January 13, 2015
Link to the Supreme Court of Missouri Opinion
Upon being assessed franchise
taxes under Mo. Rev. Stat. § 147.010 by the Director of Revenue (“Director”),
Southwestern Bell Texas Holdings, Inc. (“Holdings”) appealed to the
Administrative Hearing Commission (“AHC”).[i] The AHC determined that Holdings was not
subject to the Missouri franchise taxes for the period assessed by the Director.[ii] The Director sought judicial review of the
AHC determination and the Missouri Supreme Court decided the case.[iii] The Missouri Supreme Court ultimately
reversed and remanded the AHC’s determination.[iv]
I. Facts and Holding
Southwestern Bell Telephone Company
(“SWBT”) sought and received permission from the Missouri Public Service
Commission to undergo a corporate restructuring in 2001.[v] SWBT first created Southwestern Bell Texas
Holdings, Inc., a corporation organized under the laws of Delaware.[vi] Then, Holdings created Southwestern Bell
Telephone Texas, LLC (“LLC”), in which Holdings became the sole member and 100
percent owner.[vii] The final move in SWBT’s corporate
restructuring was to convert SWBT to a Texas limited partnership named
Southwestern Bell Telephone LP (“LP”), and make Holdings the sole limited
partner and 99 percent owner, and LLC the sole general partner and 1 percent
owner.[viii] In summation, Holdings is the sole owner of
LP owning 99 percent directly, and the remaining 1 percent indirectly through
LLC.[ix]
In 2007, an audit was
conducted by the Director, in which the Director determined that Holdings was
“engaged in business in Missouri in 2003, 2004, and 2005, through its interest
in [LP],” and pursuant to Mo. Rev. Stat. § 147.010 Holdings was assessed
franchise taxes for that period.[x] Holdings appealed the Directors assessment of
franchise taxes to the AHC.[xi] Upon receiving cross-motions for summary
disposition,[xii]
the AHC determined that Holdings was not liable for the franchise taxes assessed
during that period.[xiii] The AHC’s determination that Holdings was not
liable to pay franchise taxes for the period in question prompted this appeal
to the Missouri Supreme Court by the Director.[xiv]
Under the rule handed down in
Union Elec. Co. v. Dir. Of Revenue,[xv]
the Missouri Supreme Court must “affirm the AHC’s decision if: (1) it is
authorized by law; (2) it is supported by competent and substantial evidence
based on the whole record; (3) mandatory procedural safeguards are not
violated; and (4) it is not clearly contrary to the reasonable expectations of
the legislature.”[xvi] When the Court is deciding whether a decision
is “authorized by law,” the AHC’s construction of a revenue statute is reviewed
under a de novo standard.[xvii]
The Court notes that the
AHC’s decision found that it was incongruous to allow Holdings to escape
franchise tax liability in this situation, because Mo. Rev. Stat. § 147.010
reflects the general assembly’s evident intent to capture income earned in
Missouri by out-of-state corporations, which the Court finds to be accurate.[xviii] However, the Court determined that the AHC’s
analysis went beyond the question they were answering.
“The
threshold question in this case is not ‘whether the assets of LP should be
imputed to the [Holdings] for purposes of franchise tax liability,’ as the AHC
framed the issue. Instead, under the
plain language of section 147.010.1, the sole requirement that makes Holdings
subject to Missouri franchise tax is whether it was ‘engaged in business in
this state.’”[xix]
According to the Court, the
only question of relevance in this situation is whether Holdings was “engaged
in business in this state,” and if they were, they are subjected to the
Missouri franchise tax.[xx] The Court goes on to find that Holdings is
engaged in same business in Missouri that SWBT was engaged in prior to the 2001
corporate restructuring.[xxi] Respondents argue that Holdings was not
engaged in business in Missouri for the period in question because Holdings did
not directly own any assets in Missouri during that time.[xxii] The Court does not accept this premise
however, because according to the holding in Household Finance Corp. v. Robertson,[xxiii]
the amount of tax to be calculated is determined on the property and assets
that are employed in the state even if they are located elsewhere.[xxiv] Ultimately the Court found, as did the AHC,
that Holdings employed assets in the state of Missouri from 2003-05, which is
the sole prerequisite for the franchise tax in Missouri.[xxv] Upon making this determination, the Court
held that Holdings was subjected to the franchise tax during the period in
question, and the AHC’s determination was reversed, and remanded to calculate
the amount of tax.[xxvi]
II. Legal Background
The statute at the heart of
the dispute between Holdings and the Director – and around which the litigation
of this case centers– is Missouri Revised Statute § 147.010.1, which provides
in relevant part, that, “every corporation organized pursuant to or subject to
chapter 351 or pursuant to any other law of this state shall, in addition to
all other fees and taxes now required or paid, pay an annual franchise tax to
the state of Missouri. . .”[xxvii] The statute goes on to say that “[a] foreign
corporation engaged in business in this state, whether pursuant to a
certificate of authority issued pursuant to chapter 351 or not, shall be
subject to this section.”[xxviii]
While Holdings argues that
they were not “engaged in business” in Missouri from 2003-2005 because they did
not directly own any assets in Missouri, the Court looked to a prior case on
this issue, and determined that Holdings misconstrued the standard. In Household
Finance, the Court said that the amount of tax is calculated on the
property and assets that are employed in the state, even if they are located
elsewhere.[xxix] Further, the Court in Household Finance posed the threshold question of franchise tax
liability by saying, “[t]he language used in the statute . . . imposes a
corporation franchise tax therein exacted of every corporation, domestic and foreign,
engaged in business in this state.”[xxx] Thus, according to the Missouri Supreme
Court, the location of the property and assets is irrelevant; so long as they
are employed in the state of Missouri corporations are subject to payment of
the franchise tax.[xxxi]
III. Comment
Ultimately, the Missouri
Supreme Court correctly reversed and remanded the AHC’s decision in this
case. The conclusive issue in this case
was one of statutory interpretation, and when interpreting the meaning of a
statute in Missouri, it has been determined that rules of statutory
construction must be subservient to legislative intent.[xxxii] The AHC noted, and the Court appears to
agree, “§ 147.010 reflects the general assembly’s evident intent to capture
income earned in Missouri by out-of-state corporations.”[xxxiii] The holding reached by the Court accurately
echoes the goal of the general assembly when it enacted § 147.010. Further, if the general assembly’s intent was
to capture income earned in Missouri by corporations organized and located
outside of Missouri, to hold that by restructuring a corporation so that it
does not directly own any assets in this state, and thus not subject to the
franchise tax, would not be sound policy.
