*1
BARCLAY, Director, Arkansas
Richard
v.
of Finance
Administration
Department
and Subsidiary,
HOLDING COMPANY
PARIS
FIRST
Paris,
at
Arkansas
National Bank
First
Jack, Lyon LLP, Ebel, M. Clark, III & Walter Joseph Friday, by: Eldredge Nichols, amicuscurie of position. G. support appellees’ 1979, the In General Assembly Justice. THORNTON, 708, members of an Act allowing corporate adopted RAY return, a federal income tax that files affiliated group of Following file a consolidated Arkansas return. adoption 708, First Holding Company] Paris Holding Company [The of 1980. At the time its March organization, organized the stock of owned of the Holding eighty-six percent Company National Bank at Paris Com First Holding [First National]. formed an that filed consol and First National affiliated group pany tax returns 1994 for both idated years through its the basis state taxes. The consolidated filed return on group exclude dividend distribu of federal principles intercorporate calculation of between members of an affiliated tions income the consolidated gross group. Finance and Arkansas appellant, Department
Administration conducted an audit the consolidated [DFA], divi tax returns and tax on the imposed intercorporate group’s dends, that the Act 570 of 1965 asserting only permit provisions from First ted the of dividends received National by exemption income the consolidated gross Holding Company if the at least owned ninety-five percent' Holding Company additional of the stock of First National. assessedappellees Appellant $181,960.14, income taxes which under appellees paid protest. the DFA was to the The decision of Pulaski County appealed Court, and the chancellor found Chancery *5 returns, and that of 1979 allowed the Act 708 filing between mem distributions of dividends corporate intercompany were from bers of an affiliated excluded computation taxable income for the the consolidated It fromis taxpayer, group. we that decision that and affirm. appellant brings appeal, This case us to two statutes to the requires interpret relating related The first taxation statute was closely corporations. enacted as Act 570 of Act did not address 1965. returns, but was effective filed corporations tax returns. Act 570 that dividends separate provided payable by its were from subsidiary the taxation if corporation parent, exempt owned at least parent subsidiary’s stock. capital
The second Act as statutory provision, adopted by extended to Arkansas of an affiliated corporations right under federal tax elect laws to to consolidate tax returns of state taxation. We are instructed purposes 708 of 1979 by that “this Act is based of filing federal consoli- upon dated income tax returns.” consolidatedtax returns
Conceptof The basic federal rules for taxing were enacted corporations in 1909. A by Congress into of its corporation, regardless organization divisions, income, is taxed separate its taxable in upon 1909 the rule was adopted dividends are intercorporate excluded income. The payee corporation’s has principle been refined and limited to address abuses of the exclu perceived sion, but the that taxable income should not principle bear multiple levels of fundamental corporate policy underlying taxation of dividends received by See Mund corporations. George an stock, Taxation Dividends Under Intercorporate Unintegrated 44 Tax L. Rev. 1 Regime, Mundstock article also out Revenue Act points of author provided statutory for consolidated returns when ity divi corporation declaring is, effect, dends in of an economic unit with the part shareholder- corporation. Mundstock states: more tax Specifically, should “[N]o result than if the two were one for tax entity pur Id. poses.” As M. Pearce a comment expressed published John Review, the 1989 Law “the Oregon rationale general behind the dividends-received deduction is the double mitigate taxation of before such earnings taxed earnings paid, again, *6 Pearce, The Divi- M. Intercorporate to individual shareholders.” John L. An Area 68 OR. IncreasingComplexity, dends-ReceivedDeduction: of effect, I. Bittker same Boris and S. To the Rev. 161 (1989). James Eustice, and Federal IncomeTaxation in their treatise Corporations of 2000), note: Shareholders 13.42 (Supp. § income is of dividends from consistent gross elimination [T]he is, effect, a enter- single that the in taxable group with the theory been have reflected in the earnings already and that such prise and taxed to the group. consolidated return once of reduce the double taxation within Id. To eliminate or to earnings return, rule for the federal consoli- a consolidated filing taxpayer’s dividend returns that “a distributed dated provides by specifically a consolidated member to member shall be one another during year Bittker and further eliminated.” 26 CFR Eustice (a). §1.1502-14 note that: The basic these that the consoli- underlying concept constitutes, substance, single dated economic unitary group technically the existence of distinct enti- enterprise, legal despite ties; tax to be ought as such the based on its group’s liability rather intra group with outsiders than on transactions. This dealings — lies at the heart of the treatment both unitary concept enterprise — transactions, which past intercompany generally present ehminated taxable computing group’s effect, income. the results in many respects resemble the joint- return of a husband treatment and wife.
