McJunkin v. WV Department of Tax
Annotate this Case
January 1995 Term
___________
No. 22230
___________
McJUNKIN CORPORATION,
Plaintiff Below, Appellant,
v.
WEST VIRGINIA DEPARTMENT OF TAX AND REVENUE
AND ALAN L. MIERKE, ACTING STATE TAX COMMISSIONER,
Defendant Below, Appellee
_______________________________________________________
Appeal from the Circuit Court of Kanawha County
Honorable Charles E. King, Judge
Civil Action No. 92-AA-104
AFFIRMED
_______________________________________________________
Submitted: January 18, 1995
Filed: March 24, 1995
Gordon C. Lane
Bowles, Rice, McDavid, Graff & Love
Charleston, West Virginia
Attorney for the Appellant
Darrell V. McGraw, Jr.
Attorney General
Barry L. Koerber
Assistant Attorney General
Charleston, West Virginia
Attorneys for the Appellee
JUDGE FOX delivered the Opinion of the Court.
JUSTICE BROTHERTON did not participate.
JUDGE FOX sitting by temporary assignment.
CHIEF JUSTICE NEELY, deeming himself disqualified, did not
participate in the consideration or decision in this matter.
JUDGE FOX and JUDGE CANTERBURY sitting by temporary assignment.
SYLLABUS BY THE COURT
1. "Interpretations of statutes by bodies charged with
their administration are given great weight unless clearly
erroneous." Syllabus point 4, Security National Bank & Trust Co.
v. First W.Va. Bancorp, Inc., 166 W.Va. 775, 277 S.E.2d 613 (1981),
appeal dismissed, 454 U.S. 1131, 102 S. Ct. 986, 71 L. Ed. 2d 284
(1982).
2. Before its 1988 amendment, W.Va. Code § 11-24-6(d)
(1972) did not allow a taxpayer to compute a net operating loss
carryback or carryforward unless the taxpayer had a net operating
loss for federal income tax purposes.
3. West Virginia Code § 11-24-6(d) (1988), as amended,
authorizes taxpayers to take a West Virginia net operating loss
deduction for taxable years ending after 30 June 1988. This West
Virginia net operating loss deduction can be carried back or
carried forward and is not dependent upon the taxpayer having a
simultaneous federal net operating loss. All loss carryovers
calculated in accordance with the statute prior to the 1988
amendment are preserved and may be carried forward in conformity
with federal tax law, but they are not subject to recomputation
under the amended statute.
Fox, Judge:See footnote 1
The corporate income tax issue raised in this case
involves the administrative interpretation of statutory language
which sets forth the West Virginia net operating loss deduction.
In 1988, the West Virginia Legislature enacted
legislation which recognized a West Virginia net operating loss
deduction for the first time. West Virginia Code § 11-24-6(d)
(1988) provides:
(d) Net operating loss deduction. -- Except as
otherwise provided in this subsection, there
shall be allowed as a deduction for the
taxable year an amount equal to the aggregate
of (1) the West Virginia net operating loss
carryovers to such year plus (2) the net
operating loss carrybacks to such year. For
purposes of this subsection, the term "West
Virginia net operating loss deduction" means
the deduction allowed by this subsection,
determined in accordance with section 172 [26
U.S.C. § 172] of the Internal Revenue Code of
1986, as amended.
(1) Special Rules:
(A) When the corporation further adjusts its
federal taxable income under section 7 [§ 11-
24-7] of this article, the West Virginia net
operating loss deduction allowed by this
subsection (d) shall be deducted after the
section seven adjustments are made;
(B) The tax commissioner shall prescribe such
transition regulations as he deems necessary
for fair and equitable administration of this
subsection as amended by this act [Acts 1988,
c. 119].
(2) Effective date. -- The provisions of this
subsection (d), as amended by this act [Acts
1988, c. 119], shall apply to all taxable
years ending after the thirtieth of June, one
thousand nine hundred eighty-eight; and to all
loss carryovers from taxable years ending on
or before said thirtieth day of June.
(Emphasis added.)
