U.S. BANK NATIONAL ASSOCIATION v. SOUTH DAKOTA DEPARTMENT OF REVENUE
#29338-a-MES
IN THE SUPREME COURT OF THE STATE OF SOUTH DAKOTA
10/05/22
2022 S.D. 59
THE HONORABLE BOBBI J. RANK, Judge
APPEAL FROM THE CIRCUIT COURT OF THE SIXTH JUDICIAL CIRCUIT, HUGHES COUNTY, SOUTH DAKOTA
CRAIG B. FIELDS, NICOLE L. JOHNSON of Blank Rome LLP, New York, New York; JUSTIN L. BELL of May, Adam, Gerdes & Thompson LLP, Pierre, South Dakota, Attorneys for appellant.
JOHN T. RICHTER of South Dakota Department of Revenue, Pierre, South Dakota, Attorneys for appellee.
ARGUED FEBRUARY 16, 2021
[¶1.] The South Dakota Department of Revenue (the Department) rejected U.S. Bank‘s1 method of calculating its federal income tax deduction from net income subject to South Dakota‘s bank franchise tax for tax years 2010, 2011, and 2012. As a result, the Department denied U.S. Bank‘s request for a refund for 2010 and 2011 and disallowed the entire deduction for 2012. The Department issued a certificate of assessment for additional tax and interest for 2012. U.S. Bank appealed the administrative decision to the circuit court, which affirmed the Department‘s decision. U.S. Bank now appeals to this Court. We affirm.
[¶2.] U.S. Bank is a financial institution principally engaged in the business of banking. It operates in South Dakota and other states and is a member of a larger, consolidated group of affiliates owned by U.S. Bancorp, which is a publicly traded holding company.
[¶3.] By virtue of its business within the State, U.S. Bank is subject to South Dakota‘s bank franchise tax (SD BFT). See
[¶4.] U.S. Bank does not, itself, directly report its income to the Internal Revenue Service (IRS). Instead, U.S. Bancorp, in its role as the parent company, is responsible for filing a consolidated federal corporate income tax return for the group of affiliates using an IRS Form 1120—U.S. Corporation Income Tax Return. For the tax years at issue here, U.S. Bancorp filed the group‘s Form 1120, which included U.S. Bank‘s activities.
[¶5.] Schedule J of IRS Form 1120, entitled “Tax Computation,” provides the method used to calculate the total federal tax due. The calculation on Schedule J begins by multiplying taxable income by the appropriate tax rate to arrive at the federal income tax amount listed on line 2 of Schedule J. That number is then reduced by any number of applicable tax credits, which include, among others, general business credits, recapture of investment credit, and credit for foreign taxes. After applying all of a taxpayer‘s credits to reduce its tax liability, the total tax figure is recorded on line 11 of Schedule J and then transferred to the Form 1120. The total tax due is, therefore, a net calculation of federal tax liability that must be paid to the IRS. The excerpt of Form 1120‘s Schedule J below illustrates the sequence of the calculation.
[¶6.] U.S. Bank, the other affiliates, and U.S. Bancorp are parties to a Tax Sharing Agreement designed to allocate the federal tax liability or benefit among the members of the group according to the income or loss each generates. Under the Tax Sharing Agreement, U.S. Bank pays to U.S. Bancorp “an amount up to [U.S. Bank‘s]
[¶7.] At issue in this appeal are the tax years 2010, 2011, and 2012. The total federal income tax for U.S. Bancorp (Schedule J, line 2) for these years was:
| Tax Year Ended | Total Income Tax Due |
| December 31, 2010 | $1,142,253,649 |
| December 31, 2011 | $1,248,535,908 |
| December 31, 2012 | $1,985,176,947 |
[¶8.] However, the application of certain tax credits reduced the total tax liability due to the IRS for the U.S. Bancorp group (Schedule J, line 11) as follows:
| Tax Year Ended | Total Tax Liability |
| December 31, 2010 | $524,920,206 |
| December 31, 2011 | $617,186,234 |
| December 31, 2012 | $981,865,059 |
[¶9.] Because U.S. Bank‘s activities are included in U.S. Bancorp‘s consolidated Form 1120, U.S. Bank does not file a separate Form 1120 with the IRS. It does, however, prepare a “pro forma”2 Form 1120 (the pro forma 1120) to use in connection with reporting its taxable income subject to the SD BFT. The pro forma 1120 is not signed or filed with the IRS. It purports to show what U.S. Bank‘s federal taxable income would be, before applying tax credits, if it was operating as a single entity and not part of U.S. Bancorp.
