Somerset Telephone Company v. State Tax Assessor
259 A.3d 97, 2021 ME 26 (2021)
Rule of Law:
A state may constitutionally deny a corporate taxpayer a net operating loss carryforward deduction where state statutes do not explicitly authorize such a deduction, even if the inability to claim it stems from the offsetting effect of nonunitary, extraterritorial income in a prior tax year, provided the state does not directly tax that nonunitary income.
Facts:
- Somerset Telephone Company, a small landline telecommunications company, was part of a unitary business group known as the TDS Group, comprising about 180 corporations during the 2012 and 2013 tax years.
- Only some members of the TDS Group, including Somerset, conducted business activity in Maine, while others operated outside the state.
- In the 2012 tax year, the TDS Group's unitary business (the core business activities) experienced a loss of approximately $131 million.
- Concurrently in 2012, other members of the TDS Group earned approximately $149 million in nonunitary income from business activities occurring entirely outside Maine.
- When the unitary loss and nonunitary income were netted, the TDS Group's federal taxable income for 2012 was a positive approximately $18 million.
- Because its 2012 federal taxable income was positive, the TDS Group was not eligible for a federal net operating loss carryforward deduction to the 2013 tax year.
- Somerset requested a ruling from Maine Revenue Services to carry forward the 2012 $131 million unitary business loss as a deduction from its 2013 federal taxable income for Maine tax purposes, arguing that disallowing the deduction would increase its 2013 Maine tax liability due to the 2012 extraterritorial nonunitary income.
Procedural Posture:
- Somerset filed its 2013 Maine corporate income tax return showing positive Maine taxable income and a state income tax liability.
- Somerset later filed an amended 2013 return, which listed an adjusted federal taxable income reduced by the TDS Group’s 2012 $131 million net operating loss, resulting in a decreased tax liability.
- Somerset requested a partial refund from the State Tax Assessor to account for the difference in tax liability.
- The Assessor denied Somerset's refund claim and its subsequent request for reconsideration.
- In April 2017, Somerset filed a five-count petition for review and de novo determination in the Superior Court (Kennebec County) against the Assessor.
- The matter was transferred to the Business and Consumer Docket (a trial court level).
- Somerset moved for a summary judgment on its petition.
- The trial court, after a nontestimonial hearing, issued an order denying Somerset's motion for summary judgment and, based on the parties' agreement, entered a final judgment in the Assessor's favor. Somerset then appealed to the Maine Supreme Judicial Court.
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Issue:
Does the Maine corporate income tax scheme, which begins with federal taxable income and does not explicitly allow for a net operating loss carryforward deduction when a prior year's unitary business loss was offset by nonunitary, extraterritorial income, unconstitutionally impose an indirect tax on extraterritorial income?
Opinions:
Majority - Humphrey, J.
No, the Maine corporate income tax scheme, by not allowing a net operating loss carryforward deduction in these circumstances, does not unconstitutionally impose an indirect tax on extraterritorial income. The Court reasoned that Maine's tax statutes define "Maine net income" based on the federal taxable income for the current taxable year, with specific statutory modifications. The statutes in effect for the 2012 and 2013 tax years did not explicitly provide for an addition or subtraction based on a federal loss carryforward that would have hypothetically existed if the unitary group had been configured differently or if nonunitary income had not offset unitary losses in a prior year. The Court distinguished Fairchild Semiconductor Corp. v. State Tax Assessor (1999 ME 170) by noting that Fairchild involved recalculating federal taxable income for the current tax year due to different federal and state unitary group compositions, not creating a hypothetical carryover from another year. The Court emphasized that tax deductions are matters of legislative grace and the Constitution does not require states to adopt specific methods for apportionment or to compare actual federal taxable income with hypothetical scenarios. Since Maine's statutes did not authorize the carryover and no nonunitary income was directly taxed, the scheme was constitutional because it reflected a "reasonable effort[] properly to allocate... between taxable and tax-exempt income" (Hunt-Wesson, Inc. v. Franchise Tax Bd., 528 U.S. 458, 466 (2000)).
Dissenting - Horton, J.
Yes, the Maine corporate income tax scheme, by not allowing a net operating loss carryforward deduction in these circumstances, does unconstitutionally impose an indirect tax on extraterritorial income and contradicts previous Maine Supreme Judicial Court precedent. Justice Horton argued that the majority's decision contradicts Hunt-Wesson, Inc. v. Franchise Tax Bd. (2000), which held that a state cannot limit or deny a tax deduction solely because the taxpayer received income the state cannot constitutionally tax. The dissent contended that the majority's ruling is also contrary to Fairchild Semiconductor Corp. v. State Tax Assessor (1999 ME 170), where the Court previously held that a unitary business group's net operating loss deduction for Maine tax purposes should be calculated based only on the income of the unitary business, separate from nonunitary income. The dissent argued that the sole reason the TDS Group could not take a federal net operating loss carryforward deduction was the offsetting effect of its nonunitary income, which should be disregarded for Maine tax purposes, just as it was for the 2012 tax year calculation for Maine tax liability. Justice Horton concluded that nontaxable income must be excluded entirely and for all purposes, not partially or only in one tax year, from the calculation of the taxpayer's Maine tax liability.
Analysis:
This case reinforces the principle that states maintain substantial autonomy in structuring their tax systems, particularly concerning deductions, which are broadly deemed matters of "legislative grace." It clarifies that while states are constitutionally prohibited from directly taxing extraterritorial income, this prohibition does not compel them to construct hypothetical federal tax scenarios or to permit deductions for losses not claimed on federal returns, even if the denial of such a deduction is indirectly attributable to the presence of non-taxable extraterritorial income in a prior year. The decision underscores the necessity of explicit statutory authorization for specific tax deductions and restricts the application of prior precedents, such as Fairchild Semiconductor, to situations involving the composition of a unitary group in the current tax year, rather than carryovers from past years. This ruling could lead to increased state tax burdens for multi-state corporations when unitary losses are offset by nonunitary income, absent specific state statutory provisions for relief.
