Court Opinion

ID: 9704331
Source: CourtListenerOpinion
Date Created: 2023-08-26 00:31:10.885561+00
Date Added: 2024-06-11T15:16:30.578484
License: Public Domain

Katz, Supr. J.,
specially assigned, dissenting. For the most part, the Court’s lengthy interpretation of a one-sentence statute is aimed at supporting its view that granting a tax credit in the instant situation is good policy. To achieve this result, however, the Court ignores the plain meaning of the relevant statute and the applicable standard of review. Accordingly, I dissent.
Taxpayers are Vermont residents and S corporation shareholders who paid personal income tax in Vermont on their pro rata share of the net income of IDX Systems Corporation. As resident individual taxpayers, they were entitled under Vermont law applicable at the time to receive credit against the individual income tax assessed “for taxes imposed by, and paid to, another state . . . upon his income earned and received from sources within that state.” 32 V.S.A. § 5825 (Cum. Supp. 1989) (emphasis added). In this ease, taxpayers seek a credit for a corporate tax that Massachusetts imposed upon IDX’s income. Based on a reasonable interpretation of § 5825’s plain meaning, the Vermont Commissioner of Taxes determined that taxpayers were not entitled to the credit. In the Commissioner’s view, because IDX is a distinct entity and a separate taxpayer from individual shareholders such as taxpayers, the credit does not apply.
I believe that this is the correct view, and that we should defer to the Commissioner’s decision. Section 5825 does not explicitly state whether shareholders, taxed as individuals in Vermont, may claim credit for corporate taxes imposed by another state on their S corporation’s income. But a literal reading of the statute precludes a credit in such circumstances. See S. Nechemias, Shareholder Credits for Taxes Paid by the S Corporation to Another State, 8 J. S Corp. Tax’n 141, 144 (1996) (in states with statutory provisions that allow credit for taxes paid by S corporation shareholders to another state but say nothing about whether credit is available for corporate taxes paid by S corporation itself, credit for corporate taxes is not available because those taxes were not paid by shareholders); Kreizenbeck v. Arizona Dep’t of Revenue, No. 1126-94-I, 1995 WL 331529, at *5 (Ariz. Bd. Tax. App., Apr. 24, 1995) (under similar statute, credit not available to S corporation shareholders for taxes imposed by another state on S corporation).
We must presume that the plain meaning of the statutory language evinces the Legislature’s intent, see Chamberlin v. Department of *206Taxes, 160 Vt. 578, 580, 632 A.2d 1103, 1104 (1993), and we must sustain the interpretation of a statute made by the administrative agency responsible for its execution, absent compelling indication of error. See Burlington Elec. Dep’t v. Department of Taxes, 154 Vt. 332, 337, 576 A.2d 450, 453 (1990). Further, we have repeatedly stated that a statute providing a tax exemption or credit must be strictly construed against the party claiming the exemption or credit unless such a construction would produce irrational results or defeat the purposes of the statute. See Chamberlin, 160 Vt. at 580, 632 A.2d at 1104; Medical Ctr. Hosp. v. City of Burlington, 152 Vt. 611, 615, 566 A.2d 1352, 1354 (1989); In re R. S. Audley, Inc., 151 Vt. 513, 516-17, 562 A.2d 1046, 1049 (1989); Stephens v. Department of Taxes, 134 Vt. 178, 180, 353 A.2d 355, 356 (1976); see also Pizzagalli Construction Co. v. Department of Taxes, 132 Vt. 496, 499, 321 A.2d 437, 440 (1974) (“no claim of exemption [or credit] can be sustained unless within the express letter or necessary scope of the exempting clause”). In this case, upholding the Commissioner’s literal reading of § 5825 would neither lead to absurd consequences nor defeat the purposes of the statute. Nor is there any compelling indication of error.
