Goldberg, Richard M.

English

University of Baltimore School of Law

University of Baltimore Law ForumVolume 19Number 1 Fall, 1988 Article 101988Recent Developments: Comptroller of theTreasury Income Tax Division v. American SatelliteCorporation: Out-of-State Losses Suffered byMulti-State Corporation May Be Used to Offset in-State Capital Gains for Tax PurposesRichard M. GoldbergFollow this and additional works at: http://scholarworks.law.ubalt.edu/lfPart of the Law CommonsThis Article is brought to you for free and open access by ScholarWorks@University of Baltimore School of Law. It has been accepted for inclusion inUniversity of Baltimore Law Forum by an authorized editor of ScholarWorks@University of Baltimore School of Law. For more information, pleasecontact snolan@ubalt.edu.Recommended CitationGoldberg, Richard M. (1988) "Recent Developments: Comptroller of the Treasury Income Tax Division v. American SatelliteCorporation: Out-of-State Losses Suffered by Multi-State Corporation May Be Used to Offset in-State Capital Gains for TaxPurposes," University of Baltimore Law Forum: Vol. 19 : No. 1 , Article 10.Available at: http://scholarworks.law.ubalt.edu/lf/vol19/iss1/10will be recognized, when they result from the sexual transmission of a dangerous, contagious and incurable disease. Howev-er, the plaintiff must make the requisite factual showing of each element in every case. -Jonathan s. Beiser A heart attack may start with pres-sure, fullness, squeezing or pain in the middle of your chest. It can spread to your shoulderl?, neck or arms. Dizziness, fainting, sweating and shortness of breath may even occur. If you experience any of these symp-toms for more than two minutes, call for emergency medical help immediately. The longer you wait, the more you risk dying. Which can be very painful for everyone who cares about you. 6American Heart 'V" Association WE'RE FIGHTING FOR 'tOUR LIFE This space provided as a public service. Comptroller O/The Treasury Income Tax Division v. American Satellite Corpora-tion: OUT-OF-STATE LOSSES SUF-FERED BY MULTI-STATE CORP-ORATION MAY BE USED TO OFF-SET IN-STATE CAPITAL GAINS FOR TAX PURPOSES In Comptroller Of The Treasury Income Tax Division v. American Satellite Corpora· tion, 312 Md. 537, 540 A.2d 1146 (1988), the Court of Appeals of Maryland held that out-of-state losses, suffered by a multi-state corporation reporting no federal taxa-ble income, may offset in-state capital gains allocable to Maryland under Md. Ann. Code art. 81 § 316{bX3) (1957, 1980 Repl. Vol.). The court of appeals determin-ed that a corporation must have a "net income" as defined in Md. Ann. Code art. 81, § 280A(a) (1957, 1980 Repl. Vol.) before § 316{b) comes into play. Section 280A(a) provides that the "net income" of a corporation is its taxable income as defined in the laws of the United States, thus equivalent to its federal taxable income. Sections 280A(b) and (c) provide items which are added to, or sub-tracted from, a corporation's federal taxa-ble income to determine its final "net income." Section 316{b) provides the means of allocating the "net income" of multi-state corporations between Maryland and other states where the cor-poration does business. The Comptroller of the Treasury made an assessment of $252,786.36 against American Satellite Corporation (ASC) for a claimed deficiency from a $5,000,000 intangible capital gain that ASC realized in 1982. This gain was allocable to Maryland under § 316{bX3), which provided that a corporation's capital gains and losses from sales of intangible personal property were allocable to Maryland if the corporation had its domicile in Maryland. At the time of the Comptroller's assessment in 1982, ASC's domicile was Maryland (this situs allocation provision of 316{a) and (b) was repealed in 1984). In 1982, ASC filed a consolidated federal tax return with Fairchild Industries, its parent company. H ASC had filed a sep-arate tax return, as required by Md. Ann. Code art. 81, § 295, its federal taxable income for 1982 would have been $1,437,808. However, ASC had net operating losses carried over from previ-ous years that amounted to $51,687,594. These net operating losses completely off-set ASC's federal taxable income for 1982, thus reducing its income to zero. Conse-quently, ASC asserted that it had no "net income" under § 280A(a) and showed no taxable income on its Maryland return. Later, ASC acknowledged that it did owe $14,229 as Maryland taxable income for state and local income taxes as required by § 280A(b), and for personal property taxes as required by Md. Ann. Code art. 81, § 288(g) (1957, 1980 Repl. Vol.). The Comptroller, however, determined that ASC owed $252,786.36 in taxes. He arrived at this