Stewart v. Nebraska Dept. of Rev. , 294 Neb. 1010 ( 2016 )

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Nebraska Supreme Court A dvance Sheets
294 Nebraska R eports
STEWART v. NEBRASKA DEPT. OF REV.
Cite as 294 Neb. 1010
Brenton R. Stewart and M ary M. Stewart, appellants,
v. Nebraska Department of R evenue, an agency of
the State of Nebraska, and Leonard J. Sloup,
in his official capacity as Acting Tax
Commissioner, appellees.
___ N.W.2d ___
Filed October 14, 2016. No. S-15-700.
1. Administrative Law: Judgments: Appeal and Error. A judgment or
final order rendered by a district court in a judicial review pursuant to
the Administrative Procedure Act may be reversed, vacated, or modified
by an appellate court for errors appearing on the record.
2. ____: ____: ____. When reviewing an order of a district court under
the Administrative Procedure Act for errors appearing on the record,
the inquiry is whether the decision conforms to the law, is sup-
ported by competent evidence, and is neither arbitrary, capricious, nor
unreasonable.
3. Administrative Law: Statutes: Appeal and Error. To the extent that
the meaning and interpretation of statutes and regulations are involved,
questions of law are presented, in connection with which an appellate
court has an obligation to reach an independent conclusion irrespective
of the decision made by the court below.
4. Statutes: Appeal and Error. Statutory language is to be given its plain
and ordinary meaning, and an appellate court will not resort to inter-
pretation to ascertain the meaning of statutory words which are plain,
direct, and unambiguous.
5. Statutes. It is not within the province of the courts to read a meaning
into a statute that is not there or to read anything direct and plain out
of a statute.
6. Statutes: Legislature: Intent. In order for a court to inquire into a
statute’s legislative history, the statute in question must be open to con-
struction, and a statute is open to construction when its terms require
interpretation or may reasonably be considered ambiguous.
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STEWART v. NEBRASKA DEPT. OF REV.
Cite as 294 Neb. 1010
7. Statutes. If the language of a statute is clear, the words of such statute
are the end of any judicial inquiry regarding its meaning.
8. Statutes: Legislature: Intent. The intent of the Legislature may be
found through its omission of words from a statute as well as its inclu-
sion of words in a statute.
9. Statutes: Legislature: Presumptions. The Legislature is presumed
to know the general condition surrounding the subject matter of the
legislative enactment, and it is presumed to know and contemplate the
legal effect that accompanies the language it employs to make effective
the legislation.
Appeal from the District Court for Lancaster County: Jeffre
Cheuvront, District Judge, Retired. Reversed and remanded
with directions.
Tracy A. Oldemeyer and Andre R. Barry, of Cline, Williams,
Wright, Johnson & Oldfather, L.L.P., for appellants.
Douglas J. Peterson, Attorney General, and L. Jay Bartel for
appellees.
Heavican, C.J., Wright, Miller-Lerman, Cassel, K elch,
and Funke, JJ.
Cassel, J.
INTRODUCTION
Two taxpayers sold their capital stock of a corporation
and, in order to qualify for a special capital gains election,1
structured the transaction to comply with the literal terms of
a definitional statute.2 The disallowance of the election was
upheld below. In this appeal, we must decide whether either
the “economic substance” doctrine or the “sham transaction”
doctrine provided a basis to disallow the taxpayers’ election.
Because the statute is not open to interpretation and the plain
language demonstrates that the Legislature intended to confer
1
See Neb. Rev. Stat. § 77-2715.09(1) (Reissue 2009).
2
Neb. Rev. Stat. § 77-2715.08(2)(c) (Reissue 2009).
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STEWART v. NEBRASKA DEPT. OF REV.
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this tax benefit, the answer is no. We reverse, and remand with
directions the contrary decision below.
BACKGROUND
In determining a resident taxpayer’s liability for state income
tax, the Nebraska Revenue Act of 19673 allows the taxpayer to
make one election during his or her lifetime to exclude from
federal adjusted gross income those capital gains from the sale
of “capital stock of a corporation acquired by the individual
(a) on account of employment by such corporation or (b) while
employed by such corporation.”4 This exclusion is known as
the special capital gains election.