Section 5825 is aimed at alleviating the burden of double taxation. See Stephens, 134 Vt. at 180, 353 A.2d at 356. But the double taxation precluded by § 5825 is two separate states imposing the same type of tax on the same income during the same taxing period. See id. at 179, 353 A.2d at 356 (part-time, out-of-state residents taxed by Vermont and New York on personal income earned in New York). Here, Vermont imposed an individual income tax on taxpayers’ personal income, while Massachusetts imposed a corporate income tax on IDX’s income. Thus, there is no double taxation, just as there is no double taxation when the income of a corporation is taxed both at the corporate level and after it passes on to shareholders in the form of dividends. See State Tax Comm’n v. Television Servs., Inc., 495 P.2d 466, 469 (Ariz. 1972) (no double taxation occurs when corporation is taxed on its income, and then same income is taxed after being passed on to shareholders in form of dividends; corporation and its stockholders are separate and distinct entities, and their incomes are separate and distinct subjects of taxation). Notwithstanding Vermont’s elective pass-through tax treatment of the income of S corporations, S corporations and individual shareholders remain distinct entities and separate taxpayers. In this case, taxpayers are individuals, and Massachusetts has taxed their corporation, not them.
Section 5825’s purpose of preventing double taxation is not defeated by denying credit to S corporation shareholders for taxes *207imposed on their S corporations by states that do not recognize the federal S election. To be sure, the S corporations’ income earned or derived in those few states that do not recognize the federal S election will be taxed at the corporate and shareholder levels. But § 5825 continues to protect individuals (“the taxpayer”) from having to pay two separate states the same type of tax on the same income. Indeed, although the Legislature has now enacted a statute explicitly denying credit to S corporation shareholders for corporate taxes imposed on S corporations by other states not recognizing the federal S election, see 32 V.S.A. § 5916, resident S corporation shareholders in Vermont continue to receive credit against individual income taxes imposed by states that do recognize the federal S election.
Under the Court’s reasoning, Vermont law as it now stands, with the enactment of § 5916, compromises Vermont’s fundamental public policy goals of insulating small businesses from double taxation. I do not agree. Notwithstanding the Court’s repeated lament to the contrary, upholding the Commissioner’s reasonable interpretation of § 5825 would not undermine the goal of preventing double taxation any more than § 5916 does so now.
In any event, the Commissioner’s well-reasoned interpretation of § 5825 is entitled to deference notwithstanding the subsequent enactment of § 5916, which neither amended § 5825 nor changed existing law. Section 5916 was one small provision included in Act 169, which consisted of twenty-seven sections. Of the twenty-seven sections, sixteen amended specific provisions in Title 32, six added new provisions, two repealed old provisions, and two concerned appropriations and effective dates. Section 21 of Act 169 added a new subchapter to chapter 151 of Title 32 aimed at creating Vermont’s first discrete and orderly compilation of laws concerning the taxation of S corporations. Section 5916, one of the provisions of this new subchap-ter, provides that “no credit shall be available to a resident individual ... for taxes imposed by another state. . . upon an S corporation or the income of an S corporation.” Section 5916 does not refer to § 5825. Further, although each of the sixteen amendatory sections in Act 169 refer to and set forth the provision being amended, § 21 does not indicate that § 5916 amends or implicates § 5825. Moreover, the memorandum containing a written summary of each of Act 169’s sections that was sent to the House Ways and Means Committee by the Department of Taxation, which drafted Act 169, indicated that current law would remain unchanged. Although the Department specifically noted in its summary of other sections when existing law *208was being amended, nothing in the Department’s summary of § 21 suggests that § 5916 was intended to change § 5825.