[¶10.] According to the pro forma 1120, U.S. Bank‘s federal taxable income for tax years 2010, 2011, and 2012 accounted for the majority of U.S. Bancorp‘s taxable income:
| Tax Year Ended | U.S. Bank Fed. Taxable Inc. | U.S. Bancorp Fed. Taxable Income | % |
| Dec. 31, 2010 | $2,400,896,642 | $3,263,581,855 | 74% |
| Dec. 31, 2011 | $2,342,731,149 | $3,567,245,451 | 66% |
| Dec. 31, 2012 | $4,925,219,278 | $5,671,934,133 | 87% |
[¶11.] Critical to our consideration of this appeal is a deduction allowed to SD BFT taxpayers for the amount of their federal taxes. For purposes of calculating its SD BFT liability, the statute in effect at the time allowed U.S. Bank to subtract from its taxable income the “taxes imposed upon the financial institution within the tax
[¶12.] From 2005 to 2007, U.S. Bank calculated the deduction for federal “taxes imposed” by multiplying its federal taxable income by the applicable 35% federal income tax rate. But from 2008 to 2011, U.S. Bank changed the way it calculated the deduction by “taking separate income of U.S. Bank, as a ratio over the total positive taxable income of the consolidated group, and that ratio was multiplied by total federal tax after credits.”
[¶13.] Using this latter method, U.S. Bank timely filed its tax year 2010 and 2011 SD BFT returns, attaching to each return a copy of its pro forma 1120 for that tax year. U.S. Bank did not, however, include a copy of the U.S. Bancorp consolidated Form 1120.
[¶14.] At some point after submitting the original 2010 and 2011 SD BFT returns, U.S. Bank realized the discrepancy between how its pre-2008 and post-2008 federal income tax deduction had been calculated on its SD BFT returns. As a result, U.S. Bank decided to go back to calculating the deduction in the same way it had for tax years 2005 to 2007, which meant multiplying its separate federal taxable income by 35%. U.S. Bank amended its 2010 and 2011 SD BFT returns,4 and filed its 2012 SD BFT return, using this methodology.
[¶15.] The amended 2010 and 2011 SD BFT returns substantially increased U.S. Bank‘s federal income tax deduction from the original returns. The deduction for 2010 went from $317,843,634 to $862,815,157, and the 2011 deduction increased from $346,485,702 to $819,955,902. The larger deductions resulted in lower taxable income for U.S. Bank and substantially reduced its SD BFT liability for both years.
[¶16.] Calculating the deduction in this way also appeared to increase U.S. Bank‘s SD BFT deduction for federal “taxes imposed” to an amount greater than the total federal tax liability of the entire U.S. Bancorp group. As eventually revealed in its consolidated Form 1120, U.S. Bancorp‘s total federal tax liability for 2010 was $534,594,245. U.S. Bank‘s initial SD BFT deduction of $317,843,634 represented about 61% of this total. However, after U.S. Bank recalculated its federal tax deduction by simply multiplying its income by the 35% tax rate, its SD BFT deduction represented 161% of the total U.S. Bancorp tax liability.
[¶17.] The amended return for 2011 had a similar impact. U.S. Bank‘s $346,485,702 deduction reflected on U.S. Bank‘s original 2011 SD BFT return was about 56% of U.S. Bancorp‘s total federal tax liability of $617,186,234. However, the amended 2011 SD BFT return applied a $819,955,902 deduction, which represented about 133% of the total tax liability of the consolidated group.
[¶18.] As indicated, U.S. Bank‘s 2012 SD BFT return used the same methodology as the amended 2010 and 2011 returns (separate taxable income multiplied by 35%). The 2012 SD BFT return included a copy of the 2012 pro forma 1120 but did not include a copy of the 2012 U.S. Bancorp
[¶19.] U.S. Bank‘s decision to change the method by which it calculated its federal tax deduction on its SD BFT return prompted several requests for documentation by the Department in 2013, and ultimately the Department undertook an audit in 2014.5 In December 2014, the Department issued a Notice of Proposed Adjustment #1 (NOPA) in which it disapproved of U.S. Bank‘s methodology for calculating the federal “tax imposed” deduction. U.S. Bank submitted a response to the NOPA, claiming
[¶20.] The Department interpreted
[¶21.] The Department‘s auditor acknowledged that U.S. Bank should be allowed a deduction in some amount to reflect the federal taxes it paid. However, U.S. Bank had not furnished the Department with the information reflecting the amount of money transferred by U.S. Bank to U.S. Bancorp to pay U.S. Bank‘s federal taxes. This amount, the auditor stated, could have been used as a starting point to calculate U.S. Bank‘s SD BFT deduction.
