Tarrant v. VT Department of Taxes

Annotate this Case

Tarrant v. Department of Taxes (96-608); 169 Vt. 189; 733 A.2d 733

[Opinion Filed 9-Apr-1999]
[Motion for Reargument Denied 3-May-1999]

NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.

No. 96-608

Richard and Amy Tarrant Supreme Court

On Appeal from
v. Washington Superior Court

Vermont Tax Department September Term, 1997

John P. Meaker, J.

Robert B. Luce, William Roger Prescott and Christopher D. Roy of
Downs, Rachlin & Martin, P.C., Burlington, for Plaintiffs-Appellees.

Jeffrey L. Amestoy, Attorney General, J. Wallace Malley, Jr., Acting
Attorney General, and John M. Bagwell, Special Assistant Attorney General,
Montpelier, for Defendant-Appellant.

Stephen S. Ostrach, Boston, Massachusetts, for Amicus Curiae New
England Legal Foundation.

PRESENT: Johnson and Skoglund, J.J., and Allen, C.J. (Ret.), Gibson,
J. (Ret.) and Katz, Supr. J., (Specially Assigned).

SKOGLUND, J. The Vermont Department of Taxes appeals a superior court
decision holding that taxpayers Richard and Amy Tarrant are entitled to an
income tax credit on their 1989 joint income tax return for their pro rata
share of taxes paid by their S corporation to states that did not
recognize the pass-through taxation treatment of such corporations. The
Department contends the court erred by construing the newly enacted 32
V.S.A. § 5916, which explicitly disallows the credit at issue, as an
amendment to 32 V.S.A. § 5825 rather than as a clarification of
preexisting law. We affirm.

The parties stipulated to the facts of this case. IDX Systems
Corporation, formerly known as IDX Corporation, has its headquarters in
South Burlington, and taxpayers are Vermont

residents. In 1989, Mr. Tarrant was president of IDX and owned 48.23% of
its shares.(FN1) Previously, IDX had made a valid federal S corporation
election, also recognized by Vermont. By virtue of this election, IDX did
not pay either federal or Vermont corporate income taxes in 1989. That
is, as explained in more detail below, rather than the corporation paying
taxes on distributions to shareholders and the shareholders then paying
personal taxes on the distributions received, IDX's income, whether or not
distributed, was attributed to its shareholders in proportion to their
percentage of ownership. Thus, in 1989 taxpayers reported and paid taxes
on 48.23% of IDX's net income -- allocable to Mr. Tarrant as a shareholder
-- as personal income for federal and Vermont tax purposes. This is known
as pass-through taxation. See I.R.C. § 1366 (1986).

During the year at issue, IDX conducted business in a number of states
beyond Vermont. In those states that accorded IDX pass-through tax
treatment, taxpayers were required to pay personal income taxes on their
pro rata share of IDX's net income attributable to IDX's business
activities in those states. Since taxpayers paid personal income taxes to
those states, they were permitted to claim a credit pursuant to § 5825 for
those taxes. IDX conducted business, however, in several other states
(FN2) that either did not recognize IDX's S corporation status (FN3) or,
while recognizing IDX as an S corporation, nonetheless imposed a state,
corporate-level tax on IDX's net income attributable to the corporation's
activities within the state.(FN4)

In 1991, taxpayers timely filed an amended Vermont income tax return
for 1989, claiming a credit under § 5825 against their 1989 Vermont
personal income taxes for a pro rata share of taxes that IDX paid to such
non-pass-through-taxation states. Pursuant to the version of § 5825 in
effect for 1989:

A taxpayer of this state . . . shall receive credit against the tax
imposed, for that taxable year, by section 5822 of this title for taxes
imposed by and paid to, another state or territory of the United
States or the District of Columbia, upon his income earned or
received from sources within that state, territory, or district.

32 V.S.A. § 5825 (Cum. Supp. 1989).(FN5) The Department denied the
credit. Taxpayers appealed the denial to the Commissioner of Taxes,
maintaining that because Vermont passes S corporation income through to
the shareholders the tax imposed by other states on IDX's income
constituted a tax imposed on taxpayers' income. The Commissioner denied
the claim on the grounds that § 5825 only afforded the credit where
taxpayers were personally liable to pay the taxes to the other state.
Taxpayers then appealed the Commissioner's adverse determination to the
superior court.

On May 15, 1996, prior to hearing but after the parties had filed
memoranda of law with the superior court, the Legislature passed Act No.
169, entitled "An Act Relating to Miscellaneous Tax Changes." Whereas
Vermont's tax code had previously contained only de minimis coverage of S
corporation taxation, section 21 of the Act created a new taxation
subchapter dealing specifically with the tax treatment of S corporations.
See 1995, No. 169 (Adj. Sess.), § 21; Title 32, chapter 151, subchapter
10A. Section 5916 of this new subchapter provides:

For purposes of section 5825 of this title, no credit shall be
available to a resident individual, estate or trust for taxes imposed
by another state or territory of the United States, the District of
Columbia or a Province of Canada upon an S corporation or the
income of an S corporation.

This section applies to tax years beginning on or after January 1, 1997.
See 1995, No. 169 (Adj. Sess.), § 27. The Legislature also provided a
sunset provision for this section; it lapses as of January 1, 2000. See
id.

The court allowed both parties to file supplemental memoranda to
address the Commissioner's decision in light of this new legislation.
Taxpayers did not dispute that, if § 5916 had been in effect in 1989, they
could not have received the § 5825 credit they seek. They argued,
however, that § 5916 constituted an amendment, altering the meaning of §
5825. By contrast, the Department contended that § 5916 only confirmed
and restated the existing law of § 5825. The court, agreeing with
taxpayers' interpretation of § 5916 and noting that this interpretation
was the "most significant" factor in its decision, reversed the
Commissioner's determination and allowed the credit. This appeal
followed.

