Kroger Co. v. Bowers, Tax Commr

Full title: THE KROGER CO., APPELLANT v. BOWERS, TAX COMMR., APPELLEE

Court: Supreme Court of Ohio

Date published: Jul 7, 1965

209 N.E.2d 209 (Ohio 1965)

209 N.E.2d 209

Opinion

No. 39054

Decided July 7, 1965.

Taxation — Corporate franchise tax — Determining value of issued stock and intangible property — Section 5773.05, Revised Code — Method of determining valuation.

APPEAL from the Board of Tax Appeals.

The Kroger Company, the taxpayer and the appellant here, in stating the value of its depreciable property on its official books, employs the straight-line method of depreciation. Therefore, in reporting to its shareholders and to the various regulatory bodies and agencies of government, its financial statements are based on that method of calculating its net worth. However, ever since the Federal Internal Revenue Act of 1954 permitted the use of other methods of measuring depreciation for purposes of computing the federal income tax payable in any given year, the taxpayer, in determining its liability for that tax, has applied either the double-declining balance or the sum-of-the-digits method to all of its depreciable property. Both of these methods result in greater depreciation being claimed during the early years of the life of an asset than results from the straight-line method, producing a lower federal income tax. Conversely, in the later years of the asset, less depreciation is chargeable against income and a greater federal income tax may be payable.

The taxpayer accounts for the simultaneous use of both the uniform rate of depreciation and the accelerated methods by keeping a general office account known as "Accrued Liabilities-Federal Income Tax," to which it credits an amount equal to the federal income tax which would be payable if calculated on the basis of using the straight-line method of depreciation. In fact, it calculates its federal income tax liability and pays the tax on the basis of accelerated depreciation and debits the amount of tax paid to that account.

In each year since 1954, the tax actually paid has been increasingly less than the tax "accrued," resulting in a gradually increasing credit balance in this account. That balance is separated from the undivided surplus of the taxpayer and is set apart and known as "deferred income taxes."

The Tax Commissioner, in calculating the value of the issued and outstanding shares of the taxpayer for the purposes of the franchise tax under Section 5733.05, Revised Code, for 1960, added back to surplus the amount shown as "deferred income taxes" and assessed the taxpayer accordingly.

From this assessment, the taxpayer appealed to the Board of Tax Appeals, which sustained the action of the Tax Commissioner, and the taxpayer perfected its appeal to this court.

Messrs. George, Greek, King McMahon, Mr. Darold I. Greek and Mr. Kiehner Johnson, for appellant.

Mr. William B. Saxbe, attorney general, Mr. Jon A. Ziegler and Mr. Edgar L. Lindley, for appellee.

Per Curiam.

The taxpayer contends that its use of the optional methods of depreciation for federal income tax purposes has the effect of merely suspending the payment of a portion of that tax which will certainly be paid in future years as its depreciable assets reach exhaustion and the rate of depreciation decelerates.

It, therefore, maintains that the total amount which it characterizes as "deferred income taxes" is a liability and as much is deductible from its surplus in computing its annual corporation franchise tax.

The difficulty with this contention is that Section 5733.05, Revised Code, expressly includes as a part of the total value upon which the burden of the franchise tax is imposed, "reserves, but exclusive of:

"(A) Reserves for accounts receivable, depreciation, depletion and any other valuation reserves with respect to specific assets;

"(B) Taxes due and payable during the year for which such report was made."

As a "reserve" for future taxes, the item in question is not deductible for the reason that it is neither a "valuation" reserve nor one of the other reserves enumerated in subparagraph (A). As a liability for taxes payable in future years, the item fails to qualify as a deduction under subparagraph (B), the clear purpose of which is to exclude from the franchise tax base only that portion of any taxes due and payable during the year upon which the annual corporate report is based which in fact remains unpaid. Obviously, all such taxes which are, in fact, paid during that year are, in the nature of the accounting process, automatically removed from surplus.

No more appropriate application of the rule of expressio unius est exclusio alterius is conceivable. Having designated current taxes as excludable from the tax base, the statute will not, under the rule, be construed as permitting the exclusion of future taxes.

It is, therefore, unnecessary to consider the contingent nature of the "liability." Potential it is, although to what degree depends entirely upon the taxpayer's prospects, at the end of any one annual period, for future taxable income, and for maintaining against the wary eye of federal auditors its current schedules of depreciation, as well as upon its rate of turnover of depreciable assets and the market for retired assets, not to mention the constancy of the federal income tax rate. Certain it is that the item in question has no such absolute character as to classify it with a note, a mortgage, or an account payable which might earn it exclusion from the franchise tax, but for the specific language of the statute herein set forth.

National Tube Co. v. Peck, Tax Commr., 159 Ohio St. 98, which compelled the Tax Commissioner to accept as "correct" the value of inventory as recorded on the books of the taxpayer and used by the taxpayer as the basis for all its financial and earnings reports, has but passing application here, where the taxpayer does not claim for its depreciable assets a value less than that recorded on its official books. On the other hand, if it had chosen to adopt for book purposes the value determined by the use of one or more of the bona fide accelerated methods of depreciation, the Tax Commissioner would undoubtedly have been bound by such determination under the language of Section 5733.05, Revised Code, and National Tube.

However, Kroger seeks a three-fold advantage. It insists that only by the straight-line method can it accurately portray the condition of its affairs to its shareholders, to the various regulatory bodies to whom it must periodically report, and to the public. Second, it sought and apparently is obtaining the benefits of the other methods of depreciation for income tax purposes. Third, it seeks a corollary Ohio franchise tax advantage. The last is proscribed by the express provision of the statute.

Accordingly, we cannot find that the decision of the Board of Tax Appeals is unreasonable or unlawful and it must, therefore, be affirmed.

Decision affirmed.

TAFT, C.J., ZIMMERMAN, MATTHIAS, O'NEILL, HERBERT, SCHNEIDER and BROWN, JJ., concur.