Dayco Corporation v. Clayton

153 S.E.2d 28 (1967)

269 N.C. 490

DAYCO CORPORATION v. I. L. CLAYTON, Commissioner of Revenue.

No. 28.

Supreme Court of North Carolina.

March 1, 1967.

*30 Atty. Gen. T. W. Bruton and Deputy Atty. Gen. Peyton B. Abbott, for defendant appellee, Commissioner of Revenue.

Millar & Alley, Waynesville, for plaintiff appellant; Kennedy Legler, Jr., of counsel.

LAKE, Justice.

The plaintiff does not contend that the assessment in question has the effect *31 of the levy of a tax on income which is beyond the constitutional power of the State to tax. The sole question is the right of the plaintiff to deduct from that portion of its income, otherwise subject to tax by the State, a certain amount by reason of a "net economic loss" sustained by the plaintiff in an earlier year. The General Assembly was under no constitutional compulsion to allow any deduction whatever from income, otherwise taxable in this State, because of such loss in a prior year. Aberboyle Manufacturing Co. v. Clayton, Acting Comr. of Revenue, 265 N.C. 165, 143 S.E.2d 113; Dayton Rubber Co. v. Shaw, Comr. of Revenue, 244 N.C. 170, 92 S.E.2d 799. We are, therefore, concerned solely with the interpretation to be given G.S. § 105-147(9) (d), this being the only provision in the Revenue Act authorizing a deduction from income otherwise taxable on account of a "net economic loss" in a prior year.

This portion of the Revenue Act provides that in computing "net income" a deduction shall be allowed for "[l]osses in the nature of net economic losses sustained in any or all of the five preceding income years arising from business transactions" (or other types of transactions not germane to the present inquiry). Subparagraph (d, 2) defines "net economic loss" as follows:

"The net economic loss for any year shall mean the amount by which allowable deductions for the year other than personal exemptions, nonbusiness deductions and prior year losses shall exceed income from all sources in the year including any income not taxable under this article." (Emphasis added.)

Subparagraphs (d, 3 and 4) prescribe the extent to which a deduction for such "net economic loss" in a prior year may be allowed in computing the tax due upon the income received in the subsequent year. These provisions are:

"3. Any net economic loss of a prior year or years brought forward and claimed as a deduction in any income year may be deducted from taxable income of the year only to the extent that such carry-over loss from the prior year or years shall exceed any income not taxable under this article received in the same year in which the deduction is claimed, except that in the case of taxpayers required to apportion to North Carolina their net apportionable income, as defined in this article, only such proportionate part of the net economic loss of a prior year shall be deductible from the income taxable in this State as would be determined by the use of the apportionment ratio computed under the provisions of G.S. 105-134 or of subsection (c) of G.S. 105-142, as the case may be, for the year of such loss. (Emphasis added.) "4. A net economic loss carried forward from any year shall first be applied to, or offset by, any income taxable or nontaxable of the next succeeding year before any portion of such loss may be carried forward to a succeeding year. If there is any income taxable or nontaxable in a succeeding year not otherwise offset only the balance of any carry-over loss may be carried forward to a subsequent year." (Emphasis added.)

Statutory provisions must be construed, if possible, so as to accomplish the purpose of the statute stated therein. Blair v. Commissioners, 187 N.C. 488, 122 S.E. 298; Manly v. Abernathy, 167 N.C. 220, 83 S.E. 343. In subparagraph (d, 1) the legislature has stated its purpose in permitting a deduction for a "net economic loss" sustained in a prior year as follows:

"The purpose in allowing the deduction of net economic loss of a prior year or years is that of granting some measure of relief to taxpayers who have incurred economic misfortune or who are otherwise materially affected by strict adherence to the annual accounting rule in the determination of taxable income, and the deduction herein specified does not authorize the carrying forward of any particular items or category of loss except *32 to the extent that such loss or losses shall result in the impairment of the net economic situation of the taxpayer such as to result in a net economic loss as hereinafter defined." (Emphasis added.)

In the light of this stated purpose of the legislature, we construe the process provided by G.S. § 105-147(9) (d) for determining the amount of the deduction allowable to a corporation on account of a "net economic loss" in a prior year to be:

First: The income of the corporation from all sources whatsoever for the year in which such loss is alleged to have occurred is computed. In this computation there must be included income exempt from taxation, income allocated to other states and, therefore, not taxable in North Carolina and income allocated to North Carolina. (G.S. § 105-147(9), subparagraph d, 2.)

Second: The total "allowable deductions" for the year in which the loss is alleged to have occurred are computed. In this computation, the calculator looks to the Revenue Act of this State to determine what is an "allowable deduction." He excludes from the computation (1) personal exemptions, (2) non-business deductions, and (3) losses in earlier years. (G.S. § 105-147(9), subparagraph d, 2.)

Third: If the amount so computed in paragraph "Second" exceeds the amount so computed in paragraph "First," the excess is the amount of the taxpayer's total "net economic loss." (G.S. § 105-147(9), subparagraph d, 2.)