Before addressing the specific issue on appeal, we first set forth, by
way of background, a brief overview of the S corporation business form.
"One of the disadvantages of doing business in [traditional] corporate
form is the phenomenon of `double taxation.'" Wolff v. Director of
Revenue, 791 S.W.2d 390, 391 (Mo. 1990). A traditional corporation, also
known as a C corporation because its governing provisions are found in
Subchapter C, Chapter 1, Subtitle A of the United States Internal Revenue
Code (I.R.C.), is treated as a separate taxable entity by the federal
government and is required to pay corporate income taxes based on or
measured by its net income. When a C corporation distributes its earnings
and profits to its shareholders, these distributions generally are taxable
to the shareholders as dividends. Thus, a C corporation's income that is
distributed to its shareholders is taxed twice: once at the corporate
level and once at the personal level.

In 1958, Congress adopted Subchapter S of the I.R.C. primarily to
curtail the impact of

double taxation on small businesses. See generally P. McDaniel et al.,
Federal Income Taxation of Partnerships and S Corporations, at 383-87 (2d
ed. 1997) (discussing legislative history and purpose of S corporations);
14A W. Fletcher et al., Fletcher Cyclopedia of the Law of Private
Corporations §§ 6970.191-6970.215 (perm. ed. rev. vol. 1991) (discussing S
corporation characteristics). Subchapter S permits small businesses, or S
corporations, to receive the "non-tax advantages of incorporation such as
continuity of existence, insulation from personal liability, and ease of
transferability of ownership," Cohen v. Colorado Dep't of Revenue, 593 P.2d 957, 959 (Colo. 1979), which are also available to C corporations. There
are, however, differences between S corporations and C corporations, most
notably their tax treatment.(FN6)

S corporations and their shareholders are for the most part
statutorily exempt from double taxation. See I.R.C. §1363(a) (1986); but
see id. § 1374 (S corporation is taxable on gain recognized from
disposition of appreciated assets or income items acquired while
corporation was a C corporation, or from a C corporation in a
nonrecognition transaction). Instead, S corporations and their
shareholders are treated for tax purposes much like partnerships and their
respective partners. See S. Rep. No. 97-640, at 15 (1982) ("These rules
generally follow the . . . rules governing the taxation of partners with
respect to items of partnership income and loss."); see also Beard v.
United States, 992 F.2d 1516, 1518 (11th Cir. 1993) ("The S corporation is,
in effect, a Code-created hybrid combining traits of both corporations and
partnerships."). A small business can thus "select the form of business
organization desired, without . . . taking into account major differences
in tax consequence." S. Rep. No. 85-1983, at 87 (1958).

At the federal level, S corporations are required to file only an
informational return, reporting for the taxable year gross income (or
loss), deductions, credits, the identity of its shareholders, and the
shareholders' pro rata shares of each item. See I.R.C. § 6037(a). The
taxable income of an S corporation is typically computed in the same manner
as that of an individual. See id. § 1363(b). Certain deductions,
however, are not available to the S corporation, but may be claimed by the
individual shareholders. These include deductions for taxes paid to
foreign countries or United States possessions. See, e.g., id. §
1363(c)(1), (2). The S corporation's income (or loss), deductions, and
credits are passed through on a pro rata basis to the shareholders, who
report them on their personal income tax returns. See id. § 1366(a)(1)(A)
(items of income, including tax-exempt income, loss, deduction, or credit
-- separate treatment of which could affect any shareholder's tax
liability -- are passed through to shareholders). These pass-through
items retain their character in the shareholder's hands. See id. §
1366(b) (character of any item included in shareholder's pro rata share
shall be determined as if such item were realized directly from same
source as realized by corporation, or incurred in same manner as incurred
by corporation); S. Rep. No. 97-640, at 16 (similar to partnerships, items
involved in determination of credits pass through to S corporation's
shareholders). Thus, each shareholder reports the item on a personal
income tax return as if the item were derived by the shareholder directly.
See I.R.C. § 1366(b); S. Rep. No. 97-640, at 17-18 (like partners, each S
corporation shareholder takes account of pro rata share of corporation's
items of income, deduction, credit, etc.).(FN7) With this background in
mind, we now turn to the Department's appeal.

Where there is an intermediate level of appeal from an administrative
body, we review the

case under the same standard as applied in the intermediate appeal. See In
re Town of Sherburne, 154 Vt. 596, 603, 581 A.2d 274, 278 (1990). We will
not set aside the Department's findings of fact unless clearly erroneous.
See In re Agency of Admin., 141 Vt. 68, 75, 444 A.2d 1349, 1352 (1982).
Conclusions of law, unlike findings, are not so protected. See id.
Nonetheless, we do accord deference to the Commissioner's construction of
tax statutes where it represents a permissible construction of the
statute. See Brattleboro Tennis Club, Inc. v. Department of Taxes, 166
Vt. 604, 604, 691 A.2d 1062, 1063 (1997) (mem.); cf. Burlington Elec. Dep't
v. Department of Taxes, 154 Vt. 332, 337, 576 A.2d 450, 453 (1990)
(absent compelling indication of error, we will sustain on appeal
interpretation of statute by administrative body responsible for its
execution); In re Agency of Admin., 141 Vt. at 76, 444 A.2d at 1352 (we
will follow construction of statutes by those charged with their execution
absent compelling indications construction is wrong, but, where statute is
susceptible to more than one meaning, we will assure statute is being
construed, not reconstructed).

Here, neither the Commissioner nor the superior court made findings
because the parties submitted the matter for decision upon stipulated
facts. The Commissioner's construction of § 5825, however, does not
withstand review. The Commissioner justified denial of taxpayers'
requested credit by importing the phrase "personal liability" into the
statute. The Commissioner then focused unduly on the imported language to
conclude that the plain meaning of the credit provision precluded
taxpayers from claiming a refund for taxes imposed on what Vermont
considers their personal income but on which their S corporation paid taxes
to non-pass-through-taxation states.

On appeal, the Department argues that an early version of the foreign
tax credit provision supports this reading as the plain meaning of the
statute. When the foreign tax credit provision was first added in 1957,
it included the language, "should a resident of this state . . . become
liable to another state." See 1957, No. 52, § 1 (emphasis added) (codified
as 32 V.S.A. § 5646 (1959)). The phrase was changed to the current
version in 1966. See 1966, No. 61, (Spec.