number by apportioning ASC's net operating losses to only $1,297,452, instead of the $51,687,594 that ASC claimed. The Comptroller arrived at the smaller number by making the follow-ing calculations: (1) he took the $14,229 (zero federal taxable income plus the § 280A(b) and § 288(g) modifications); (2) he subtracted the $5,000,000 capital gain, sub-ject to 100% situs allocation under § 316{b)(3), from the $14,229 (allocable items are 100% taxable to Maryland and should not be apportioned); (3) this resulted in $-4,985,771; (4) he multiplied this number by the three-factor apportion-ment fraction of .260231 (this comes from a formula which takes into account prop-erty, payroll and sales, which are opera-tions subject to apportionment) under § 316{c), which equalled $-1,297,452; (5) then he added back the $5,000,000 allo-cated capital gain not subject to apportion-ment; (6) which left $3,702,548 as Maryland taxable income; (7) which was multiplied by the 7% tax rate provided for under § 288; (8) which totalled $259,178.36; (9) from which $6,392.00 was subtracted as governed by § 288(g); this left a final tax owed of $252,786.36. The Comptroller's view was that § 316{b)(3) worked in the same manner as § § 280A(b) and (c), that is, to modify the federal taxable base. He supported his posi-tion by arguing that when the statute is read as a whole, the words "[E]xcept as hereinafter modified" from § 280A(a), included the provisions of § 316(b)(3) as additions to taxable base. Thus, the Comp-troller's position was that capital gains were allocable to Maryland under § 316{b)(3) if the taxpayer's domicile was Maryland. Since out-of-state profits were not taxable in Maryland, the Comptroller felt that out-of-state losses should not be used to offset Maryland capital gains. Therefore, he determined that even though ASC had no "net income" for fed-eral tax purposes, ASC's capital gain would be subject to Maryland income tax. On April 16, 1986, the Maryland Tax Court ordered the assessment of the Comptroller to be reversed. The tax court felt that § 316 modifications arise only "when a corporation has net income as defined under § 280A." Comptroller Of The Treasury Income Tax Division v. Amer-ican Satellite Corporation, __ Md. -> 32-The Law Forum/ 19.1-----------------------------------~.2~ (1988). Section 316(b) can-not be used as a separate basis for imposing tax if there is no federal taxable income to begin with. Id. The Circuit Court for Balt-imore City affirmed the Tax Court and held that Ford Motor LAnd Dev. v. Compo troller, 68 Md. App. 342, 511 A.2d 578, cert. denied, 307 Md. 596, 516 A.2d 567 (1986) was controlling. Ford Motor involved a Delaware corpora-tion involved in real estate development and related activities in Maryland. Ford sold real property, that it owned in Maryland, in 1978 and realized a net capi-tal gain of close to $3,000,000 from the sale. However, between 1973 and 1978, Ford suffered overall net operating losses which exceeded, and offset, the 1978 capi-tal gain. Ford realized this after it had already submitted its 1978 taxes and conse-quently asked for a refund, claiming it had no "net income" to be taxed in Maryland. The Comptroller, on the other hand, assessed additional taxes on Ford arguing that Ford's capital gain was Maryland net income, and therefore taxable by Maryland under § 316(b) regardless of Ford's net operating losses. The Maryland T ax Court agreed with the Comptroller and affirmed his assessment. The Circuit Court for Baltimore City affirmed the tax court. On appeal, the Court of Special Appeals of Maryland reversed, basing their decision on statutory construction. The court of special appeals held that a corporation must have a "net income" under § 280A(a) before the capital gains allocation provision of § 316(b) can apply. The court determined that the plain mean-ing of "net income" for a corporation was its federal taxable income as governed by § 280A. Comptroller Of The Treasury Income Tax Division v. A merican Satellite Corpora· tion, 312 Md. 543-44, 540 A.2d at 1149 (1988) (citing Ford Motor, 68 Md. App. at 350·351). Since § 316 provides the means of allocating "net income" between Maryland and other states, the existence of a "net income" is required as a prerequi-site to using § 316. Id. In American Satellite Corporation, the Court of Appeals of Maryland used a statu· tory construction analysis, as did the court of special appeals in Ford Motor, to deter-mine that the meaning of "net income" was federal taxable income. American Satellite Corporation, 312 Md. at 544-45, 540 A.2d at 1150. The court of appeals decided that the appropriate method to reach the definition of "net income" was to ascertain the legislature's