Comptroller of the Treasury v. American Satellite Corp.

MURPHY, Chief Judge. The question presented is whether, under Maryland’s income tax statutes, out-of-state losses incurred by a multistate corporation reporting no federal taxable income may offset in-state capital gains allocable to this State under Maryland Code (1957, 1980 Repl.Vol.), Article 81, § 316(b)(3). ⁵³⁹ I. Maryland’s corporate income tax was originally enacted in 1937. 1 This Act taxed the “net income” of a corporation for the years 1937 and 1938 only. Codified as Code (1935 Supp.), Article 81, § 219, “net income” was defined as “the gross income of a taxpayer less the deductions allowed by this subtitle.” 2 The tax law subsequently went through various revisions but remained basically unchanged until 1967 when ch. 142 was enacted which significantly restructured the State income taxation system. Under the new law, codified as Code (1957, 1980 Repl.Vol.), § 280A(a), federal taxable income was adopted as the base from which State tax liability was to be determined.

This subsection provides in pertinent part: “The net income of a corporation shall be the taxable income of such taxpayer as defined in the laws of the United States ... except as hereinafter modified.” 3 Section 280A(b) and (c) immediately following set forth certain items that must either be added to or subtracted from the corporation’s federal taxable income in determining its net income. If the taxpayer is a multi-state corporation, § 316 provides the method by which its net income is allocated between Maryland and other states in which it conducts business. At the time the dispute arose in this case, § 316(b)(3) provided: “(b) Capital gains and losses.— ... 3. Capital gains and losses from sales of intangible personal property are allocable to this State if the taxpayer’s commercial domicile is in this State.” ⁵⁴⁰ Section 316(c) then describes how the remaining net income, i.e., the “business income” of the corporation not allocable under either § 316(a), pertaining to income from real estate or tangible personal property, or § 316(b), is to be apportioned. 4 The State income tax, imposed pursuant to § 288(b), is levied “on the net income of every corporation (domestic or foreign) at the rate of six and one quarter percent (61/4%) of such portion thereof as is allocable to this State under the provisions of § 316 hereof.” To this rate is added %% which is earmarked for the Transportation Trust Fund. § 288(c).

II

In 1982, the Comptroller of the Treasury made a $252,-786.36 assessment against American Satellite Corporation (ASC) for a claimed deficiency in its Maryland income taxes. The alleged deficiency resulted from a $5,000,000 intangible capital gain realized by ASC, all of which was allocable to Maryland under then existing § 316(b)(3) as ASC was domiciled in this State. A calendar year taxpayer, ASC had filed a consolidated federal tax return with its parent company, Fairchild Industries. Pursuant to § 295, affiliated corporations must file separate tax returns.

Had ASC done so, its federal taxable income for 1982 would have been $1,437,808, but because of net operating losses (NOL) totaling $51,687,-594 carried over from previous years, which completely offset this amount, ASC’s federal taxable income was reduced to zero. Claiming that it had no “net income” under § 280A(a), ASC showed no taxable income on its Maryland return. It later conceded that the proper amount of net State taxable income was $14,229; that figure was the combined amount of addition modifications to federal taxable income of zero for State and local income taxes and personal property taxes as required by § 280A(b) and ⁵⁴¹ § 288(g). Based on this computation, the Comptroller determined that ASC owed additional taxes in the amount of $252,786.36.

He assessed the deficiency by apportioning the losses so that only $1,297,452 instead of the full $51,-687,594 of NOL was available to ASC to reduce its in-state capital gain. The Comptroller thus made the following calculations: (1) taking ASC’s taxable base of $14,229 (federal taxable income of zero arrived at in accordance with § 280A(a) plus the § 280A(b) and § 288(g) modifications); (2) then subtracting out the $5 million capital gain subject to 100% situs allocation pursuant to § 316(b)(3) (allocable items are 100% taxable to Maryland and should not be apportioned); (3) which resulted in a negative figure of $-4,985,-771; (4) then multiplying this number by .260231, the 3-factor apportionment fraction as provided for under § 316(c), equalling $—1,297,452 (representing the operations subject to apportionment); (5) adding back the $5 million allocated capital gain not subject to apportionment; (6) resulting in Maryland taxable income of $3,702,548; (7) multiplied by 7% (the tax rate provided for under § 288); (8) which computed out to $259,178.36; (9) from which a $6,392.00 credit was subtracted pursuant to § 288(g); (10) resulting in a final tax owed of $252,786.36. 5 ⁵⁴² The Comptroller maintained that § 316(b)(3) operated to modify the federal taxable base just as § 280A(b) and (c) did. In support of his position, the Comptroller relied on the language contained in § 280A(a)—“except as hereinafter modified”; he contended that when the statute is read as a whole the provisions of § 316(b)(3), requiring that capital gains be allocable to Maryland if the taxpayer’s commercial domicile is in this State, are also included within this phrase. This reading, according to the Comptroller, insured consistency in the taxation of capital gains and losses, i.e., that because out-of-state profits are not taxable in Maryland, neither should out-of-state losses be allowed to offset Maryland gains.

The Comptroller argued that it was a more equitable interpretation of the statutory scheme if the losses were apportioned to determine the amount thereof which actually occurred in Maryland, as required by § 316(b). Thus, even though ASC reported no net income for federal tax purposes, the Comptroller argued that the Maryland capital gain would still be subject to Maryland income tax. In an order dated April 16, 1986, the Maryland Tax Court reversed the assessment of the additional tax. In its memorandum, the court explained: “As Section 288(b) indicates, Section 316 only comes into play when a corporation has net income as defined under Section 280A.

It is not a separate basis for imposing tax. Our conclusion is supported by the introductory language of Section 316 which states that ‘The net income of a corporation (domestic or foreign) shall be allocated in the following manner____’ Thus, Section 316 prescribes the way in which corporate net income shall be allocated for tax purposes between Maryland and the rest of the world. The statute presupposes the existence of net income and if there is none it does not apply.” On appeal, the Circuit Court for Baltimore City affirmed the order of the Tax Court, finding that Ford Motor Land Dev. v. Comptroller, 68 Md.App. 342 , 511 A.2d 578 , cert. denied, 307 Md. 596 , 516 A.2d 567 (1986) was dispositive of ⁵⁴³ the issue. In his petition for certiorari, which we granted, the Comptroller asks that we overrule Ford Motor and hold that income allocable to Maryland is taxable even though it may be exceeded by losses attributable to business carried on outside of Maryland.

III

In Ford Motor, a multi-national Delaware corporation was engaged in real estate development and related activities in Maryland. It owned real property in this State, which it sold in 1978, realizing a net capital gain of almost three million dollars. As the corporation had suffered overall net operating losses between 1973 and 1978, which exceeded the amount of its 1978 capital gain, it reported no federal taxable income for the year. It claimed, therefore, that it had no “net income” allocable to, or taxable in Maryland, and therefore requested a refund for State taxes already remitted.

The Comptroller, on the other hand, had assessed an additional $74,950.55 against the company, over the original tax of $94,658 previously paid, contending that pursuant to the capital gains provisions of § 316(b), further adjustments had to be made to federal taxable income when the taxpayer is a multi-state corporation. He maintained that the capital gain would be considered Maryland net income, and thus taxable by the State. The Tax Court upheld the assessment and denial of the refund; its order was affirmed by the Circuit Court for Baltimore City. Resolving the issue as a matter of statutory construction, the Court of Special