INTEL CORP. V. TAXATION & REVENUE DEP'T, 1997-NMCA-005, 122 N.M. 760, 931 P.2d 754
CASE HISTORY ALERT: affected by
1997-NMSC-005
INTEL CORPORATION,
Plaintiff-Appellant/Cross-Appellee,
vs.
TAXATION AND REVENUE DEPARTMENT OF THE STATE OF NEW
MEXICO,
Defendant-Appellee/Cross-Appellant.
COURT OF APPEALS OF NEW MEXICO
1997-NMCA-005, 122 N.M. 760, 931 P.2d 754
APPEAL FROM THE NEW MEXICO TAXATION AND
REVENUE DEPARTMENT. GERALD B. RICHARDSON, Hearing Officer.
CURTIS W. SCHWARTZ MODRALL, SPERLING,
ROEHL, HARRIS & SISK, P.A. Santa Fe, New Mexico.
PAUL H. FRANKEL, WALTER HELLERSTEIN,
HOLLIS L. HYANS, JUDITH E. LANSKY, IRWIN M. SLOMKA, MORRISON & FOERSTER,
New York, New York, Attorneys for Plaintiff-Appellant/Cross-Appellee.
TOM UDALL, Attorney General, BRUCE J.
FORT, Special Assistant Attorney General, Taxation & Revenue Department,
Santa Fe, New Mexico, Attorneys for Defendant-Appellee/ Cross-Appellant.
HARRIS L HARTZ, Judge. I CONCUR: MICHAEL
D. BUSTAMANTE, Judge, THOMAS A. DONNELLY, Judge (Concurring in part &
dissenting in part)
{1} Intel Corporation
appeals the decision of the New Mexico Taxation and Revenue Department hearing
officer denying its claim for refund of New Mexico corporate income tax
payments for the tax years 1988 through 1991. The Department cross-appeals from
the hearing officer's allowance of Intel's claim to a tax credit for payments
for employee child care in the tax year 1991. We
{*761}
affirm the decision of the hearing officer. Only our discussion of the
child care credit merits publication.
{2} The Department
contends that the hearing officer erred in allowing Intel a tax credit under NMSA
1978, Section
7-2A-14(A) (Repl. Pamp. 1993), which states:
A taxpayer that pays for child care services in New
Mexico for dependent children of an employee of the taxpayer during the
employee's hours of employment may claim a credit against the corporate income
tax imposed pursuant to the Corporate Income and Franchise Tax Act in an amount
equal to thirty percent of the total expenses for child care services incurred
and paid by the taxpayer in the taxable year.
The credit is limited to $ 30,000 per taxable year. Section
7-2A-14(D). What makes the provision particularly generous is that the same
expenditure by the corporation will usually result in a New Mexico income tax
deduction as well as the tax credit. Corporate expenses that are deductible for
federal income tax purposes--for example, ordinary and necessary business
expenses, I.R.C. § 162(a)--are, with a few enumerated exceptions, also
deductible for New Mexico income tax purposes. Deductibility under state law is
a consequence of the state tax being imposed upon "net income," NMSA
1978, Section 7-2A-3(A) (Repl. Pamp. 1993), which is defined in terms of
federal taxable income, see Section 7-2A-2(C) (Repl. Pamp. 1993)
(defining "base income" as federal taxable income) and (I) (defining
"net income" as "base income" adjusted for certain
enumerated exclusions).1
No provision of New Mexico law specifically prohibits a corporation from
claiming a credit under Section 7-2A-14 for expenditures that are also deductible
under federal (and hence state) income tax law.
{3} The credits
challenged by the Department were based on payments pursuant to Intel's
dependent care assistance program (the DCAP Plan). The hearing officer
described the plan as follows:
The DCAP Plan has two parts. One part is a resource
and referral service to assist employees in finding day care programs for their
dependent children. The other part is a salary reduction payroll program by
which employees may shelter from income tax a portion of their salary and then
use the tax sheltered salary to pay for dependent care expenses.
