25 Mich. App. 522 | Mich. Ct. App. | 1970
Brunswick brought suit in the Court of Claims for a refund of $16,900 out of the $103,076 franchise privilege tax it paid in connection with its 1967 Michigan Annual Report.
The $16,900 is the amount of additional annual taxes for 1967 that resulted from the state’s inclusion of a liability account entitled “Deferred Federal Income Taxes” in Brunswick’s taxable “surplus.” MCLA § 450.304 (Stat Ann 1970 Cum Supp § 21-.205).*
The sole issue in this appeal, consequently, is whether a corporate account for deferred Federal income taxes should be recognized by the Department of the Treasury in computing a corporation’s surplus on which the annual privilege fee is levied. An equally-divided Supreme Court discussed this issue in McLouth Steel Corporation v. Corporation & Securities Commission (1963), 372 Mich 76 in the setting of Federal income taxes deferred by reason of the accelerated depreciation provisions of the Internal Revenue Code, 26 USC §§ 167, 168. We must determine whether to apply the reasoning of Justice Thomas M. Kavanagh for reversal or that of Jus
Brunswick Corporation is a Delaware corporation doing business in Michigan and thereby subject to the privilege fee. Its sales are substantially of the installment variety. Recognizing the significant difference between the cash-flow position of an installment-sales corporation and a cash-sales corporation, Congress enacted § 453 so that each corporation would pay the Federal income tax due as cash is realized from the profit-generating transaction. For simplicity, we will illustrate this difference with the single transaction discussed in the Court of Claims.
Both a cash-sales corporation and an installment-sales corporation sell merchandise for $200 on which the net profit is $100. A cash-sales corporation presently has the $100, of which $52 must be paid to the Federal government in income taxes and $48 goes into surplus on which the Michigan corporation privilege fee is levied. An installment-sales corporation, on the other hand, may receive $25 in cash and a note for $175, payable over eight years. It has the same accounting profit of $100, but in a substantially less liquid form. Rather than take $52 in taxes from the corporation in the year of the sale, the Federal government allows the corporation to pay in taxes only 52% of the profit realized, 52% of $12.50 or $6.50. Each year as the corporation realizes another $25, it pays an additional $6.50 to the Federal government. Thus only $6.50 of the $52 Federal tax obligation is paid in the year of the sale; the remaining $45.50 is Federal tax incurred in the year of the sale, but not payable until the installments are re
The Michigan Department of Treasury found Brunswick’s privilege fee computation deficient because Brunswick deducted $45.50 from its surplus.
Justice T. M. Kavanagh, speaking for the four justices advocating reversal in the McLouth case, considered the state’s argument on contingency persuasive :
“Since the determination of this projected liability for which the reserve was created will be based upon several variable factors such as [sales, gross income, cost of operations, capital additions], the possibility of such liability is a contingent one, at best, and cannot be considered at this time as any more than speculative and conjectural.
“Conjectural liability to another sovereign is too uncertain a foundation upon which to permit avoidance of a presently well-defined obligation to the State of Michigan.” 372 Mich at p 87.
Justice Dethmers thought McLouth’s claim presented a question of fact as to the net value of the depreciated facilities. He concluded:
“Expert testimony of certified public accountants, who testified in the case, supports and confirms plaintiff’s position in this respect, not only as to its conformance with sound accountancy practice but also as being correct as a matter of fact. We think it is sound and correct. For that reason it should be held that the items in question are properly deducted
The record in the case now before us requires the same conclusion. Plaintiff’s expert witness, unrebutted by the state, testified that the “net value” of the installment receivables was the face amount reduced by the deferred Federal income taxes. Plaintiff also introduced into evidence the method of reporting the § 453 deferrals approved by the Securities and Exchange Commission, a method whereby the deferred income taxes are treated as current or noncurrent liabilities, depending on their maturation date.
Our decision adopting Justice Dethmer’s opinion in the McLouth case is further justified by the per curiam opinion of the Supreme Court in Corporation & Securities Commission v. Michigan Consolidated Gas Company (1968), 381 Mich 116, where the Court said that the 1967 legislature had provided evidence
“The foregoing is fair proof that the construction placed on each of the involved statutes by Judge Quinn . * * * has not met with legislative disapproval, or even legislative concern over the impact of his reasoning upon the coffers of Michigan’s treasury.” 381 Mich at p 121.