To allow Southwestern Bell Telephone Co. to evade paying a franchise tax
on income gained in Missouri might result in many other corporations that
employ assets in this state to restructure and escape tax liability. Allowing such a result would not be congruent
with the intent of the legislature and would not be sound precedent. The Missouri Supreme Court however, did not
allow such an outcome, and by reversing the AHC’s decision, the Court correctly
answered the question with which they were confronted. The intent of the legislature was to obtain
income based on foreign corporations employing assets in the state, and the
Court’s holding furthers such intent.
- Cameron A. Beaver
[i]
Southwestern Bell Telephone Co. v. Director of Revenue, 2015 WL 161771 (Mo.
banc 2015).
[ii]
Id.
[iii]
Id.
[iv]
Id.
[v]
Id. at *1.
[vi]
Id.
[vii]
Southwestern Bell Telephone Co. v. Director of Revenue, 2015 WL 161771, *1 (Mo.
banc 2015).
[viii]
Id.
[ix]
Id.
[x]
Id. at *2.
[xi]
Id.
[xii]
Summary disposition is the administrative equivalent of cross-motions for
summary judgment. Southwestern Bell
Telephone Co., 2015 WL 161771, *2 (Mo. banc 2015).
[xiii]
Southwestern Bell Telephone Co. v. Director of Revenue, 2015 WL 161771, *2 (Mo.
banc 2015).
[xiv]
Id. at *2.
[xv]
425 S.W.3d 118 (Mo. banc. 2014).
[xvi]
Southwestern Bell Telephone Co. v. Director of Revenue, 2015 WL 161771, *2 (Mo.
banc 2015) (citing Union Elec. Co. v. Dir. of Revenue, 425 S.W.3d 118, 121 (Mo.
banc. 2014)).
[xvii]
Southwestern Bell Telephone Co. v. Director of Revenue, 2015 WL 161771, *2 (Mo.
banc 2015) (citing Acme Royalty Co. v. Dir. of Revenue, 96 S.W.3d 72, 74 (Mo.
banc. 2002)).
[xviii]
Southwestern Bell Telephone Co. v. Director of Revenue, 2015 WL 161771, *3 (Mo.
banc 2015).
[xix]
Id.
[xx]
Id.
[xxi]
Id.
[xxii]
Id.
[xxiii]
364 S.W.2d 595 (Mo. banc. 1963).
[xxiv]
Southwestern Bell Telephone Co. v. Director of Revenue, 2015 WL 161771 (Mo.
banc 2015) (citing Household Finance Corp. v. Robertson, 364 S.W.2d 595, 607
(Mo. banc. 1963)).
[xxv]
Southwestern Bell Telephone Co. v. Director of Revenue, 2015 WL 161771, *3 (Mo.
banc 2015).
[xxvi]
Id. at *4.
[xxvii]
Mo. Rev. Stat. § 147.010.1 (2011).
[xxviii]
Id.
[xxix]
Southwestern Bell Telephone Co. v. Director of Revenue, 2015 WL 161771, *3 (Mo.
banc 2015) (citing Household Finance Corp. v. Robertson, 364 S.W.2d 595, 607
(Mo. banc 1963)).
[xxx]
Household Finance Corp. v. Robertson, 364 S.W.2d 595, 607 (Mo. banc 1963).
[xxxi]
Southwestern Bell Telephone Co. v. Director of Revenue, 2015 WL 161771, *3-4
(Mo. banc 2015).
[xxxii]
Anderson ex rel. Anderson v. Ken Kauffman & Sons Excavating, LLC, 248
S.W.3d 101 (Mo. Ct. App. 2008) (internal citations omitted).
[xxxiii]
Southwestern Bell Telephone Co. v. Director of Revenue, 2015 WL 161771, *3 (Mo.
banc 2015).
