Aberfoyle Manufacturing Company v. Clayton

143 S.E.2d 113 (1965) 265 N.C. 165

ABERFOYLE MANUFACTURING COMPANY
v.
Ivey L. CLAYTON, Acting Commissioner of Revenue.

No. 200.

Supreme Court of North Carolina.

July 23, 1965.

Moore & Van Allen, by Robert W. King, Jr., Charlotte, for plaintiff appellant.

Atty. Gen. T. W. Bruton and Asst. Atty. Gen. Charles D. Barham, Jr., for defendant appellee.

PARKER, Justice.

Plaintiff has one assignment of error reading as follows: "For that the court erred in the signing and entry of judgment dismissing plaintiff's suit for refund, the facts, as appear on the face of the record, being insufficient to support the judgment." This assignment of error presents for review the question as to whether the agreed statement of facts support the judgment, and whether error of law appears on the face of the judgment. Strong's North Carolina Index, Vol. 1, Appeal and Error, § 21.

This statement appears in the agreed statement of facts: "If the Commissioner's contention with respect to the $4,120,418.65 unrecognized gain is sustained, plaintiff would not be entitled to recover any amount because this gain alone would more than offset the $231,546.63 in operating losses without regard to the treatment given the $97,730 in dividends." This quoted statement in the agreed statement of facts presents this basic question for decision, as stated in plaintiff's brief: "When on the liquidation of a wholly-owned subsidiary a parent corporation has a gain which under G.S. Sec. 105-144(c) is not recognized is such gain nontaxable income which the parent must offset against its operating losses in computing the G.S. Sec. 105-147(9) (d) net operating loss deduction?" This quoted statement presents this basic question for decision, as stated in defendant's brief: "Does a capital gain which qualifies for nonrecognition as taxable income under the provisions of G.S. 105-144(c) constitute `income from all sources in the year including income not taxable under this (Income Tax) Article of the Revenue Act' in determining net economic loss under G.S. § 105-147(6) (d) (now G.S. § 105-147(9) (d))?" G.S. § 105-147 (6) (d) is the same section of our Income Tax Statute as G.S. § 105-147(9) (d), and is expressed in substantially the same words, except that G.S. § 105-147(9) (d) (2) was rewritten by Ch. 1169, p. 1610, 1963 Session Laws. This 1963 rewriting of G.S. § 105-147(9) (d) (2) by the General Assembly is not relevant here on the basic question specifically stated above. This section is codified as G.S. § 105-147(6) (d) in G.S. Vol. 2C, 1957 Cumulative Supplement to Recompiled Vol. 2C, 1950, and is codified as G.S. § 105-147(9) (d) in G.S. Vol. 2C—Replacement 1958, and as G.S. § 105-147(9) (d) in G.S. Vol. 2D—Replacement 1965. It will hereafter be referred to as G.S. § 105-147(9) (d).

Plaintiff makes these contentions: "Gain realized by plaintiff in the liquidation of a wholly-owned subsidiary should not reduce the carry-over loss deduction authorized under G.S. § 105-147(9) (d)." Upon the liquidation of its subsidiaries, it merely transferred its subsidiaries' assets to its own books. G.S. § 105-144(c) provides that any "gain" attendant upon such transfer will not be recognized for tax purposes. The nonrecognition of gain on the liquidation of a subsidiary might well be a temporary condition, i. e., subsequent sale of the property by the parent corporation can result in the taxation of this gain.

G.S. § 105-144(c) reads:

"No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation, if the corporation receiving such property was on the date of the adoption of the plan of liquidation and has continued to be at all times until the receipt of the property the owner of stock (in such other corporation), possessing at least eighty per centum (80%) of the total combined voting power of all classes of stock entitled to vote, and the owner of at least eighty per centum (80%) of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends)."

It seems clear that the nonrecognition principle embodied in G.S. § 105-144(c) was to permit a corporation to simplify its corporate structure, and to relieve a parent corporation from tax liability liquidation gains realized in a particular year as a result of corporate liquidation. However, the instant case on the precise basic question above stated does not involve taxation of liquidation gains or the public policy embodied in G.S. § 105-144(c). The instant case is concerned with the application of the net economic losses provisions of G.S. § 105-147(9) (d), and the only pertinent public policy considerations are those which underlie this particular section of the statute.