Sess.), § 1 (codified as 32 V.S.A. § 5825). The Commissioner testified
before the Senate Finance Committee that the bill did not change the way
in which individual taxpayers compute their tax liabilities. The
Commissioner also submitted a memorandum that merely summarized § 5825 as
restating § 5646 and providing the foreign tax credit. The Department
alleges that the concept of personal liability was carried forward in the
statutory language, "for taxes imposed by, and paid to, another state."
32 V.S.A. § 5825 (emphasis added).(FN8)

Contrary to the Department's conclusion that the historical presence
of the word "liable" demonstrates that the concept of personal liability
continues to reside in the interstices of § 5825, we presume that the
Legislature adds and removes statutory language advisedly. See Payea v.
Howard Bank, 164 Vt. 106, 107, 663 A.2d 937, 938 (1995); see also State v.
Fuller, 163 Vt. 523, 528, 660 A.2d 302, 305 (1995) (it is inappropriate to
expand statute by implication by reading into it something not there,
unless it is necessary to make statute effective). Even if we were to
accept that this sparse legislative history manifested a legislative intent
to retain the word "liable," cf. Swett v. Haig's Inc., 164 Vt.1, 6-7, 663 A.2d 930, 932 (1995) (declining to accept

sparse legislative history as decisive), the meaning of § 5825 would remain
far from plain.(FN9) Precisely what constitutes "his income earned or
received," see 32 V.S.A. § 5825 (1989), would persist as an open question,
a question unanswered by tying it to income on which a taxpayer incurs
personal liability because, at least in Vermont, the pass-through taxation
renders taxpayers personally liable for taxes on the income at issue.

When interpreting a statute, our principal goal is to effectuate the
intent of the Legislature. See In re West, 165 Vt. 445, 449, 685 A.2d 1099, 1102 (1996). Initially, in our attempts to ascertain legislative
intent we look for guidance in the plain meaning of the words used. If
legislative intent is clear, the statute must be enforced according to its
terms without resorting to statutory construction. Conversely, if, as
here, the statute is ambiguous, legislative intent must be determined
through consideration of the entire statute, including its subject matter,
effects and consequences, as well as the reason and spirit of the law.
See Harris v. Sherman, ___ Vt. ___, ___, 708 A.2d 1348, 1349 (1998)
(mem.). While we recognize the general rule that statutes granting credits
must be strictly construed against the taxpayer, the construction must not
defeat the purposes of the statute. Stephens v. Department of Taxes, 134
Vt. 178, 180, 353 A.2d 355, 356 (1976).

The effect of an intervening enactment becomes a matter for
interpretation only after the plain language does not prove decisive. As
we have concluded that the plain language of the statute does not resolve
the question before us, we now address the primary grounds on which the
superior court reversed the Commissioner's decision: Act 169.
Nondeferential review of Act 169's import is appropriate here -- as it was
at the superior court -- given that the Commissioner's decision issued
prior to its enactment, and the Commissioner therefore had no opportunity
to take

the Act into consideration.

The Department notes that subchapter 10A is Vermont's first orderly
compilation of laws concerning taxation of S corporations. See 1995, No.
169 (Adj. Sess.), §§ 21-24. It then draws from the fact that at least
some sections undisputedly confirm existing law, see id.§ 21 (requiring S
corporation shareholders to adhere to I.R.C. § 1366), the conclusion that
the enactment does not provide evidence that cuts either for or against
construction of § 5916 as an amendment.

Taxpayers support their view that the newly created § 5916 constitutes
an amendment, as opposed to a clarification of preexisting law, with the
fact Act 169 is entitled "An Act Relating to Miscellaneous Tax Changes."
See 1995, No. 169 (Adj. Sess.) (emphasis added). Further, they rely on
the Legislature's provision of effective and sunset dates, arguing that
such dates would not have been necessary for a mere clarification and
that, where the Legislature enacts a clarifying provision, it regularly
specifies this and provides for the statute to be effective upon passage.
See, e.g., 1994, No. 235 § 12(e) ("Sec. 9a and 9b are intended to clarify
existing law. . . . Such sections shall take effect on passage and shall
apply retroactively."). Finally, taxpayers observe that material changes
in statutes evince an intent to change the effect of existing law. See
Rock of Ages v. Commissioner of Taxes, 134 Vt. 356, 359,360 A.2d 63, 65
(1976) (construing amendment that expressly brought extraction of mineral
deposits under purview of manufacturing exemption as changing coverage of
existing exemption).

We agree that § 5916 bears the indicia of an amendment. While we
recognize that "[c]larification is a legitimate objective of legislative
action," we presume that the Legislature intends to change the meaning of
a statute, unless "the circumstances clearly indicate clarification to be
intended." Town of Cambridge v. Town of Underhill, 124 Vt. 237, 241, 204 A.2d 155, 158 (1964). The Department fails to point to any persuasive
evidence indicating the Legislature intended § 5916 as a clarification of
§ 5825 and, hence, fails to rebut the presumption that § 5916 changes the
law with respect to S corporations.

Further, the fact that Act 169 contains specifically tailored
effective dates for different

provisions and a sunset date applicable to several of the Act's provisions,
including § 5916, weighs against construing § 5916 as merely clarifying
legislation. If § 5916 merely clarified existing law, an effective date
would have been unnecessary surplusage. By its own terms § 5916 was not
effective until January 1, 1997. Consequently, the Department's contention
that the section clarifies § 5825 in effect seeks retroactive effect for
disallowance of the credit. Such a construction of the amendment would
contravene 1 V.S.A. § 214(1) (prohibiting amendment of statutory provision
from affecting operation of provision prior to effective date). The
dissent as well as the Department contend that, because Act 169 also
contains extensive provisions adding to and changing the law with respect
to S corporations, the Legislature understandably provided one sunset
provision for the sections that add, amend, and clarify S corporation
legislation. Although we agree it may have been easier for the
Legislature to enact one sunset for the entire S corporation legislation
instead of providing a sunset provision for only those sections that
amended existing legislation, we also presume that the Legislature inserted
the sunset provision advisedly. See Payea, 164 Vt. at 107, 663 A.2d at
938. Again, the Department fails to produce evidence to overcome this
presumption. We therefore conclude that § 5916 was intended to change the
meaning of § 5825. Nonetheless, while the enactment of § 5916 mitigates in
favor of taxpayers' position, it is not, by itself, conclusive.(FN10)
Our affirmance therefore also rests in part on other grounds articulated
below.