FederalIncome and Shareholders 13.42. Taxation Corporations §
It is clear exclusion divi- concept intercompany dends in taxable affiliated income of an is central computing group returns. We next filing whether, law, under Arkansas address question Holding to form and National Bank were an affiliated eligible Company and to consolidated return as Act 708 of file a provided by were Act 570 or whether restricted of 1965 the benefits of forming realizing consolidated return.
Statutory Interpretation
of a
Our standard
review
chancery court’s decision in
Club, Inc.,
a tax case is de
v.
novo.
TrollBook
316 Ark.
Pledger
871 S.W.2d
We will not
disturb
chancellor’s find
*7
of fact
unless
erroneous. Id. We
ings
they
clearly
also review
of
issues
construction de novoas it is for us to decide what
statutory
Huckabee,
454,
v.
a statute means.
338 Ark.
Hodges
995
341
S.W.2d
court;
We are
bound
the
(1999).
not
the decision of
trial
how
ever, in the absence of a
that the trial court
in
showing
erred
its
law,
the
will be
interpretation
as
interpretation
accepted
Id.
correct
appeal.
The basic rule of
construction is
statutory
to
effect
give
Keith,
487,
to the intent of the
Ford v.
338
legislature.
Ark.
996
20
Where
S.W.2d
the
of a statute is
and
language
plain
we determine
unambiguous,
intent from
legislative
the ordinary
used. In
meaning
language
of a
considering
meaning
statute,
reads,
we
it
construe
as it
just
words their ordi
giving
in common
nary
usually accepted meaning
We con
language.
void,
strue the
statute so
no word is left
or
superfluous,
insignif
icant; and
and effect are
to
meaning
word in the statute
given
every
if
Id. When
statute is
we must
possible.
it
ambiguous,
interpret
ACW,
Weiss,
to the
intent.
Inc. v.
according
legislative
329
302,
Appellant 1965 was the controlling case, at all law relevant times to this and that it certain grants subsidiaries, to with exemptions but if the only parent owns company ninety-five stock. percent subsidiary’s Appel- lant that because the argues does own Holding not Company stock, of First National’s ninety-five percent then not claim this Act may 1965 in relevant exemption. states: part do not include the following income’ The words
(2) ‘gross items, taxation under this act: be which shall exempt business within doing received by corporation Dividends if at least a subsidiary, this state from such busi- corporation doing stock is owned by subsidiary’s capital the state. ness within
Id. argument by contending they respond Appellees 1979, and, tax return 708 of
filed a consolidated pursuant therefore, to the federal tax laws for as to looked guidance they from the affiliated could eliminate group’s gross whether to the Act 708 of income the dividends Holding Company. paid titled “an Act Arkansas statutes clarify which was to file that are part allowing corporations and other consolidated income returns purposes,” provides that: part *8 (as who are members an that group
All corporations eligible of affiliated (b) and as of the effective (a) term is defined 26 U.S. C. § a Act), date of this which affiliated files Federal consolidated group income tax return to 26 U.S.C. 1501-1505 pursuant corporate §§ Act, elect to a as of the effective date of this consolidated may file Arkansas income return. corporate of We hold that and added). Act 708 1979 (emphasis plain of this statute is that language unambiguous an file a become members of affiliated to consoli- eligible group dated tax return based of federal consolidated concepts .upon Thus, the issue we must whether returns. address is Act 570 of 1965 restrict the formation of group return, file a consolidated may thereby eliminating intercorporate income. dividends from its gross
Analysis for resolution is whether Act 570 question remaining and the Bank of 1965 National Holding precludes Company members of an file a from affiliated becoming eligible group return because owns less Holding Company of the National Bank’s stock. As we have ninety-five previ percent noted, Act 570 of 1965 did not address the formation of an ously return, file a affiliated but a group merely expressed threshold level for a and a returns to parent subsidiary filing separate if the dividends stock exempt ownership by parent ninety- five or stock of the This avenue percent greater subsidiary. of dividends between returns corporations filing exemption separate remained effective from the time of its until the adoption present time.1 a Act 570 means for a that does not file provides corporation a consolidated return to from taxation the income received exempt dividends from This of Act 570 subsidiary. interpretation harmonizes with Act which offers a second means of imposing taxes the taxable income of a formed affiliated upon lawfully file consolidated return. electing single
