permit any addition or

subtraction based on the taxpayer’s federal taxable income for other taxable

years.

         [¶21] Although in Fairchild Semiconductor, 1999 ME 170, 740 A.2d 584,

we interpreted Maine’s statutes to require an adjustment to the federal taxable

income reported on a return because the federal and Maine unitary groups had

different memberships, we clearly distinguished those circumstances from a

situation like that which is before us here, where the calculation of the unitary

income—not the identity of the unitary group’s members—is at issue. Id.

¶¶ 11, 15-16. We noted that, although the federal taxable income had to be

recalculated for the Maine taxpayer group for the tax year in question, the
                                                                              16

taxpayer there did not seek to “manipulate . . . income or losses in a way that

would change . . . treatment pursuant to the Internal Revenue Code.” Id. ¶ 16;

see also id. ¶¶ 13-16 (distinguishing cases); cf. Graham v. State Tax Comm’n, 369
N.Y.S.2d 863 (N.Y. App. Div. 1975) (requiring the state’s taxing authority to

allow a nonresident individual a deduction for a net operating loss when the

federal return for that year did not report a loss due entirely to out-of-state

income). We emphasized that the Maine taxpayer group in Fairchild was not

“trying to reconfigure or recalculate its income. Rather the group merely

s[ought] treatment as a separate entity” without regard to the income of other

corporations with which it was affiliated for federal tax purposes. Fairchild

Semiconductor, 1999 ME 170, ¶ 15, 740 A.2d 584.

      [¶22] We specifically distinguished the facts in Fairchild Semiconductor

from those in Tiedemann v. Johnson, 316 A.2d 359, 360-61 (Me. 1974), where a

taxpayer sought to report income in different years at the federal and state

levels. We held that Fairchild Semiconductor’s situation as a taxpayer was

different because it was merely seeking “separate treatment for its unitary

group the one and only time the federal taxable income of the group is

calculated.”   Fairchild Semiconductor, 1999 ME 170, ¶ 16, 740 A.2d 584

(emphasis added). That is not the case in the matter before us, where the

unitary group in essence seeks a recalculation of its 2012 federal taxable
                                                                                                      17

income for purposes of taking a loss in Maine for the 2013 taxable year.

Although in Fairchild Semiconductor, we applied federal law to determine the

federal taxable income of the reconstituted group “for that taxable year,”

36 M.R.S. § 5102(8), we did not thereby require a separate application of

federal law to every conceivable taxable year in which a loss carryover could

have been generated if the group itself had been configured differently so that

it had no nonunitary income.14

        [¶23] Other states have considered the consequences of federal net

operating loss carryovers and held that, absent a state’s statutory authorization,

a loss may not be carried over on a state return to a tax year other than the year

for which a loss was actually claimed on a federal tax return.15 In New York, the

   14 The dissent ignores this distinction and asserts that the existence of a net operating loss in 2012
necessitates a 2013 deduction, even though Maine’s statutes did not authorize that deduction for the
2013 tax year. See 36 M.R.S. § 5102(8) (2011) (establishing a tax based on the federal taxable income
of the taxpayer for a taxable year).

   15 To the extent that other state courts have held that the federal methodology was incorporated
into state law, those courts were either interpreting statutes that fully incorporated the federal
definition of taxable income, see Sch. St. Assocs. v. District of Columbia, 764 A.2d 798, 806-08 (D.C.
2001) (en banc); Cooper Indus. v. Ind. Dep’t of State Revenue, 673 N.E.2d 1209, 1212-14 (Ind. T.C.
1996); interpreting statutes that specifically authorized a deduction even if none was taken on that
year’s federal return, see McJunkin Corp. v. W. Va. Dep't of Tax & Revenue, 457 S.E.2d 123, 126 (W.Va.
1995); construing a statutory amendment that repealed a limitation on carryback deductions,
Revenue Cabinet v. Southwire Co., 777 S.W.2d 598, 600 (Ky. Ct. App. 1989); or deferring to the state
tax authority’s interpretation of the statute as authorized by state law, see NL Indus. v. N.D. State Tax
Comm'r, 498 N.W.2d 141, 146-47 (N.D. 1993). Although the dissent posits that Searle
Pharmaceuticals, Inc. v. Department of Revenue, 512 N.E.2d 1240, 1246-51 (Ill. 1987), is analogous to
the matter before us, the court in that case reviewed a state tax statute to determine whether it
violated either the Equal Protection Clause or a state constitutional provision regarding tax
uniformity, and no such issues have been presented here.
                                                                               18