Brenton R. Stewart and Mary M. Stewart, both residents of
Nebraska, attempted to make this election regarding their sales
of capital stock in Pioneer Aerial Applicators, Inc. (Pioneer), to
Aurora Cooperative Elevator Company (Buyer).
Sale of Pioneer Stock
On February 26, 2010, the Stewarts and the one other share-
holder of Pioneer (collectively the Sellers) signed a contract
to sell their combined shares of Pioneer to Buyer. The con-
tract closing date was scheduled for March 1. Throughout this
appeal, all of the parties before us have asserted that the clos-
ing date—March 1—is the relevant date. We limit our discus-
sion accordingly.
The structure of the sale was critical to the tax exclusion.
Without additional shareholders, the sale was not eligible for
the special capital gains election because, otherwise, Pioneer
was not a qualified corporation. A qualified corporation is
one that
at the time of the first sale or exchange for which the
election is made, [has] (i) at least five shareholders and
(ii) at least two shareholders or groups of shareholders
3
See Neb. Rev. Stat. § 77-2701 et seq. (Reissue 2009, Cum. Supp. 2014 &
Supp. 2015).
4
§ 77-2715.09(1).
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STEWART v. NEBRASKA DEPT. OF REV.
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who are not related to each other and each of which owns
at least ten percent of the capital stock.5
Before the agreement was made, Pioneer had only three share-
holders. Thus, it did not meet element (i) of the definition.
Prior to the closing date, Mary was to sell one share of stock
to each of three officers of Buyer. This was to be done so that
Pioneer was a qualified corporation for the underlying stock
purchase with Buyer.
The purchase agreement explicitly laid out the restructuring
intended to make the Sellers’ sale to Buyer eligible for the spe-
cial capital gains election:
Ownership of Stock at Closing. It is the intention of
the parties to structure the transaction in a manner
that complies with the requirements of Neb. Rev. Stat.
§§ 77-2715.08 and 77-2715.09 (R.R.S. 2009) in order
to permit Sellers to subtract the capital gain from the
sale of the Stock from their federal adjusted income
pursuant to Neb. Rev. Stat. § 77-2715.9 [sic] (R.R.S.
2009) and exclude such gain from Nebraska income tax.
Accordingly, at least three (3) days prior to the Closing,
Mary [M.] Stewart agrees to transfer One (1) share of
the Pioneer Stock to each of [three officers of Buyer] in
exchange for non-recourse notes in an amount equal to
.011% of the Stock Purchase Price, which notes shall be
due and payable at the Closing; secured by a first lien in
the Pioneer Stock so transferred; and be subject to the
terms of this Agreement . . . .
On February 26, 2010, pursuant to the plan in the purchase
agreement, Mary entered into separate agreements for the
sales of stocks with the three officers, and Pioneer issued
new stock certificates for the four of them to reflect the sale.
At closing, on March 1, the Sellers and the officers executed
stock powers with Buyer and Buyer issued and delivered
checks to each in return.
5
§ 77-2715.08(2)(c).
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STEWART v. NEBRASKA DEPT. OF REV.
Cite as 294 Neb. 1010
Stewarts’ Special Capital
Gains Election
For the 2010 tax year, the Stewarts filed their federal and
state income tax returns as married filing jointly and, on their
state return, made a special capital gains election on the sale
of their shares of Pioneer stock to Buyer. The Stewarts chose
not to make the election on Mary’s February 26, 2010, sale
of shares of Pioneer stock to the three officers of Buyer, and
Mary paid capital gains tax for that sale.
The Nebraska Department of Revenue (Department) dis­
allowed the Stewarts’ special capital gains election for the sale
of capital stock to Buyer, on the basis that the capital stock was
not issued from a qualified corporation. With this disallowance,
the Department issued the Stewarts a “Notice of Deficiency
Determination” for a tax deficiency of $499,732.42, plus addi-
tional penalties and interest. The total amount assessed was
$549,158.01. The Stewarts contested this finding and filed a
petition for redetermination.