Looking to both the purpose underlying the specific section at issue
and the more general purposes behind Vermont's statutory taxation and
corporation schemes, we encounter additional grounds for permitting
taxpayers the credit. For Vermont individual taxpayers, § 5825 clearly

permits a credit for taxes paid to foreign jurisdictions. The purpose of
affording taxpayers credit for income taxes paid in another state is to
prevent or alleviate the burden of double taxation. See Stephens, 134 Vt.
at 180, 353 A.2d at 356. The Legislature has thus enacted tax provisions
to eliminate the threat to Vermont taxpayers of two or more taxing
authorities taxing the same personal income more than once.

A second type of double taxation can occur when the same stream of
income is taxed at the corporate level and then again at the personal
level. Particularly for small businesses this double taxation proved
onerous; hence the creation of the hybrid S corporate form in which the
business is recognized as a corporate entity for certain purposes and,
similar to partnerships, as a functional equivalent of its aggregate
shareholders for taxation purposes. That is, with respect to income tax,
the individual shareholders substitute for the corporation. The Department
contends that taxpayers were not subjected to double taxation because two
distinct entities, the corporation and the individuals, were taxed. The
pass-through tax treatment of S corporations, however, in a sense renders
or should render the corporate entity transparent for tax purposes.

By allowing S corporations to form and operate in Vermont and by
adopting the federal pass-through treatment, the Legislature endorsed a
policy against taxing both entities, the S corporation and its individual
shareholders, on the same income. See S. Nechemias, Shareholder Credits
for Taxes Paid by the S Corporation to Another State, 8 J. S Corp. Tax'n
141, 146 (1996) ("[I]f a shareholder's state of residence recognizes the
flow-through status of S corporations, then such state has a policy
against `double taxation' of S corporation income."). Regardless of the
fact that the Legislature has since espoused a different policy, see 32
V.S.A. § 5916, the policy as it then stood could only be realized if
Vermont permitted its resident shareholders to receive a credit for
corporate-level taxes paid to nonrecognizing states. Pursuant to 32 V.S.A.
§ 5833(a), a traditional Vermont taxable corporation is only taxed by
Vermont on income attributable to its activities in Vermont, while
activities in other states are taxed solely by those other states. A
resident shareholder of a resident S corporation may claim a credit under §
5825 for taxes paid

by the shareholder to other states in which the S corporation does
business if the other states

recognize its S corporation status.

The Department's interpretation of the § 5825 credit, however,
essentially deprives taxpayers of the benefit of either § 5825 or § 5833
because income allocable to other states is included, without a
corresponding credit, on their personal tax return at the same time as the
other states tax the income at the corporate level. Thus, under the
Department's view, the income is taxed in two places instead of allocated
according to the location where the income arose. Since one consequence
of S corporation pass-through taxation is potential inclusion of
undistributed corporate income on a resident shareholder's personal
return, it is necessary to supply a corresponding credit to consistently
apply Vermont's policy of alleviating double taxation of small businesses.

Vermont's "piggyback" on the federal income tax framework provides
additional support for the credit. The Legislature has expressly codified
its intent to conform the Vermont personal and corporate income taxes to
the United States Internal Revenue Code, "except as otherwise expressly
provided," 32 V.S.A. § 5820(a) (emphasis added), for the purpose of
simplifying the taxpayer's filing of returns, reducing the taxpayer's
accounting burdens, and facilitating the collection and administration of
these taxes. See id.; see also Oxx v. Department of Taxes, 159 Vt. 371,
375, 618 A.2d 1321, 1323 (1992) (noting that one of Legislature's goals is
to "piggyback" Vermont's tax provisions onto federal tax structure).

The Legislature began "piggybacking" Vermont's tax statutes on the
federal tax code in 1947. See 1947 V.S. § 948 (Vermont's tax policy to
"conform as closely as may be with the Internal Revenue Code"); see also
id. § 932(VI) ("`Net income' means the same as net income, as defined
under the Internal Revenue Code in effect April 26, 1947, excluding (a)
income which under such code is expressly exempted from taxation by the
states; and (b) capital gains and losses.").(FN11) Thus, in 1958, when
Congress permitted the formation of S corporations and

provided for them in the I.R.C., Vermont's tax provisions, due to the
"piggyback" policy, automatically permitted the formation and operation of
S corporations within Vermont, and also adopted the same tax treatment of
S corporations as provided in the I.R.C.

We note that, at the federal level, shareholders of an S corporation
are entitled to a foreign tax credit for their share of foreign income
taxes paid by an S corporation. See I.R.C. §§ 901(b)(3), 1373(b) (1986).
Vermont's tax provisions contain no language expressly denying taxpayers
the credit at issue. In light of Vermont's § 5820 policy conforming our
tax code to the I.R.C., absent an express provision to deviate from the
federal tax scheme, like the newly enacted §5916, shareholders are
entitled to a tax credit for their share of "foreign" income taxes paid by
an S corporation in another state, regardless of whether that "foreign"
state recognizes S corporations.(FN12) See White v. Commissioner, No.
6558, 1995 WL 495912, at *2 (Minn. T.C., Aug. 18, 1995); In re Baker, No.
805550 TSB-D-90(28)I, 1990 WL 169491, at *3 (N.Y Tax App. Trib. Oct. 11,
1990) (holding that resident shareholder of S corporation is eligible for
tax credit for taxes paid by corporation in another state and noting that
this conclusion is "consistent with the Internal Revenue Code which
provides that shareholders of an S corporation are entitled to a foreign
tax credit for their share of foreign income tax paid by an S
corporation").