Court of Appeals held that the New York net operating loss deduction taken for

purposes of a franchise tax on insurance companies could not “exceed the

amount deducted on the Federal return for the corresponding year” and

concluded that no independent application of the federal method of

computation was necessary.        Royal Indem. Co. v. Tax Appeals Tribunal,

549 N.E.2d 1181, 1182 (N.Y. 1989). That court reasoned that a deduction “is a

matter of legislative grace” and that the taxpayer had not carried its burden of

establishing a right to the deduction based on a statute defining taxable income

to begin with the income required to be reported to the United States for a

taxable year, with net operating loss deductions not to exceed that amount. Id.;

see N.Y. Tax Law § 1503(a), (b)(4)(B) (Consol. LEXIS through 2021 released

Chapters 1-49, 61-68) (defining taxable income based on the amount that “the

taxpayer is required to report to the United States treasury department, for the

taxable year” and providing that a net operating loss deduction may not exceed

the deduction allowable for federal tax purposes); see also Am. Emps.’ Ins. Co. v.

State Tax Comm’n, 494 N.Y.S.2d 513, 514 (N.Y. App. Div. 1985) (holding that a

franchise tax statute limiting deductions to losses deducted on federal returns

within a taxable year did not allow for a net operating loss deduction to be taken

“without having a valid and reciprocal loss claim on [the] Federal income tax

return for the same taxable year”).
                                                                                 19

      [¶24] The Supreme Court of Oklahoma similarly held that a statute

requiring the determination of Oklahoma taxable income by beginning with

reported federal taxable income “does not create a deduction based on net

operating loss.” Utica Bankshares Corp. v. Okla. Tax Comm’n, 892 P.2d 979, 982

(Okla. 1994). The court held that “tax deductions are a matter of legislative

grace” and that the statute defining Oklahoma taxable income “does not create

a federal [net operating loss] deduction.” Id. at 983. As a result, the court

affirmed the denial of the taxpayer’s claimed deductions to the extent that they

exceeded “the amount of federal net operation loss deduction used at the

federal level for the corresponding tax years.” Id. (emphasis added). One justice

concurred to specifically indicate that “the state deduction ‘allowed’ is based

upon the federal deduction that was ‘allowed’ by the I.R.S. for use on the return.

The state deduction is not based upon a deduction theoretically available under

federal law but which was not actually used on the federal return.” Id. at 984

(Summers, J., concurring) (emphasis added).

      [¶25] The Supreme Court of Oklahoma held that because no state

statutory provision “specifically adopt[ed] all federally allowed deductions,”

any adjustments to claimed carryover losses pertained only to limit deductions

actually reflected in that year’s federal return. Getty Oil Co. v. Okla. Tax Comm’n,

563 P.2d 627, 630 (Okla. 1977). “If the Legislature had intended to allow a
                                                                                                    20

carryover deduction in other situations, it could have provided for such an

adjustment.” Id. at 631.

       [¶26] That court applied the same reasoning in a case in which the

taxpayer’s earlier loss was, as here, taken in a federal tax return filed by a

federal consolidated group that reported no overall loss for that year. Postal

Fin. Co. v. Okla. Tax Comm’n, 594 P.2d 1205, 1205-06 (Okla. 1977).16 The court

held that the loss could not be claimed for a different tax year for purposes of

state taxation and that “[t]he rationale of Getty is not destroyed so as not to be

applicable here because of the consolidated return.” Id.

       [¶27] In considering the effect of the previous year’s net operating loss

on the calculation of taxable income for a taxable year, the Illinois Supreme

Court affirmed the denial of a deduction where, due to income reported in a

consolidated federal income tax filing, no net operating loss could be claimed

on the federal return for that previous year.                     Bodine Elec. Co. v. Allphin,

410 N.E.2d 828, 829-33 (Ill. 1980). “Though a given taxpayer may therefore

    16  We did not find this case persuasive for purposes of deciding the issue in Fairchild
Semiconductor because Oklahoma’s statute—unlike Maine’s—required that the calculation of that
state’s taxable income begin with the “reported” income on the federal return. 1999 ME 170, ¶ 17,
740 A.2d 584 (quotation marks omitted). Here, however, the parties do not, as in Fairchild
Semiconductor, dispute or contest the composition of the group that reported its income and losses
on the federal returns in 2013, and we are focused directly on whether a loss must be allowed in a
different year for purposes of federal and state taxation. On this issue we find the reasoning in Postal
Finance Co. v. Oklahoma Tax Commission, 594 P.2d 1205, 1205-06 (Okla. 1977), persuasive despite
the differences in the statutory language.
                                                                             21

enjoy no tax benefit from a particular loss, we cannot say that the scheme

adopted by the General Assembly is an improper exercise of its taxing

authority.” Id. at 833.