intent in enacting the various statutes in question. Id. at 544, 540 A.2d at 1150. With this pro-blem solved, the court could then deter-mine whether § 316 modifications could be made even if a corporation reported no "net income for the year in question." Id. The court of appeals used the legislative committee reports to ascertain the legisla-tive intent of the statutes in question. The committee reports clearly demonstrated that the purpose of the current tax law, which was enacted in 1967, was to signifi-cantly restructure the earlier tax law and bring it into conformity with the federal tax scheme. Id. at 539, 540, A.2d at 1141-As was said previously, the court of appeals also determined that the legislative intent was for the "net income" of a cor-poration to be its federal taxable income plus or minus certain modifications. See American Satellite, 312 Md. at 545, 540 A.2d at 1150 (citing Technical Supplement to the 1975 Report of the State Tax Reform Study Committee (Legislative Council Of Maryland at 145 (Feb. 1976))). These modifications were to be specific additions and/or subtractions to the feder-al taxable income. The result of these addi-tions and/or subtractions would be the corporation's "net income." The modifi-cations which were listed in the committee report corresponded exactly to those mod-ifications listed in §§ 280A(b) and (c). See. Id. There was no indication in the commit-tee report that the Comptroller's position, namely that § 316 modifications should be used when a corporation reported no "net income," was correct. See American Satel· lite, 312 Md. at 545-46, 540 A.2d at 1150. Therefore, the Comptroller was incor-rect in trying to read into the provisions of § 280A(b) a further addition to the taxable base from § 316(b)(3). Id. at 546, 540 A.2d at 1150-51. Consequently, § 316(b) cannot be used unless a corporation has a "net income" as defined under the laws of the United States because there must be some-thing to allocate in the first place. Id. at 547, 540 A.2d at 1151. Hence, ASC only owed $14,229 in taxes as required by § 280A(b) for state and local income taxes, and § 288(g) for personal property taxes. In A merican Satellite, the Court of Appeals of Maryland concluded that the "net income" of a corporation is its federal taxable income as modified by the addition and/or subtraction of those items listed in § 280A(b) and (c). Furthermore, the court determined that if a corporation has no taxable income because its in-state capital gains were offset by out·of-state losses, then § 316 modifications cannot be used to assess further additions. Therefore, § 316 modifications can only be used when a corporation has a "net income." -Richard M. Goldberg United States v. Whitehead: RAILWAY PASSENGER'S FOURTH AMEND-MENT RIGHTS NOT VIOLATED BY CANINE SNIFF OF LUGGAGE BAS-ED ON REASONABLE SUSPCISION In the consolidated appeal of United States v. Whitehead, 849 F.2d 849 (4th Cir. 1988), the United States Court of Appeals for the Forth Circuit held that the expecta-tion of privacy of one travelling by rail-road is substantially less than that of a person occupying a temporary residence, such as a hotel room. In addition, the court held that the brief exposure of the interior of a sleeping compartment on board a train to narcotics detection dogs is consti-tutionally permissible when based on an articulable, reasonable suspicion that the contraband is contained within the occu-pant's luggage. In so holding, the court affirmed the district court's ruling. On November 26, 1986, ten minutes before the departure of the morning train from Miami to New York City, two spe-cial narcotics officers assigned to the Miami station observed the defendant, Whitehead, arrive at the station in a taxi. As he emerged from the cab, Whitehead carefully surveyed the station before enter-ing. Then, carrying a sports bag and a suit-case, he entered the station, where he paid $403 in cash for a one-way, first-class sleep-ing car ticket to New York. Ieu<emia® research We!re clasing in an a killer. Please support the I",. 01, • society of R::\.Aen1Ia america, inc. ---------------------------------- 19.1/ The Law Forum-33 

Recent Developments: Comptroller of the Treasury Income Tax Division v. American Satellite Corporation: Out-of-State Losses Suffered by Multi-State Corporation May Be Used to Offset in-State Capital Gains for Tax Purposes

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Recent Developments: Comptroller of the Treasury Income Tax Division v. American Satellite Corporation: Out-of-State Losses Suffered by Multi-State Corporation May Be Used to Offset in-State Capital Gains for Tax Purposes

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