Court Opinion

ID: 9534216
Source: CourtListenerOpinion
Date Created: 2023-08-07 04:37:40.935034+00
Date Added: 2024-06-11T13:28:00.310675
License: Public Domain

PAULSON, Judge
(dissenting).
I dissent. I did not agree with the decision of the majority of the members of this court in Messner v. Dorgan, supra, 228 N.W.2d 311 [dissent at page 321] (N.D. 1975), and I do not agree with the majority opinion in the instant case. The majority of the members of this court continue to ignore the full impact of the so-called “Federalizing Act of 1967” (S.L.1967, Ch. 446), insofar as it applies to the North Dakota income tax law, Chapter 57-38 of the North Dakota Century Code.
The appellees are willing to accept federalizing of our State’s income tax law to the extent that it relieves the corporation, Man-dan Creamery & Produce Company, from the payment of a state corporate income tax upon the gain realized from the sale of its assets; and to the extent that it provides a starting point, federal taxable income, for the shareholders in filing their state individual income tax returns. It is at this *896point that the shareholders desire the best of two worlds — by advantageously selecting portions of the North Dakota income tax law and applying them without regard to the remainder of the applicable statutory provisions of Chapter 57-38, N.D.C.C.
Section 57-38-01.2, N.D.C.C., including subdivision i of subsection 1 thereof, cannot be read alone; it must be read in conjunction with the remainder of the Act of which it was a part at the time it was enacted. That Act is S.B.No.393 (S.L.1967, Ch. 446), and it provides for the “federalizing” of income tax returns for individuals as well as corporations. S.B.No.393, supra, contained nine sections, including one section which set forth a declaration of legislative intent, and six sections which either created new law or amended the existing law. In addition, a number of existing statutory provisions of Chapter 57-38, N.D.C.C., were repealed. There can be no other conclusion drawn from an enactment of this magnitude but that the North Dakota Legislature intended a change in the direction of the taxing statutes of this State. That direction was toward the federalizing of this State’s income tax law and the adoption of Federal interpretations thereof. This means that Chapter 57-38, N.D.C.C., must be read in toto, and in light of the federalizing provisions of S.B.No.393, supra.
In the instant case, while the income tax laws of North Dakota may have provided for a particular form of tax treatment during the period that Mandan Creamery & Produce Company was accumulating its surplus, this does not mean that such surplus inured to Mandan Creamery & Produce Company that same type of tax treatment after the statutory change in the income tax law decreed different treatment by virtue of the federalizing process.
The Legislature intended, by adopting the Federal definition of taxable income as a starting point for computing North Dakota income tax, that income defined for Federal income tax purposes as income from the sale of assets should be similarly defined as such for State tax purposes.
The Legislature enacted a law which in effect changed the method of tax treatment for corporation and individual income tax purposes (the gain resulting from the sale of assets by a corporation which had adopted a formal liquidation process). In not taxing such a gain to the corporation, the Legislature did not intend that the gain should be taxed to the shareholders. By adopting the Federal definition of taxable income, the Legislature provided a tax savings to both the corporation and the shareholders by taxing only the gain which resulted from the exchange of shares of stock for the monetary distribution received.
The North Dakota Supreme Court has previously determined that interpretations of the tax commissioner or any agency head should be given great weight. Voss v. Gray, 70 N.D. 727, 298 N.W. 1 (1941). The arguments which the tax commissioner has advanced in the instant case, as well as in Messner v. Dorgan, supra, demonstrate that the tax commissioner’s interpretations were practical in construction and dealt fairly with the issue involved. The majority of the court, by holding that the tax commissioner has adopted a ruling that alters substantive rights, indicates that the majority is ignoring the legislative intent expressed in S.B.No.393, supra and the majority, instead, is substituting its conclusion that one sentence in a paragraph, standing alone, will preserve for a taxpayer whatever alternative provision of the income tax law will benefit him.