      [¶28] Maine did not tax 2012 nonunitary income in 2013 but simply

denied a deduction in 2013 because Maine’s statutes did not provide for one.

Because Maine’s statutes did not call for the application of a carryforward loss

that would only hypothetically have been allowed under federal law, we must

next examine the constitutionality of Maine’s taxation scheme.

B.    Constitutionality

      [¶29] Somerset contends that Maine must consider the extent of unitary

income on a timeline broader than a single tax year because the manner in

which Maine taxes a unitary business, see 36 M.R.S. § 5200(4), can result in the

imposition of higher taxes on a taxpayer because it received nonunitary income

in another year. Specifically here, it contends that it must be allowed to carry

the 2012 net operating loss arising from the unitary business forward into the

2013 Maine tax year because if it had not realized nonunitary business income

in 2012, it could have carried forward the net operating loss of the unitary

business for purposes of calculating its 2013 federal taxable income—the

starting point for determining the income taxable in Maine. Somerset contends
                                                                                22

that, by not allowing the loss carryover on its Maine return for 2013, Maine has

imposed an unconstitutional indirect tax on nonunitary income from 2012.

      [¶30] “A person challenging the constitutionality of a statute bears a

heavy burden of proving unconstitutionality, since all acts of the Legislature are

presumed constitutional.”      Goggin, 2018 ME 111, ¶ 20, 191 A.3d 341

(alterations omitted) (quotation marks omitted).             “To overcome the

presumption of constitutionality, the party challenging the statute must

demonstrate convincingly that the statute and the Constitution conflict. All

reasonable doubts must be resolved in favor of the constitutionality of the

statute.” Id.   (alterations omitted) (citation omitted) (quotation marks

omitted).

      [¶31] “The Commerce Clause and the Due Process Clause impose distinct

but parallel limitations on a State’s power to tax out-of-state activities. The Due

Process Clause demands that there exist some definite link, some minimum

connection, between a state and the person, property or transaction it seeks to

tax, as well as a rational relationship between the tax and the values connected

with the taxing State. The Commerce Clause forbids the States to levy taxes that

discriminate against interstate commerce or that burden it by subjecting

activities to multiple or unfairly apportioned taxation.” MeadWestvaco Corp.,
553 U.S. at 24 (citations omitted) (quotation marks omitted). Pursuant to the
                                                                                   23

Due Process and Commerce Clauses of the United States Constitution, see U.S.

Const. art. I, § 8, cl. 3; U.S. Const. amend. XIV, § 1, Maine “may not, when

imposing an income-based tax, tax value earned outside its borders,” Container

Corp. of Am., 463 U.S. at 164 (quotation marks omitted); see Irving Pulp & Paper,

Ltd., 2005 ME 96, ¶ 6, 879 A.2d 15. Although the unitary business principle

permits Maine to tax income arising out of certain interstate activities, the state

may not tax extraterritorial, nonunitary income. See Hunt-Wesson, Inc., 528 U.S.

at 460-61, 464.

      [¶32] “The United States Constitution does not, however, require the

states to employ any particular method for achieving fair apportionment of

income for tax purposes,” Irving Pulp & Paper, Ltd., 2005 ME 96, ¶ 6, 879 A.2d
15, and the deduction of a net operating loss through a carryover is obtained

“not as of right, but as of grace,” United States v. Olympic Radio & Television, Inc.,

349 U.S. 232, 235 (1955).          Although a state’s imposition of a tax is

unconstitutional if it impermissibly taxes income “outside its jurisdictional

reach,” Hunt-Wesson, Inc., 528 U.S. at 468, statutes that make “reasonable

efforts properly to allocate . . . between taxable and tax-exempt income” are

upheld even if they increase an entity’s tax obligation, id. at 466. Thus, the
                                                                                                   24

existence of a tax disadvantage to a particular taxpayer does not necessarily

establish unconstitutional taxation.17

       [¶33] When the Supreme Court of the United States held, in Hunt-Wesson,

Inc., that California had imposed a tax that discriminated against interstate

commerce, it did so because the state had allowed a unitary business to deduct

its interest expense only to the extent that, for that taxable year, the amount

exceeded “certain out-of-state income arising from unrelated business activity

of a discrete business enterprise.” 528 U.S. at 460, 466-68. There, the existence

of the out-of-state income in that tax year directly and explicitly increased the

taxpayer’s tax burden for that year. Id.

