Summary
In State Tax Commission v. Mississippi Power Light Company, 194 Miss. 260, 11 So.2d 828 (1943), the Court permitted a corporation to show that because a certain item (an unamortized debt discount) had no true value, and was carried on the books only to keep them in balance, the item should not be considered "capital used, invested or employed within this state" for purposes of the franchise tax law.
Summary of this case from Mississippi St. Tax Com'n v. Ill. Cen. Gulf ROpinion
No. 35249.
February 15, 1943. Suggestion of Error Overruled March 1, 1943.
1. TAXATION.
Where foreign corporation carried expense of floating bond issues on its books as "unamortized debt discount and expense" but item represented no definite value of itself as a true asset and it was necessary to include amount thereof as surplus in order for books to balance, such item did not constitute "capital used, invested or employed within this state," within statute imposing franchise tax on foreign corporations (Laws 1934, ch. 121, sec. 3).
2. TAXATION.
In determining whether item carried on foreign corporation's books as "unamortized debt discount and expense" constituted "capital" within meaning of statute imposing franchise tax on foreign corporations, fact that corporation carried item on asset side of ledger was not conclusive and actual value thereof was a relevant subject of inquiry (Laws 1934, ch. 121, secs. 3, 6, 7).
3. TAXATION.
The fact that foreign corporation carried expense of floating bond issues on asset side of ledger did not give rise to any "estoppel" against corporation precluding it from contending that item did not constitute "capital" subject to franchise tax on foreign corporations (Laws 1934, ch. 121, secs. 3, 7).
APPEAL from the circuit court of Hinds County, HON. J.F. BARBOUR, Judge.
Greek L. Rice, Attorney-General, by W.D. Conn, Jr., for appellant.
Appellee insists that the item carried on its books as "unamortized debt discount and expense" constituted a deferred debit rather than a prepaid expense, that it had no actual value, and the amount thereof should be deducted from the surplus shown by the books of the company before the application of franchise tax rates.
Appellant's position is, first, that the account was in fact an asset, being a prepaid expense for the use of money and should be treated as an asset having value and not deductible from the surplus in arriving at the base for the imposition of franchise taxes; and, second, that the legislature had the right to establish a formula for measuring the value of capital and that a taxpayer has no right to go beyond the formula so fixed and bring in any additional elements not contemplated by the statute; that appellee had no right to adjust its surplus for franchise tax purposes in any other manner than provided in the statutory formula.
A franchise tax is not one levied upon property but is one on the right to do business.
State v. Hotel Co. (Mo.), 221 S.W. 721; International Shoe Co. v. Shartel, 279 U.S. 429, 73 L.Ed. 781; Home Ins. Co. v. New York, 134 U.S. 594, 33 L.Ed. 1025.
Such a tax is not governed, controlled, or in any way affected by Section 112 of our Constitution.
Southern Package Corporation v. State Tax Commission, 174 Miss. 212, 164 So. 45.
The franchise tax is definitely not an ad valorem tax. It is an excise tax imposed by law on both foreign and domestic corporations alike. It is a tax laid and collected on corporations for the privilege of being corporations and acting as such, and the imposition of the tax is in no wise dependent upon value, except as such value may be measured by the formula provided for that purpose.
In determining the base or value upon which the franchise tax shall be computed, the legislature may arbitrarily prescribe any convenient mode without regard to actual values.
Home Insurance Co. v. New York, supra; California v. Railroad Co., 127 U.S. 1, 32 L.Ed. 150; Light Power Co. v. Oklahoma, 62 P.2d 637; Bergen Aqueduct Co. v. State Board of Taxes (N.J.), 112 A. 881; Delaware Railroad Tax Case, 18 Wall. 206; People v. Lynch, 281 N.Y.S. 306; Fullerton Oil Co. v. Johnson (Cal.), 39 P.2d 796; Armstrong v. Emmerson (Ill.), 132 N.E. 768; Roberts Schaefer Co. v. Emmerson, 271 U.S. 50, 70 L.Ed. 827; State v. Perry (Del.), 14 A. 474; People v. Latrobe, 279 U.S. 421, 73 L.Ed. 776; State v. Xeter Realty (La.), 162 So. 29.
See also Rose's Notes on U.S. Reports In Re: Home Ins. Co. v. New York, 134 U.S. 594, 33 L.Ed. 1025, and California v. Railroad Co., 127 U.S. 1, 32 L.Ed. 150.