Tax Commissioner’s Decision
After an administrative hearing, the Tax Commissioner
entered an order denying the Stewarts’ petition for redeter-
mination. The Tax Commissioner concluded that at the time
of the sale for which the election was made, there were only
three shareholders of Pioneer and that Pioneer was not a
qualified corporation. In reaching this conclusion, the Tax
Commissioner acknowledged that the purchase agreement
between the Sellers and Buyer intended to add three more
shareholders through an additional stock transaction prior to
the closing date. However, the Tax Commissioner disregarded
Mary’s sale of stock to the three officers by applying the fed-
eral common-law “economic substance” and “sham transac-
tion” tax nonavoidance doctrines.
On appeal, the district court for Lancaster County affirmed
the order of the Tax Commissioner and his application of the
federal tax doctrines in reaching his decision. Thereafter, the
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STEWART v. NEBRASKA DEPT. OF REV.
Cite as 294 Neb. 1010
Stewarts timely appealed, and we granted their petition to
bypass review by the Nebraska Court of Appeals.
ASSIGNMENT OF ERROR
The Stewarts assign, consolidated and restated, that the
district court erred in applying the economic substance and
sham transaction doctrines in determining whether they were
entitled to the special capital gains election.
STANDARD OF REVIEW
[1,2] A judgment or final order rendered by a district court
in a judicial review pursuant to the Administrative Procedure
Act may be reversed, vacated, or modified by an appellate
court for errors appearing on the record.6 When review-
ing an order of a district court under the Administrative
Procedure Act for errors appearing on the record, the inquiry
is whether the decision conforms to the law, is supported by
competent evidence, and is neither arbitrary, capricious, nor
unreasonable.7
[3] To the extent that the meaning and interpretation of
statutes and regulations are involved, questions of law are
presented, in connection with which an appellate court has an
obligation to reach an independent conclusion irrespective of
the decision made by the court below.8
ANALYSIS
[4-6] Resolution of the Stewarts’ assignment of error
requires statutory interpretation. Thus, we begin by recalling
basic principles of statutory interpretation. Statutory language
is to be given its plain and ordinary meaning, and an appellate
6
Valpak of Omaha v. Nebraska Dept. of Rev., 290 Neb. 497, 861 N.W.2d
105 (2015).
7
Id.
8
Kerford Limestone Co. v. Nebraska Dept. of Rev., 287 Neb. 653, 844
N.W.2d 276 (2014).
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STEWART v. NEBRASKA DEPT. OF REV.
Cite as 294 Neb. 1010
court will not resort to interpretation to ascertain the meaning
of statutory words which are plain, direct, and unambiguous.9
It is not within the province of the courts to read a meaning
into a statute that is not there or to read anything direct and
plain out of a statute.10 In order for a court to inquire into a
statute’s legislative history, the statute in question must be
open to construction, and a statute is open to construction when
its terms require interpretation or may reasonably be consid-
ered ambiguous.11
Plain Meaning R eview
One statute defines a qualified corporation for the purposes
of a special capital gains election as one that
at the time of the first sale or exchange for which the
election is made, [has] (i) at least five shareholders and
(ii) at least two shareholders or groups of shareholders
who are not related to each other and each of which owns
at least ten percent of the capital stock.12
We note that the statute does not include any language dis-
cussing the context or the purpose for creating the quali-
fied corporation. Rather, the statute merely sets forth certain
requirements for the shareholders at one specific point in time
for the special capital gains election. Namely, the shareholder
requirements must be met at the time of the first sale or
exchange for which the election is made. Similarly, the stat-
ute authorizing the election13 contains no language discussing
underlying sales and transactions or requiring a purpose for
taking actions to comply with the statute other than qualifying
for the election.
9
Cargill Meat Solutions v. Colfax Cty. Bd. of Equal., 290 Neb. 726, 861
N.W.2d 718 (2015).
10
Id.
11
Synergy4 Enters. v. Pinnacle Bank, 290 Neb. 241, 859 N.W.2d 552 (2015).
12
§ 77-2715.08(2)(c) (emphasis supplied).