Enrollment in the DCAP plan is voluntary by Intel
employees. Intel employees may enroll in the DCAP Plan on an annual basis. Upon
enrollment, an employee must designate, within certain limitations, a specific
amount of salary to be paid into the DCAP Plan. The designated amount cannot be
changed except in very limited circumstances. Intel pays the designated salary
into the plan, rather than to the employee. . . . After incurring dependent
care expenses, the employee submits evidence of those expenses to the DCAP Plan
and obtains reimbursement of those expenses from the DCAP Plan in accordance
with the terms of the DCAP Plan.
Any funds placed in the DCAP Plan by Intel on behalf
of a participating employee which are in excess of the reimbursed expenses
received by the employee during the plan year remain the funds of the DCAP
Plan.
The chief advantage to an employee from enrolling in the DCAP
Plan is that I.R.C. Section 129 excludes payments into the plan from the
employee's gross income for federal income tax purposes, and hence for state
income tax purposes. See NMSA 1978, § 7-2-3 (Repl. Pamp. 1993) (personal
income tax imposed upon "net income"), NMSA 1978, § 7-2-2(N) (Repl.
Pamp. 1993) ("net income" defined as "base income" adjusted
for certain enumerated exclusions), § 7-2-2(B), ("base income"
defined in terms of adjusted gross income for federal income tax purposes).
{4} The Department
limits its challenge to credits arising from the salary-reduction component of
the plan. The Department allowed the credit claimed by Intel that arose from
the referral-service component.
{5} The determinative
issue on this appeal is whether the expenses for child care were "incurred
and paid" by Intel, within the
{*762} meaning
of Section 7-2A-14(A). The briefs of the parties focus on the meaning of the
word "incurred." One possibility is that "incurred" is used
as a term of art that applies only to accrual basis taxpayers. When tax statutes
use the phrase "paid or incurred," often the word "paid" is
to be applied to cash basis taxpayers and "incurred" is to be applied
to accrual basis taxpayers.
See Don E. Williams Co. v. Commissioner,
429 U.S. 569, 574, 51 L. Ed. 2d 48, 97 S. Ct. 850 (1977). We must reject such a
technical application of the words "incurred" and "paid,"
however, because it would lead to an absurd construction of Section 7-2A-14(A).
See State v. Gutierrez,
115 N.M. 551, 552,
854 P.2d 878, 879 (Ct. App.)
(statute may not be interpreted to reach absurd result),
cert. denied,
115 N.M. 79,
847 P.2d 313 (1993). The section requires that the expense must be
"incurred
and paid." Because a corporation cannot be both an
accrual basis taxpayer and a cash basis taxpayer with respect to the same
transaction,
see generally I.R.C. Section 446, adoption of the technical
construction of the phrase would mean that no corporation could ever qualify
for the tax credit.
{6} We have looked for
some special meaning of the phrase "incurred and paid" but without
success. Various states have enacted statutes which include the phrase, but
apparently no reported decision has construed the language. Thus, in the
absence of any reason to do otherwise, we adopt the ordinary meaning of the
words.
See Davis v. Commissioner of Revenue,
83 N.M. 152, 153,
489 P.2d
660, 661 (Ct. App.),
cert. denied,
83 N.M. 151,
489 P.2d 659 (1971).
"Paid" presents no difficulty. As for "incurred," the
Department has cited one dictionary as defining the verb "incur" as
"[to] bring down upon oneself."
Webster's Third New International
Dictionary 1146 (1971). Another definition is: "[to] become liable or
subject to."
Id. In the present context, we believe the natural
definition of "incurred" would be "due because services have
been performed." In other words, the addition of "incurred and"
to the word "paid" in Section 7-2A-14(A) is simply to prevent the
award of credits for prepayment of services to be provided in the future. An
expense is "incurred and paid" when it is paid to cover a liability
for services already rendered.
{7} The real question
before us is not whether expenses for child care were "incurred and
paid." It is
who incurred and paid the expenses. The positions of
both parties have considerable force. Intel can properly point out that the
money came out of its pocket and it had an obligation to pay the child care
expenses. In addition, Intel bore the administrative expenses of the DCAP Plan.
On the other hand, the Department can point out that the employee was the true
source of the money, because the employee was giving up a portion of his or her
salary to enable Intel to make the payment.