The legislature can define for itself and its definition is conclusive.
Mathison v. Brister, 166 Miss. 67, 145 So. 358; Stone v. Interstate Natural Gas Co., 103 F.2d 544.
Section 7, Ch. 121, Laws of 1934, of the franchise tax law provides that in all cases, for the purpose of determining the amount of capital, "the book value as regularly employed in conducting the affairs of the corporation shall be accepted as prima facie correct as to the true capital of the organization." It will be noted that this provision refers to "capital" and not to "capital stock" of a corporation.
Section 3, Ch. 121, Laws of 1934, levies a tax upon "the value of capital used, invested or employed within this state, except as hereinafter provided."
The legislature specifically provided how, for the purposes of the franchise tax act, the value of the capital should be determined (Section 6 of the act). This formula, broken down into its component parts, is as follows: It is provided that the value of the capital employed shall be measured by: (1) the issued and outstanding capital stock, (2) surplus, (3) undivided profits. In computing the capital, surplus and undivided profits there shall be included: (a) all true reserves, including reserves other than for definite, known, fixed liabilities which do not include the value of assets; and (b) dividend funds, until they are definitely and irrevocably placed to the credit of the stockholders subject to withdrawal on demand. There shall not be included in the value of the capital: (a) debts, notes, bonds and mortgages due and payable; (b) depreciation reserves; (c) bad debt reserves, and (d) reserves representing valuation accounts.
There can be no question but that the legislature has the right to say how such value should be arrived at — this whether the result equaled actual value or not. I do not think that there is any question or doubt as to the correctness of this observation. So that if the legislature had the right to do so, I submit that the court should hold the taxpayer to that method exclusively and without the introduction of any other provision into the calculation.
We are not concerned in this proceeding with the true value of anything, but only in determining the amount upon which franchise taxes shall be computed when measured by the formula outlined by the legislature.
Only deductions expressly authorized by statute can be made in determining the taxable value of a corporation's franchise.
Safe Deposit Co. v. Commonwealth, 276 Mass. 474, 177 N.E. 612.
In view of the fact that the legislature has prescribed the formula by which franchise tax liability shall be determined, appellee should be held to that formula just as all other corporate franchise taxpayers. The franchise tax law is not one, as above pointed out, to be measured ad valorem. It is not concerned with actual or true values but is concerned only with book values. It is, therefore, submitted that this court should reverse the circuit court of Hinds County and hold that appellee is bound by its surplus account as used by it in the ordinary conduct of its business.
Green Green and E.R. Holmes, Jr., all of Jackson, for appellee.
There is no liability for franchise tax imposed by a book entry for unamortized debt discount and expense as such entry clearly evidences no value.
Senatobia Oil Co. v. Poag, 86 Miss. 457, 38 So. 741; Hazlehurst Oil Mill Fertilizer Co. v. Decell (Miss.), 33 So. 412; Billingsly v. Illinois Cent. R. Co., 100 Miss. 612, 56 So. 790; Alabama V.R. Co. v. Thornhill, 106 Miss. 387, 63 So. 674; Alabama Great Southern R. Co. v. Daniels, 108 Miss. 358, 66 So. 730; New Orleans G.N.R. Co. v. Walden, 160 Miss. 102, 133 So. 241; Redmond v. Marshall, 162 Miss. 359, 137 So. 733; Smith v. State (Miss.), 185 So. 193, 194; State v. Tonella, 70 Miss. 701, 713, 14 So. 17; Southwestern L. P. Co. v. Okla. Tax Com. (Okla.), 62 P.2d 637; In Re Detroit International Bridge Co., 257 Mich. 52, 240 N.W. 68, affirmed on other grounds, 287 U.S. 295, 77 L.Ed. 314; United States v. Phellis, 257 U.S. 156, 168, 66 L.Ed. 180; Haugh, etc., Co. v. Heiner, 20 F.2d 923; Broom's Legal Maxims (7 Ed.), p. 127.
The franchise tax for appellee for the years 1938, 1939, and 1940 was properly computed by deducting unamortized debt discount and expense to determined "the true capital of the organization," for (a) it was clearly shown on the books as a deferred debit; (b) the book value as regularly employed in conducting the affairs of the corporation was accepted; (c) it was not a true asset; (d) it has no actual or real value; and (e) it was never used or employed by the corporation in this state nor benefit of the law of this state received.
Argued orally by W.D. Conn, Jr., for appellant, and by Garner Green, for appellee.