13
§ 77-2715.09.
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STEWART v. NEBRASKA DEPT. OF REV.
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For these reasons, we find no support in the plain language
of either statute to review transactions that came before the
“first sale or exchange for which the election is made” for a
special capital gains election. The plain language of the stat-
ute defining a qualified corporation has clearly focused on
the single point in time of the first sale for which the election
is made. Here, the parties agree the relevant date is March 1,
2010. Accordingly, the transactions occurring on February 26
are outside the scope of the statute.
Nonavoidance Doctrines
Nonetheless, the Department and the Tax Commissioner
argue that the economic substance and sham transaction doc-
trines require us to find a legitimate business purpose and eco-
nomic substance in the creation of the qualified corporation.
This would require us to consider events leading up to and in
anticipation of the first sale or exchange for which the elec-
tion is made. In support of this argument, they allege that the
doctrines “do not alter or modify plain statutory language, but,
rather, are judicial doctrines applied to effectuate the purpose
of a tax statute even if a transaction falls within the literal
language of a statute.”14
[7] We do not find this persuasive. The language of each
statute is clear and unambiguous. If the language of a statute
is clear, the words of such statute are the end of any judicial
inquiry regarding its meaning.15 Therefore, we are precluded
from looking beyond the words of the statute to apply addi-
tional elements for the special capital gains election or a quali-
fied corporation.
Our previous decisions in Kerford Limestone Co. v.
Nebraska Dept. of Rev.16 and Cargill Meat Solutions v. Colfax
14
Brief for appellees at 19.
15
Bridgeport Ethanol v. Nebraska Dept. of Rev., 284 Neb. 291, 818 N.W.2d
600 (2012).
16
Kerford Limestone Co. v. Nebraska Dept. of Rev., supra note 8.
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Cty. Bd. of Equal.17 support this analysis. We briefly explain
each one.
In Kerford Limestone Co., the taxpayer purchased a motor
grader for use in its limestone mining and manufacturing busi-
ness and claimed the motor grader was exempt from sales and
use tax under a Nebraska statute. The statute provided a per-
sonal property tax exemption for machinery or equipment “pur-
chased, leased, or rented by a person engaged in the business
of manufacturing for use in manufacturing.”18 Upon review of
the exemption, the Department rejected the taxpayer’s claim
on the grounds that the motor grader was not exempt manu-
facturing machinery or equipment. A revenue ruling provided:
“‘If machinery and equipment has [sic] uses in addition to its
manufacturing use, the manufacturing use must be greater than
50% of total use to qualify for the exemption.’”19
The Department did not base this rejection upon preexist-
ing Department regulations. Rather, it engaged in an ad hoc
interpretation of the statute, and, consequently, we granted no
deference to the agency’s proposed interpretation.
In our review of the statute, we determined that the
Department’s ruling was contrary to its plain language, because
the statute did not establish a percentage of total use that the
machinery or equipment had to be used for manufacturing in
order for it to qualify for the exemption.20 Instead, we found
that the Department had added this requirement and that it
lacked the authority to add to the language of the statute.
Because this court likewise could not do so in the guise of
statutory interpretation, we concluded that the taxpayer was
entitled to the exemption.
17
Cargill Meat Solutions v. Colfax Cty. Bd. of Equal., supra note 9.
18
§ 77-2701.47(1) (Supp. 2005).
19
Kerford Limestone Co. v. Nebraska Dept. of Rev., supra note 8, 287 Neb.
at 655, 844 N.W.2d at 279 (emphasis omitted). See Nebraska Department
of Revenue Ruling 1-05-1 (Oct. 12, 2005).
20
Kerford Limestone Co. v. Nebraska Dept. of Rev., supra note 8.
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STEWART v. NEBRASKA DEPT. OF REV.
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Similarly, in Cargill Meat Solutions, we refused to allow
a county board of equalization to add words to a statute. A
statute allowed a county board of equalization to “meet at any
time for the purpose of assessing any omitted real property . . .
and for correction of clerical errors . . . that result in a change
of assessed value.”21 The county board invoked this statute to
place mistakenly omitted personal property on the tax rolls.