       [¶34] Using federal taxable income for a particular tax year as a starting

point for calculating taxable income in a state does not, however, violate the

Constitution. See Bodine Elec. Co., 410 N.E.2d at 833. And the decision whether

to allow a carryover of a net operating loss for purposes of state taxation is a

matter for state legislatures. See Olympic Radio & Television, Inc., 349 U.S. at

   17 The dissent is narrowly focused on the tax disadvantage, stating that the mere fact of a unitary

net operating loss in 2012 made Somerset eligible to take a carryforward deduction in 2013,
Dissenting Opinion ¶ 51, regardless of the “taxable income of that taxpayer for that taxable year,”
here 2013, “under the laws of the United States.” 36 M.R.S. §§ 5102(8), 5200(5) (2011) (emphasis
added). The dissent’s interpretation—not the Assessor’s position—is in conflict with Maine’s
statutes. It is undisputed that, due to nonunitary income, TDS Group was not eligible for a net
operating loss carryforward deduction on its federal return in 2013, and the Constitution does not
compel us to create such a deduction for purposes of Maine taxation for that year. See Hunt-Wesson,
Inc. v. Franchise Tax Bd., 528 U.S. 458, 466 (2000).
                                                                              25

235; see also B.F. Goodrich Co. v. Dubno, 490 A.2d 991, 995 (Conn. 1985)

(“Although corporations would be further benefited by greater availability of

loss carryover deductions, that is a consideration for the legislature, not the

courts.”); cf. Boulet v. State Tax Assessor, 626 A.2d 33, 35 (Me. 1993) (“Tax

credits are a matter of legislative grace that can be broadened, constricted or

eliminated at any time.”).

      [¶35] The Constitution does not require a state to compare a group’s

actual federal taxable income in a tax year with the hypothetical federal taxable

income it might have realized in that year if, for instance, the group had, in

another year, been reconstituted in a way that excluded all nonunitary income.

Such a hypothetical group might have behaved differently in the other year—

or in the taxable year, for that matter—due to the lack of income- and loss-

sharing with a larger group or due to various other business- and tax-related

considerations at a state, national, or international level.

      [¶36]    Although the application of Maine’s taxation statutes might

preclude a group from taking a deduction or receiving a credit for a previous

year’s net operating loss, that does not mean that the group is being taxed on

nonunitary income during the tax year for which a carryover is denied.

See Hunt-Wesson, Inc., 528 U.S. at 466 (upholding state taxation statutes as long

as they make a reasonable effort to allocate between taxable and tax-exempt
                                                                            26

income). No part of the nonunitary income reported in 2013 has been taxed,

and thus there has been no unconstitutional taxation of that nonunitary income.

Nor has any 2012 nonunitary income been taxed, given that the State of Maine

imposed no tax on Somerset whatsoever in 2012. In short, the Tax Assessor’s

determination that the unitary business loss in 2012 could not be deducted

from the unitary 2013 income does not render any part of the unitary income

reported in 2013 nonunitary income. Within neither year has there been an

unfair apportionment or an unconstitutional taxation of extraterritorial

income. See id.; MeadWestvaco Corp., 553 U.S. at 24-25. In each year, the

application of the Maine statutes reflected a “reasonable effort[] properly to

allocate . . . between taxable and tax-exempt income.” Hunt-Wesson, Inc.,
528 U.S. at 466.

      [¶37] In essence, Somerset seeks to create a new deduction in Maine that

was not authorized by statute and is not required by the Constitution. Because

Maine statutes do not provide for a carryover of the 2012 net operating loss to

Maine’s 2013 tax year, and because no such carryover is constitutionally

required, we affirm the judgment of the Superior Court affirming the decision

of the State Tax Assessor.

      The entry is:

                   Judgment affirmed.
                                                                             27

HORTON, J., dissenting.

      [¶38] I respectfully dissent. In Hunt-Wesson, Inc. v. Franchise Tax Board,

528 U.S. 458, 460-65 (2000), the United States Supreme Court held that a state

cannot limit or deny a tax deduction solely because the taxpayer received

income that the state cannot constitutionally tax. Today our Court holds the

opposite. In Fairchild Semiconductor Corp. v. State Tax Assessor, 1999 ME 170,

¶¶ 6-12, 740 A.2d 584, we specifically held that the Assessor could not deny a

unitary business group the ability to take a net operating loss deduction as an

offset against its Maine taxable income, despite the fact that the unitary

business did not—and could not—report a net operating loss in its federal

return because its Maine loss was more than offset by nonunitary income not

apportionable to Maine. Today the Court holds the opposite.