The State Tax Commission required of appellee additional franchise tax assessments for the years 1938, 1939 and 1940. Appellee appealed to the circuit court and from a judgment in its favor the case is brought here. The assessment is made under Chapter 121, Laws of 1934. Section 3 of the Act thereto applicable imposed a franchise tax of $1 of each $1,000 or fraction thereof "of the value of capital used, invested or employed within this state, except as hereinafter provided. It being the purpose of this section to require the payment of a tax by all organizations not organized under the laws of this state, measured by the amount of capital or its equivalent, for which such organization receives the benefit and protection of the government and laws of the state." (The amendment by Chap. 115, Laws 1940, affects only the tax rate.) Other relevant provisions of the Act are: "Sec. 6. The tax imposed, levied and assessed, under the provisions of this act, shall be calculated on the basis of the value of the capital employed in this state for the year preceding the date of filing the return, whether a calendar year, or fiscal year, except where otherwise provided in this act, measured by the combined issued and outstanding capital stock, surplus and undivided profits; . . ." And: "Sec. 7. In all cases for the purpose of determining the amount of capital, the book value as regularly employed in conducting the affairs of the corporation shall be accepted as prima facie correct as to the true capital of the organization."
The facts, the construction of which has led to divergent contentions, are as follows: Some years ago the power company floated bond issues of some sixteen million dollars in the State of New York. The expense of such sales included discount and other incidental charges which, at the time of the filing of the return for the franchise tax for the year 1938, amounted to $487,822.90. This item is included in the several returns as "Unamortized Debt Discount and Expense" and is so shown on its books. This item varied for the two succeeding years for reasons not affecting the principles involved. The conflicting views of the parties evolve from an insistence by the Tax Commission that this item constitutes "capital used, invested or employed within this state" and the contention by the taxpayer that the item represents no actual value and constitutes a mere bookkeeping entry. The opposing theories are further indicated by its designation by the parties respectively as a "deferred debit" and as a "prepaid expense."
Against the rather obvious position that the item represents no definite value of itself as a true asset, the Tax Commission argues that it is carried on appellee's books as such and that, viewed as a prepaid expense incurred for the privilege of using the proceeds of the issue during the term of the bonds, it has purchased something of value and is properly a part of its capital assets. Appellant further emphasizes its quality as a true asset by adverting to its availability as a source of deduction throughout the years of its amortization against earnings subject to income tax. We are unable to see the relevancy of these contentions upon what we deem the real issue, namely, whether it is "capital" within the definition of Section 3, quoted above.
The Tax Commission urges that Section 7 makes the book value of the company prima facie correct in determining the amount of its true capital. Evidently by way of countering the argument that the presumptive force of this provision must yield to rather overwhelming testimony that the item has no true value, the commission calls attention to the testimony of the company's treasurer that its books are not only prima facie correct but are "absolutely correct." Such a statement is saved from inconsistency by the testimony of the witness and other expert accountants that it comports with correct bookkeeping procedure to carry as a conventional asset an item which is not a true asset. The apparent inconsistency is shown not to operate to the disadvantage of the state in the matter of computing franchise tax by the fact that in order for the company's books to remain in balance the amount of surplus so carried and made a factor in the base for computing the tax includes this item. In other words, if the item were charged off, the amount of the surplus would be correspondingly reduced.
We are unable to assent to the proposition that the value of the item is not a relative subject of inquiry. It is true that this is not an ad valorem tax, but the excise tax is properly to be computed upon "the amount of capital or its equivalent, for which such organization receives the benefit and protection of the government and laws of the state." Nor does it fall within the formula insisted upon as required by Section 6, which requires that it "be calculated on the basis of the value of the capital employed . . . measured by the combined issued and outstanding capital stock, surplus and undivided profits . . ." There would seem to be no question but that if the company had elected not to carry the item on the asset side of the ledger there would be no disagreement as to the amount of the tax, since the amount of the other element of capital, its surplus, would be reduced by such exact amount. There is no estoppel available against the company because of its bookkeeping tactics nor are we concerned with any effect of its procedure in matters not here involved.
In this connection, we find In re Detroit International Bridge Company, 257 Mich. 52, 240 N.W. 68 (affirmed on other grounds Detroit International Bridge Co. v. Corporation Tax Appeal Board of Michigan, 287 U.S. 295, 53 S.Ct. 137, 77 L.Ed. 314) in point.
Affirmed.