The sole question for decision is whether the plaintiff, having voluntarily elected the installment method of accounting for income tax purposes, may deduct deferred, potential state and federal income tax liabilities from its franchise tax base under G.S. 105-122 (b).
Plaintiff contends that it should be permitted to deduct from its franchise tax base, as computеd under G.S. 105-122 (b), the amount of state and federal income taxes which may become due as certain installment income is received in the future. This contention is based upon the premise that generally accepted accounting principles would permit such a deduction from surplus. Defendant rejects this contention upon the ground that G.S. 105-122 provides that no reservation or allocation from surplus or undivided profits shall be allowed for items other than those specified in G.S. 105-122 (b). Defendant thus argues that since future income tax liability which may or may not arise in the future does not constitute a “definite and accrued *611 legal liability” or “taxes accrued” within the meaning of G.S. 105-122 (b), the amount claimed by plaintiff is not deductible.
The franchise tax payable by a corporation in this State is determined by G.S. 105-122 through G.S. 105-129.1. G.S. 105-122 (b), in pertinent part, provides:
“ (b) Every such corporation taxed under this section shall determine the total amount of its issued and outstanding capital stock, surplus and undivided profits; no reservation or allocation from surplus or undivided profits shall be allowed other than for definite and accrued legal liabilities, except as herein provided; taxes accrued, dividends declared and reserves for depreciation of tangible assets as permitted for income tax purposes shall be treated as deductible liabilities....”
Franchise taxes are imposed upon corporations for the opportunity and privilege of transacting business in this State. It is an annual tax which varies with the nature, extent and magnitude of the business conducted by the corporation in this State.
Telephone Co. v. Clayton, Comr. of Revenue,
In construing taxing statutes, there are several well established rules of construction. Where the statute is ambiguous or there is doubt as to the proper interpretation of a statute which imposes a tax, the statute is construed in favor of the taxpayer and against the State.
Food House, Inc. v. Coble, Sec. of Revenue,
The threshold question is whether plaintiff’s deferred taxes are “definite and accrued lеgal liabilities” or “taxes accrued” under G.S. 105-122 (b) as interpreted by the rules of construction stated above. As was stated in
Dixie Pine Products Co. v. Commissioner,
The allowable deductions from the franchise tax base under G.S. 105-122 (b) are clear and unambiguous. The permissible deductions, relevant to this case, are “definite and accrued legal liabilities” and “taxes accrued.” The amounts which plaintiff is attempting to deduct are not definite and accrued liabilities. The sums are not definitely fixed in amount and plaintiff is not presently liable for the amounts. Likewise, there is no permissible deduction for the amounts sought to be deducted as “taxes accrued.” Neither the amount of, nor the liability for, such deferred taxes is fixed. Thus, under the plain meaning of G.S. 105-122 (b), the deduction claimed by plaintiff for deferred income taxes was properly denied.
In its opinion, the Court of Appeals stated that the deferred taxes were not technically “accrued” under the wording of G.S. 105-122 (b), but further stated that the statute should be strictly construed against the Commissioner bеcause it was a tax levy. That court reasoned that G.S. 105-122 provides for the computation of the franchise tax in accordance with the books and records of the corporation, and that books and records of a corporation should be kept in accordance with the Business *613 Corporation Act, Chapter 55 of the Gеneral Statutes of North Carolina. Therefore, the definitions contained in Chapter 55 relating to the computation of “surplus” should be controlling. Since under the Act these records and computations are to be maintained in accordance with generally accepted accounting principles, the court further reasoned that the franchise tax should also be computed in such manner. Accordingly, since plaintiff’s evidence showed that it is a generally accepted accounting principle to deduct deferred income taxes from the income which will be received from the installment sales, the Court of Appeals held the deferred taxes were properly deductible.
The Court of Appeals relied heavily upon
American Can Co. v. Director of Div. of Tax,
We are of the opinion that American Can is distinguishable from instant case. G.S. 105-122 (a) provides, in addition to that portion of the statute relied upon by the Court of Appeals, that corporations shall:
“[M]ake and deliver to the Cоmmissioner of Revenue in such form as he may prescribe a full, accurate and complete report and statement signed by either its president, vice-president, treasurer, assistant treasurer, secretary or assistant secretary, containing such facts and information as may he required by the Commissioner of Revenue as shown by the books and rеcords of the corporation at the close of such income year” (Emphasis added.)
There is no requirement contained in the North Carolina franchise tax statute that the Commissioner of Revenue follow *614 generally accepted accounting principles in making his determination of the franchise tax due from a corporation. Thus, we do not feel that American Can is dispositive of the case at bar.
In
National-Standard Co. v. Department of Treasury,
“Because of their professional competence, the opinions of certified public accountants are entitled to be given great weight. . . . The state, in making its determination of the privilege fee, is bound, however, to follow not the accepted standards for corporate accounting, no matter how correct such standards may be as a matter of accounting principles, but rather the directive of the privilege fee statute. Delegation of the power to private accountants or to CPA’s to determine surplus or capital or indebtedness, in lieu of a legislative standard sеt forth in the statute, would be clearly unconstitutional.” (Emphasis added.)180 N.W. 2d at 769 .
In determining that reserves for deferred federal income taxes were not deductible from the franchise tax base, the Michigan Court noted:
“ . . . Here, once again, we are confronted with a conflict between generally accepted accounting principles оn the one hand — which may be good and prudent corporate practice by setting up of reserves to meet future contingencies — and on the other hand, with the statutory test — surplus is to be determined by deducting from the net value of the corporation’s property its outstanding indebtedness and paid-up capital.