The Supreme Court thought the failure of the legislature to amend the statutes over the course of several years indicated approval of their construction. Two more years have now passed, and
Affirmed. No costs, a public question being involved.
The relevant portion of MCLA § 450.304 is as follows:
“The term ‘surplus’, as used in this act, shall be taken and deemed to mean the net value of the corporation’s property, less its outstanding indebtedness and paid-up capital.”
Justice Black also wrote for affirmance of the lower court’s decision. He thought that the commission could not redetermine the corporate fee absent a showing of fraud or mistake on the part of McLouth Steel in the preparation of its balance sheet.
The accounting picture is reflected in the stipulation of facts incorporated in Judge William Beer’s findings:
(i) Cash Sale
Book Entries:
Cost of
Manufacture and Federal Net
Sale Selling Expenses Profit Income Tax Profit
$200.00 $100.00 $100.00 $52.00 $48.00
Balance Sheet: ' •• ‘s Cash
$200.00
$200.00
Liabilities
Owed for cost of Manufacture and Selling Expenses $100.00
Owed for Federal Income Taxes 52.00
Surplus 48.00
$200.00
(ii) Installment Sale Book Entries:
Current
Manufacture and Federal
Sale Selling Expenses Profit Income Tax $200.00 $100.00 $100.00 $6.50
Deferred Federal Income Tax $45.50
Net
Profit
$48.00
Balance Sheet:
Assets
Cash $ 25.00
Installment Reeeiv. 175.00
$200.00
Liabilities
Owed for cost of Manufacture and Selling Expenses $100.00
Owed for Current Income
Taxes 6.50
Owed for Deferred Income Taxes 45.50
Surplus 48.00
$200.00
The actual figure was $24,554,587 which raised Brunswick’s privilege fee for 1967 by $16,900.
The Securities and Exchange Commission’s release states that: “The deduction of the deferred income taxes from the related installment receivables is not considered to be an appropriate procedure; the current value of the receivables is not affected by the amount of the tax deferral. The deferral is not a valuation reserve but a eredit item representing cash retained in the business by the deferral of tax payments under the alternate tax provisions.
■ “Where installment receivables are classified as current assets in accordance with the operating cycle practice, the related liabilities of credit items maturing or expiring in the time period of the operating cycle, including the deferred income taxes on installment sales, should be classified as current liabilities. Installment receivables not realizable within one year and the related deferred income taxes may be classified consistently as noncurrent items.” 30 ER 15420, December 7, 1965 (Securities Exchange Act Release No 7763).
Similarly, both New Jersey and Texas have reached the result our Supreme Court did in McLouth in interpreting somewhat corresponding franchise fee statutes. In Calvert v. Houston Lighting & Power Co. (Tex Civ App, 1963), 369 SW2d 502, construing VATS-Tax-Gen, art 12.01(3) (a), the Texas court concluded the deferred Federal taxes resulting from accelerated amortization represented an expense and would never get into surplus. American Can Company v. Director of the Division of Taxation (1965), 87 Super 1 (207 A2d 699), presents the same factual situation as McLouth. In interpreting NJSA 54:10A-4 and 5, the court held that to include in net worth an account for deferred Federal taxes resulting from accelerated depreciation would violate accounting principles. Contra, but distinguishable, see The Kroger Co. v. Bowers (1965), 3 Ohio St 2d 76 (209 NE2d 209), where the income tax reserve arising out of accelerated depreciation could not be deducted in computing the franchise fee because Ohio RC § 5733.05(B) includes tax reserves in the computation except reserves for taxes due and payable during the year; Trunkline Gas Company v. Mississippi State Tax Commission (1960), 238 Miss 591 (119 So 2d 378), where the court construed Miss Code 1942, §§ 9314, 9317 which permits only reserves for fixed liabilities to be used in franchise fee computation, and the court found that the reserve for Federal taxes arising from accelerated depreciation was not within the exception because, unlike Michigan, Mississippi interprets ambiguities in tax statutes favorably to the state.