United States: Mississippi Supreme Court Holds Combined Group Could Use Affiliates’ Tax Credits To Offset Income

The Mississippi Supreme Court recently has held that a combined group could offset its corporate income tax liability with gaming license fee tax credits earned by some of its affiliates.1 Under the tax credit statute, each affiliate that earned the credit could use it to offset its income tax liability. Because each affiliate was jointly and severally liable for the tax liability of the entire group, each affiliate's tax liability was the same as the group's tax liability. Therefore, the credits earned by the affiliates could be used by the combined group. The Court also held that the taxpayer satisfied the statutory surety bond requirements.

Background

The taxpayer, which owned and operated a group of Mississippi casinos, elected to compute its Mississippi corporate income tax on a combined basis with its affiliated entities.2 Four entities in the affiliated group held Mississippi gaming licenses and paid license fees based on their monthly gross revenue from gaming operations. The taxpayer used the license fees as a credit to offset its combined corporate income tax liability for the 2007 tax year. Applying the credits in the same manner, the taxpayer filed amended returns for the 2004 through 2006 tax years. After auditing the taxpayer's returns for the 2004 through 2007 tax years, the Mississippi Department of Revenue assessed over $4 million in taxes, penalties and interest. The assessment was based on the Department's determination that only the tax liability of the four entities that actually held the licenses was eligible for offset. According to the Department, the credit belonged exclusively to the entities that paid the license fee and could not be used to benefit the combined group as a whole.

The Mississippi Board of Review and Mississippi Board of Tax Appeals both affirmed the Department's assessment with minor changes. The taxpayer appealed to a county chancery court and filed a surety bond for half the assessment as required by statute. The chancery court granted summary judgment for the taxpayer and overturned the Department's assessment. The Department appealed the chancery court's decision.

Combined Group Could Use Credits

The Mississippi Supreme Court affirmed the chancery court and held that the taxpayer could use its affiliates' credits to offset the income tax liability of the entire combined group. In reaching its decision, the Court rejected the Department's argument that the tax liability of the group must be determined individually when applying the gaming license fee tax credit. The Department argued that each entity's credit could be used only to offset the tax the entity would be required to pay if it were filing its own return. Under this approach, a credit could not be used to the extent it exceeded the entity's tax liability.

The taxpayer relied on a case, General Motors Corp. v. Mississippi State Tax Commission,3 concerning the issue of using credits earned by one entity to offset the combined tax liability of an affiliated group of entities. In General Motors, the taxpayer and its affiliated group filed on a combined basis.4 The affiliated group applied a privilege tax credit earned by one of the affiliated entities to its total tax liability. The Mississippi Supreme Court held in General Motors that the credit could be used to offset the entire affiliated group's tax liability. Because the affiliate that earned the credit was jointly and severally liable with respect to the affiliated group's tax, the Court reasoned in General Motors that the credit was being used to offset the affiliate's tax due.

The Court disagreed with the Department's arguments that General Motors did not apply to the instant case. The Department argued that the statute that governed combined returns for the tax years at issue (and is the current statute) is different than when General Motors was decided in 1987. The more recent statute instructs taxpayers to combine the income or loss of the individual entities to determine the affiliated group's net income. Any credits are applied after the combined group's tax liability is computed. The Court determined that this approach is consistent with the reasoning in General Motors that the credit does not become part of the tax calculation until after the tax becomes due and joint and several liability has attached to each member of the reporting group. The application of the statutory instructions on how to compute the combined taxable income supported the taxpayer's interpretation of the statute in the instant case.