The net economic losses deduction claimed by plaintiff is described and defined in G.S. § 105-147(9) (d). The pertinent parts of G.S. § 105-147 so far as the instant case is concerned on the precise basic question above stated are as follows:

"§ 105-147. Deductions.—In computing net income there shall be allowed as deductions the following items:

* * * * * *

"(9) Losses of such nature as designated below:

* * * * * *

"d. Losses in the nature of net economic losses sustained in any or all of the five preceding income years arising from business transactions or to capital or property as specified in a and b above subject to the following limitations:

"1. 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 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.

"2. The net economic loss for any year shall mean the amount by which allowable deductions for the year other than contributions, personal exemptions, prior year losses, taxes on property held for personal use, and interest on debts incurred for personal rather than business purposes SHALL EXCEED INCOME FROM ALL SOURCES IN THE YEAR INCLUDING ANY INCOME NOT TAXABLE UNDER THIS ARTICLE." (Emphasis ours.) ("2" is quoted as it appears prior to its being rewritten by the 1963 Session of the General Assembly. As rewritten in Ch. 1169, p. 1610, 1963 Session Laws, it reads:

"2. 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.")

The General Assembly was under no constitutional or other legal compulsion to permit a net economic loss or losses deduction for a corporation from taxable income in a subsequent year or years. It enacted the carry-over provisions of G.S. § 105-147(9) (d) "purely as a matter of grace, gratuitously conferring a benefit but limiting such benefit to the net economic loss of the taxpayer after deducting therefrom the allocable portion of such taxpayer's nontaxable income." Dayton Rubber Co. v. Shaw, Comr. of Revenue, 244 N.C. 170, 92 S.E.2d 799.

It appears from the agreed statement of facts that during plaintiff's fiscal and tax year ending 30 June 1960, it liquidated two wholly-owned subsidiaries and realized a gain of $4,120,418.65. This gain was not included in plaintiff's state taxable income for the year 1960, because the gain qualified for nonrecognition under the provisions of G.S. § 105-144(c). Even though this liquidated gain of $4,120,418.65 did not constitute taxable income to plaintiff, it seems manifest that it did in fact constitute a gain and increased plaintiff's assets for the year by $4,120,418.65 over the value of plaintiff's two wholly-owned subsidiaries as carried in plaintiff's assets before the liquidation.

For its three fiscal and tax years ending 30 June 1958, 1959, and 1960, plaintiff had net operating losses apportionable to North Carolina under G.S. § 105-134 in the total amount of $231,546.63. G.S. § 105-147(9) (d) (2), in force at all times relevant here, provides in relevant part: "The net economic loss for any year shall mean the amount by which allowable deductions for the year * * * shall exceed income from all sources in the year including any income not taxable under this article."

G.S. § 105-132(1) reads: "The word `taxpayer' includes any individual, corporation, or fiduciary subject to the tax imposed by this article."

G.S. § 105-140 reads: "The words `net income' mean the gross income of a taxpayer, less the deductions allowed by this article."

G.S. § 105-141(a) reads in relevant part: "The words `gross income' mean the income of a taxpayer derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, business, commerce or sales, or dealings in property, whether real or personal, located in this or any other state or any other place, growing out of the ownership or use of or interest in such property, also from interest, rent, dividends, securities, or the transactions of any business carried on for gain or profit, or gains or profits, and income derived from any source whatever and in whatever form paid." (Emphasis ours.)

In our opinion, and we so hold, plaintiff's gain in the amount of $4,120,418.65 realized from the sale of its two wholly-owned subsidiaries by reason of our statutory definition of "gross income" constitutes "income from all sources in the year including any income not taxable under this article," as stated in G.S. § 105-147(9) (d) (2). Consequently, plaintiff is not entitled to any net economic losses deduction as sought in its complaint, and is not entitled to recover anything sought in this suit, because as stated in the agreed statement of facts "this gain [$4,120,418.65] alone would more than offset the $231,546.63 in operating losses without regard to the treatment given the $97,730.00 in dividends."

The Federal cases and statutes relied on by plaintiff are clearly distinguishable. We are here concerned with our own statutes.

Having reached this conclusion, the question presented for decision in plaintiff's brief reading: "When dividends received by a parent corporation from a subsidiary are deductible under G.S. § 105-147(7) (because all of the subsidiary's income was subject to taxation by North Carolina) does the parent thereby receive nontaxable income which must be offset against its operating losses in computing the G.S. § 105-147(9) (d) net operating loss deduction?", has become moot.

The agreed statement of facts supports Judge Riddle's judgment, and no error of law appears on the face of the record. The Judgment below is

Affirmed.