      [¶39] In this case, it is undisputed that the sole reason that TDS Group

was unable to take a net operating loss carryforward deduction on its 2013

federal return was that in 2012 certain members of the unitary business group

received $149 million in nonunitary income that more than offset the group’s

$131 million unitary net operating loss for that tax year and thereby caused
                                                                              28

TDS Group’s 2012 federal tax return to reflect net taxable income rather than a

net operating loss. As was the case in Fairchild, “if the members of the unitary

group had calculated their taxable income separately at the federal level, the

loss incurred in the [2012] tax year would have been available to the unitary

group corporations as [a net operating loss carryforward] deduction in the

[2013] tax year,” id. ¶ 3.

      [¶40] The Assessor acknowledges that the nonunitary income must be

excluded from TDS Group’s 2012 federal taxable income for purposes of

calculating Somerset’s 2012 Maine corporate income tax obligation but

maintains that it cannot be excluded from TDS Group’s 2012 federal taxable

income for purposes of calculating Somerset’s 2013 Maine corporate income

tax obligation. In other words, although the Assessor agrees that TDS Group

incurred a unitary net operating loss in 2012, it disputes Somerset’s claim to a

net operating loss deduction against 2013 unitary income based on that same

net operating loss.      The Court’s endorsement of this self-contradictory

interpretation is contrary to our own interpretation of the Maine tax code and

the United States Constitution.

      [¶41] In Fairchild, we resolved virtually the same issue as the one

presented here in deciding that the calculation of a unitary business group’s net

operating loss deduction for Maine tax purposes should not include income
                                                                                29

earned by corporate affiliates that were not engaged in the unitary business.
Id. ¶¶ 6-12. The unavoidable corollary is that the calculation of the deduction

for Maine purposes must be based only on the taxpayer’s unitary income.

See id. We phrased the issue in Fairchild as being

      whether a [net operating loss] carry-back deduction is available to
      a Maine unitary group for Maine losses when determining “Maine
      net income” . . . despite one not being available at the federal level
      due to the composition of the group filing a consolidated federal
      return.
Id. ¶ 6 (emphasis added) (quoting 36 M.R.S.A. § 5102(8) (1990)). “Maine net

income” was defined as the taxpayer’s

      taxable income . . . for that taxable year under the laws of the United
      States . . . [and t]o the extent that it derives from a unitary
      business . . . [it] shall be determined by apportioning that part of
      the federal taxable income of the entire group which derives from
      the unitary business.

36 M.R.S.A. § 5102(8) (1990) (emphasis added). We described the difference

between the taxpayer’s position and the Assessor’s position as being that “[t]he

Assessor argues that the statute requires a reference to the federal tax return,

Fairchild to federal law.” Fairchild Semiconductor Corp., 1999 ME 170, ¶ 6,

740 A.2d 584.

      [¶42] In a striking manifestation of jurisprudential déjà vu, this case

presents essentially the same issue and the same difference in perspective

between the Assessor and the taxpayer. The Assessor’s disallowance of a net
                                                                                           30

operating loss carryforward deduction for Somerset’s 2013 Maine return rests

totally on the fact that TDS Group did not—and could not due to its receipt of

nonunitary income—report a net operating loss in its 2012 federal return.18

Somerset contends that, because federal law would entitle TDS Group to take a

net operating loss deduction but for the receipt of nontaxable income earned

outside the unitary business, our decision in Fairchild requires the Assessor to

allow the deduction.

       [¶43] Our analysis in Fairchild applies so neatly to the facts here that it

is worth quoting at length:

       The State Tax Code for the tax year in question defined “Maine net
       income” for corporate taxpayers as the taxable income of that
       taxpayer pursuant to the United States Internal Revenue Code. The
       Internal Revenue Code in turn defined “taxable income” as gross
       income minus the deductions allowed pursuant to the [Internal
       Revenue] Code. The deduction at issue in this case for net
       operating losses was allowed by [the Internal Revenue] Code. We
       are asked to determine whether the Legislature intended that the
       income of the Maine unitary group is to be determined by
       calculating the income of the group separately pursuant to [the
       Internal Revenue] Code, or whether the Legislature intended to
       merely adopt the treatment of the unitary group’s income as
       reflected on the federal consolidated return filed by the [fifteen]
       affiliated corporations.