Section 172 of the Internal Revenue Code permits a taxpayer to
carry over or carry back net operating losses (NOL) incurred in one
taxable year -- referred to as the "loss year" -- to offset net
income in previous and future taxable years. A net operating loss
deduction can be carried back for three years and carried forward
for up to fifteen years. The "net operating loss deduction" for a
year is the aggregate of the net operating loss carryovers to the
year plus the net operating loss carrybacks to the year. IRC
§ 172(a). A "net operating loss" is defined in Internal Revenue
Code § 172(c) as the excess of deductions allowed over gross
income, computed with certain modifications specified in Internal
Revenue Code § 172(d).See footnote 2
The appellant, McJunkin Corporation, filed a 1988 West
Virginia Corporate Net Income Tax (WVCNIT) Return which included a
West Virginia net operating loss deduction. On this return, McJunkin reported a NOL of $1,450,138.00 for tax year 1985,
$1,239,485.00 for tax year 1986, and $161,445.00 for tax year 1987.
McJunkin offset its 1988 taxable income with these loss carryovers
and requested a $105,000.00 refund on its 1988 return.
In a letter dated 12 October 1989, the West Virginia
State Tax Department (Tax Department) denied the refund and
explained its reasons as follows:
The West Virginia net operating loss
which is allowable is $161,445. For 1985 and
1986, there was a net operating profit on the
federal level. The West Virginia loss was
incurred by West Virginia modifications only.
These losses are not available for carry-
forward or carryback. They are for that one
year only.
Thus, because McJunkin did not have net operating losses for
federal income tax purposes in 1985 and 1986, it could not claim
West Virginia net operating losses for these years as deductions on
its 1988 WVCNIT return.
On 19 October 1989, McJunkin filed a petition for review,
requesting the Tax Department reconsider its denial of the
carryforward of the West Virginia NOL for 1985 and 1986. A hearing
was held before the Office of Hearings and Appeals of the West
Virginia Department of Tax and Revenue on 23 January 1991. The Tax
Department ruled against McJunkin on 2 March 1992. The Tax
Department held that W.Va. Code § 11-24-6(d) (1988) does not apply
to the computation of NOL carryovers arising from taxable years
ending on or before 30 June 1988. The Tax Department also held that under the former statute, W.Va. Code § 11-24-6(d) prior to its
1988 amendment, a NOL carryforward or carryback could not arise
under West Virginia corporate net income tax laws unless a federal
NOL existed.
McJunkin appealed this administrative decision to the
Circuit Court of Kanawha County, West Virginia. In a final order
dated 30 September 1993, the lower court affirmed the Tax
Commissioner's decision, concluding "the decision of the Tax
Commissioner is neither clearly wrong with respect to the facts of
this case, nor contrary to applicable law."
On appeal, McJunkin now argues (1) the court below erred
in concluding that the changes made to W.Va. Code § 11-24-6(d) by
Chapter 119 of the 1988 Acts of the West Virginia Legislature do
not apply to a loss carryover from years ending prior to 30 June
1988; and (2) the court below erred in concluding that under the
old W.Va. Code § 11-24-6(d), prior to the 1988 amendments, a
federal net operating loss was necessary in order to have a NOL
carryback or carryforward under West Virginia corporate net income
tax laws.
McJunkin disputes the Tax Department's interpretation of
the amended statute at W.Va. Code § 11-24-6(d) (1988) and argues
that for tax years ending after 30 June 1988, a business can
recalculate all losses disregarding the former requirement of a federal NOL. According to McJunkin, "[t]he clear and unambiguous
language of the WV New Law, WV Code 11-24-6(d)(2), clearly states
that the WV New Law applies to loss carryovers from years ending
prior to June 30, 1988 . . . it is difficult to imagine a provision
being more clear."
