Duke Energy Corp. v. South Carolina Department of Revenue

THE STATE OF SOUTH CAROLINA
In The Supreme Court
Duke Energy Corporation, Petitioner,
v.
South Carolina Department of Revenue, Respondent.
Appellate Case No. 2014-002736
ON WRIT OF CERTIORARI TO THE COURT OF APPEALS
Appeal from the Administrative Law Court
Ralph King Anderson, III, Administrative Law Judge
Opinion No. 27606
Heard November 18, 2015 – Filed February 17, 2016
AFFIRMED AS MODIFIED
Burnet Rhett Maybank, III, of Nexsen Pruet, LLC, of
Columbia; Jeffrey A. Friedman, of Washington, D.C.,
Eric S. Tresh and Maria M. Todorova, of Atlanta,
Georgia, all of Sutherland, Asbill & Brennan, LLP, all
for Petitioner Duke Energy Corporation.
John Marion S. Hoefer, Tracey Colton Green, and
John William Roberts, all of Willoughby & Hoefer,
PA, of Columbia; and Milton Gary Kimpson, of
Columbia, all for Respondent South Carolina
Department of Revenue.
CHIEF JUSTICE PLEICONES: We granted certiorari to review the Court of
Appeals' decision affirming the administrative law judge's finding that the principal
recovered from the sale of short-term securities was not includible in the sales
factor of the multi-factor apportionment formula, and, therefore, Duke Energy was
not entitled to a tax refund. See Duke Energy Corp. v. S.C. Dep't of Revenue, 410
S.C. 415, 764 S.E.2d 712 (Ct. App. 2014). We affirm as modified.
FACTS
The controversy in this case arises from the South Carolina Department of
Revenue's ("SCDOR") computation of Duke Energy's taxable income.
Duke Energy generates and sells electricity. Because Duke Energy does business
in both North Carolina and South Carolina, it must apportion its income to
determine its income tax liability in South Carolina. See S.C. Code Ann. § 12-6-
2210(B) (2014)1 ("If a taxpayer is transacting or conducting business partly within
and partly without this State, the South Carolina income tax is imposed upon a
base which reasonably represents the proportion of the trade or business carried on
within this State.").
Duke Energy has a treasury department responsible for purchasing and selling
securities, such as commercial paper, corporate bonds, United States Treasury bills
and notes, United States money market preferred securities, loan repurchase
agreements, and municipal bonds. In 2002, Duke Energy filed amended corporate
tax returns with the SCDOR for the income tax years of 1978 to 2001, seeking a
total refund of $126,240,645 plus interest.2 In the amended returns, Duke Energy
1
Section 12-6-2210(B) was enacted in 1995 and effective for all taxable years after
1995. The language of the statute applicable to years prior to § 12-6-2210(B)
varies slightly, but the effect is the same. See S.C. Code Ann. § 12-7-250 (1976).
2
Duke Energy requested recalculation of its tax liability for tax years 1978 to
2001. The ALC found Duke Energy's claims for tax years 1978 to 1993 were
untimely, and this issue has not been appropriately preserved for review by this
Court. See Rule 208(b)(1)(D), SCACR (stating an issue which is not argued in the
sought to include the principal recovered from the sale of short-term securities
from 1978 to 1999 in the sales factor of the multi-factor apportionment formula. In
its original returns, Duke Energy included only the interest or gain from those
transactions.
The SCDOR denied the refund request. Duke Energy appealed the decision to the
SCDOR's Office of Appeals. The Office of Appeals denied Duke Energy's refund
request, finding, inter alia, that including recovered principal in the apportionment
formula: was contrary to the SCDOR's long-standing administrative policy, would
lead to an absurd result, and would misrepresent the amount of business Duke
Energy does in South Carolina.
Duke Energy filed a contested case in the Administrative Law Court ("ALC"). The
ALC was asked to determine whether Duke Energy, in its amended returns,
properly included the principal recovered from the sale of short-term securities in
the sales factor of the multi-factor apportionment formula. The parties filed cross-
motions for summary judgment. Duke Energy claimed it was required by S.C.
Code Ann. § 12-6-2280 (1995) to include all monies recovered from any sales in
the "total sales" computation of the apportionment calculation, including the
principal recovered from the sale of short-term securities. The SCDOR disagreed,
and the ALC granted summary judgment to the SCDOR on this issue.