       The plain language of the statute appears clear on this point when
       [it] is read in its entirety. We find reflected in that language an
       intent to determine the Maine “net income” of a unitary group

  18  To be clear, it is undisputed that Somerset’s 2013 Maine tax burden was increased solely
because some TDS Group members received nonunitary, nontaxable income in 2012.
                                                                                                    31

       separately pursuant to . . . the Internal Revenue Code, as opposed
       to simply adopting the treatment of the unitary group’s income at
       the federal level which may be the result of the group’s
       membership in a federal consolidated group.
Id. ¶¶ 8-9 (quoting 26 U.S.C.S. § 63(a) (LEXIS through Pub. L. No. 116-344);

36 M.R.S.A. § 5102(8) (1990)) (citing 26 U.S.C.S. § 172 (LEXIS through Pub. L.

No. 116-344)).19

       [¶44] The Maine statute that we found dispositive, 36 M.R.S.A. § 5102(8)

(1990), was substantively the same as the one that applies for purposes of the

tax years at issue here. See 36 M.R.S. § 5102(8) (2011). Yet here, rather than

separating out the unitary business income for 2012 in determining Somerset’s

entitlement to a net operating loss deduction for 2013, the Assessor has done

exactly what in Fairchild we said the Assessor should not do: it has “simply

adopt[ed] the treatment of the unitary group’s income at the federal level,”

Fairchild Semiconductor Corp., 1999 ME 170, ¶ 9, 740 A.2d 584.

       [¶45] There are two differences between Fairchild and this case, but

neither matters. One difference is that Fairchild involved a net operating loss

   19 In holding that section 5102(8) requires a unitary business group’s entitlement to a net

operating loss deduction to be determined based only on the income of the unitary business, we also
explained that net operating loss deductions “counteract the inequity that may result from breaking
up taxable activity into relatively short periods of time and taxing a discrete income producing period
without regard to a preceding period of loss.” Fairchild Semiconductor Corp. v. State Tax Assessor,
1999 ME 170, ¶ 12, 740 A.2d 584 (quotation marks omitted); see 1 Jerome R. Hellerstein et al., State
Taxation § 7.16 at 7-120 (3d ed. 2000) (“The [net operating loss] deduction is a response to what can
be the harsh results of the annual accounting concept when a taxpayer has gains in some years and
losses in others.”).
                                                                               32

carryback deduction rather than a net operating loss carryforward deduction.
Id. ¶¶ 1-6. However, both types of net operating loss deductions operate

similarly: a net operating loss incurred in one tax year is netted against income

in the tax year (or years) in which the deduction is taken. See 26 U.S.C.S.

§ 172(a)-(c). The other difference is that the unitary business group in Fairchild

was prevented from taking a net operating loss deduction at the federal level

because the larger affiliated group that filed a consolidated federal return

included nonunitary companies outside the unitary business group. Fairchild

Semiconductor Corp., 1999 ME 170, ¶¶ 2-3, 11, 740 A.2d 584. Here, TDS Group’s

federal filing was by a unitary business group, some members of which received

nonunitary income.     In both instances, income from outside the unitary

business, i.e., income not apportionable to Maine for purposes of determining

“Maine net income,” was what prevented the unitary business group from

taking a federal net operating loss deduction.

      [¶46]     The issue in Fairchild and here is whether the Assessor’s

determination of a unitary business group’s entitlement to a net operating loss

deduction must be based exclusively on income earned as a result of the group’s

unitary business activities, and in Fairchild we answered that question in the

affirmative. Id. ¶¶ 6-12. In this case, the Court answers the same question in

the negative.
                                                                                                   33

        [¶47] In upholding the Assessor’s interpretation, the Court also departs

from the plain constitutional stricture, explained by the United States Supreme

Court in Hunt-Wesson, Inc., 528 U.S. at 460-65, that a state taxpayer’s receipt of

nontaxable income cannot increase, directly or indirectly, the tax due to the

state. In Hunt-Wesson, the Court held that California could not limit the amount

of an interest expense deduction based on the taxpayer’s receipt of nonunitary

income.20 Id. Nothing in Hunt-Wesson suggests that the Supreme Court’s

holding applies only to interest expense deductions and not to net operating

loss deductions. The Court today emphasizes the point that all deductions are

matters of grace, not of right, Court’s Opinion ¶¶ 23-24, 32, 34, but that point

becomes immaterial once a state has granted the right to a deduction, as the

State of Maine did for tax year 2013.21 The interest deduction at issue in

Hunt-Wesson was a matter of grace, but the state still could not constitutionally

