Court Opinion

ID: 9656872
Source: CourtListenerOpinion
Date Created: 2023-08-23 20:05:05.605252+00
Date Added: 2024-06-11T13:05:58.109669
License: Public Domain

DONALD L. Corbin, Justice, concurring. I concur with the majority’s decision to affirm the chancellor’s ruling. I write separately because I view the issue presented differently than the majority. In my opinion, the key issue is whether dividends paid by a subsidiary to a parent corporation, holding more than eighty percent, but less than ninety-five percent, of the subsidiary’s stock, should be reported as gross income when the corporations make up an affiliated group that files a consolidated corporate tax return. Resolution of this issue turns on this court’s interpretation of Ark. Code Ann. §§ 26-51-404(b) (9) and 26-51-805 (Supp. 1992). During the relevant dates in this case, section 26-51-404(b)(9) provided an exemption from gross income for dividends paid by a subsidiary corporation to its parent corporation, if that parent owned at least ninety-five percent of the subsidiary. That provision was originally enacted in Act 570 of 1965. At the time of its passage, Arkansas law did not provide a means for such affiliated corporations to file consolidated state income tax returns. The General Assembly subsequently passed Act 708 of 1979, now codified as section 26-51-805, allowing corporations that are members of an affiliated group to file a consolidated Arkansas corporate income tax return. Section 26-51-805 (a) directs DF&A to look to the federal laws to determine whether a group of corporations is an “affiliated group,” for purposes of filing a consolidated return. During the time in question here, federal tax regulations defined an “affiliated group” as one in which corporations share a common parent, and the parent owns at least eighty percent of the subsidiary. Also at that time, federal law provided that affiliated groups filing consolidated federal tax returns could eliminate from the group’s gross income those dividends paid by the subsidiary to the parent. DF&A does not dispute that Appellees were an affiliated group under the federal definition and that they were, therefore, eligible to file a consolidated state tax return. Nor does the agency dispute that federal regulations provided for the “elimination” of dividends distributed by one member of an affiliated group to another. The question then is whether the General Assembly intended to allow the same elimination for purposes of determining gross income of the affiliated group under state law. I believe that was the legislature’s intention. Our state system of income taxation is based on the federal system, and our legislature has consistently looked to the federal income tax regulations for guidance. For example, Ark. Code Ann. § 26-51-401 (Repl. 1997) provides that a taxpayer must calculate his state income tax liability using the same accounting method as used for federal income tax purposes. Similarly, Ark. Code Ann. § 26-51-402 (Repl. 1997) provides that a taxpayer must calculate his state income tax liability using the same income year as used for federal income tax purposes. More significantly, section 26-51-805(c) requires an affiliated group filing a consolidated state tax return to attach to its state return “a complete copy of the federal consolidated corporate income tax return filed with the federal Internal Revenue Service for that taxable year[.]” This court has previously held that requiring federal returns to be attached to state returns is an indication of the legislature’s intent to conform state returns to the requirements of federal concepts. See Central & Southern Cos., Inc. v. Weiss, 339 Ark. 76, 3 S.W.3d 294 (1999). In enacting section 26-51-805, the General Assembly intended this state’s consolidated corporate income tax provisions to mirror the corresponding federal tax regulations. Subsection (g) specifically provides: “This section is based upon the concept of filing federal consolidated income tax returns.” I agree with the chancellor that this “concept” is based on a considerable body of federal law regarding consolidated corporate tax returns that existed at the time the statute was enacted. That established body of law provided that an affiliated group could eliminate from its gross income dividends paid by one member of the group to another member. Accordingly, I believe that the chancellor did not err in concluding that section 26-51-805 requires DF&A to look to the federal laws in effect at the time the Act was passed to determine whether such dividends should be eliminated from the affiliated group’s income. I agree with the majority that section 26-51-404(b)(9) was not rendered meaningless by the passage of section 26-51-805. Rather, it’s exemption for dividends paid by a subsidiary to a parent corporation owning at least ninety-five percent of the subsidiary continued to apply to those corporate groups that elected not to file consolidated returns. For those corporations that elected to file consolidated returns, however, I believe that section 26-51-805 and its reference to the federal concept and federal tax regulations is controlling of those corporations that file a consolidated return. Additionally, I agree with the majority that the purpose of allowing these intra-group dividends to be eliminated from the group’s gross income is to prevent double taxation. When affiliated corporations file a consolidated return, effectively pooling their income and deductions, they should not be required to count dividends paid by one member of the group to another. The reason is that before the group’s gross income is arrived at, each member of the group must first determine its individual income. The earnings that create the stock dividends will be included in the income of the first member. Thus, including them as dividend income to the second member would be tantamount to counting the same monies twice and would amount to double taxation of the group. In sum, I believe that with the passage of Act 708 in 1979, the General Assembly differentiated between corporations that file separate returns and those that file consolidated returns. Because of the specific reference in Act 708 to the federal “concept” of filing consolidated corporate tax returns and the Act’s deference to federal law to determine which corporate groups are eligible to file consolidated returns, I believe that the General Assembly intended to adopt the federal law regarding the elimination of dividends paid by the subsidiary to the parent from the group’s consolidated income. Federal law at the time in question only required eighty percent ownership of the subsidiary by the parent. Under the facts of this case, Appellees were entitled to that elimination. I cannot leave this subject without noting that in 1997, the General Assembly realized the confusion that was being created by these two statutes, and it amended section 26-51-404(b)(9) to require only eighty percent ownership of the subsidiary by the parent in order to get the state tax exemption. See Act 1189 of 1997. The Act reflects the legislature’s awareness of the many pending cases that were litigating the very issue at stake in this case. Although it offers a disclaimer of sorts, attempting not to influence the outcome of those pending cases, the stated purpose for amending the section is quite telling: It is further determined that state income tax laws should have been the same as federal income tax laws and this Act is adopted to clarify that these dividends are to be treated for state income tax purposes in the same manner they would be treated for federal income tax purposes for all corporations to which the Act is applicable. Acts 1997, No. 1189, § 3 (emphasis added). This section makes one thing perfectly clear: Federal law was always intended to guide Arkansas law in the area of consolidated corporate income tax. For these reasons, I concur in the majority’s decision to affirm the chancellor’s order.