{8} We resolve the
dispute by considering the context--the entire statutory scheme governing the
tax treatment of child care expenditures. Because New Mexico's income tax laws
incorporate the pertinent provisions of federal law, we examine both the
federal and state provisions. That examination compels us to reject the
Department's argument. To adopt the premise that the money involved here was
really the employees' and not Intel's would be to contradict the provisions of
I.R.C. Section 129. That section states that Intel's payments of child care
expenses for an employee are to be excluded from the employee's gross income
for federal income tax purposes. In other words, for income tax purposes the
money spent for child care is not considered to be the employee's money.
Indeed, I.R.C. Section 129(e)(7) provides that an employee cannot claim any
federal income tax deduction or credit (including the credit for child care
expenditures) for amounts excluded from the employee's income by Section 129.
{9} Our interpretation
does not appear to undermine any policy of the New Mexico tax law. In
particular, we reject the Department's implicit suggestion that the legislature
would not have condoned such a loss in tax revenue. A similar loss would be
incurred under the Department's approach of treating the child care expenses as
being paid and incurred by the employee. If expenditures for child care under
the DCAP Plan should be treated as expenditures by the employees, then the
employees would be
{*763} entitled to
the New Mexico income tax credit for child-care expenses provided by NMSA 1978,
Section
7-2-18.1 (Repl. Pamp. 1993). Given the $ 30,000 cap on the corporate
child-care credit,
see Section 7-2A-14(D), and the large number of Intel
employees, the loss to the state in tax revenues might well be greater if one
were to treat the expenditures as being the employees', as suggested by the
Department. We have no way of knowing what the impact on revenue would be if
the Department's approach were applied to all Section 129 plans instituted by
corporations in the state.
{10} We recognize and
appreciate the Department's concern about what appears to be overly generous
income tax treatment of Intel's DCAP Plan. Our task, however, is to interpret
the statute as written, not to "improve upon" the work of the
legislature. Any modifications to the law sought by the Department must come
from the other branches of government.
{11} Under NMSA 1978,
Section
7-1-25(D) (Repl. Pamp. 1993), a taxpayer is entitled to reasonable
attorney's fees if we affirm a decision by the hearing officer that has been
appealed by the Department. Pursuant to that provision we order the Department
to pay Intel $ 2000 in attorney's fees.
{12} The decision of
the hearing officer is affirmed.
MICHAEL D. BUSTAMANTE, Judge
THOMAS A. DONNELLY, Judge (Concurring in part &
dissenting in part)
THOMAS A. DONNELLY, Judge
DONNELLY, Judge (Concurring in part and dissenting in part).
{14} I concur in the
affirmance of the administrative hearing officer's decision to allow Intel's
claim to the corporate child care tax credit for payments made during the 1991
tax year.
{15} For the reasons
set forth in my dissenting opinion in
Conoco, Inc. v. Taxation & Revenue
Department, No. 15,372, slip op. (N.M. Ct. App. May 1, 1995), I
respectfully dissent from that portion of the majority decision which affirms
the State Taxation and Revenue Department's denial of Intel's refund claims in
the instant case. As stated in the dissent in
Conoco, in my opinion, the
Department's disparate treatment of Conoco's dividend income received from its
foreign subsidiaries facially discriminates against foreign commerce and thus
is contrary to
Kraft General Foods, Inc. v. Iowa Department of Revenue &
Finance, 505 U.S. 71, 112 S. Ct. 2365, 120 L. Ed. 2d 59 (1992). I would
reverse the administrative hearing officer's decision and grant Intel's refund
claims for the tax years 1988 through 1991. Moreover, since this Court's
decision was filed in
Conoco, the Supreme Court of Rhode Island has also
had occasion to rule on an analogous claim involving that state's disparate
treatment of domestic and corporate dividend income in light of the decision in
Kraft General Foods.
See Dart Indus., Inc. v. Clark, Nos.
94-102-M.P., 94-439-M.P., 91-356- M.P., 1995 WL 274466 (R.I. May 10, 1995). In
Dart
Industries the court found that Rhode Island failed to comply with
Kraft
General Foods and ordered a refund of taxes paid by the taxpayer. The court
in
Dart Industries held that the Rhode Island corporate income tax
statute which required the inclusion of foreign, but not domestic, dividend
income impermissibly discriminated and violated the Foreign Commerce Clause of
the United States Constitution and the holding in
Kraft General Foods.
1
The Department has conceded that the payments at issue were deductible.