limit or deny the deduction based on the taxpayer’s receipt of income that the

   20 The Court concluded that its prior decisions explaining the constitutional prohibition on state
taxation of extraterritorial nonunitary income “ma[de] clear” that the California statute violated the
Due Process and Commerce Clauses. Hunt-Wesson, Inc. v. Franchise Tax Bd., 528 U.S. 458, 463 (2000).
Although the statute did “not directly impose a tax on nonunitary income,” it “denie[d] the taxpayer
use of a portion of a deduction from unitary income” because the amount of the deduction was limited
by the amount of nonunitary income the taxpayer received. Id. at 464-65.
   21As the Court notes, Court’s Opinion ¶ 20, Maine denied corporate taxpayers a net operating loss
carryforward deduction for the 2009, 2010, and 2011 tax years by requiring that the amount of the
deduction be added back to federal taxable income in the corporation’s Maine income tax returns for
those years. See 36 M.R.S. § 5200-A(1)(V) (2011). There was no such addback provision for the 2012
and 2013 tax years.
                                                                                                     34

state could not constitutionally tax. Hunt-Wesson, Inc., 528 U.S. at 460-65; see

Nat’l Life Ins. Co. v. United States, 277 U.S. 508, 519 (1928) (“One may not be

subjected to greater burdens upon his taxable property solely because he owns

some that is free.”). The principle expressed in Hunt-Wesson is not that the

Constitution requires the states to allow any particular deduction; it is that a

state cannot constitutionally use the receipt of nontaxable income to limit a

deduction to which a taxpayer would otherwise be entitled.22                                       See

Hunt-Wesson, Inc., 528 U.S. at 460-65.

        [¶48]       The Court’s ruling today characterizes the outcome in

Hunt-Wesson as being based on “the existence of the out-of-state income in that

tax year [that] directly and explicitly increased the taxpayer’s tax burden,”

Court’s Opinion ¶ 33 (emphasis added), yet nothing in Hunt-Wesson suggests

that the constitutional prohibition against indirect taxation of nontaxable

income applies only in the tax year in which the income is received.

   22  According to the Court’s broad holding today, there are no circumstances in which “[u]sing
federal taxable income for a particular tax year as a starting point for calculating taxable income in a
state” can “violate the Constitution.” Court’s Opinion ¶ 34. To support that proposition, the Court
cites only Bodine Elec. Co. v. Allphin, 410 N.E.2d 828, 833 (Ill. 1980), a case decided twenty years
before Hunt-Wesson. The Bodine court simply did not analyze the constitutional issue presented here.
Id. Its bare, unexplained statement that it could not “say that [an Illinois statute was] an improper
exercise of [the state’s] taxing authority,” id., was apparently based only on a prior holding that
Illinois did not unconstitutionally delegate legislative powers (to the federal government) when it
enacted a statute that “adopt[ed], by reference, existing provisions of the [Internal Revenue] Code,”
Thorpe v. Mahin, 250 N.E.2d 633, 640 (Ill. 1969).
                                                                                                      35

        [¶49] Likewise, the Court characterizes our holding in Fairchild as

involving only one tax year:

        We held that Fairchild Semiconductor’s situation as a taxpayer was
        different because it was merely seeking “separate treatment for its
        unitary group the one and only time the federal taxable income of
        the group is calculated.” Fairchild Semiconductor, 1999 ME 170,
        ¶ 16, 740 A.2d 584 (emphasis added). That is not the case in the
        matter before us, where the unitary group in essence seeks a
        recalculation of its 2012 federal taxable income for purposes of
        taking a loss in Maine for the 2013 taxable year.

Court’s Opinion ¶ 22 (emphasis in original).

        [¶50] Fairchild cannot thus be distinguished.23 In Fairchild and this case,

(1) both unitary business groups sustained a Maine operating loss in one tax

   23  In lieu of following Fairchild, the Court cites cases from other jurisdictions in which courts
reached the opposite conclusion to the one we reached in Fairchild. Court’s Opinion ¶¶ 23-27, 34;
compare, e.g., Bodine Elec. Co., 410 N.E.2d at 829-33 (affirming, based on an interpretation of Illinois’s
tax statutes, the denial of a net operating loss carryback deduction for a taxpayer whose federal
consolidated group reported taxable income even though the taxpayer itself incurred a net operating
loss), and Postal Fin. Co. v. Okla. Tax Comm’n, 594 P.2d 1205, 1205-07 (Okla. 1977) (examining
Oklahoma’s statutes), with Fairchild Semiconductor Corp., 1999 ME 170, ¶¶ 3-12, 17, 740 A.2d 584,
(vacating, based on an interpretation of Maine’s tax statutes, the denial of a net operating loss
carryback deduction in the exact same circumstances, and specifically rejecting the approach taken
by the Oklahoma court).