We disagree with McJunkin's contention that the Tax
Commissioner's administrative decision completely ignores express
statutory language. "Interpretations of statutes by bodies charged
with their administration are given great weight unless clearly
erroneous." Syllabus point 4, Security National Bank & Trust Co.
v. First W.Va. Bancorp, Inc., 166 W.Va. 775, 277 S.E.2d 613 (1981),
appeal dismissed, 454 U.S. 1131, 102 S. Ct. 986, 71 L. Ed. 2d 284
(1982). We find that the Tax Commissioner's thorough analysis of
W.Va. Code § 11-24-6(d) (1988) is clear, unambiguous, and entitled
to deference from this Court.
First, the Tax Commissioner discusses the differences in
the "old law" found at W.Va. Code § 11-24-6(d) and the "new law"
after this section was amended in 1988. Significantly, the title
of the statute formerly at W.Va. Code § 11-24-6(d) was "Adjustment
resulting from recomputation of net operating loss deduction."
This statute, which was in effect until the 1988 amendment, stated:
d. Adjustment resulting from recomputation of
net operating loss deduction. -- In
determining the West Virginia taxable income
of a corporation entitled to a net operating
loss deduction for the taxable year for
federal income tax purposes, there shall be added to or subtracted from federal taxable
income the amount of an adjustment reflecting
a recomputation of such net operating loss
deduction in which the adjustments required by
subsections (b) and (c) are made for each
taxable year involved in the computation of
such net operating loss deduction.
The Tax Commissioner explains: "[T]he Old Law recognized a federal
NOL deduction in determining West Virginia taxable income, provided
the amount of the federal NOL deduction was adjusted to reflect a
recomputation in accordance with the increasing and decreasing
modifications required by W.Va. Code 11-24-6(b) and (c)." The "old
law" required taxpayers to have a federal NOL to be able to carry
it over for state tax purposes, but this requirement was eliminated
by the 1988 amendment to subsection (d). West Virginia Code § 11-
24-6(d) was completely rewritten, and its new title was "Net
operating loss deduction."
The Tax Commissioner emphasizes that amended subsection
(d) must be examined in its entirety in order to determine the
meaning of the contested language in W.Va. Code § 11-24-6(d)
(1988). The first clause, "Except as otherwise provided in this
subsection," tells taxpayers there are exceptions to the amended
statute. The statute then refers to the NOL deduction and states:
. . . there shall be allowed as a deduction
for the taxable year an amount equal to the
aggregate of (1) the West Virginia net
operating loss carryovers to such year plus
(2) the net operating loss carrybacks to such
year. For purposes of this subsection, the
term "West Virginia net operating loss
deduction" means the deduction allowed by this
subsection, determined in accordance with section 172 [26 U.S.C. § 172] of the Internal
Revenue Code of 1986, as amended.
Thus, the Tax Commissioner explains that a federal NOL is no longer
adjusted and recomputed to determine West Virginia taxable income,
because, "[t]he amendments create a NOL deduction independent of a
federal NOL."
Next, W.Va. Code § 11-24-6(d)(1) (1988) contains two
"special rules," which are followed by subsection (d)(2), with its
contested language regarding the effective date. The first
independent clause in this subsection states: "The provisions of
this subsection (d), as amended by this act [Acts 1988, c. 119],
shall apply to all taxable years ending after the thirtieth of
June, one thousand nine hundred eighty-eight . . . ." According to
the Tax Commissioner, "[t]his provision tells taxpayers that they
are entitled to compute a West Virginia NOL in accordance with the
new rule for all tax years ending after June 30, 1988."
The second clause in subsection (d)(2) states: "The
provisions of this subsection (d) as amended by this act [Acts
1988, c. 119], shall apply . . . to all loss carryovers from
taxable years ending on or before said thirtieth day of June." The
Tax Commissioner explains that "[t]his clause informs taxpayers
that loss carryovers computed under the former statute . . . remain
a lawful modification in computing West Virginia taxable income and
are subject to the special rules of the subsection."
The Tax Commissioner rejects McJunkin's argument and
concludes its analysis as follows:
The clear meaning of the statute does not
support McJunkin's position. It argues that
the second clause states that all prior 1988
loss carryovers are to be recomputed in
accordance with the new law. It supports its
argument by reading the second clause to state
"on its face that it applies to loss carryover
years prior to June 30, 1988 . . . ." The
second clause does not, on its face, apply to
loss carryover years; it applies to loss
carryovers from years prior to 1988. Thus, a
taxpayer had to have a pre-1988 loss carryover
before the second clause becomes operational.
