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01/06/95 INTERNATIONAL PAPER COMPANY v. ERNEST

January 6, 1995

INTERNATIONAL PAPER COMPANY
v.
ERNEST BROADHEAD, AS CHIEF OF FRANCHISE TAX DIVISION OF THE DEPARTMENT OF REVENUE OF THE STATE OF ALABAMA



Appeal from Montgomery Circuit Court. (CV-92-2300).

Wright, Retired Appellate Judge

The opinion of the court was delivered by: Wright

WRIGHT, Retired Appellate Judge

This is an appeal from a decision of the Circuit Court of Montgomery County upholding the denial of a foreign franchise tax credit by the Department of Revenue of the State of Alabama against International Paper Company (IPCO).

The facts are not in dispute and are as follows: In March 1986 Hammermill Paper Company, a Pennsylvania corporation (Hammermill Penn), qualified for an investment tax credit allowed under Ala. Code 1975, § 40-14-41(d)(2)d. This is a tax credit for foreign corporations doing business in this state and was designed to promote investment in counties where the unemployment rate was higher than the national average. To receive the qualified credit, Hammermill Penn invested $107 million in Dallas County and met all the requirements set forth in § 40-14-41(d)(2)d, including the signing of a contract or memorandum of agreement with the state. The memorandum provided the following pertinent provision:

"6. The terms of this Agreement may not be amended or altered, nor may the rights of a TAXPAYER hereunder be assigned or otherwise transferred, without the written consent of the STATE."

The memorandum further provided that Hammermill Penn's right to the deduction shall not be revoked "unless [Hammermill Penn] fails to comply with the terms of this agreement, in which case [the deduction] shall immediately cease and terminate."

Effective August 1987, Hammermill Penn merged into H.P. Subsidiary, Inc., a Delaware corporation. The articles of merger provided that the surviving corporation would be called Hammermill Paper Company. Effective January 1989, Hammermill Paper Company merged into International Paper Company (IPCO). At the time of the merger, IPCO owned all the outstanding shares of the capital stock of Hammermill Paper Company. The merged corporation became International Paper Company (IPCO).

The § 40-14-41(d)(2)d credit was allowed, without objection by the Department, each year through 1989. In 1990 IPCO inadvertently omitted it from its return, and then sought to amend its return in order to obtain the benefit of the credit. The Department disallowed the benefit on the basis that the certificate was not issued to IPCO and that Hammermill Penn assigned and transferred the credit to IPCO without having obtained the written consent of the state.

IPCO appealed the denial to the Administrative Law Division. Following a hearing, the administrative law Judge determined that the denial was proper. IPCO appealed the matter to the Circuit Court of Montgomery County. The circuit court affirmed the denial of the credit. IPCO appeals.

The dispositive issue is one of law--specifically, whether the right to the credit was "assigned or otherwise transferred" when Hammermill Penn merged with H.P. Subsidiary, Inc., in 1987 and, if so, did the transfer violate paragraph 6 of the memorandum agreement.

IPCO contends that the merger was not an assignment or a transfer of the rights provided for in § 40-14-41(d)(2)d. It suggests that the credit in this case is a right and that under the merger statutes, a right simply continues to exist in the surviving corporation and is not to be considered a transfer or an assignment.

The Department contends that at the time of the merger, Hammermill Penn ceased to exist. Its rights, including the right to the credit, passed to the surviving corporation by operation of law. It asserts that this passage of rights was a "transfer" and violated the nonassignment clause found in the memorandum agreement.

In authorizing corporate mergers, the Alabama legislature has provided that "when such merger has been effected ... such surviving ... corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises, of a public as ...


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