Specifically, the ALC found this issue is novel in South Carolina, and adopted the
reasoning of states that have found including the principal recovered from the sale
of short-term investments in an apportionment formula would lead to "absurd
results" by greatly distorting the calculation, and by defeating the intent and
purpose of the applicable statutes.
The Court of Appeals affirmed, albeit applying a different analysis.
We granted Duke Energy's petition for a writ of certiorari to review the Court of
Appeals' decision.
brief is deemed abandoned and precludes consideration on appeal). Therefore, the
law cited herein relates to tax years 1994 to 2001, unless otherwise indicated.
ISSUE
Did the Court of Appeals err in affirming the ALC's
ruling that the principal recovered from the sale of short-
term securities is not includable in the sales factor of the
multi-factor apportionment formula?
LAW/ANALYSIS
The Court of Appeals found the ALC correctly concluded the principal recovered
from the sale of short-term securities is not includable in the sales factor of the
multi-factor apportionment formula, and, therefore, summary judgment in favor of
the SCDOR on this issue was proper. We agree; however, we disagree with the
analysis applied by the Court of Appeals. Accordingly, we affirm as modified.
Questions of statutory interpretation are questions of law, which this Court is free
to decide without any deference to the tribunal below. Centex Int'l, Inc. v. S.C.
Dep't of Revenue, 406 S.C. 132, 139, 750 S.E.2d 65, 69 (2013) (citing CFRE, LLC
v. Greenville Cnty. Assessor, 395 S.C. 67, 74, 716 S.E.2d 877, 881 (2011)). The
language of a tax statute must be given its plain and ordinary meaning in the
absence of an ambiguity therein. Beach v. Livingston, 248 S.C. 135, 139, 149
S.E.2d 328, 330 (1966) (citation omitted). However, regardless of how plain the
ordinary meaning of the words in a statute, courts will reject that meaning when to
accept it would lead to a result so plainly absurd that it could not have been
intended by the General Assembly. Kiriakides v. United Artists Commc'ns, Inc.,
312 S.C. 271, 275, 440 S.E.2d 364, 366 (1994) (citing Stackhouse v. Cnty. Bd. of
Comm'rs for Dillon Cnty., 86 S.C. 419, 422, 68 S.E. 561, 562 (1910));3 Kennedy v.
S.C. Ret. Sys., 345 S.C. 339, 351, 549 S.E.2d 243, 249 (2001) (citation omitted)
3
We note there is a discrepancy between the South Carolina Reports and the South
Eastern Reporter as to the proper party names in Stackhouse. The South Eastern
Reporter reflects the case citation as "Stackhouse v. Rowland, 68 S.E. 561 (1910)."
However, the South Carolina Reports reflects the case citation as "Stackhouse v.
Cnty. Bd. of Comm'rs for Dillon Cnty., 86 S.C. 419 (1910)." Because the official
publication of the decisions of this Court is the South Carolina Reports, we defer to
its citation as to the proper party names.
(finding statutes should not be construed so as to lead to an absurd result). If
possible, the Court will construe a statute so as to escape the absurdity and carry
the intention into effect. Kiriakides, 312 S.C. at 275, 440 S.E.2d at 366 (citing
Stackhouse, 86 S.C. at 422, 68 S.E. at 562). In so doing, the Court should not
concentrate on isolated phrases within the statute, but rather, read the statute as a
whole and in a manner consonant and in harmony with its purpose. CFRE, 395
S.C. at 74, 716 S.E.2d at 881 (citing State v. Sweat, 379 S.C. 367, 376, 665 S.E.2d
645, 650 (Ct. App. 2008), aff'd, 386 S.C. 339, 688 S.E.2d 569 (2010)); S.C. State
Ports Auth. v. Jasper Cnty., 368 S.C. 388, 398, 629 S.E.2d 624, 629 (2006) (citing
Laurens Cnty. Sch. Dists. 55 & 56 v. Cox, 308 S.C. 171, 174, 417 S.E.2d 560, 561
(1992)).
In South Carolina, if a taxpayer is transacting business both within and without the
State, an apportionment formula determines the fraction of business conducted in
South Carolina—the tax "base"—upon which the taxpayer's state income tax is
calculated. S.C. Code Ann. § 12-6-2210(B) (2014). Regarding the apportionment
statutes, "the statutory policy is designed to apportion to South Carolina a fraction
of the taxpayer's total income reasonably attributable to its business activity in this
State." Emerson Elec. Co. v. S.C. Dep't of Revenue, 395 S.C. 481, 485–86, 719
S.E.2d 650, 652 (2011) (emphasis supplied) (quoting U.S. Steel Corp. v. S.C. Tax
Comm'n, 259 S.C. 153, 156, 191 S.E.2d 9, 10 (1972)).
