Ford Motor Land Development Corp. v. Comptroller of Treasury

ROBERT M. BELL, Judge. In these two appeals, consolidated in one record, from judgments entered by the Circuit Court for Baltimore City, Ford Motor Land Development Corporation, appellant, seeks to overturn two actions taken by the Comptroller of the Treasury, appellee, and affirmed by both the Tax Court and the circuit court: his assessment of additional income tax against appellant and his denial of appellant’s claimed refund of taxes already paid. Ford’s attack is double barrelled: 1. Because it had no federal taxable income in 1978, was Ford Land without taxable “net income” in 1978 in Maryland pursuant to [Art. 81,] Section 288(b)?; 2.

If this Court determines that Ford Land had “net income” in 1978, ... whether Ford Land may offset the gain realized on the sale of the Maryland project by a net operating loss carry forward deduction arising from its losses in prior years (1973-1977) allocable to the Maryland Project. Finding merit in appellant’s first contention, we will reverse. It is, therefore, unnecessary to consider appellant’s second contention. Appellant, a Delaware corporation, organized in 1970 to engage in real estate development and related activities, is a wholly owned subsidiary of Ford Motor Company, with principal offices in Michigan.

From the year of its organization until 1973, appellant pursued its activities exclusively in Michigan. In 1973, appellant acquired its first and only parcel of Maryland real property, a little more than .7 acres of ³⁴⁴ undeveloped land in Montgomery County. It constructed on that parcel a commercial office building which, until its sale in 1978, it owned, operated and managed. In 1978, appellant sold the building and the land for $11.3 million dollars, realizing a net capital gain of $2,976,054.00.

With the sale, appellant terminated all of its Maryland activities. From the beginning, appellant suffered substantial losses from its Maryland real estate operation. These losses were reflected in its 1974-1978 Maryland Income Tax returns, 1 which, although appellant was clearly engaged in real estate leasing and development, requiring allocations of its income, were prepared on the apportionment basis. Its losses between 1974 and 1977, computed on that basis, totaled $1,378,260.00.

When appellant filed its 1978 Maryland Corporation income tax return, still using the apportionment method of accounting, it paid a tax of $94,658, plus $4,250.00 interest. Appellant determined that its operating loss for 1978 was $245,543.00. This figure was added to the losses incurred in prior years, and "the total was deducted from the capital gain. To arrive at the tax paid, the tax rate of seven percent, see § 288(b) and (c), was applied against the resulting figure.

The Comptroller conducted a desk audit and, by “notice of corporation tax audit change”, increased appellant’s tax and interest liability by $74,950.55. 2 Appellant appealed the assessment to the Tax Court. Appellant then filed an amended 1978 Maryland Corporation income tax return, in which it requested a refund of the full tax and interest previously paid. In that amended return, computed on the allocation basis, appellant showed ³⁴⁵ accumulated losses in the amount of $3,297,397.36 for the years 1973 through 1978. These losses included a stipulated 1978 operating loss of $435,352.

Since the losses exceeded the amount of the capital gain, appellant contended that no tax was due. The Comptroller disagreed and denied the requested refund. Appellant again appealed to the tax court. The Tax Court affirmed both the Comptroller’s assessment of additional tax and his denial of appellant’s requested refund of taxes and interest paid.

Responding to appellant’s argument, “Because it had no federal taxable income for 1978, it had no “net income” allocable to, or taxable, in, Maryland”, the court explained: Unfortunately for the Petitioner, however, the nature of the State tax system demands that several modifications or adjustments from the federal taxable income be made. An adjustment to what is shown on the federal return may be necessary for Maryland purposes, for example, where the taxpayer filed a consolidated return for affiliated corporations for federal purposes, which type of return is not permitted under Maryland law. Art. 81, § 295. Comptroller v. Atlantic Supply, 294 Md. 213 [ 448 A.2d 955 ] (1982).

This adjustment could require the corporation to file a pro forma federal return for the separate corporation. Another adjustment is when an adjustment is necessary to produce a final figure of income tax is taxable by Maryland because the corporation conducts its business in a number of states, [sic] Such federal taxable income must be subjected to either the apportionment formula of Section 316(c) or the complete inclusions or exclusions by allocation of Section 316(a) or (b) relating to rental income or capital gains that might be allocated entirely to or outside of Maryland. The last type of adjustment results from the addition and subtraction modifications of Section 280 A(b) and (c) which alter the normal federal rules and results for particular types of income. All three of these adjustments exist in the instant case. ³⁴⁶ The Tax Court thus found that the capital gain was Maryland net income, taxable by Maryland, and further, that the Maryland Tax system does not establish an operating loss deduction or account separate from that permitted by federal law, which only creates an entity deduction.

Appellant fared no better in the circuit court, which affirmed the Tax Court decision. Our task is to determine the meaning of the term, “net income”, and, given its relationship to the federal concept of “taxable income”, the effect of that term, as used in the Maryland tax law. Our task, is therefore, one of statutory construction. In approaching this task, we seek to ascertain and effectuate the legislative intention.

