Court Opinion

ID: 9622659
Source: CourtListenerOpinion
Date Created: 2023-08-22 06:21:48.052908+00
Date Added: 2024-06-11T17:33:30.397888
License: Public Domain

CARLEY, Presiding Justice.
Prior to October 1, 1999, Trawick Construction Company, Inc. was a closely-held Florida corporation. For federal income tax purposes, Trawick was treated as a Subchapter S corporation. As a result, Trawick’s shareholders, instead of the corporation itself, were required to report their proportionate share of Trawick’s taxable business income on their individual tax returns and pay the appropriate federal income taxes. For Georgia state income tax purposes, however, Trawick was a Subchapter C corporation which paid taxes directly to the State of Georgia on business income which was apportioned to this state. See generally Graham v. Hanna, 297 Ga. App. 542, 543 (677 SE2d 686) (2009). Thus, we note from the outset that the dissent is mistaken when it asserts, without authority, that, “[i]n Georgia, however, the shareholders must stand in the place of the corporate taxpayer, paying its tax from the proceeds passed through to them.” (Dissenting opinion, p. 605)
On October 1, 1999, Trawick’s shareholders sold all of their stock in Trawick and a sister company to Quanta Services, Inc. for $36,500,000. Pursuant to the stock purchase agreement and Section 338 (h) (10) of the Internal Revenue Code, 26 USC § 338 (h) (10), an election was made to treat the transaction as a deemed sale of all corporate assets, the majority of which was goodwill. For the shortened tax year ending on October 1, 1999, Trawick included the gain from the deemed sale of assets in its reported federal taxable income and apportioned a small percentage of that amount to this state, resulting in Georgia income tax of $47,980.
In 2004, the Georgia Department of Revenue, based upon a different apportionment, assessed Trawick an additional $224,820 in income tax, along with accrued interest. An administrative law judge (ALJ) concluded that the additional assessment was erroneous, but the State Revenue Commissioner reversed that decision. On judicial review, the superior court reversed the Commissioner’s decision, and the Court of Appeals reversed the judgment of the superior court. Georgia Dept. of Revenue v. Trawick Constr. Co., 296 Ga. App. 275 (674 SE2d 350) (2009). We granted certiorari to consider the Georgia corporate income tax implications of an election under § 338 (h) (10) of the Internal Revenue Code by the shareholders of a federal Subchapter S corporation.
*598OCGA § 48-7-21 (a) provides that a corporation’s taxable income “shall consist of the corporation’s taxable income as defined in the Internal Revenue Code of 1986, with the adjustments provided for in subsection (b) of this Code section and allocated and apportioned as provided in [OCGA §] 48-7-31.” One of Trawick’s contentions is that the federal § 338 (h) (10) election is inapplicable to the determination of Georgia corporate income tax, by virtue of subsection (b) (7) of OCGA § 48-7-21. Under that subsection, “[a]ll elections made by corporate taxpayers under the Internal Revenue Code . . . shall also apply under [OCGA § 48-7-20 et seq.] except elections involving consolidated corporate returns and Subchapter ‘S’ elections . . .OCGA § 48-7-21 (b) (7). Subsection (b) (7) (B) of the statute further provides that “Subchapter ‘S’ elections apply only” where, unlike here, “all stockholders are subject to tax in this state on their portion of the corporate income” and “all nonresident stockholders pay the Georgia income tax on their portion of the corporate income. ...”
Trawick argues that, under federal regulations, the § 338 (h) (10) election cannot be “made by corporate taxpayers,” as required in OCGA § 48-7-21 (b) (7). In the case of an unaffiliated Subchapter S corporation like Trawick, that election is “made jointly by [the purchasing corporation] and . . . the S corporation shareholders .. ..” 26 CFR § 1.338 (h) (10)-1 (c) (3). The Department argues that the election is “made for” the target corporation such as Trawick. 26 CFR § 1.338 (h) (10)-1 (c) (1).
Contrary to the dissent, OCGA § 48-7-12 (b) (7) does not provide for an “exemption,” but rather deals with federal elections made by the taxpayer which, as illustrated in this case, may not benefit the taxpayer for state tax purposes. Thus, the proper rule of construction for statutory law regarding such elections is the general rule that, “when a taxing statute has doubtful meaning, it must be construed liberally in favor of the taxpayer and against the State. [Cit.]” TELECOM*USA v. Collins, 260 Ga. 362, 364 (1) (393 SE2d 235) (1990). Furthermore, we are required “to follow the literal language of the statute ‘unless it produces contradiction, absurdity or such an inconvenience as to insure that the legislature meant something else.’ [Cit.]” TELECOM*USA v. Collins, supra at 363 (1).
Giving the words “by corporate taxpayers” in OCGA § 48-7-21 (b) (7) their ordinary meaning, Trawick would have to be the actual maker of the election or to possess the authority to direct that the election be made. See Lykes Bros. Steamship Co. v. United States, 513 F2d 1342, 1348 (II) (Ct. Cl. 1975).
It is significant that the statute itself does not include [elections made] for the taxpayer — it merely speaks of *599[elections made] by the taxpayer. The implication that the word “by” is not intended to mean “for” is strengthened by looking at the larger statutory phrase ....