The applicable apportionment formula in this case is the multi-factor formula. The
multi-factor formula is a fraction, the numerator of which is the property factor,
plus the payroll factor, plus twice the sales factor, and the denominator of which is
four. S.C. Code Ann. § 12-6-2252 (2014).4
The issue presented in this case regards the calculation of the sales factor within
the multi-factor apportionment statute. For the majority of the years at issue, the
statute defining the sales factor provided:
4
Section 12-6-2252 was enacted in 2007. Its language, however, is effectively
identical to the predecessor statutes that apply to this case: (1) former section 12-7-
1140 (1976), which applied to tax years 1978 to 1995; and (2) former section 12-6-
2250 (2000), which applied to tax years 1996 to 2001. Section 12-7-1140 was
repealed and section 12-6-2250 was enacted in 1995. Section 12-6-2250 was
repealed in 2007 when section 12-6-2252 was enacted.
(A) The sales factor is a fraction in which the numerator
is the total sales of the taxpayer in this State during the
taxable year and the denominator is the total sales of the
taxpayer everywhere during the taxable year.
...
(C) The word "sales" includes, but is not limited to:
...
(2) sales of intangible personal property and receipts
from services if the entire income-producing activity is
within this State. If the income-producing activity is
performed partly within and partly without this State,
sales are attributable to this State to the extent the
income-producing activity is performed within this State.
Section 12-6-22805 (emphasis supplied).
In addressing this issue, the Court of Appeals limited its analysis to the concept of
"receipts," stating, "We find . . . the issue does not depend on the difference
between 'gross' and 'net' receipts. Instead, the issue turns on whether the return of
the principal of these investments is properly characterized as a 'receipt' in the first
place." The Court of Appeals cited Webster's Dictionary to define "receipt," which
is the only authority cited by the court in its analysis on this issue. The Court of
Appeals concluded the profit received from the sale of short-term securities was
properly considered a "receipt," but the principal of the investment was Duke
5
Section 12-6-2280 was enacted in 1995. The prior provision, S.C. Code Ann. §
12-7-1170 (1976), required the same calculation, and also utilized the term "total
sales."
As discussed infra, the definition of the sales factor was changed in 2007. Prior to
tax year 1996, former South Carolina Code § 12-7-1170 (1976), provided for the
same calculation of the sales factor.
Energy's "own money," and, therefore, was not a "receipt," and may not be
included in the apportionment formula. We find the Court of Appeals' analysis
employs nomenclature that is subject to misinterpretation.
Specifically, we find the Court of Appeals' focus on the term "receipt" has the
potential to generate confusion because the term is only relevant to the single-
factor apportionment formula under S.C. Code Ann. § 12-6-2290 (2014), which is
not at issue in this case. Rather, it is undisputed on certiorari to this Court that
section 12-6-2252, the multi-factor apportionment formula, applies in this case,
which uses the term "total sales." Accordingly, we find the appropriate
determination is whether principal recovered from the sale of short-term securities
could be included as "total sales" in the sales factor of the multi-factor formula, the
relevant term under the apportionment statutes.
Whether principal recovered is includable in the total sales under the
apportionment statutes is a novel issue in South Carolina. We agree with the ALC
that extra-jurisdictional cases addressing this issue are instructive, and as explained
infra, we agree with the states that have found the inclusion of principal recovered
from the sale of short-term securities in an apportionment formula leads to absurd
results by distorting the sales factor within the formula, and by defeating the
legislative intent of the apportionment statutes.