[¶22.] In December 2015, the Department completed its audit. Based upon its findings, the Department disallowed in full the federal income tax deduction claimed by U.S. Bank for 2012. This resulted in a deficiency of $364,169. On December 28, 2015, the Department issued a Certificate of Assessment for the deficiency amount plus $144,757.11 in interest, for a total of $508,926.11.
[¶23.] Given its stated interpretation of
[¶25.] Following an administrative hearing, the hearing examiner issued a proposed decision, recommending that the Department‘s Certificate of Assessment for 2012 and its denial of refund requests for 2010 and 2011 be affirmed in all respects. The Secretary of Revenue agreed with the hearing examiner‘s proposed disposition, but issued a final decision modifying several of the hearing examiner‘s findings of fact and conclusions of law. See
[¶26.] U.S. Bank appealed to the circuit court, which affirmed the Department‘s final decision. In its effort to construe the federal “taxes imposed” text of
[¶27.] In the circuit court‘s view, “taxes imposed” meant taxes paid or an accrual-method taxpayer‘s tax liability. The precise amount of the federal tax deduction from net income for the SD BFT was a product of calculating tax liability pursuant to the method set out in Schedule J of Form 1120. However, U.S. Bank‘s pro forma 1120 only included its total federal tax amount. Missing was the application of credits allowed by the IRS to directly reduce the amount of taxes owed. These include business-related credits, which are implicated in this case. Though less significant to the calculation of the deduction in this case, the court also noted that Schedule J of Form 1120 authorizes reductions from the total tax owed for foreign taxes paid by the corporation.
[¶28.] In the end, the circuit court was unwilling to accept the idea that the Legislature had, by its “taxes imposed” language, intended to allow SD BFT taxpayers to increase their federal tax deduction, thereby decreasing their SD BFT taxable income, by failing to account for federal tax reductions obtained through tax credits. The court concluded, as the hearing examiner and the Department had, that doing so has the incongruous effect of creating a SD BFT deduction for U.S. Bank that significantly exceeds the total tax liability for the entire U.S. Bancorp group of affiliates.
[¶29.] U.S. Bank now appeals the circuit court‘s decision affirming the Department‘s determination, arguing that the court erred by interpreting “taxes imposed” to mean taxes paid or tax liability.
Standard of Review
[¶30.] When this Court reviews a decision from an administrative agency, “we examine agency findings in the same manner as the circuit court to decide whether they were clearly erroneous in light of all the evidence.” Pirmantgen v. Roberts Cnty., 2021 S.D. 5, ¶ 20, 954 N.W.2d 718, 724 (quoting Clarkson and Co. v. Harding Cnty., 1998 S.D. 74, ¶ 5, 581 N.W.2d 499, 501, superseded by statute on other grounds,
Analysis and Decision
The Bank Franchise Tax and the deduction for federal “taxes imposed”
[¶31.] Financial institutions doing business in South Dakota are subject to bank franchise taxes pursuant to
[¶32.] As it relates to the tax years at issue here,
[¶33.] The provisions of
Subtracted from taxable income are:
. . .
(3) Taxes imposed upon the financial institution within the tax year, under the Internal Revenue Code . . . .
(Emphasis added.)
[¶34.] Though the phrase “taxes imposed” is not defined in
[¶35.] U.S. Bank reads the “taxes imposed” phrase of
When engaging in statutory interpretation, we give words their plain meaning and effect, and read statutes as a whole, as well as enactments relating to the same subject. When the language in a statute is clear, certain, and unambiguous, there is no reason for construction, and this Court‘s only function is to declare the meaning of the statute as clearly expressed.
Citibank, N.A., 2015 S.D. 67, ¶ 12, 868 N.W.2d at 387 (quoting Paul Nelson Farm v. S.D. Dep‘t of Revenue, 2014 S.D. 31, ¶ 10, 847 N.W.2d 550, 554). Additionally, “words of a statute must be read in their context and with the view to their place in the overall statutory scheme.” In re Hunt Companies, Inc., 2019 S.D. 26, ¶ 24, 927 N.W.2d 894, 900 (citation omitted).