   Meanwhile, other cases from outside Maine are consistent with our conclusion in Fairchild and
with Somerset’s position in this case. See, e.g., Sch. St. Assocs. v. District of Columbia, 764 A.2d 798,
804, 806-815 (D.C. 2001) (en banc) (holding that a taxpayer was entitled to a net operating loss
carryback deduction on its D.C. return even though it could not claim the deduction on its
consolidated federal return); Revenue Cabinet v. Southwire Co., 777 S.W.2d 598, 599-601 (Ky. Ct. App.
1989) (explaining that state taxable income must be based on “a figure representing the loss actually
sustained in” the state and deciding that “the Kentucky legislature intended to allow corporations the
benefit of income averaging for state tax purposes” because it declined to add back federal net
operating loss deduction amounts (quotation marks omitted)); Searle Pharms., Inc. v. Dep’t of
Revenue, 512 N.E.2d 1240, 1246-51 (Ill. 1987) (concluding that there was no rational basis for
limiting net operating loss carryback deductions for members of affiliated groups that filed
consolidated federal returns but not those that filed separate returns); Graham v. State Tax Comm’n,
369 N.Y.S.2d 863, 863-65 (N.Y. App. Div. 1975) (vacating, on constitutional grounds, the denial of net
                                                                                                   36

year that was more than offset by nonunitary income; (2) both unitary business

groups sought to take a net operating loss deduction in their state tax returns

in a different tax year; (3) both unitary business groups could have taken a

federal net operating loss deduction in those other tax years had they reported

their unitary business income separately on their federal returns; and (4) the

Assessor disallowed the net operating loss deduction solely because the loss

had not been reflected in the group’s federal return.24                               See Fairchild

Semiconductor Corp., 1999 ME 170, ¶¶ 3-4, 740 A.2d 584.

         [¶51] In a similar vein, the Court concludes that “[t]he [TDS] group was

not eligible for a net operating loss carryforward on its 2013 federal tax return

because it had already accounted for the loss in calculating its federal taxable

operating loss carryback and carryforward deductions for a taxpayer who incurred an in-state loss
but reported taxable income on his federal return, which incorporated both in-state and out-of-state
income).
   24   We summarized the factual background in Fairchild as follows:

         In the 1988 tax year, after adjustments that are not at issue in this case, Fairchild’s
         unitary group had positive income totaling approximately $21 million. The following
         year, the unitary group sustained losses totaling approximately $115 million.
         Because the unitary group filed a consolidated return at the federal level, however,
         these losses were more than offset by the income of the other members of the
         consolidated group. As a result, no [net operating loss] carry-back deduction was
         available to the consolidated group at the federal level. However, if the members of
         the unitary group had calculated their taxable income separately at the federal level,
         the loss incurred in the 1989 tax year would have been available to the unitary group
         corporations as [a net operating loss] carry-back deduction in the 1988 tax year
         pursuant to [the Internal Revenue Code].

Fairchild Semiconductor Corp., 1999 ME 170, ¶ 3, 740 A.2d 584.
                                                                            37

income in 2012.” Court’s Opinion ¶ 19 (emphasis added). But the fact that the

loss was accounted for in TDS Group’s taxable income for 2012 did not render

Somerset ineligible to take the net operating loss carryforward deduction in

2013. In fact, the exact opposite is true: it is because TDS Group incurred a

unitary net operating loss in 2012 that Somerset became eligible to take a net

operating loss carryforward deduction against unitary income in 2013. The

fact that it is the loss that gives rise to the deduction is why the Assessor’s

position of acknowledging the loss but denying the resulting deduction is

self-contradictory.

      [¶52] The significance of our ruling in Fairchild and the Supreme Court’s

ruling in Hunt-Wesson is that nontaxable income must be excluded entirely and

for all purposes—not partially, not for some purposes, and not only in one tax

year—from the calculation of the taxpayer’s Maine tax liability. Because the

Assessor’s determination of Somerset’s entitlement to a net operating loss

deduction fails to exclude nontaxable income from outside the unitary business,

I would vacate the judgment and remand for entry of a judgment in favor of

Somerset in the amount of the requested refund.
                                                                               38

Jonathan A. Block, Esq., and Olga J. Goldberg, Esq. (orally), Pierce Atwood LLP,
Portland, for appellants Somerset Telephone Co., et al

Aaron M. Frey, Attorney General, and Kimberly L. Patwardhan, Asst. Atty. Gen.
(orally), Office of the Attorney General, Augusta, for appellee State Tax Assessor

Business and Consumer Court Docket docket number AP-2017-4
FOR CLERK REFERENCE ONLY