In American Telephone and Telegraph Co., AT&T claimed all receipts received
upon the sale of investment paper should be included in the multi-factor allocation
formula. See Am. Tel. & Tel. Co. v. Dir., Div. of Taxation, 194 N.J. Super. 168,
172, 476 A.2d 800, 802 (Super. Ct. App. Div. 1984). The court disagreed,
reasoning:
It is no true reflection of the scope of AT & T's business
done within and without New Jersey to allocate to the
numerator or the denominator of the receipts fraction the
full amount of money returned to AT & T upon the sale
or redemption of investment paper. To include such
receipts in the fraction would be comparable to
measuring business activity by the amount of money that
a taxpayer repeatedly deposited and withdrew from its
own bank account. The bulk of funds flowing back to
AT & T from investment paper was simply its own
money. Whatever other justification there is for
excluding such revenues from the receipts fraction, it is
sufficient to say that to do otherwise produces an absurd
interpretation of [the apportionment statute]. "It is
axiomatic that a statute will not be construed to lead to
absurd results. All rules of construction are subordinate
to that obvious proposition. [Even the rule of strict
construction] does not mean that a ridiculous result shall
be reached because some ingenious path may be found to
that end."
Id. at 172–73, 476 A.2d at 802 (quoting State v. Provenzano, 34 N.J. 318, 322, 169
A.2d 135, 137 (1961)); see also, Sherwin-Williams Co. v. Ind. Dep't of State
Revenue, 673 N.E.2d 849 (Ind. T.C. 1996) (finding persuasive the Superior Court
of New Jersey, Appellate Division's rationale concluding any interpretation of the
apportionment statutes allowing for the inclusion of principal produced absurd
results).
Similarly, in Walgreen Arizona Drug Co., the appellate court was tasked with
determining whether "total sales" in the sales factor of the apportionment formula
included principal recovered from short-term investments. See Walgreen Ariz.
Drug Co. v. Ariz. Dep't of Revenue, 209 Ariz. 71, 97 P.3d 896 (Ct. App. 2004).
The Arizona Court of Appeals found the reinvestment of funds, for example, in
inventory, reflected ongoing business activity and did not "artificially distort the
sales factor as does inclusion of unadjusted gross receipts from investment and
reinvestment of intangibles."6 Id. at 74, 97 P.3d at 899. The Arizona court further
found including the principal from the sale of investment intangibles in the
apportionment statute would create a tax loophole for businesses engaged in sales
within and without the state, which was neither intended by the Arizona
legislature, nor required by the plain meaning. Id. at 77, 97 P.3d at 902.
Accordingly, the court held the return of principal from the types of short term
6
The statute in Arizona applicable at the time defined "sales" as "all gross
receipts." See Ariz. Rev. Stat. Ann. §§ 43-1131(5), 43-1145 (1983).
investments at issue were not includable in the sales factor denominator.7 Id.
We find the inclusion of principal recovered from the sale of short-term securities
distorts the sales factor and does not reasonably reflect a taxpayer's business
activity in this state. See Emerson Elec. Co., 395 S.C. at 485–86, 719 S.E.2d at
652 (citation omitted) ("the statutory policy [as to the apportionment formulas] is
designed to apportion to South Carolina a fraction of the taxpayer's total income
reasonably attributable to its business activity in this State."). We further find the
resulting distortion leads to absurd results that could not have been intended by the
General Assembly. See Kiriakides, 312 S.C. at 275, 440 S.E.2d at 366 (citation
omitted) (stating courts will reject that meaning when to accept it would lead to a
result so plainly absurd that it could not have been intended by the General
Assembly).
The record in this case demonstrates conclusively that a taxpayer could manipulate
the sales factor by the simple expediency of a series of purchases using the same
funds. As was indicated by the Court of Appeals, the following illustration
elucidates why, from a common-sense standpoint, Duke Energy's position leads to
absurd results. See Kiriakides, 312 S.C. at 275, 440 S.E.2d at 366.
Duke Energy's Assistant Treasurer and General Manager of Long Term
Investments, Sherwood Love, testified by way of deposition that the short-term
securities transactions at issue consisted of Duke Energy's Cash Management
Group investing large sums of money "pretty much every day," which were
typically left outstanding for less than thirty days. Mr. Love's deposition provided
an example of a typical transaction controlled by the Cash Management Group.
Specifically, the example provided: $14,982,900 was invested in a short-term
instrument on August 7, 1996; the instrument was then sold eight days later on
August 15, collecting $17,000 in interest; Duke Energy then immediately
reinvested the approximately $15,000,000 in another short-term instrument. Under
Duke Energy's theory, the transaction described yields a $15 million "sale" to be
included as "total sales" in the denominator of the sales factor, as it was a "sale"
outside of South Carolina. Further extrapolating under Duke Energy's theory, if
the Cash Management Group had decided instead to sell the instrument on August
7
The types of short-term investments at issue were similar to those at issue in the
instant case: U.S. Treasury bonds, notes, and bills; and bank certificates of deposit.