We next address the criteria for to form an affiliated eligibility Act 708 of 1979 states that for becom- group. specifically eligibility a member of an affiliated ing a consoli- purposes dated Arkansas income tax return is controlled U.S.C. That (a) (b). provision provides: § The term ‘affiliated
(1) means— group’
(A) 1 or more chains of includible corporations connected stock with a common through ownership parent corporation which is an includible but if— corporation, only
(B)(i) the common owns stock parent directly meeting (2) in at least 1 requirements paragraph other includible corporations,
[*] [*] [*] (2) 80 and value voting test— The percent of stock ownership meets the any corporation of this requirements if it— paragraph *9 (A) at least 80 possesses percent of total of voting power the stock of such corporation, value
(B) has a to at least equal 80 of the total value percent the stock of such corporation. 1 We note that Act 570 was amended in 1997 to eighty conform to the percent
eligibility forming group an affiliated to file a consolidated return. See Act requirement 1189 of 1997.
721 Id. intent to us that the of Act 708 of It legislative appears for a available the choice
1979 was to make corporation holding and total value of of the one or more voting power eighty percent an affiliated with to form such other group corpora corporations to file a tions and for the affiliated return single group on from its business thereby gross earnings operations, eliminating dividends from taxation. intercorporate was followed We note that this DFA from interpretation by DFA allowed under 1977 until 1994. Act 708 eligible to form an affiliated and to file consolidated tax returns group the federal tax code from the time Act following concepts in until 1994. were 708 was 1979 contacted passed Appellees by DFA three occasions to 1994 DFA auditors. DFA by prior reviewed income-tax returns. The auditors did not chal- appellees’ eliminations of dividends on the consolidated tax lenge appellees’ 1994, returns which reviewed. In DFA decided to interpret 708, Act Act 570 as and decided to restricting disallow the elimination of dividends from consolidated gross income of an affiliated when a within the group parent corporation did not own of its We note subsidiary. that there were no nor were there new statutory changes, any the DFA to regulations this new “audit promulgated by explain position.” DFA auditors decided Apparently, simply
Act 570 of 1965
Act
1979. This
superseded
conclusion is
returns,
did,
does not
address consolidated
and if it
wrong.
the later Act
1979 would
See Dickenv.Missouri
prevail.
Pacific
Co.,
R.R.
were to prevail. supra. affirm the trial court on this first we ingly, point. next that if we the federal rules argues
Appellant adopt regard- elimination of dividends then be we would unconstitution- ing to the federal the General ally delegating government Assembly’s net to determine the income of Arkansas ability taxpayers. Appel- lant further that this would be harmful to the tax argues system it would Arkansas because be time the subject change every its tax laws. The government changes language, appellant this unconstitutional to the federal argues, delegates authority gov- ernment is as follows: “this is based upon tax returns.” federal consolidated
Before addressing specifically appellant’s point appeal, we note: act,
In of an we reviewing constitutionality recognize every act carries The burden strong presumption constitutionality. is on the proof party challenging legislation its uncon- prove and all doubts will be stitutionality, resolved favor of the statute’s if it is constitutionality, to do so. An act will be struck possible down when there is a clear only between the act incompatibility and the constitution. Cave v. 343 Ark. 37 S.W.3d City Springs City Rogers, mindful on this we turn now to Remaining presumption,
appellant’s challenge. Inc., In v. Arkansas, Leathers Rice 338 Ark. Gulf
S.W.2d we discussed doctrine (1999), prohibiting delega tion of on the United States legislative power. Relying Supreme Court, we explained: whether an determining unconstitutional has been delegation
made, the Court considers whether “has Congress attempted abdicate, others, or to transfer to the essential legislative functions with which it is vested Constitution.” Wallace, Id. v. Currin 306 U.S. We have also 1939)). noted (citing laws, while the not its to make it can legislature may delegate power make a law and the conditions which it prescribe upon may become Cave operative. Springs,supra.