Jones v. State, 304 Md. 216, 220 , 498 A.2d 622 (1985); In re Arnold M., 298 Md. 515, 520 , 471 A.2d 313 (1984); Celanese Corp. v. Comptroller, 60 Md.App. 392, 397 , 483 A.2d 359 (1984). “Where the language [of the statute] is clear and free from doubt the Court has no power to evade it by forced and unreasonable construction” State Tax Comm. v. C & P Tel. Co., 193 Md. 222, 231 , 66 A.2d 477 (1949). Thus, where “there is no ambiguity or obscurity in the language of a statute, there is usually no need to look elsewhere to ascertain the intent of the General Assembly”. City of Baltimore v. Hackley, 300 Md. 277, 283 , 477 A.2d 1174 (1984).

Furthermore, the statute must be construed considering the context in which the words are used and viewing all pertinent parts, provisions, and sections so as to assure a construction consistent with the entire statute. Comptroller v. Mandel Re-election Com., 280 Md. 575, 579 , 374 A.2d 1130 (1977). And, if there is no clear indication to the contrary, a statute must be read so that no part of it is “rendered surplusage, superfluous, meaningless or nugatory.” Bd. of Educ., Garrett Co. v. Lendo, 295 Md. 55, 63 , 453 A.2d 1185 (1982); Baltimore Building and Construction Trades Council v. Barnes, 290 Md. 9, 15 , 427 A.2d 979 (1981). On the other hand, we “shun a construction of the statute which will lead to absurd consequences”.

Erwin and Shafer, Inc. v. Pabst Brewing Co., 304 Md. 302, 311 , ³⁴⁷ 498 A.2d 1188 (1985), or “a proposed statutory interpretation if its consequences are inconsistent with common sense”. Blandon v. State, 304 Md. 316, 319 , 498 A.2d 1195 (1985). With these principles in mind, we set forth those portions of the Maryland tax law which are necessary to the fulfillment of our task. Article 81, § 280A(a) 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 as amended from time to time and for the corresponding taxable period____ Sections (b) and (c) provide for adjustments, e.g., additions to or subtractions from the federal taxable income of the corporation.

None of those adjustments is applicable to this case. The tax on corporate income is imposed by § 288, which, in 1978, provided: (b) Basic tax on corporations.—There is hereby annually levied and imposed for 1968 and subsequent years, a tax on the net income of every corporation (domestic or foreign) at the rate of six and one quarter percent (6V4%) of such portion thereof as is allocable to this State under the provisions of § 316 hereof, (emphasis added) 3 Section 316, Allocation of Corporate Income, provided: The net income of a corporation (domestic or foreign) shall be allocated in the following manner: (a) Income from real estate or tangible property.— Income from ground rents, rents and royalties and other income from real estate or tangible personal property permanently located in this State (less related expenses) shall be allocated to this State; and such income from real estate or tangible personal property permanent ³⁴⁸ ly located outside this State (less related expenses), shall be allocated outside this State. (b) Capital gains and losses.— 1. Capital gains and losses from sales of real property located in this State are allocable to this State. 2.

Capital gains and losses from sales of tangible personal property are allocable to this State if: (A) the property had a situs in this State at the time of the sale; or, (B) the taxpayer’s commercial domicile is in this State and the taxpayer is not taxable in the State in which the property had a situs. 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. (c) Business income.— The remaining net income hereinafter referred to as business income, shall be allocated to this State if the trade or business of the corporation is carried on wholly in this State, but if the trade or business of the corporation is carried on partly within and partly without this State so much of the business income of the corporation as is derived from or reasonably attributable to the trade or business of the corporation carried on within this State, shall be allocated to this State and any balance of the business income shall be allocated outside this State. The portion of the business income derived from or reasonably attributable to the trade or business carried on within this State may be determined by a separate accounting where practicable, but never in the case of a unitary business; however, where separate accounting is neither allowable nor practicable the portion of the business income of the corporation allowable to this State shall be determined in accordance with a three-factor formula of property, payroll and sales, in which each factor shall be given equal weight and in which the property factor shall include rented as well as owned property and tangible personal property having a permanent situs within this State and used in the trade or business shall be included as well as real property.

The ³⁴⁹ Comptroller of the Treasury shall have the right, in those eases where circumstances warrant, to alter any of the above rules as to the use of the separate accounting method or the formula method, the weight to be given the various factors in the formula, the manner of valuation of rented property included in the property factor and the determination of the extent to which tangible personal property is permanently located within the State. 4 (emphasis added) Appellant’s argument is that, unless the corporation has federal taxable income, it cannot have Maryland net income. Appellant reasons that § 280A defines the base, which may be adjusted upward or downward, § 280A(b) and (c), upon which Maryland corporate income taxes are payable; §§ 288(b) and (c) prescribe the rate to be applied to that base and directs that it shall be applied against the portion of the base allocable to Maryland; and § 316 prescribes the methods by which the taxable base is allocated between Maryland and the rest of the world. This scheme, it concludes, makes clear that § 316 is merely an allocation mechanism, not one for adjusting the taxable base. In a sense, then, appellant argues that federal taxable income is not only a base for the computation of Maryland net income, but also a ceiling on Maryland tax.

The Comptroller, characterizing appellant’s argument as “pure linguistic analysis” and “mechanistic linguistics”, urges that we reject appellant’s position because “it is not directly ordained by statute [and] ... is totally dependent upon a particular interpretation of ‘net income ’ ...” (emphasis in the original). He argues: While Ford maintains that this inclusion of the phrase “taxable income” means positive taxable income for the ³⁵⁰ corporation as a whole, this is not in fact the case. No such