In sum, Act 169 amended many provisions of the tax code, but § 5825 was not one of them. Section 5916 is but one of several provisions contained in the new subchapter that confirms, specifies, details, and consolidates existing law concerning S corporations. See, e.g., 32 V.S.A. § 5914(a) (confirming existing law contained in 32 V.S.A. § 5862); 32 V.S.A. §§ 5911(b), 5912 (confirming existing law contained in 32 V.S.A. §§ 5823, 5832). Because § 5916 is only a small part of a comprehensive act aimed principally at specifying and consolidating the law on S corporations, its enactment does not indicate a substantive change in the law. See Oklahoma Tax Comm’n v. Stanolind Pipe Line Co., 113 F.2d 853, 856 (10th Cir. 1940) (presumption that new enactment intended substantive change in existing law is fairly strong in case of isolated, independent amendment, but has much less persuasive force when new enactment is general, comprehensive tax code); see 1A N. Singer, Sutherland Statutory Construction § 22.30, at 266 (5th ed. 1994) (accord).
Nor is the sunset provision imposed on §§ 21 through 24 of Act 169 rendered meaningless if we conclude that § 5916 merely specified existing law. An effective date of limited duration would make no sense if applied only to § 5916, but considering the general scope of the sunset provision, it does not undermine the State’s view that § 5916 merely specified and confirmed existing law under the plain meaning of § 5825.
Further, I am not impressed with the Court’s reliance on the fact that federal law entitles S corporation shareholders to a foreign tax credit for their share of foreign income taxes paid by the corporation. Vermont is not required to follow federal law. In general, an individual’s Vermont state income tax is calculated as a percentage of that individual’s federal income tax. Further, as the Court notes, our income tax laws conform to federal law to simplify the filing of returns and ease administrative burdens. 32 V.S.A. § 5820(a). But Vermont’s adoption of a “piggyback” system does not mean that Vermont income tax law is required to follow, or does follow, every nuance of federal law. See J. Conners & R. Kozub, Multistate S Corporations Endure Maze of State Laws, 70 J. Tax’n 174, 176-77 (March 1989) (noting differences between Vermont law and federal law regarding S corporations). Section 5825 is a provision of Vermont’s tax code that does not exist in the federal tax code. We should not stray from its plain meaning based on perceived analogous federal law.
*209In the end, the Court sets forth a number of policy arguments for why a credit should be allowed under the instant circumstances — a position that has been expressly rejected by the Legislature in enacting § 5916 — but it has failed to demonstrate that a credit is available under the plain meaning and strict construction of § 5825. Ironically, the Court proclaims that “[t]he Department cannot escape the consequences of the Legislature’s tax policies,” when in fact the Legislature plainly adopted the Department’s position of not allowing a credit under the instant circumstances, and this Court refuses to defer to the Department’s interpretation of the statute confirming that position. It is this Court that evades the consequences of the Legislature’s tax policies by imposing its own policy, which ignores not only the expertise of the Commissioner but also our long-standing policy of denying a claimed credit unless it is plainly provided by statute. The Court states that it is an “open question” under § 5825 whether taxpayers are entitled to the credit claimed here, and yet the Court grants the credit notwithstanding the ambiguity it recognizes and the contrary ruling of the agency assigned to implement the statute. Further, if indeed § 5825 is ambiguous as to the point of law raised in this appeal, the Court fails to recognize that § 5916 was enacted merely to clarify the question left in doubt by the previous statute.
Because I believe that taxpayers are not entitled to a credit under the statute’s plain meaning, and that taxpayers’ constitutional challenges to the statute on equal protection, proportional contribution, and common benefits grounds are wholly without merit, see Oxx v. Department of Taxes, 159 Vt. 371, 376, 618 A.2d 1321, 1324 (1992) (statute is constitutional if it is reasonably related to legitimate public purpose); Fleury v. Kessel/Duff Constr. Co., 149 Vt. 360, 362, 543 A.2d 703, 704 (1988) (one who seeks to void statute undertakes very weighty burden); Wheeler v. State, 127 Vt. 361, 366, 249 A.2d 887, 891 (1969) (party challenging constitutionality of statute has burden to demonstrate discrimination to extent that it is arbitrary and unreasonable), I dissent.