The Georgia Court of Appeals in Georgia Department of Revenue v. Georgia Chemistry Council, Inc., No. A04A1602, 2004 Ga. App. LEXIS 1543 (Ga. Ct. App. Nov. 23, 2004), held that a Georgia Department of Revenue regulation requiring that a taxpayer have positive Georgia taxable net income for the preceding three years in order to claim the research tax credit was valid.
The Georgia Research Tax Credit Statute and Interpretive Regulation
In 1997, the Georgia General Assembly enacted O.C.G.A. § 48-7-40.12 (the "Research Tax Credit Statute") to provide a Georgia income tax credit to business enterprises for research expenses. The Statute provides a tax credit of 10% of the amount by which a qualified taxpayer’s research expenditures exceed a base amount. The base amount is defined as "the product of a business enterprise’s Georgia taxable net income in the current taxable year and the average of the ratios of its aggregate qualified research expenses to Georgia taxable net income for the preceding three taxable years or .300, whichever is less." O.C.G.A. § 48-7-40.12 (emphasis added). On April 24, 2001, the Georgia Department of Revenue (the "Department") promulgated Regulation 560-7-8-.42(2) (the "Regulation") interpreting the Research Tax Credit Statute to require that a taxpayer have positive taxable net income in order to claim the credit: In order to calculate the required ratios and be eligible for the research tax credit, a business enterprise must have positive Georgia taxable net income for each of the preceding three taxable years. A business enterprise that incurred a loss or had no Georgia taxable net income during one or more of the prior three taxable years may not claim a research tax credit for the current taxable year.
GA. COMP. R. & REGS. r. 560-7-8-.42(2). The Department reasoned that the Statute’s language could easily result in a mathematical anomaly. A taxpayer that does not have positive taxable income during all three base years must insert a zero into one or more of the formula’s denominators, which results in one or more undefined numbers. Because the Regulation imposed conditions that could eliminate research tax credits for some companies in Georgia, the Georgia Chemistry Council, Inc. ("GCC"), a trade organization that represents nearly two dozen companies in the bio-tech industry, filed a declaratory judgment action challenging the validity of Regulation 560-7-8-.42(2).
The Trial Court Decision
The trial court held the Research Tax Credit Statute to be unambiguous and the Regulation facially invalid. Georgia Chemistry Council, Inc. v. Georgia Department of Revenue, No. 2003CV74094 (Ga. Sup. Ct. Jan. 1, 2004). The court reasoned that the Statute provides a "fallback" base amount of 30% for determining the tax credit so that if the statutory formula results in an infinite number, the tax credit can still be calculated. The court further noted that the General Assembly could easily have imposed an income or profitability threshold in the Statute if that had been its intent. As the trial court explained, "[t]he net effect of the Regulation is to exclude from eligibility all taxpayers who have not reported four consecutive years of positive Georgia taxable income. Consequently, all business enterprises that move their operations to Georgia, perhaps lured by the promise of statutory tax credits, are ineligible under the Regulation to claim or receive the credit unless and until they post four consecutive years of positive Georgia taxable income." Id. Further, if a business enterprise has not reported four consecutive years of positive Georgia taxable income, the Regulation not only forfeits the business’s right to claim a research tax credit in the current year, it also eliminates the taxpayer’s right to carry forward unused research tax credits over the next 10 years. Id.
The Appellate Decision
The Court of Appeals rejected the trial court’s reasoning and reversed its decision. Georgia Department of Revenue v. Georgia Chemistry Council, Inc., No. A04A1602, 2004 Ga. App. LEXIS 1543 (Ga. Ct. App. Nov. 23, 2004). The appellate court found the dispositive question to be whether the Department was authorized to interpret the statute as requiring positive taxable net income in order to claim the tax credit. The trial court found the absence of an express income or profitability threshold in the Statute to indicate a legislative intent that companies without positive income be allowed to claim the research tax credit. The Court of Appeals, in contrast, found the absence of the term "net operating loss" in the Statute to indicate a legislative intent that companies not be allowed to claim the credit if they do not have positive income. The Court reasoned that:
Georgia taxable net income is defined . . . in terms of income, not loss. . . . Negative income, on the other hand, is commonly referred to as a "net operating loss." The absence of that term in the statute invites application of the principle expressio unius est exclusio alterius, or the express mention of one thing implies the exclusion of another. The General Assembly’s use of the term "Georgia taxable net income" and the exclusion of the term "net operating loss" supports GDOR’s argument that the legislature intended to require Georgia taxable net income to be expressed as a positive number.
As a result, the appellate court held that the Regulation reflected the intent of the legislature. The Court also noted that because GCC sought to establish the right to a tax credit, it bore the burden of showing that the legislature intended to allow business enterprises with a net operating loss to claim the credit. GCC, the Court found, had failed to make this showing. As a result, the tax credit statute had to be strictly construed against the taxpayers.
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