The Department also argued that the difference in the statutory language of the credit in General Motors compared to the statutory language of the credit in the instant case mandated that the credit could not be used by the entire combined group. In General Motors, the credit was limited to the "total amount of income tax due by the taxpayer."5 In the instant case, the gaming license fee credit was allowed "against the income tax liability of the licensee."6 The Department argued that the legislature's use of "income tax liability" and "licensee" as opposed to "tax due" and "taxpayer" supported its interpretation that the credit is limited to the individual entity that earned it. The Court disagreed, determining that the use of the terms "taxpayer" and "licensee" was similar in nature to General Motors, not a difference. According to the Court, the key phrase in the present case was "income tax liability." This phrase is identical to "tax due" used in the statute at issue in General Motors because both phrases refer to the amount of money that the Department is entitled to collect from the taxpayer. Applying General Motors, each entity's tax liability is the same as the group's tax liability because each entity is jointly and severally liable for that amount.7 If the limit on a credit is tax liability, the limit is a reference to the tax liability of the group.

Finally, the Department argued that it has historically interpreted the gaming license tax credit to apply only to the income generated by the use of the license.8 The Court explained that the Department's interpretation of tax is afforded deference, but this deference must be applied in light of General Motors. Because the Court held that the Department incorrectly interpreted the statute in General Motors, it followed that the Department's same interpretation of nearly identical statutory language in the instant case also was incorrect.

Surety Bond Requirements Satisfied

The Court held that the surety bond filed by the taxpayer with the chancery court in the amount of over $2 million, half the amount in controversy, satisfied the statutory surety bond requirements. As a result, the chancery court did not commit error by exercising jurisdiction over the case. The Department argued that the surety bond did not meet the statutory requirements because it was not "conditioned to pay the judgment of the court."9 In rejecting the Department's argument, the Court explained that even though the bond did not use the exact language provided by the statute, it clearly bound the surety to pay the Department. Therefore, the Court held that the surety bond satisfied the statutory requirement that it be conditioned on the judgment of the court.

Commentary

This decision allows credits earned by affiliates of a Mississippi nexus combined group to offset the tax liability of the entire group, rather than solely the tax liability of the affiliates generating the credits. This increases the ability of a combined group to utilize the credits, either on a current or prospective basis. The Court reinforced the General Motors decision from 1987 and held that its reasoning is still applicable, and in some respects stronger, after the intervening statutory amendments. Also, the General Motors holding was applied to the gaming license fee credit. Even though the Department has interpreted this credit to be limited to income generated from the use of the gaming license, the Court held that General Motors was entitled to greater deference than the Department's interpretation. Thus, the gaming license fee credit can be used beyond the income derived from the gaming license, presumably including income from non-gaming activities. While this case concerned the gaming license fee credit, the Court's reading of General Motors may be applied to other tax credits. The decision may inspire other taxpayers with multiple entities that have a Mississippi presence to elect to file in the state on a combined basis in certain situations.

Footnotes

1 Department of Revenue v. Isle of Capri Casinos, Inc., Mississippi Supreme Court, No. 2012-CA-01419-SCT, Feb. 13, 2014.

2 MISS. CODE ANN. § 27-7-37. An affiliated group of corporations with nexus in Mississippi may elect to file, or the Commissioner of the Department may require the filing of what is termed a combined income tax return, in lieu of separate returns. The Mississippi combined return is similar to the consolidated return concept in several states, and consists of a post-apportioned combination of corporations that have Mississippi nexus with no intercompany eliminations.

3 510 So. 2d 498 (Miss. 1987).

4 The statute in effect for General Motors referred to the return as a "consolidated return." As discussed previously, MISS. CODE ANN. § 27-7-37 refers to the return as a "combined return."

5 MISS. CODE ANN. § 27-21-9.

6 MISS. CODE ANN. § 75-76-179.

7 Also, a repealed regulation provided: "Each member of the affiliated group is severally liable for the tax on a consolidated or combined return and for any subsequently determined deficiency thereon. No intercompany agreement can change this rule." CODE MISS. R. 35.III.8.07 at 102(5) (repealed Nov. 17, 2011).

8 Jones County School District v. Department of Revenue, 111 So. 3d 588 (Miss. 2013); Buffington v. Mississippi State Tax Commission, 43 So. 3d 450 (Miss. 2010).

9 See MISS. CODE ANN. § 27-77-7(3).

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