While the federal legislation concerning S corporations has been
amended and revised over the past forty years, the fundamental purposes of
Subchapter S -- "to eliminate the corporation as a taxable entity and
provide a system under which the operating profits of qualifying
corporations are taxed directly to the shareholders," McDaniel, supra, at
384 -- remain unchanged. Because of Vermont's goal to conform to the
federal tax provisions, the Legislature also implicitly adopted and has
maintained these fundamental purposes. Thus, by construing § 5825 as
permitting the credit to pass through to the resident shareholders, we
ensure that the fundamental goals and tax benefits provided to small
Vermont multistate businesses operating as S corporations are not

outweighed by the procedural complexities and costs of compliance with
other states' rules. See J. Connors & R. Kozub, Multistate S Corporations
Endure Maze of State Laws, J. Tax'n, Mar. 1989, at 179.

Finally, we must respond to the Department's few remaining arguments
against granting the credit. The Department puts stock in two unenacted
bills that, had they passed, would have expressly granted the type of tax
credit at issue in the present case. We fail to see the significance of
these two bills since the Legislature may well have rejected the bills for
other reasons, such as the belief § 5825 already granted the credit. See
Munson v. City of S. Burlington, 162 Vt. 506, 510, 648 A.2d 867, 870
(1994).

The Department also contends that taxpayers may not claim the credit
because Vermont allows only those federal credits that are specifically
identified in 32 V.S.A. § 5811(4). See 32 V.S.A. § 5811(4) (Cum. Supp.
1989) ("`Federal income tax liability' means . . . the federal income tax
payable by the taxpayer . . . under the laws of the United States . . .
after the allowance of the retirement income credit, investment credit,
foreign tax credit, child care and dependent care credit and alternative
minimum tax credit, but before the allowance of any other credit against
that liability."). We disagree. Section 5828b of Title 32 also grants a
federal credit that is not listed in § 5811(4). See id. § 5828b(a) (Cum.
Supp. 1989) ("A resident individual . . . who is entitled to an earned
income tax credit granted under the laws of the United States shall be
entitled to a credit."). Thus, because § 5811(4) is not the only section
containing available federal credits, we are not constrained in concluding
that § 5825 grants the credit at issue, which is also available to S
corporation shareholders at the federal level.

The Department argues lastly that, if we construe § 5825 as granting
the credit at issue, we will in effect be financing or subsidizing those
other states' decisions to tax Vermont S corporations at the corporate
level. If so, it was a legislative decision in the first instance -- one
that the Legislature has since changed. Moreover, we disagree that it
amounts to a subsidy.

As discussed above, two Vermont tax provisions, §§ 5825 and 5833,
allocate the primary taxing authority on income to the state from which it
arises. These two sections alleviate the

burden of double taxation for resident persons and corporations
respectively. At the personal level, individuals must report all income
received, no matter the source, on their personal income tax returns.
While they are potentially subject to Vermont taxation on the total income,
the taxpayer is able to offset some of the Vermont tax liability by
claiming a credit pursuant to § 5825. The maximum tax credit that can be
claimed, however, is limited. Section 5825 states that, "[i]n no case
shall the credit allowed by this section exceed the portion of Vermont
income tax, otherwise imposed by this chapter, attributable to the
adjusted gross income earned or received from sources within such other
state, territory or district." 32 V.S.A. § 5825 (Cum. Supp. 1989). In
short, the actual amount of the income tax that was paid to another state
is first determined, and then the potential Vermont income tax on the
out-of-state income is calculated using Vermont's income tax provisions.
The taxpayer may claim a credit only for the lesser of these two amounts.
By contrast, Vermont corporations are taxed only on net income that is
received from Vermont sources. See 32 V.S.A. § 5833. That is, as opposed
to a credit for non-Vermont income, § 5833 provides from the outset for
allocation of income according to its state source.

The interface between Vermont's tax policy and the policies of other
states has both a positive and negative impact on the revenues collected
here. For instance, many Vermont residents work in New Hampshire.
Vermont currently collects income tax on these residents' New Hampshire
earnings because New Hampshire does not impose such a tax. Were New
Hampshire to enact an income tax, Vermont would then allow a credit for
that tax pursuant to § 5825. If the Vermont tax rate were higher, Vermont
would continue to collect the difference between the New Hampshire and
Vermont rates. New Hampshire's enactment of an income tax would certainly
lower the total tax Vermont could collect from the Vermont residents who
perform work in New Hampshire. Nonetheless, this does not mean that
Vermont would then be subsidizing New Hampshire. To the contrary, the
benefit, or windfall, Vermont has received from New Hampshire's lack of
income tax would merely be reduced. Similarly, the other states at issue
in this appeal can legally collect a tax on income that IDX derives from
activities in their state. Whether they choose to adopt a policy of
collecting the tax in the form of a personal

income tax, because they recognize pass-through taxation of S corporations,
or in the form of a corporate tax, because they do not recognize such tax
treatment, they have the opportunity either way of imposing a tax on that
stream of income.

The Legislature has attempted to maximize Vermont's tax revenues while
protecting Vermont's resident taxpayers, including S corporation
shareholders, from the possibly unfair and burdensome impact of double
taxation. In the event another state imposes a higher tax rate than does
Vermont, the taxpayer, not Vermont, pays the difference. As it existed in
1989, the § 5825 credit ensured that Vermont small business shareholders
were able "to select the form of business organization desired, without
the necessity of taking into account major differences in tax
consequence." S. Rep. No. 85-1983, at 87.

The Department cannot escape the consequences of the Legislature's
corporation and tax policies. If we were to accept the Department's
position that a credit was not authorized in the case at bar, Vermont's
policies favoring small business by insulating them from double taxation
would be compromised, and taxpayers would be unreasonably penalized --
caught between the Scylla of § 5825 and the Charybdis of § 5833.