723 Co., cites v. Louis St. Southwestern Appellant Cheney Railway S.W.2d 731 in (1965), 394 of its support argument, if we the federal rules the elimination of adopt regarding dividends, then we would be to the unconstitutionally delegating the General to determine the government Assembly’s ability net Arkansas we determined income of that a taxpayers. Cheney, statute, which the allowed Interstate Commerce Commis expressly sion to determine net income of a was an unlawful railway, of the General to the federal delegation Assembly’s taxing power The unlawful statute stated: government. income taxable in Arkansasof in any corporation engaged [T]he railroad, business a steam or electric operating ser- express
vice, business, or or other such telephone telegraph forms public service, shall be a proportionate part corporation’s gross revenues, therefrom a deducting of all deduc- proportionate part revenues, tions. The deductionsand the allocations are to be thereof determinedunderthe InterstateCommerceAct to the Interstate pursuant CommerceCommission’sstandard accounts. classificationof Cheney, added). supra (emphasis in is statutory language from Cheney easily distinguishable in the statutory language case. question present Specifically, the General to the federal Cheney, Assembly delegated govern- ment, Act, of its Interstate Commerce through language revenues, deductions, to determine the
authority allocations for Arkansas This statute should be contrasted with the stat- taxpayers. ute in in the case now on review. question case,
In the the General was not present Assembly to abdicate or transfer to the federal attempting government to determine how income is calculated in right Arkansas. The of Act 708 stated' the provisions requirements determining eligi to file a consolidated tax return in Arkansas in bility accordance with the of 26 U.S.C. (a) as of the date of (b) § of Act We 708. conclude that the passage “this Act is language based federal consolidated tax upon returns” filing was not to the federal it delegation power government, instead the General of the conditions Assembly’s adoption upon which the law for consolidated tax returns was to become operative. also that if we allow to claim an Appellant argues appellees
elimination of dividends without the Holding Company owning because filed a of First National’s stock return, tax then we would differ be treating taxpayers file a return based on their election to instead of ently return. barred this raising separate Appellant procedurally it was not below or ruled because raised argument appeal upon the trial court. It is well settled that to preserve arguments ones, even must obtain a constitutional ruling appeal, appellant Neal, 332 Ark. S.W.2d below. Wilson v. 199 (1998). without we merits. reaching Accordingly, reject argument However, that there are numerous we do note variations of *12 a elect that result from decision to to file a consoli consequences return, dated which are the some of beneficial to taxpayer, some which are not.
In its final on that the trial court appeal, argues point appellant the burden of on the at trial. applied wrong proof parties Specifi- that the trial court the cally, erroneously appellant argues placed burden of on the DFA to that the additional assessment proof prove of taxes on that the appellees proper. Appellant argues appropri- ate burden would have been for that the divi- appellees prove dends were eliminated. properly We discussed issue of burdens of 164, appropriate proof Club, v. Meadowbrook 777 S.W.2d Ragland Country In the DFA it that was the Ragland, argued taxpayer’s
burden to entitlement to a Id. We noted prove statutory exemption. that the in that case was not entitlement to an taxpayer claiming but instead was an exclusion from Id. exemption, claiming coverage. We the difference in the two and noted explained taxing concepts, that “a different burden of at the administrative and trial levels proof when an or at exclusion is issue.” We noted required exemption that: an claiming shoulders the burden of estab- taxpayer exemption
lishing By his claim. same it follows that the logic, agency to collect a tax bears the burden of claiming right proving the tax law to the item to be taxed. applies sought hand, this rule to the at case we hold that Ragland, supra. Applying the trial court the burden on properly placed justifying imposi- tion of a tax were dividends that excluded from upon intercorporate taxation on the DFA. The facts in the now on review are all case fours with those in in this case Ragland. Specifically, appellees were not an from taxation were instead claiming exemption an exclusionfrom the income of claiming group’s gross First National. There- dividends to the Holding Company paid fore, were not it became DFA’s burden appellees prove filed, file, a consohdated tax return that or eligible improperly dividends within the affiliated did not include intercorporate meet burden of we DFA did not proof. Accordingly, group. affirm the trial court.