That pre-1988 loss carryover was computed in
accordance with the old law.
In summary, the words of the statute
clearly show that the Legislature intended the
new law to be applicable to all tax years
ending after June 30, 1988, and that its
provisions did not apply to the calculation of
loss carryovers arising from tax years ending
prior to June 30, 1988. Those prior year loss
carryovers, calculated in accordance with the
old law were, however, preserved and could be
carried forward in conformity with federal tax
law. Thus, the Division's application of the
law mirrors the words of the statute. In
contrast, McJunkin's application of the
statute requires the addition of words to the
law which the Legislature did not include in
its amendment. Therefore, McJunkin's argument
fails and the Division's position is held to
be correct.
McJunkin also argues that under W.Va. Code § 11-24-6(a)
and 6(d), as it existed prior to the 1988 amendments, a federal NOL
was not required in order to carry back and carry forward a West
Virginia NOL. The Tax Commissioner explains why McJunkin's
position is incorrect:
Given that West Virginia's corporate net
income tax is a conformity tax . . . the term
"net operating loss deduction" as used in
W.Va. Code § 11-24-6(d) means the net
operating loss deduction allowed by 26 U.S.C.
§ 172, which is allowed as a deduction for
purposes of determining federal taxable
income. It is the existence of a federal net
operating loss which triggers the carryback
and carryforward treatment of the loss.
The statute at issue does not provide for
a net operating loss carryback or carryforward
as a deduction for purposes of determining
West Virginia taxable income. Thus, there is
no statute which allows the taking of a West
Virginia net operating loss carryback or
carryforward arising from a West Virginia loss
in a particular year.
The provisions of W.Va. Code § 11-24-6(d)
do allow a federal net operating loss to be
recomputed and claimed for purposes of
determining West Virginia taxable income under
the carryback and carryforward provisions
applicable to federal net operating losses.
This is the only statutory provision governing
net operating losses. Accordingly, it
provides authority for the Division requiring
a federal net operating loss to invoke loss
carryback and carryforward treatment.
The Tax Commissioner noted that McJunkin filed separate
federal and West Virginia returns in accordance with 26 U.S.C.
§ 172 and did not have a federal NOL. McJunkin had a West Virginia
NOL only after it made the prescribed section 6 adjustments.
However, the previous statute provided no statutory authority for
the carryback or carryforward of a West Virginia NOL.
To summarize, before its 1988 amendment, W.Va. Code § 11-
24-6(d) (1972) did not allow a taxpayer to compute a net operating loss carryback or carryforward unless the taxpayer had a net
operating loss for federal income tax purposes. However, W.Va.
Code § 11-24-6(d) (1988), as amended, authorizes taxpayers to take
a West Virginia net operating loss deduction for taxable years
ending after 30 June 1988. This West Virginia net operating loss
deduction can be carried back or carried forward and is not
dependent upon the taxpayer having a simultaneous federal net
operating loss. All loss carryovers calculated in accordance with
the statute prior to the 1988 amendment are preserved and may be
carried forward in conformity with federal tax law, but they are
not subject to recomputation under the amended statute.
For the foregoing reasons, the 30 September 1993 order of
the Circuit Court of Kanawha County is affirmed.
Affirmed.
Footnote: 1 Pursuant to an administrative order entered by this Court on 18 November 1994, the Honorable Fred L. Fox, II, Judge of the Sixteenth Judicial Circuit, was assigned to sit as a member of the West Virginia Supreme Court of Appeals commencing 1 January 1995 and continuing through 31 March 1995, because of the physical incapacity of Justice W. T. Brotherton, Jr. On 14 February 1995 a subsequent administrative order extended this assignment until further order of said Court. Footnote: 2 See J. Michael Yarborough, State Income Tax Treatment of NOL Carryovers: A Framework for Analysis, 10 J.St.Tax'n 1, 5 n.5 (1991).
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