Accordingly, we conclude that § 5825 entitled taxpayers to claim a
credit for 1989 taxes IDX paid to other states that did not treat the S
corporation's income on a pass-through basis. Our conclusion obviates the
need to address the constitutional issues raised by taxpayers.

Affirmed.

FOR THE COURT:

___________________________________
Associate Justice

-------------------------------------------------------------------------
Footnotes

FN1. Amy Tarrant, Richard Tarrant's spouse, is a party in this
matter because the Tarrants filed their 1989 Vermont income tax return
and amended return jointly. See 32 V.S.A. § 5861(c) (imposing joint and
several liability on joint filers).

FN2. These jurisdictions were California, Connecticut, District of
Columbia, Louisiana, Massachusetts, Michigan, New Jersey, and North
Carolina.

FN3. Since 1989, some of these states have enacted statutes
recognizing S corporations. See, e.g., N.J. Stat. Ann. § 54A:5-9 (West
1996).

FN4. For example, in 1989, California recognized S corporation status
but still required such corporations to pay a corporate-level tax on
income attributable to activities conducted within California. See Cal.
Rev. & Tax. Code § 23802(b)(1) (West 1992); see also Heller v. Franchise
Tax Bd., 27 Cal. Rptr. 2d 88, 90 (Cal. Ct. App. 1994) (discussing
California's treatment of S corporations for tax purposes).

FN5. Section 5825 of Title 32 was subsequently amended in 1991, 1992,
and 1997. See 1997, No. 50, § 16 (designating existing provisions of
section as subsection (a) and adding subsection (b), which deals with tax
issues for taxpayers who are Vermont residents domiciled in another
jurisdiction); 1991, No. 186 (Adj. Sess.), § 12 (changing catchline of
section and adding provisions concerning taxes paid to Canadian
provinces); 1991, No. 67, § 26 (adding provision concerning taxes paid to
Canadian provinces).

FN6. Other differences include restrictions on the number and
identity of corporation shareholders. See, e.g., I.R.C. §§ 1361(b)(1)(A),
1361(b)(1)(B), 1361(c)(2) (1986). In addition, an S corporation must be a
domestic corporation. See id. § 1361(b)(1). It cannot have a stockholder
who is a (1) nonresident alien individual, see id. 1361(b)(1)(C), (2)
corporation, or (3) partnership. See id. § 1361(b)(1)(B). Finally, an S
corporation may issue only one class of stock (although there is an
exception for stock that varies in voting rights). See id. §§
1361(b)(1)(D), 1361(c)(4). IDX terminated its S corporation election in
1995 when it offered its stock publicly.

FN7. In 1986, due primarily to this special pass-through tax
treatment, the maximum effective rate of taxation on S corporation income
was estimated at 39.6%, while the maximum effective rate of taxation of
distributed C corporation income was estimated at 60.74%. See P. McDaniel
et al., Federal Income Taxation of Partnerships and S Corporations, at 384
(2d ed. 1997). Not surprisingly, the avoidance of double taxation has
made the S corporation a popular business form in the United States. See
id.

FN8. The Department also attempts to support its contention that tax
credits are available only for those taxes for which a taxpayer is
"personally liable" by relying on the language contained in three other
sections in Title 32. Section 5822 permits the imposition of tax "upon the
income earned or received in that taxable year by every individual, estate
and trust." Section 5832 imposes a corporate income tax "upon the income
earned or received in that taxable year by every taxable corporation."
Finally, § 5861(a) requires that "[e]very individual, trust or estate
subject to taxation for any taxable year under section 5822" file a tax
return. The Department claims a synergistic reading of these sections in
conjunction with § 5825 evinces the Legislature's intent to make a tax
credit available only for those taxes paid by a taxpayer and for which a
taxpayer is "personally liable." While we agree that these other sections
should be read in pari materia with § 5825, see In re Rushford, 111 Vt.
494, 497, 18 A.2d 175, 176-77 (1941), we find this argument without merit.
First, none of these sections expressly mentions the term "personal
liability," and we decline to add it unnecessarily. More importantly, as
is discussed infra, we conclude, due to the nature of S corporations and
the legislative intent behind allowing corporations to elect S corporation
status, that, as a matter of law, Vermont shareholders of a Vermont S
corporation are personally liable for their pro rata share of taxes paid
by their S corporation to other states where they conduct business. FN9.
We note that disallowance of the § 5825 credit for corporate taxes paid to
nonrecognizing states did not appear plain, prior to enactment of § 5916,
to one knowledgeable tax commentator. See St. Tax. Rep. (Vermont) (CCH)
10-215, at 1112 ("Applicable to taxable years beginning in 1997 through
1999, no credit will be available to a resident individual, estate or trust
for taxes imposed by another state on the S corporation or its income.").

FN10. The dissent relies on the Department's memorandum to the House
Ways and Means Committee characterizing § 21 of Act 169, in which the new
32 V.S.A. § 5916 appears, as leaving current law unchanged. We find the
memorandum unpersuasive given that the Department was at the same time
pursuing the instant appeal. Moreover, legislative intent cannot be
garnered simply from one submission to the committee. See, e.g., Vermont
Dev. Credit Corp. v. Kitchel, 149 Vt. 421, 428, 544 A.2d 1165, 1169 (1988)
(testimony and statements of legislative witnesses and individual
legislators are inconclusive at best). FN11. In 1967, the Legislature
changed the manner in which personal income tax was calculated, from a
percentage of net income to a percentage of federal income tax liability.
See 1967, No. 121, § 4.

FN12. The express provision that was lacking in 1989 can now be found
in 32 V.S.A. § 5916. See discussion infra.

-------------------------------------------------------------------------
Dissenting

No. 96-608

Richard and Amy Tarrant Supreme Court

On Appeal from
v. Washington Superior Court

Vermont Tax Department September Term, 1997

John P. Meaker, J.

Robert B. Luce, William Roger Prescott and Christopher D. Roy of
Downs, Rachlin & Martin, P.C., Burlington, for Plaintiffs-Appellees.