[¶36.] “Statutes that ‘impose taxes are to be construed liberally in favor of the taxpayer and strictly against the taxing body.” Citibank, N.A., 2015 S.D. 67, ¶ 7, 868 N.W.2d at 385 (quoting Rushmore Shadows, LLC, 2013 S.D. 73, ¶ 7, 838 N.W.2d at 816). However, “when we are called on to interpret a statute granting an exemption, a deduction, or a credit . . . the statute is strictly construed against the taxpayer.” Burlington N. R.R. Co. v. Strackbein, 398 N.W.2d 144, 146 (S.D. 1986). See also In re State & City Sales Tax Liab. of Quality Serv. Railcar Repair Corp., 437 N.W.2d 209, 211 (S.D. 1989) (“[S]tatutes allowing a tax exemption are strictly and narrowly construed in favor of the taxing power and are given a reasonable, natural and practical meaning to effectuate the purpose for which the exemption was granted.“).
[¶37.] Simply reading the text does not resolve the question before us—whether “taxes imposed” means total income allocated multiplied by the applicable tax rate, as U.S. Bank argues,9 or whether instead “taxes imposed” means the amount of taxes paid or compulsory tax liability required by federal law. Standard dictionary definitions could conceivably support either view.10 See Jackson v. Canton Place Homeowner‘s Ass‘n, Inc., 2007 S.D. 37, ¶ 11, 731 N.W.2d 210, 213 (“We may use . . . dictionary definitions to determine the plain and ordinary meaning of undefined words.“).
[¶38.] Looking to the overall statutory scheme in
[¶39.] U.S. Bank‘s claimed SD BFT deduction over each of the three years at issue was between 133% and 175% higher than the entire consolidated group‘s payments to the IRS. Overall, the combined deduction for taxes imposed claimed by U.S. Bank was $1,272,952,268 higher than the combined federal income taxes actually paid by all of the U.S. Bancorp entities over those years. That result, while perhaps beneficial to U.S. Bank, is conspicuously at odds with the Legislature‘s apparent intent to relieve SD BFT taxpayers from state tax liability for money already expended satisfying their federal tax obligation.
[¶40.] Interpreting “taxes imposed” to mean federal taxes paid or tax liability is also consistent with the similar term “net federal income taxes” used in
[¶41.] U.S. Bank‘s argument that “taxes imposed” means its total tax calculated after multiplying its income by the 35% tax rate rests uneasily upon its claim that using credits to reduce its tax liability is identical to the expenditure of cash to
[¶42.] Though the text of
[¶43.] Beyond this, U.S. Bank devotes a substantial portion of its advocacy effort to the claim that the Department and the circuit court were obligated to provide it with more definitive guidance concerning the federal tax deduction. Failing that, U.S. Bank argues, the Department was required to accept U.S. Bank‘s methodology. We cannot agree. Nor do we perceive any uncertainty about the proper methodology for calculating the deduction, given our holding that “taxes imposed” means taxes paid or the actual amount a taxpayer is obligated to pay. Therefore, we view U.S. Bank‘s claim in this regard as an extension of its principal argument that “taxes imposed” means its separate income multiplied by the 35% tax rate. Even if the application of the 35% tax rate signals its “imposition,” U.S. Bank‘s total tax liability is no less “imposed” or compelled after being reduced by tax credits.
[¶44.] We therefore conclude that the “taxes imposed” text of
Deduction Calculation
[¶45.] A certificate of assessment is deemed prima facie correct.
[¶46.] The circuit court concluded U.S. Bank had placed the Department and its auditor in an all-or-nothing situation in which the Department either approved U.S. Bank‘s methodology and allowed the deduction it sought, or it denied the deduction in total.14 Though U.S. Bank describes what it believes was “[t]he obvious third option[,]” it has not, on appeal, identified an alternative calculation that would allow for a deduction of the net taxes it paid. Instead, U.S. Bank claims the additional option was “for the Department to provide
[¶47.] U.S. Bank points to the acknowledgement by the Department‘s auditor that U.S. Bank should be allowed a deduction in some amount, but it does so to support its recurring argument concerning the need for further guidance—not a specific alternate amount. Perhaps most conspicuously, U.S. Bank does not identify the amount of federal tax it paid on a separate-company basis for tax year 2012.
Instead, U.S. Bank makes a vexing argument that seems to place the burden on the Department to calculate an alternative deduction. We believe this view of burden allocation to be unsustainable and agree with the circuit court‘s conclusion that U.S. Bank did not meet its burden to establish a specific amount for a federal tax deduction in 2012.
Conclusion
[¶48.] We conclude that the circuit court correctly construed the “taxes imposed” text of
[¶49.] JENSEN, Chief Justice, and KERN and MYREN, Justices, and SEVERSON, Retired Justice, concur.
[¶50.] SEVERSON, Retired Justice, sitting for DEVANEY, Justice, who deemed herself disqualified and did not participate.