10, immediately reinvest the money, and sell the second instrument on August 15,
its "total sales" in the denominator of the sales factor during the same time period
as above would be approximately $30 million in principal alone. As a more
extreme example, we could assume Duke Energy sold and reinvested the $15
million on August 9, August 11, August 13, and August 15. Duke Energy's theory
applied to this example would result in its "total sales" outside South Carolina for
purposes of the apportionment formula being reported as approximately $60
million dollars in principal alone. Accordingly, under Duke Energy's theory, the
frequency of investments made within that eight day window would dictate how
large or small Duke Energy's "total sales" would be reflected in the denominator of
the sales factor of the multi-factor apportionment formula. The artificial inflation
of the denominator of the sales factor allows a taxpayer to significantly reduce its
tax liability in South Carolina in a manner clearly inconsistent with the legislative
intent and logical interpretation of the term "reasonably attributable." See Emerson
Elec. Co., 395 S.C. at 485–86, 719 S.E.2d at 652 (citation omitted) ("the statutory
policy [as to the apportionment formulas] is designed to apportion to South
Carolina a fraction of the taxpayer's total income reasonably attributable to its
business activity in this State.").
We find the potentially drastic impacts such cash management decisions have on
determining a company's business activity demonstrates the absurdity that results
from Duke Energy's position. Duke Energy's view would require two taxpayers,
equal in all respects except for their level of investment activity, to report
drastically different results in the taxable income reported through application of
the multi-factor apportionment formula due solely to the difference in frequency at
which the taxpayers roll over their investments. Plainly, counting the same
principal that is invested and sold repeatedly as "total sales" can radically
misrepresent any taxpayer's business activity.
We find this illustration further demonstrates Duke Energy's position could not
have been intended by the General Assembly, and defeats the legislative intent of
the apportionment statutes—to reasonably represent the proportion of business
conducted within South Carolina. See S.C. Code Ann. § 12-6-2210(B) (2014) ("If
a taxpayer is transacting or conducting business partly within and partly without
this State, the South Carolina income tax is imposed upon a base which reasonably
represents the proportion of the trade or business carried on within this State.");
Kiriakides, 312 S.C. at 275, 440 S.E.2d at 366 (citation omitted) (finding
regardless of how plain the ordinary meaning of the words in a statute, courts will
reject that meaning when to accept it would lead to a result so plainly absurd that it
could not have been intended by the General Assembly).
Further, the General Assembly enacted S.C. Code Ann. § 12-6-2295 (2007),
defining the term "sales" in the apportionment formulas, effective for taxable years
after 2007. Section 12-6-2295(B) explicitly excludes from the sales factor: (1)
"repayment, maturity, or redemption of the principal of a loan, bond, or mutual
fund or certificate of deposit or similar marketable instrument;" and (2) "the
principal amount received under a repurchase agreement or other transaction
properly characterized as a loan." We find the General Assembly's decision to
define "sales" in § 12-6-2295, supports our finding that the legislative intent has
always been to exclude such distortive calculations from the apportionment
formulas. See Stuckey v. State Budget & Control Bd., 339 S.C. 397, 401, 529
S.E.2d 706, 708 (2000) ("A subsequent statutory amendment may be interpreted as
clarifying original legislative intent."); Cotty v. Yartzeff, 309 S.C. 259, 262 n.1, 422
S.E.2d 100, 102 n.1 (1992) (citation omitted) (noting light may be shed upon the
intent of the General Assembly by reference to subsequent amendments which may
be interpreted as clarifying it); see also See Emerson Elec. Co., 395 S.C. at 485–
86, 719 S.E.2d at 652 (citation omitted) ("the statutory policy [as to the
apportionment formulas] is designed to apportion to South Carolina a fraction of
the taxpayer's total income reasonably attributable to its business activity in this
State.").
Accordingly, we find the inclusion of principal recovered from the sale of short-
term securities produces absurd results, which could not have been intended by the
General Assembly. Therefore, we affirm as modified the decision by the Court of
Appeals. See Duke Energy Corp. v. S.C. Dep't of Revenue, 410 S.C. 415, 764
S.E.2d 712 (Ct. App. 2014).
The Court of Appeals' decision is therefore
AFFIRMED AS MODIFIED
HEARN, J., and Acting Justices James E. Moore, Robert E. Hood and G.
Thomas Cooper, Jr., concur.