Jeffrey L. Amestoy, Attorney General, J. Wallace Malley, Jr., Acting
Attorney General, and John M. Bagwell, Special Assistant Attorney General,
Montpelier, for Defendant-Appellant.

Stephen S. Ostrach, Boston, Massachusetts, for Amicus Curiae New
England Legal Foundation.

PRESENT: Johnson and Skoglund, J.J., and Allen, C.J. (Ret.), Gibson,
J. (Ret.) and Katz, Supr. J., (Specially Assigned).

KATZ, Supr. J., dissenting. For the most part, the Court's lengthy
interpretation of a one-sentence statute is aimed at supporting its view
that granting a tax credit in the instant situation is good policy. To
achieve this result, however, the Court ignores the plain meaning of the
relevant statute and the applicable standard of review. Accordingly, I
dissent.

Taxpayers are Vermont residents and S corporation shareholders who
paid personal income tax in Vermont on their pro rata share of the net
income of IDX Systems Corporation. As resident individual taxpayers, they
were entitled under Vermont law applicable at the time to receive credit
against the individual income tax assessed "for taxes imposed by, and paid
to, another state . . . upon his income earned and received from sources
within that state." 32

V.S.A. § 5825 (Cum. Supp. 1989) (emphasis added). In this case, taxpayers
seek a credit for a corporate tax that Massachusetts imposed upon IDX's
income. Based on a reasonable interpretation of § 5825's plain meaning,
the Vermont Commissioner of Taxes determined that taxpayers were not
entitled to the credit. In the Commissioner's view, because IDX is a
distinct entity and a separate taxpayer from individual shareholders such
as taxpayers, the credit does not apply.

I believe that this is the correct view, and that we should defer to
the Commissioner's decision. Section 5825 does not explicitly state
whether shareholders, taxed as individuals in Vermont, may claim credit
for corporate taxes imposed by another state on their S corporation's
income. But a literal reading of the statute precludes a credit in such
circumstances. See S. Nechemias, Shareholder Credits for Taxes Paid by
the S Corporation to Another State, 8 J. S Corp. Tax'n 141, 144 (1996) (in
states with statutory provisions that allow credit for taxes paid by S
corporation shareholders to another state but say nothing about whether
credit is available for corporate taxes paid by S corporation itself,
credit for corporate taxes is not available because those taxes were not
paid by shareholders); Kreizenbeck v. Arizona Dep't of Revenue, No. 1126-
94-I, 1995 WL 331529, at *5 (Ariz. Bd. Tax. App., Apr. 24, 1995) (under
similar statute, credit not available to S corporation shareholders for
taxes imposed by another state on S corporation).

We must presume that the plain meaning of the statutory language
evinces the Legislature's intent, see Chamberlin v. Department of Taxes,
160 Vt. 578, 580, 632 A.2d 1103, 1104 (1993), and we must sustain the
interpretation of a statute made by the administrative agency responsible
for its execution, absent compelling indication of error, see Burlington
Elec. Dep't v. Department of Taxes, 154 Vt. 332, 337, 576 A.2d 450, 453
(1990). Further, we have repeatedly stated that a statute providing a tax
exemption or credit must be strictly construed against the party claiming
the exemption or credit unless such a construction would produce
irrational results or defeat the purposes of the statute. See Chamberlin,
160 Vt. at 580, 632 A.2d at 1104; Medical Ctr. Hosp.

v. City of Burlington, 152 Vt. 611, 615, 566 A.2d 1352, 1354 (1989); In re
Audley, Inc., 151 Vt. 513, 516-17, 562 A.2d 1046, 1049 (1989); Stephens v.
Department of Taxes, 134 Vt. 178, 180, 353 A.2d 355, 356 (1976); see also
Pizzagalli v. Department of Taxes, 132 Vt. 496, 499, 321 A.2d 437, 440
(1974) ("no claim of exemption [or credit] can be sustained unless within
the express letter or necessary scope of the exempting clause"). In this
case, upholding the Commissioner's literal reading of § 5825 would neither
lead to absurd consequences nor defeat the purposes of the statute. Nor
is there any compelling indication of error.

Section 5825 is aimed at alleviating the burden of double taxation.
See Stephens, 134 Vt. at 180, 353 A.2d at 356. But the double taxation
precluded by § 5825 is two separate states imposing the same type of tax
on the same income during the same taxing period. See id. at 179, 353 A.2d at 356 (part-time, out-of-state residents taxed by Vermont and New
York on personal income earned in New York). Here, Vermont imposed an
individual income tax on taxpayers' personal income, while Massachusetts
imposed a corporate income tax on IDX's income. Thus, there is no double
taxation, just as there is no double taxation when the income of a
corporation is taxed both at the corporate level and after it passes on to
shareholders in the form of dividends. See State Tax Comm'n v. Television
Servs., Inc., 495 P.2d 466, 469 (Ariz. 1972) (no double taxation occurs
when corporation is taxed on its income, and then same income is taxed
after being passed on to shareholders in form of dividends; corporation
and its stockholders are separate and distinct entities, and their incomes
are separate and distinct subjects of taxation). Notwithstanding
Vermont's elective pass-through tax treatment of the income of S
corporations, S corporations and individual shareholders remain distinct
entities and separate taxpayers. In this case, taxpayers are individuals,
and Massachusetts has taxed their corporation, not them.

Section 5825's purpose of preventing double taxation is not defeated
by denying credit to S corporation shareholders for taxes imposed on their
S corporations by states that do not recognize the federal S election. To
be sure, the S corporations' income earned or derived in those few states
that do not recognize the federal S election will be taxed at the corporate
and

shareholder levels. But § 5825 continues to protect individuals ("the
taxpayer") from having to pay two separate states the same type of tax on
the same income. Indeed, although the Legislature has now enacted a
statute explicitly denying credit to S corporation shareholders for
corporate taxes imposed on S corporations by other states not recognizing
the federal S election, see 32 V.S.A. § 5916, resident S corporation
shareholders in Vermont continue to receive credit against individual
income taxes imposed by states that do recognize the federal S election.

