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State Department of Revenue v. Coca-Cola Refreshments, U.S.A., Inc.

Alabama Court of Civil Appeals

September 8, 2017

State Department of Revenue and Vernon Barnett, in his official capacity as Commissioner of the State Department of Revenue
v.
Coca-Cola Refreshments, U.S.A., Inc. f/k/a Coca-Cola Enterprises, Inc., et al.

         Appeal from Montgomery Circuit Court (CV-13-900448)

          THOMPSON, PRESIDING JUDGE.

         The State Department of Revenue ("the department") and Vernon Barnett, in his official capacity as the commissioner of the department, appeal from a judgment of the Montgomery Circuit Court. The circuit court's judgment upheld a decision of the department's administrative-law judge ("the ALJ") regarding an income-tax refund that Coca-Cola Refreshments, U.S.A., Inc., formerly known as Coca-Cola Enterprises, Inc. ("CCE"), and two of its subsidiaries, Roddy Coca-Cola Bottling Company, Inc. ("Roddy"), and Vending Holding Company ("VHC"), had sought from the department. (CCE, Roddy, and VHC are hereinafter referred to collectively as "the taxpayers.")

         The facts in this matter are not disputed. CCE, a Delaware corporation, did business in Alabama at all times relevant to this appeal. Roddy, a Tennessee corporation, operated a soft-drink bottling and distribution facility in Montgomery. In November 1998, Roddy became an indirect wholly owned subsidiary of CCE. VHC, a Georgia corporation, also did business in Alabama at all times relevant to this appeal. VHC has been a wholly owned subsidiary of CCE since CCE acquired it in 1992.

         All three entities--CCE, Roddy, and VHC--were required to file corporate tax returns and pay corporate income taxes in Alabama. As the ALJ explained in his decision, before the 1999 tax year, § 40-18-39, Ala. Code 1975, required all corporations subject to Alabama income tax to file separate-entity returns. However, in 1998, the Alabama Legislature amended that statute by enacting Act No. 98-502, Ala. Acts 1998 ("the 1998 Act"). Pursuant to the 1998 Act, for the first time, a group of affiliated corporations in Alabama could elect to file a consolidated Alabama tax return if that group also filed a consolidated federal tax return, provided that at least one member of the group was subject to Alabama corporate taxes. § 40-18-39(c)(1). Such a group of corporations is known as an Alabama affiliated group ("AAG"). At that time, by definition, an AAG included all members of its federal consolidated group. Under the 1998 Act, an AAG that elected to file a consolidated return was to be treated as though it was a single taxpayer for the purpose of determining the AAG's taxable income or losses. § 40-18-39(c)(3). As the ALJ stated, "the deductions and losses, including [net operating loss] carryovers, attributable to one group member could be applied to offset the income of the other group members in computing the group's net taxable income or loss."

         Section 40-18-39 was amended again by Act No. 2001-1089, Ala. Acts 2001 ("the 2001 Act"). The amendment became effective beginning with the 2002 tax year. Under the 2001 Act, the definition of an AAG was modified to limit the members of the group to only those members of a federal consolidated group that had a nexus with and were subject to Alabama's corporate income tax. § 40-18-39(b)(1). In addition, under the 2001 Act, the AAG was no longer to be treated as a single taxpayer; each member of an AAG that elects to file a consolidated return now must compute its Alabama taxable income or loss separately. § 40-18-39(c)(5). The 2001 Act also limited the allocation of net operating loss ("NOL") in a consolidated return as follows:

"(h) If, in a taxable year before the corporation became a member of an Alabama affiliated group that has elected to file an Alabama consolidated return, the corporation incurred a net operating loss, the deductibility of the loss on the Alabama consolidated return shall be limited to only the amount necessary to reduce to zero the Alabama taxable income, calculated on a separate return basis, of the corporation that incurred the net operating loss. Except as provided in the preceding sentence, the separate return limitation year ('SRLY') rules contained in 26 U.S.C. § 1502 shall apply."

§ 40-18-39(h).

         The taxpayers each filed separate corporate income-tax returns in years they were required to file Alabama returns until 2007. On its returns for calendar years 1992 through 2002 and calendar year 2004, CCE reported total Alabama NOLs of $10, 249, 031. CCE was permitted to carry forward its NOLs and deduct them in later years. Although CCE and VHC were members of an affiliated group and filed federal consolidated tax returns for calendar years 1992 through 2007, and although Roddy was included in that federal affiliated group from 1998 through 2007, the taxpayers elected to file an Alabama consolidated corporate income-tax return for the first time in 2007.

         As required by § 40-18-39(c)(5), the taxpayers prepared and submitted separate "pro forma" returns to submit with their 2007 Alabama consolidated return. On their individual forms, CCE reported a 2007 Alabama taxable loss in the amount of $989, 933; VHC reported a 2007 Alabama taxable loss in the amount of $37, 342; and Roddy reported 2007 Alabama taxable income in the amount of $11, 371, 206. On their consolidated return, the taxpayers reported their aggregate taxable income as $10, 343, 871.[1] They then deducted CCE's Alabama NOL of $10, 249, 031, which it had carried forward from previous years, for a consolidated taxable income in the amount of $94, 840. Because of certain credits and tax payments that had already been made, the taxpayers, on their 2007 consolidated return, requested a refund of Alabama corporate income tax in the amount of $978, 934.