Affirmed.
Corbin, J„ concurs. Imber, dissent. JJ.,
Brown Corbin, I concur with the concurring. Justice, L. decision to affirm the I chancellor’s majority’s ruling. DONALD write because I view the issue than separately presented differently issue is whether dividends majority. my opinion, key paid to a more than by subsidiary parent corporation, holding eighty stock, but less than percent, ninety-five percent, subsidiary’s should be as income when the make reported gross up files tax return. Resolution of this issue turns on this court’s of Ark. interpretation Code Ann. and 26-51-805 26-51-404(b) (9) 1992). (Supp. §§ *13 case, the relevant dates in this section
During 26-51-404(b)(9) an for provided income dividends exemption gross paid by to its subsidiary if that corporation parent corporation, parent owned at least of the That subsidiary. provision enacted in Act 570 of 1965. At the time of originally its Arkansas law did not passage, means for such affiliated provide to file consolidated state income tax returns. corporations The General Assembly subsequently passed 26-51-805, now codified as section that allowing corporations members of an affiliated to file a consolidated Arkansas cor group income tax return. Section porate 26-51-805 directs DF&A to (a) look to the federal laws to determine whether a group corpora tions is an “affiliated for a consolidated group,” purposes filing here, return. the time in federal During tax question regulations defined an “affiliated as one in which share a group” common and the at owns least the parent, parent eighty percent time, at Also subsidiary. federal law that affiliated provided consolidated federal tax groups filing returns could eliminate from income those dividends group’s gross paid by subsidiary the parent. an affiliated were group DF&A does not dispute Appellees were, therefore, eligible definition and that they under the federal tax return. Nor does agency dispute file a consolidated state the “elimination” of dividends for that federal provided regulations to another. The member of an affiliated distributed one group intended to allow Assembly then is whether General question income of of determining gross the same elimination purposes law. I believe that was legisla- the affiliated under state group ture’s intention. federal taxation is based on the state of income
Our
system
to the federal
has
looked
and our
consistently
system,
legislature
Ark. Code Ann.
tax
For
income
guidance.
example,
regulations
must calculate
that a
1997)
26-51-401
provides
taxpayer
(Repl.
§
method as
income tax
same accounting
his state
liability using
Ann.
tax
Code
Similarly,
used for federal income
purposes.
that a
must calculate
1997)
26-51-402
taxpayer
(Repl.
provides
§
the same income
as used for
year
his state income tax liability using
section 26-51-
federal income tax
More
purposes.
significantly,
a consolidated state tax
an affiliated
805(c)
filing
requires
“a
of the federal
return to attach to its state return
copy
complete
return
with the federal
income tax
filed
consolidated corporate
Internal
for that taxable
This court has
year[.]”
Revenue Service
federal returns to be attached to state
held that
previously
requiring
intent to conform state
returns is an indication of
legislature’s
of federal
See
South-
returns to the
Central &
requirements
concepts.
Weiss,
Cos.,
ern
Inc. v.
339 Ark.
It is tax laws sameas income clarify Act is adopted purposes dividends to be treated state income these income tax would be treated for federal the same manner for all to which the Act is applicable. purposes corporations 1189, 1997, makes one added). No. 3 This section Acts (emphasis § intended to Federal law guide clear: always thing perfectly income tax. in the of consolidated For Arkansas law area corporate reasons, affirm I in the decision to these concur majority’s chancellor’s order. In the Gen- Brown, 1965, Justice, dissenting.