The majority, in remanding the case to the tax commissioner, is stating that that part of the distribution received by a shareholder which represents his proportionate share of the gain resulting from the sale of corporate assets should be taxed to him at the maximum rates applicable to his particular situation, which could be 10 percent instead of the 6 percent maximum which the corporation would be taxed. No capital gain provisions are applicable. That part of the distribution which is in excess of the shareholder’s portion of the capital gains is tax exempt for State income tax purposes. The real irony of the majority’s decision now becomes evident.
*897Reference has been made in the majority opinion to a subsequent amendment of subdivision i of subsection 1 of § 57-38-01.2, N.D.C.C., which limits domestic dividend deduction privileges to the first $15,000 received. Because this amendment is effective for years subsequent to the years presently in question, such amendment does not affect the appellees in this case. However, after July 1, 1975, the taxpayers affected will find themselves paying income tax at individual rates which are higher than the corporate tax on their share of gains resulting from the sale of corporate assets in a liquidating situation and they will then find themselves paying tax on any excess distribution which exceeds the $15,000 limitation. In future litigation, North Dakota will find the tax commissioner citing the decision in this case as supportive of his additional assessments, and the taxpayers will be urging the “federalizing” concept in that S.B. No.393, supra, should be read in its entirety.
Past legislative action clearly demonstrates that State income tax laws have been and continue to be federalized. The passage of S.B.No.393, supra, in 1967 has been followed by subsequent enactments of updating provisions whereby newly enacted Federal income tax provisions were incorporated into our State’s income tax laws (S.L. 1969, Ch. 507; S.L.1973, Ch. 465, § 1; S.L. 1975, Ch. 529). During the 1975 legislative session, the North Dakota Legislature continued to be cognizant of probable future changes in the Federal income tax law (S.L. 1975, Ch. 534, § 2).
In the instant case, another cogent reason for dissenting from the majority opinion is that the assets of a dissolved corporation are not dividends, but are a proportionate share of such corporation’s assets, and are based upon the individual shareholder’s equity or proportionate ownership of the shares with reference to the total outstanding shares of the corporation.
There is a great distinction between a dividend received from an existing corporation and a distribution of assets in liquidation of a corporation which has determined to cease operations. In Rossi v. Rex Consolidated Mining Company, 108 Wash. 296,183 P. 120 (Wash.S.Ct.1919), the question was asked:
“. . . are the assets of a dissolved corporation a dividend, where the board of directors authorized such assets to be distributed to its stockholders according to law?
In answer to this question, the Washington Court stated, 183 P. at page 121:
“. . . we think there can be no doubt that the assets of a dissolved corporation are not distributed as dividends, as dividends are commonly known. [Citations omitted.] A dividend, when spoken of in reference to an existing corporation, and not one being closed up and dissolved, is understood as a fund which the corporation sets apart from its profits to be divided among its members.”
Upon the trial of the Rossi case, supra, the Washington Court concluded that the proceeds of the sale of assets of a dissolved corporation were capital assets and not a dividend.
In the instant case, the Mandan Creamery & Produce Company, in addition, failed to comply with § 10-19-44(1), N.D.C.C., which states, in pertinent part:
“1. Dividends may be declared and paid in cash or property only out of the unreserved and unrestricted earned surplus of the corporation . . .”
This language, therefore, limits the application of § 57-38-01(12), N.D.C.C., because there must be a resolution passed by the board of directors of a corporation before a distribution of any kind can be made. In the instant case, the only actual declaration made by the corporation was a resolution adopted by the shareholders and directors on June 9, 1972, providing for a plan of complete liquidation and dissolution and which expressly provided that distributions of cash or tangible property were to be made to the shareholders in exchange solely for and in complete redemption and cancellation of and in payment for all the outstanding capital stock of the company. There is absolutely no provision in the reso*898lution, nor elsewhere in the minutes of the corporation, authorizing or providing for the payment of a dividend from current earnings or accumulated earnings in connection with the liquidation and dissolution of the corporation. Therefore, there was no distribution that could come within the meaning or intent of either § 10-19-44 or § 57-38-01(12), N.D.C.C. In conclusion, the majority in its opinion has failed to recognize the distinction between liquidation of assets, dividends, or income. I would reverse the judgment of the district court and affirm the decision of the State Tax Commissioner.