Lykes Bros. Steamship Co. v. United States, supra at 1349-1350 (III). The relevant definitions of the verb “make,” as used in OCGA § 48-7-21 (b) (7) in its past participle form, include “[t]o cause (something) to exist” and “[t]o legally perform, as by executing, signing, or delivering. . . .” Black’s Law Dictionary, p. 967 (7th ed. 1999). Thus, the words “made by” in the Georgia statute “connote an active participation by the taxpayer” itself in actually making the election. Lykes Bros. Steamship Co. v. United States, supra at 1350 (III).
Furthermore, construing OCGA § 48-7-21 (b) (7) so as to exclude elections made “for” the taxpayer is generally consistent with the policy behind the express exceptions in the statute and does not produce contradictory or absurd results. The express exceptions in subsection (b) (7) relate to elections which, even if made by the taxpayer, nevertheless involve active participation in the election by entities other than the taxpayer. Those entities are affiliated corporations desiring to file a consolidated return with the taxpayer and shareholders wanting the taxpayer to be taxed as a Subchapter S corporation. OCGA § 48-7-21 (b) (7) (A), (B). Thus, subsection (b) (7) is indicative of a legislative skepticism regarding elections which may represent the interests of the corporate taxpayer itself less than the interests of other entities. As a whole, therefore, OCGA § 48-7-21 (b) (7) reflects a legislative policy of limiting the availability of elections which require the consent of entities other than the taxpayer. That policy is strongest where, as here, the election can legally be made only by other entities and not by the corporate taxpayer itself. In this regard, we note that the Court of Appeals relied on irrelevant evidence when it found that “Trawick joined in making the election as a matter of fact . . . .” Georgia Dept. of Revenue v. Trawick Constr. Co., supra at 280-281 (2) (b).
Even if the wisdom behind OCGA § 48-7-21 (b) (7) as we construe it today is debatable, that subsection certainly is not contradictory or absurd, nor do its effects show that the General Assembly must have meant something else. The Department points out that the Internal Revenue Code provides a large number of elections. However, the Department fails to identify any elections, except for § 338 (h) (10) elections, which are legally required to be made by entities other than the taxpayer. Even assuming that some such elections are available, it does not appear that interpreting OCGA § 48-7-21 (b) (7) as excluding elections made “for” the taxpayer will have far-reaching adverse effects.
*600The Department has failed to show ill effects not only generally from a rejection of elections made “for” the taxpayer, but also specifically from the rejection of § 338 (h) (10) elections. The State of Georgia benefitted for many years from treatment of Trawick as a Subchapter C corporation which consistently paid taxes on its entire Georgia business income directly to this state, rather than treatment as a Subchapter S corporation whose taxes are proportionately paid to this state only by those nonresident shareholders who consent thereto. See Graham v. Hanna, supra. Thus, there is no obvious unfairness in now requiring Georgia to continue to treat Trawick as a Subchapter C corporation and not as a Subchapter S corporation. It is not unreasonable to require the State of Georgia to forego a § 338 (h) (10) election made for a Subchapter S corporation, when the State has consistently refused to recognize that corporation’s original federal Subchapter S election.
Contrary to the dissent, Trawick’s concession that it expects to benefit from a stepped-up basis in its assets due to increased amortization and depreciation in subsequent tax years hardly constitutes proof that our rejection of § 338 (h) (10) elections is illogical or harmful. In the first place, any assertion of a step-up in basis for purposes of Georgia taxation cannot be considered undisputed. The Department’s position is that, if Trawick’s taxable income at issue in this case must be computed as though the § 338 (h) (10) election was not made, then Trawick’s depreciation in subsequent years will not be increased because of the stepped-up basis. Although resolution of that issue is not necessary here, we note that the Department may be correct in this respect. Because of our holding that a § 338 (h) (10) election is not one of the elections approved by OCGA § 48-7-21 (b) (7), it appears that the effect of that federal election will always have to be excluded from the determination of “the corporation’s taxable income as defined in the Internal Revenue Code of 1986, with the adjustments provided for in subsection (b). . . OCGA § 48-7-21 (a). Thus, the assets in question would have a stepped-up basis for federal tax purposes, but not for Georgia tax purposes. This result would not be unusual. “Because many states do not recognize [the § 338 (h) (10)] election, a purchaser will have a different basis for the acquired entity’s assets for federal and state tax purposes.” Mark J. Silverman and Lisa M. Zarlenga, Use of Limited Liability Companies in Corporate Transactions, SR022 ALI-ABA 3263, 3425 (XI) (C) (1) (2009). Moreover, even assuming that the assets of the acquired entity do have a stepped-up basis for purposes of Georgia taxation, such future tax treatment would not control the present issue. Future depreciation and amortization deductions cannot be neatly matched to a current § 338 (h) (10) election with respect to any individual state, as they depend on numerous other factors, includ*601ing any dispositions of assets and the percentage of the corporation's business done in Georgia, which can and often does either increase or decrease considerably over the years.
The General Assembly did "not specifically define the phrase `by [corporate] taxpayer[s],' and the legislative background does not contain anything which would lead us to depart from the plain meaning of the statute." Lykes Bros. Steamship Co. v. United States, supra at 1348 (II). We conclude that the § 338 (h) (10) election is not "made by [the] corporate taxpayer[ ]" and, therefore, does not apply for Georgia income tax purposes. Because the gain from the deemed sale of assets recognized by Trawick on its federai income tax return did not constitute Georgia taxable income, the judgment of the Court of Appeals must be reversed. Trawick's remaining contentions are moot.
Judgment reversed.
All the Justices concur, except Benham and Melton, JJ, who dissent.