However, the statute did not specify “personal” property; it
referred only to “real” property. Accordingly, we determined
that the county board was essentially attempting to add the
words “or personal” into the statute and that we could not read
the statute in that manner.
Once again, we confront an attempt to read additional words
into a clear and unambiguous statute. As in Kerford Limestone
Co. and Cargill Meat Solutions, the statutes before us are
not ambiguous. The Department and the Tax Commissioner
would have us insert business purpose and economic substance
requirements where the Legislature has not. We decline this
invitation. To do so would be contrary to the plain meaning of
the statute and our established precedents.
Legislative Intent
For the sake of completeness, we note that the application
of these federal tax doctrines in this case is also not supported
by the legislative intent plainly evident in the words of the
statute. The parties agree that these tax doctrines had been in
place at the federal level for over 50 years by the time the spe-
cial capital gains election statutes were enacted. Despite these
long-established and well-known concepts, the Legislature did
not include any language invoking either of them.
[8,9] The intent of the Legislature may be found through
its omission of words from a statute as well as its inclusion of
words in a statute.22 Additionally, the Legislature is p­ resumed
21
Neb. Rev. Stat. § 77-1507(1) (Cum. Supp. 2014) (emphasis supplied).
22
Kerford Limestone Co. v. Nebraska Dept. of Rev., supra note 8.
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to know the general condition surrounding the subject mat-
ter of the legislative enactment, and it is presumed to know
and contemplate the legal effect that accompanies the lan-
guage it employs to make effective the legislation.23 If the
Legislature wanted to impose either of these additional require-
ments, it could have done so. And, indeed, in other instances,
the Legislature has expressly invoked two similar concepts—
“economic activity” and “business purpose.”24 Its omissions
here are significant.
Mid City Bank
Finally, the Department and the Tax Commissioner suggest
our prior application of another federal tax doctrine in Mid City
Bank v. Douglas Cty. Bd. of Equal.25 should guide us to adopt
the economic substance and sham transaction doctrines in this
case. However, our decision in Mid City Bank was driven by
the facts of that case. And, even if our holding in Mid City
Bank could be applied to other cases, we do not find it control-
ling here.
Mid City Bank involved a conflict between two state stat-
utes that both applied to personal property of a taxpayer. The
personal property originally received a favorable tax treatment
under one state statute26 that allowed it to be assessed at a
lower value with a concurrent transfer of stock. However, the
taxpayer then made a federal tax election that treated the stock
transferred as an asset sale instead of a sale of stock—valuing
the personal property at a higher rate for federal tax purposes.
This triggered the application of a second state statute27 that
23
Id.
24
See, e.g., Neb. Rev. Stat. §§ 77-4931(6), 77-5540(6), and 77-5724(6)
(Reissue 2009).
25
Mid City Bank v. Douglas Cty. Bd. of Equal., 260 Neb. 282, 616 N.W.2d
341 (2000).
26
Neb. Rev. Stat. § 77-122 (Reissue 1996).
27
Neb. Rev. Stat. § 77-118 (Reissue 1996).
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allowed the county board of equalization to adjust property
values for state tax purposes to reflect the federal valuation of
the property.
This court ultimately was called upon to determine which
of these two state statutes controlled in light of the federal
tax election. Therefore, to give effect to both state statutes,
we invoked a federal tax doctrine to aid in our construction.
Here, we have no conflict between statutes or ambiguous lan-
guage. And no federal statutes apply in our analysis. We see
no reason to apply our reasoning in Mid City Bank to the case
before us.
CONCLUSION
Because the statutes at issue are clear and unambiguous, we
limited our review to the plain language. Pioneer was a quali-
fied corporation at the time of the first sale or exchange for
which the Stewarts made their special capital gains election.
Having met all the statutory requirements, the Stewarts were
entitled to make the election. We therefore reverse the decision
of the district court and remand the cause to the district court
with directions to reverse the decision of the Tax Commissioner
disallowing the special capital gains election.
R eversed and remanded with directions.
Stacy, J., not participating.