Somerset Tel. Co. v. State Tax Assessor

SOMERSET TELEPHONE CO.,TELEPHONE AND DATA SYSTEMS,INC. & AFFILIATES, Petitioners, v. STATE TAX ASSESSOR, Respondent.

BUSINESS & CONSUMER DOCKET NO. BCD-AP-17-04

Superior Court of Maine

January 23, 2020

STATE OF MAINE

CUMBERLAND, ss.

ORDER DENYING PETIONERS' MOTION FOR SUMMARY JUDGMENT

Petitioners Somerset Telephone Co., Telephone & Data Systems, Inc. (TDS), and its unitary affiliates move for summary judgment according to M.R. Civ. P. 56(c), in their appeal of the State Tax Assessor's decision to deny the carry-forward of certain losses to their 2013 tax return. TDS is a publicly traded corporation with a principal place of business in Chicago, Illinois, and is the parent company of Somerset, a small landline rural telecommunications company located in North Anson, Maine. TDS, Somerset, and United States Cellular Corporation were all members of an affiliated group of about 180 corporations ("the TDS Group") that was engaged in a unitary business, defined as a "business activity which is characterized by unity of ownership, functional integration, centralization of management and economies of scale." 36 M.R.S. § 5102(10-A). All member corporations of the TDS Group were engaged in the TDS unitary business, which engaged in activities both inside and outside of the State of Maine.

On or about October 11, 2013, Petitioners filed their 2012 Maine Corporate Income Tax Return, Form 1120ME. On line one of the return, Petitioners reported Federal Taxable Income ("FTI") of $18,037,032. This FTI included all income of the TDS Group Members, including their non-unitary income. According to the Maine corporate income tax framework, corporations operating in multiple states may subtract non-unitary income from their FTI by way of a subtraction modification, codified in 36 M.R.S. § 5200-A(2)(F). Petitioners subtracted their 2012 non-unitary income, amounting to $149,715,060 from their FTI, and the resulting Maine Adjusted FTI reported on the Petitioners' 2012 return was negative (-$162, 213,857). Accordingly, Petitioners reported zero Maine corporate income tax liability.

In March of 2014, Petitioners requested an advisory ruling from the State Tax Assessor regarding its Maine corporate income tax liability for 2012 and 2013. Petitioners asked the Assessor whether it could subtract the excess non-unitary income subtracted from their FTI according to section 5200-A, a total of $131,678,028 (the Disputed Amount), as a net operating loss in 2013, or in the alternative, carry forward the Disputed Amount from 2012 to 2013 to re-calculate the FTI of its unitary group. The Assessor concluded there were no provisions of Maine law allowing either of Petitioners requests.

Petitioners then timely filed their 2013 Maine corporate income tax return in accordance with the Assessor's advisory ruling. Petitioners then later filed an amended 2013 tax return seeking the carry-forward of the Disputed Amount previously requested, and in turn a refund of $536,027, plus interest. The Assessor denied the refund request and Petitioners filed the present case. This Court is presented with Petitioners' motion for summary judgment, asking the Court to hold that the plain language of Maine's corporate income tax framework allows for the carry forward of the Disputed Amount from 2012 to 2013. In the alternative, Petitioners ask the courtto find that the Assessor's interpretation of Maine's corporate income tax statute in violation of the due process and commerce clauses of the United States Constitution. After consideration of the arguments of the parties, along with the record before the Court, the Petitioners' motion for summary judgment is DENIED.

STANDARD OF REVIEW

This is a de novo appeal of the State Tax Assessor's denial of the TDS Group's request for a refund of Maine corporate income tax. When a party seeks review of a decision issued by the Assessor upon reconsideration, the Court must make a de novo determination of the merits of the case and make its own determination as to all questions of fact or law. Blue Yonder, LLC v. State Tax Assessor, 2011 ME 49, ¶ 6, 17 A.3d 667 (citing 36 M.R.S. § 151). The Court does not accord heightened deference to the Assessor's decision in interpreting tax statutes. Id.

A party is entitled to summary judgment pursuant to M.R. Civ. P. 56 (c) when the summary judgment record reflects there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. A fact is material if it has the potential to affect the outcome of the suit, and a genuine issue of material fact exists when a fact-finder must choose between competing versions of the truth, even if one party's version appears more credible or persuasive.