Under the Court's reasoning, Vermont law as it now stands, with the
enactment of § 5916, compromises Vermont's fundamental public policy goals
of insulating small businesses from double taxation. I do not agree.
Notwithstanding the Court's repeated lament to the contrary, upholding the
Commissioner's reasonable interpretation of § 5825 would not undermine the
goal of preventing double taxation any more than § 5916 does so now.

In any event, the Commissioner's well-reasoned interpretation of §
5825 is entitled to deference notwithstanding the subsequent enactment of
§ 5916, which neither amended § 5825 nor changed existing law. Section
5916 was one small provision included in Act 169, which consisted of
twenty-seven sections. Of the twenty-seven sections, sixteen amended
specific provisions in Title 32, six added new provisions, two repealed
old provisions, and two concerned appropriations and effective dates.
Section 21 of Act 169 added a new subchapter to Chapter 151 of Title 32
aimed at creating Vermont's first discrete and orderly compilation of laws
concerning the taxation of S corporations. Section 5916, one of the
provisions of this new subchapter, provides that "no credit shall be
available to a resident individual . . . for taxes imposed by another
state . . . upon an S corporation or the income of an S corporation."
Section 5916 does not refer to § 5825. Further, although each of the
sixteen amendatory sections in Act 169 refer to and set forth the
provision being amended, section 21 does not indicate that § 5916 amends or
implicates § 5825. Moreover, the memorandum containing a written summary
of each of Act 169's sections that was sent to the House Ways and Means
Committee by the Department of Taxation, which drafted Act 169, indicated
that current law would remain unchanged. Although

the Department specifically noted in its summary of other sections when
existing law was being amended, nothing in the Department's summary of
section 21 suggests that § 5916 was intended to change § 5825.

In sum, Act 169 amended many provisions of the tax code, but § 5825
was not one of them. Section 5916 is but one of several provisions
contained in the new subchapter that confirms, specifies, details, and
consolidates existing law concerning S corporations. See, e.g., 32 V.S.A.
§ 5914(a) (confirming existing law contained in 32 V.S.A. § 5862); 32
V.S.A. §§ 5911(b), 5912 (confirming existing law contained in 32 V.S.A. §§
5823, 5832). Because § 5916 is only a small part of a comprehensive act
aimed principally at specifying and consolidating the law on S
corporations, its enactment does not indicate a substantive change in the
law. See Oklahoma Tax Comm'n v. Stanolind Pipe Line Co., 113 F.2d 853,
856 (10th Cir. 1940) (presumption that new enactment intended substantive
change in existing law is fairly strong in case of isolated, independent
amendment, but has much less persuasive force when new enactment is
general, comprehensive tax code); see N. Singer, 1A Sutherland Statutory
Construction § 22.30, at 266 (5th ed. 1994) (accord).

Nor is the sunset provision imposed on sections 21 through 24 of Act
169 rendered meaningless if we conclude that § 5916 merely specified
existing law. An effective date of limited duration would make no sense
if applied only to § 5916, but considering the general scope of the sunset
provision, it does not undermine the State's view that § 5916 merely
specified and confirmed existing law under the plain meaning of § 5825.

Further, I am not impressed with the Court's reliance on the fact that
federal law entitles S corporation shareholders to a foreign tax credit
for their share of foreign income taxes paid by the corporation. Vermont
is not required to follow federal law. In general, an individual's
Vermont state income tax is calculated as a percentage of that individual's
federal income tax. Further, as the Court notes, our income tax laws
conform to federal law to simplify the filing of returns and ease
administrative burdens. 32 V.S.A. § 5820(a). But Vermont's adoption of a

"piggyback" system does not mean that Vermont income tax law is required to
follow, or does follow, every nuance of federal law. See J. Conners & R.
Kozub, Multistate S Corporations Endure Maze of State Laws, 70 J. Tax'n
174, 176-77 (March 1989) (noting differences between Vermont law and
federal law regarding S corporations). Section 5825 is a provision of
Vermont's tax code that does not exist in the federal tax code. We should
not stray from its plain meaning based on perceived analogous federal law.

In the end, the Court sets forth a number of policy arguments for why
a credit should be allowed under the instant circumstances -- a position
that has been expressly rejected by the Legislature in enacting § 5916 --
but it has failed to demonstrate that a credit is available under the
plain meaning and strict construction of § 5825. Ironically, the Court
proclaims that "[t]he Department cannot escape the consequences of the
Legislature's tax policies," when in fact the Legislature plainly adopted
the Department's position of not allowing a credit under the instant
circumstances, and this Court refuses to defer to the Department's
interpretation of the statute confirming that position. It is this Court
that evades the consequences of the Legislature's tax policies by imposing
its own policy, which ignores not only the expertise of the Commissioner
but also our long-standing policy of denying a claimed credit unless it is
plainly provided by statute. The Court states that it is an "open
question" under § 5825 whether taxpayers are entitled to the credit
claimed here, and yet the Court grants the credit notwithstanding the
ambiguity it recognizes and the contrary ruling of the agency assigned to
implement the statute. Further, if indeed § 5825 is ambiguous as to the
point of law raised in this appeal, the Court fails to recognize that §
5916 was enacted merely to clarify the question left in doubt by the
previous statute.

Because I believe that taxpayers are not entitled to a credit under
the statute's plain meaning, and that taxpayers' constitutional challenges
to the statute on equal protection, proportional contribution, and common
benefits grounds are wholly without merit, see Oxx v. Department of Taxes,
159 Vt. 371, 376, 618 A.2d 1321, 1324 (1992) (statute is constitutional if

it is reasonably related to legitimate public purpose); Fleury v.
Kessel/Duff Constr. Co., 149 Vt. 360, 362, 543 A.2d 703, 704 (1988) (one
who seeks to void statute undertakes very weighty burden); Wheeler v.
State, 127 Vt. 361, 366, 249 A.2d 887, 891 (1969) (party challenging
constitutionality of statute has burden to demonstrate discrimination to
extent that it is arbitrary and unreasonable), I dissent.

____________________________________________
Superior Judge, Specially Assigned

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