*615 “Future Federal income taxes are not an outstanding indebtedness — they are a mere contingency. The fact that a tax is certain to accrue in years to come does not make it a present debt. ...”180 N.W. 2d at 773-74 .
See also Brunswick Corp. v. State,
Brunswick Corp. v. State, supra, involves a factual situation identical to the case at bar. In Brunswick, plaintiff elected, pursuant to Internal Revenue Code section 453, to have its installment sales reported as deferred income. Plaintiff, аs does plaintiff in instant case, contended that its deferred federal income taxes should be deducted from its surplus for franchise tax purposes. Apparently relying upon National-Standard Co. v. Department of Treasury, supra, and the franchise tax statute which did not expressly permit the deduction of such amounts, the court held that such deferred income taxes could not be deducted from surplus and that the Commissioner was correct in denying taxpayer’s deduction.
G.S. 105-122 does not authorize either the deduction of deferred income taxes from the franchise tax base or the use of generally accepted accounting principles to compute the tax. That portion of the statute which states that the tax shall be computed from the “books and records of the corporation” is not a requirement that the Commissioner follow the categorizations placed upon the information contained in the books and records. Rather, the statute authorizes the Commissioner to require such facts and information as is deemed necessary to comply with his duty to assess the franchise tax in accordance with the statute. As was stated in
Watson v. Farms, Inc.,
“The phrase ‘in accordance with generally accepted principles of sound accounting practice’ appears repeatedly in those sections of the Act [Business Corporation Act] relating to accounting and finance. Sec. 49(b), relating to the legality of dividends, adds to the quoted phrase ‘applicable to the kind of business conducted by the corporation.’ This addition is, we think, an inherent qualification when the statutory provisions are applied to a particular corporation. What is standard accounting practice for a corner grocery *616 store may not be standard accounting practice for corporate giants such as General Motors, American Telephone & Telegraph, and similar corporations.
"... A corporation may, pursuant to promulgated state and federal regulations, use either a cash receipt or an accrual basis in computing its income taxes. These methods of accounting are not new. Each has been in general use for many years. It is not, we think, logical to conclude that the Legislature, in adopting the Business Corporation Act, intended to require a corporation to keep two sets of books, one for its stockholders, the other for the government, if it wished to compute its taxes on a cash receipt basis. It is еven more illogical to assume that the Legislature intended by the Business Corporation Act to void regulations permitting computation of taxes on the cash receipt basis and thereby outlaw that method of accounting, or to invalidate an accepted method of determining capital and surplus for franchise tax returns required by G.S. 105-122.”
In prеsent case, the Secretary of Revenue, in making his determination of plaintiff’s franchise tax liability, was bound to follow the directive of the franchise tax statute. No matter how correct certain accounting standards may be, the statute itself must control the permissible accounting methods available for the measurement of the franchise tax base. G.S. 105-122(b) clearly does not permit a deduction for future income taxes from the franchise tax base. Further, the statute does not require that the Commissioner use generally accepted accounting principles in making his determination of the franchise tax. To accept plaintiff’s argument would clearly violate the statutory requirements for deductibility set forth in G.S. 105-122 (b).
As an alternative argument, plaintiff contends that to permit an accrual method taxpayer to deduct from its franchise tax base those taxes attributable to installment sales and to deny such a deduction to a cash-basis taxpayer reporting under the installment method (Internal Revenue Code section 453) is a dеnial of equal protection of the laws under the Fourteenth Amendment to the United States Constitution and a violation of Article V, Section 3 (as it existed in 1965) of the North Carolina Constitution requiring that taxes be levied by “uniform rule.”
*617
Although the provision of the North Carolina Constitution does not expressly apply to a franchise tax but rather to “property and other subjects,” numerous decisions of this Court have held the clause to be applicable to license, franchise and other forms of taxation.
See Hajoca Corp. v. Clayton, Comr. of Revenue,
In instant case, we hold that the application of the franchise tax as applied to plaintiff does not violate the equal protection clause of the Fourteenth Amendment or the North Carolina Constitution. The different treatment between plaintiff and those taxpayers reporting income under the accrual method is based upon a rational reason.
Snyder v. Maxwell, Comr. of Revenue,
*618 Plaintiff has voluntarily elected to place itself in the classir fication about which it now complains; to wit, a cash-basis taxpayer reporting- its income under the installmеnt method. See Watson v. Farms, Inc., supra. Plaintiff makes no contention that all corporations in plaintiff’s classification — i.e., cash-basis, corporate taxpayers reporting under the installment method — are not taxed in the same manner. In fact, it appears that all are taxed the same.
Accordingly, we hold that plaintiff, having voluntarily elected the installment method of accounting for income tax purposes, may not deduct from its franchise tax base an anticipated future state and federal income tax liability. This holding is in accordance with those cases interpreting statutes similar to G.S. 105-122, see Trunkline Gas Co. v. Mississippi State Tax Comm., supra, and Brunswick Corp. v. State, supra, and is in accordance with the interpretations of the Commissioner of Revenuе and the Attorney General over a number of years. See 38 Op. Att’y. Gen. 84 (1966) ; 27 Op. Att’y. Gen. 229 (1944).
For the reasons stated, the decision of the Court of Appeals is reversed and the case is remanded to that court with direction that it remand the case to the Superior Court of Wake County for entry of judgment sustaining defendant’s motion for non-suit, treated as a motion for dismissal under Rule 41 of the North Carolina Rules of Civil Procedure.
Reversed and remanded.