L. Act ERT which amended Tax eral Assemblypassed ROB read in for income taxes and relevant Code part: The income’ do not include the (2) words ‘gross following this act[:] items, which shall be taxation under exempt .... received business within (j) by corporation doing Dividends (95%) from a if at least this state subsidiary, ninety-five percent stock is owned subsidiary’s such capital corporation doing within business this state. of 1965 is
Act 570 codified at Code Ann. 26-51-404(b)(9) § 1995). (Supp. the General 708 to Act Assembly passed clarify income tax of consolidated returns in Arkansas. Act filing stated as “This of its Act is based part purpose: upon The Federal consolidated income tax returns.” filing further stated that qualify corporations return are those members of an affiliated as that term eligible is defined in Act 708 of 1504(a) (b). U.S.C. § codified at Ark. Code Ann. 1997). 26-51-805(a)(l) (Repl. § United one
The States Code defines “affiliated as or group” more chains of includable connected stock through with a common 26 U.S.C. ownership parent corporation. The 1504(a)(1). an “affiliated must group” parent corporation § at least own stock the includable eighty percent corpora- tion. 26 U.S.C. 1504(a)(2). § remained exemption percentage *16 Act Act
Arkansas until 1997 when 1189 was 1189 changed passed. the to subsidiary’s eighty percentage ninety-five percent per- 1189, the cent. In section 3 of Act General Assembly acknowledged that was “at with Arkansas income tax law variance” federal income tax law the and stated that the Act was on figure percentage passed to treat and federal income taxes “in the same manner” and state was not intended to affect controversies or have an effect on existing the law. of prior interpretation concludes since the Act 1979 refer- majority opinion
ences the United States Code’s definition of “affiliated and group” states of the federal consolidated returns the will apply, 1965 Act with the was ninety-five percent figure effectively for consolidated returns. I see it that do not repealed way. sure, To be 708 of 1979 the directs United corporations States Code for a of definition “affiliated but it is silent on group,” what of of a is percentage ownership subsidiary company necessary That, course, for an income tax of unam- exemption. clearly out in of set Act 570 1965. All Act was 708 did define biguously what to enable to file comprises returns, course, consolidated returns. Consolidated be filed may for a and not reasons to take variety advantage simply dividend Act 708 did not or exemption. adopt incorporate federal which from federal income regulation provides exemption tax for dividends ato See26 C.F.R.. paid by corporation parent. § Hence, 1.1502-14. Arkansas’s criterion stayed was not affected Act. this 1979 place by Again, ninety- five criterion not the General percent by repealed Assembly until 1997. And the stated intent of the General in 1997 Assembly was to eliminate the variance in between Arkansas and percentages income law.
Here,
arewe
about a tax
Act 570 of 1965
talking
exemption.
makes that fact
clear. Tax
state
abundantly
must
exemptions
be
a reasonable doubt. See
proved beyond
Little Rock v.
City of
McIntosh,
423,
319 Ark.
730 construc it is blackletter law for statutory And
S.W.3d
See Board
statute over the
effect
general.
tion to
specific
give
Fund v.
Police
Pension &
Little Rock
Dept.
Trustees City
Relief
for
Stodola,
(citations omitted).
942 S.W.2d
(1997)
that the
intent of Act
has
held
this court
recently
legislative
Finally,
“unless a
of federal taxation to
of 1979 was
apply
concepts
& South
Arkansas law.” Central
treatment is
different
prescribed
Arkansas
Inc.,
at
law
Cos.,
pany prove in Arkansas for an during exemption stock ownership necessary hold reverse the court and time I would trial relevant period, *17 did not for the qualify exemption. my Holding Company 1979, the General Assembly merely with opinion, and the federal the federal of consolidated returns adopted while of affiliated Arkansas’s definition retaining specific groups Cos., Weiss, & Inc. v. on stock See Central Southern statute ownership. harmonizes two That statutory easily interpretation supra. statutes. I dissent. Accordingly,
IMBER, joins. J., BUNCH v. STATE Arkansas
Rodney CR 00-1360 S.W.3d 132 Court of Arkansas Supreme delivered Opinion May