When examining tax statutes, Maine courts look to the plain meaning of the language to give effect to the legislative intent. Foster v. State Tax Assessor, 1998 ME 205, ¶ 7, 716 A.2d 1012. Tax statutes must be construed strictly against the taxing authority. BCN Telecom, Inc. v. State Tax Assessor, 2016 ME 165, ¶ 10, 151 A.3d 497.

DISCUSSION

In taxing the income of a nonresident corporation operating within its borders, Maine is limited to taxing that portion of the corporation's income attributable to business activity within the State of Maine. Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 164 (1983). Taxing income not attributable to business activity within the State violates the due process and commerce clauses of the United States Constitution. U.S. Const. amend. XIV; art. 1, § 8, cl. 3. Nevertheless, a state is not without any power to tax the income of a business engaged in interstate and foreign commerce. Maine may tax income of such a business if that income is attributable to Maine. See Mobile Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 436-37 (1980). The "unitary business principle" is used to determine which portion of a multistate corporation's income is attributable to Maine.

According to the unitary business principle, Maine can tax an apportioned share of the income generated by a non-domiciliary corporation's activities within and outside of the State if those activities form part of a unitary business, or are investments serving operational roles in the unitary business. Maine statute defines a "unitary business" as "a business activity which is characterized by unity of ownership, functional integration, centralization of management and economies of scale," 36 M.R.S. § 5102(10-A). Meanwhile, an investment is unitary if it serves an operational, rather than investment, function in the unitary business. Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768, 787 (1992). The parties agree that Petitioners are engaged in a unitary business in Maine. The parties' disagreement involves the relationship of Maine's corporate income tax framework to income that was derived from the Petitioner's unitary group, though not from Petitioner's unitary business or investments.

I. Maine's Corporate Income Tax Framework Does Not Permit Petitioners to Carry Forward the Disputed Negative Income to Future Years

Maine's corporate income tax is guided by the federal Internal Revenue Code (the Code), which imposes tax on "the taxable income of every corporation." 26 U.S.C. § 11(a) (2018). The Code defines "taxable income" as the corporation's "gross income minus the deductions allowed by this chapter." 26 U.S.C. § 63(a) (2018). One of the deductions the Code permits is the deduction for "net operating loss." 26 U.S.C. § 172 (2018). A net operating loss (NOL) is a federal income tax concept, and is defined as "the excess of the deductions allowed by this chapter over the gross income." Id. § 172(c). Once a unitary group subtracts deductions, including the NOL, from its gross income, it has arrived at what Maine describes as Federal Taxable Income (FTI).

For the purpose of Maine's corporate income tax, the taxpayer- unitary group's FTI serves as a basis. The FTI is modified by subtracting, or adding back specified income to arrive at the Maine corporate income tax base, or "Maine net income." 36 M.R.S. §§ 5200-A, 5102(8). These modifications codify the Maine Legislature's policy decisions, while enforcing constitutional limits on the income Maine is allowed to tax. Crucially, section 5200-A provides a subtraction modification to exclude non-unitary income from Maine Net Income. Finally, the amount of income attributed to Maine is determined using an apportionment formula. 36 M.R.S. §§ 5211, 5200(4). Thus, Maine's corporate income tax is based on the unitary group's federal taxable income, adjusted by addition and subtraction modifications and then apportioned to Maine. This calculation is similar whether the business operates as a single corporation or as a member of a "group of corporations that derive income from a unitary business carried on by 2 or more members of an affiliated group", otherwise known as a unitary group. The taxpayer reports, on an aggregate basis, the federal taxable income, Maine net income, and apportionment data of its unitary business on a combined report. 36 M.R.S. §§ 5220(5), 5244.

When apportioning federal taxable income, the State of Maine treats activities inside and outside of Maine as one single integrated business enterprise, operating as a unit in the ultimate production of income. The State is constitutionally permitted to include the income from out-of-state activities in determining the income apportionable to and taxable by Maine. The income of a unitary group, engaged in a unitary business, is apportioned to Maine by multiplying the group's net income by a sales factor. 36 M.R.S.A. §§ 5200(1), (4)-(5); 5211(1), (8), (14) (2010).

At the time of filing their 2012 Maine Corporate Income Tax Return, Petitioners claimed $18,037,032 in FTI. This included all income of the TDS unitary group, including both unitary and non-unitary income. In accordance with section 5200-A, Petitioners then subtracted $149,715,060 in...