         The department reviewed the taxpayers' 2007 Alabama consolidated return. In an adjustment notice dated April 16, 2009, the department disallowed the entire NOL deduction on the ground that "[t]here are no consolidated net operating losses to be utilized by the Alabama Affiliated Group as 12/31/2007 is the first tax year that the taxpayer has filed an Alabama consolidated return." After disallowing the NOL deduction, the department recalculated the refund due the taxpayers. Based on its calculation, the department issued the taxpayers a 2007 refund in the amount of $318, 882.37.

         On June 26, 2009, the taxpayers appealed the department's adjustment based on the disallowance of the NOL to the department's administrative-law division.[2] The ALJ analyzed the words and terms used in the applicable statutes governing the filing of an Alabama consolidated return and determined that the NOLs for 1992 through 1998 could not be used on the AAG's 2007 consolidated return because, he found, CCE had negative taxable income "in that year." However, the ALJ ruled that the NOLs from 1999 through 2002 and 2004 could be allowed as group NOLs on the 2007 consolidated return because CCE was a member of an AAG in those loss years.

         Both the taxpayers and the department and one of Barnett's predecessors as commissioner of the department appealed to the circuit court from the ALJ's decision. The taxpayers initially challenged the ALJ's determination that the NOLs incurred by CCE in the separate filing years 1992 through 1998 could not be deducted on the 2007 Alabama consolidated return. The department and its commissioner challenged the ALJ's determination that the taxpayers were entitled to deduct the NOLs from 1999 through 2002 and 2004 on the 2007 Alabama consolidated return.

         The circuit court referred the matter to a special master. After considering the record from the proceedings before the administrative-law division and the briefs and arguments of the parties, the special master submitted his findings of fact and conclusions of law to the circuit court on February 17, 2016. The special master, like the ALJ, analyzed the relevant statutes and reached the same conclusions as the ALJ. The special master determined that

"§ 40-18-39 must be construed as allowing Alabama affiliated group members to share NOL carryovers on an Alabama consolidated return, but only if the § 40-18-39(h) limitation does not apply. The subsection (h) limitation applies if an NOL was incurred by a group member in a year before the member became a member of the Alabama affiliated group. Because an Alabama affiliated group did not exist before 1999, all NOLs incurred before 1999 are subject to the subsection (h) limitation. If, however, the loss was incurred in 1999 or later, and the corporation that incurred the loss was a group member in the loss year, the subsection (h) limitation does not apply, even if the Alabama affiliated group did not file an Alabama consolidated return in the loss year.
"In conclusion, the Court holds [that] CCE, Roddy, and VHC were all members of an 'Alabama affiliated group' for the years 1999 through 2007 and are entitled to file a consolidated return in 2007. Further, they are entitled to report the Alabama Net Operating Losses for the years 1999 through 2002 and 2004."

         The special master recommended that the department recompute the amount the taxpayers were due as a tax refund based on his conclusions.

         The taxpayers dropped their challenge regarding the decision that they could not claim NOLs before 1999 and urged the circuit court to adopt the special master's report in full. The department and its commissioner continued their challenge to the decision that the taxpayers could report the NOLs from 1999 to 2002 and 2004 on the 2007 Alabama consolidated return. On February 20, 2017, the circuit court entered a judgment adopting the special master's report in full. The department and Barnett filed a timely notice of appeal to this court.

         The issues presented on appeal were well argued by the parties in their respective briefs. The key issue on appeal is whether the limitation on the use of NOLs set forth in § 40-18-39(h), that is,

"[i]f, in a taxable year before the corporation became a member of an Alabama affiliated group that has elected to file an Alabama consolidated return, the corporation incurred a net operating loss, the deductibility of the loss on the Alabama consolidated return shall be limited to only the amount necessary to reduce to zero the Alabama taxable income, calculated on a separate return basis, of the corporation that incurred the net operating loss, "

         applies in this case. For reasons explained more fully later in this opinion, the department and Barnett argue that it does apply, therefore precluding the taxpayers from reporting on their 2007 Alabama consolidated return the NOLs that CCE had incurred from 1999 through 2002 and in 2004 and that CCE was attempting to carry forward.

         "Our standard of review is de novo: 'Because the issues presented by [this appeal] concern only questions of law involving statutory construction, the standard of review is de novo. See Taylor v. Cox, 710 So.2d 406 (Ala. 1998).' Whitehurst v. Baker, 959 So.2d 69, 70 (Ala. 2006)." Ex parteBirmingham Bd. of Educ., 45 So.3d 764, 767 (Ala. 2009); seealso Page v. Southern Care, Inc., 219 So.3d 660, 664 (Ala. Civ. App. 2016)("The construction of a statute ... ...


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