Fourth: The total "net economic loss" is multiplied by the "apportionment ratio" computed for the corporation, pursuant to G.S. § 105-134 (or G.S. § 105-142(c), if applicable), for the year in which the "net economic loss" was sustained. The product, so obtained, is the amount to be "carried forward" for use in computing the corporation's income tax liabilities to North Carolina in the subsequent year or years. (G.S. § 105-147(9), subparagraph d, 3.)

Fifth: Compute the total income "not taxable" under the North Carolina Revenue Act which the corporation receives in the next succeeding year after the year in which the "net economic loss" was sustained. (G. S. § 105-147(9), subparagraphs d, 3 and 4.)

Sixth: Subtract from the amount "carried forward" (Step Fourth, above) the amount computed in Step Fifth, above. The remainder is the amount available for deduction in North Carolina in the year next succeeding that in which the "net economic loss" was sustained on account of that loss.

Seventh: Subtract from what would otherwise be the corporation's "net taxable income" in North Carolina for the year next succeeding that in which the "net economic loss" was sustained the deduction computed in Step Sixth, above. The remainder, if any, is subject to tax in North Carolina at the rate of six per cent. (G.S. § 105-134.)

Eighth: Any excess of the deduction computed in Step Sixth, above, over what would have been the corporation's "net taxable income" in North Carolina for the year next succeeding that in which the "net economic loss" was sustained had there been no such loss, then is "carried forward" for use in computing the corporation's income tax liabilities to North Carolina in the next year. (G.S. § 105-147(9), subparagraph d, 4.)

Ninth: In such next year (i. e., the second year following that in which the "net economic loss" was sustained), start with the amount "carried forward" to such year, as computed in Step Eighth, above. Repeat for such year Steps Fifth, Sixth, Seventh and Eighth, above. This process continues through the fifth year following that in which the "net economic loss" occurred, or until the amount "carried forward" from the year in which such loss occurred (Step Fourth) is exhausted. (G.S. § 105-147(9), subparagraphs d, 4 and 5.)

Dividends received by a corporate taxpayer from shares of stock owned by it *33 in non-subsidiary corporations are clearly "income" in the year received within the meaning of G.S. § 105-147(9) (d). Likewise, a gain received by a corporate taxpayer from its sale of such shares of stock is "income" in the year received.

Under G.S. § 105-134(2) (a) all such income so received by the plaintiff was allocable to states other than North Carolina. Thus, it is income upon which no tax is imposed by the Revenue Act. The Commissioner of Revenue contends that this is, therefore, income "not taxable under this article," within the meaning of G.S. § 105-147(9), subparagraphs (d, 2 and 3) and "income nontaxable" under subparagraph (d, 4). If this be correct, such income must be included in the computations to be made under Steps Fifth and Ninth, above. The plaintiff contends that such income is not "income not taxable under this article," but is taxable income allocated to states other than North Carolina and, therefore, it is not to be included in the computations to be made under Steps Fifth and Ninth, above.

We hold that the construction placed by the Commissioner upon the terms "income not taxable under this article" and "income nontaxable" as used in these provisions of the statute is correct. It is a strained and unnatural use of the term "taxable income" to extend it to income which the statute attributes, by the allocation process, to a state or country other than North Carolina. The construction placed upon these terms by the Commissioner is supported by the language of G.S. § 105-134, which provides, "Every corporation engaged in doing business in this State shall pay annually an income tax equivalent to six per cent of its net taxable income." (Emphasis added.) Here, the term "taxable income" clearly means income on which the State of North Carolina, by the Revenue Act, levies a tax. All other income is "income not taxable under this article" and, therefore, is to be included in the computations to be made in Steps Fifth and Ninth, above.

If such dividends or gains are received by the corporation in the year in which it alleges it sustained a "net economic loss," it is clear that the statute contemplates that such dividends and gains must be included in the "income from all sources" to be computed under Step First, above. It is necessary that they be so included in order to achieve the declared purpose of the statute in allowing a deduction for "net economic loss." (G.S. § 105-147(9), subparagraph (d, 1).)

G.S. § 105-147(9), subparagraph (d, 4) provides that a "net economic loss" carried forward from any year shall first be applied to or offset by "any income taxable or nontaxable" of the next succeeding year before any portion of it may be carried forward to a second, third, fourth or fifth year. Clearly dividends and gains from the sale of corporate stock received in the year "next succeeding" that in which the "net economic loss" was sustained are either "taxable" income or "nontaxable" income. In either event, all such income in the year next succeeding that in which the "net economic loss" was sustained is to be deducted from the part of such loss "carried forward" for use in the computation of the deduction permissible in the second, third, fourth or fifth year after that in which the "net economic loss" was sustained. Surely the legislature intended that such income received in the year next succeeding the year in which the "net economic loss" was sustained is to be subtracted from the original "carry forward" loss in computing the deduction allowable in the first year following such loss. (Steps Fifth and Sixth, above.) That is, such income is "income not taxable under this article."

The judgment of the superior court denying recovery by the plaintiff was, therefore, in accordance with the provisions of the statute.

Affirmed.