Koch Refining v. Tax Assessor
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MAINE SUPREME JUDICIAL COURT				Reporter of Decisions
Decision:		1999 ME 35
Docket:		Ken-98-393
Argued:		January 6, 1999
Decided :		February 19, 1999

Panel:	WATHEN, C.J., and CLIFFORD, RUDMAN, DANA, SAUFLEY and CALKINS, JJ.



 									

KOCH REFINING CO.

v.

STATE TAX ASSESSOR

CLIFFORD, J.

	[¶1]  The State Tax Assessor appeals from the summary judgment
entered in the Superior Court (Kennebec County, Alexander, J.) in favor of
Koch Refining Co. on the ground that the state's assessments of deficiency
taxes are barred by the statute of limitations.  The Assessor contends that
the trial court:  (1) misconstrued 36 M.R.S.A. § 141(2)(A) (1990) in
concluding that it did not extend the limitations period to allow the
Assessor to validly assess income tax deficiencies for 1987 and 1989, and
(2) erred in concluding that the extender provision of 36 M.R.S.A. § 5270(2)
(1990) did not apply to allow a proper assessment because the court
improperly found that Koch's income tax filings for those years contained
information adequate to apprise the tax assessor of the company's actual tax
status and liability.  Because we conclude that section 141(2)(A) applies in
this case to extend the limitations period and validate the assessment, we
vacate the judgment.
	[¶2]  Koch Fuels, Inc. sold and dispensed oil refinery products in
Maine.   Koch timely filed Maine income tax returns for the years 1987
through 1992.  In the 1987 through 1990 returns, Koch represented itself
as a corporation engaged in a unitary business by itself.   The 1991 and 1992
returns correctly listed Koch as a member of a multi-corporate unitary
business.  The Assessor decided to audit Koch's tax returns for the years
1987 through 1992.  The audit revealed that Koch had been a member of a
multi-corporate unitary business prior to 1991 and had incorrectly
calculated its Maine income tax liability for the years in which its returns
stated that it was engaged in a unitary business by itself.   On August 15,
1994, the Assessor issued a Notice of Assessment of additional taxes against
Koch for the years 1987 and 1989 through 1992.{1} 
	[¶3]  Following a denial of a petition for reconsideration, Koch
Refining Co., the successor in interest to Koch Fuels, Inc. following a
merger, filed a petition for judicial review in the Superior Court pursuant to
36 M.R.S.A. § 151 (Supp. 1998), 5 M.R.S.A. § 11002 (1989), and M.R. Civ. P.
80C.  Koch challenged the 1994 assessment of taxes for the years 1987 and
1989, contending that the three year statute of limitations period had run. 
Koch does not dispute that it was engaged in a multi-corporate unitary
business in 1987 and 1989, that its tax returns did not reflect that, and that
the deficiency assessed by the Assessor accurately reflected what its tax
liability should have been.  The Superior Court concluded that the provision
in section 5270(2) extending the time within which an assessment may be
filed against a taxpayer from three to six years after the filing of the return
does not apply because, although Koch omitted from its 1987 and 1989
returns more than 25% of the amount of its gross income, the court found
the information attached to those returns was "adequate to apprise the
Assessor of the nature and amount" of what was omitted.  The court also
declined to apply a similar extender provision found in section 141(2)(A),
even though the tax liability shown on Koch's tax returns for those years was
less than 50% of its actual liability.  The court concluded that the
information provided with those returns was "adequate to inform the
Assessor that there was a basis to view [Koch] as part of a multi-corporate
unitary business."  This appeal by the Assessor followed.
	[¶4]  The Superior Court, in reviewing a decision by a state tax
assessor, makes a de novo determination of the merits of the case. 
36 M.R.S.A. § 151.  There is no factual dispute here, and we review the
Superior Court's interpretation of the statutes directly for errors of law.  See
Foster v. State Tax Assessor, 1998 ME 205, ¶ 7, 716 A.2d 1012.  When
construing the language of a statute, we look to the plain meaning of the
language to give effect to the legislative intent.  See Estate of Whittier, 681
A.2d 1, 2 (Me. 1996).  In so doing, we "consider the whole statutory scheme
for which the section at issue forms a part so that a harmonious result,
presumably the intent of the Legislature, may be achieved."  Id. 
	[¶5]  Title 36 M.R.S.A. § 141(1) provides for a three year statute of
limitations on the assessment of tax deficiencies by the State Tax Assessor. 
The limitations period begins to run on "the date the return was filed or the
date the return was required to be filed, whichever is later." 36 M.R.S.A.
§ 141(1).  The two returns at issue in this case, the 1987 and 1989 returns,
were filed more than three years prior to the assessment of the tax
deficiencies in 1994.  Two statutory provisions, however, permit the
extension of the statute of limitations period from three to six years if
certain requirements are met.  Title 36 M.R.S.A. § 141(2)(A) provides, 

An assessment may be made within 6 years from the date the
return was filed if the tax liability shown on the return is less
than 1/2 of the tax liability determined by the State Tax
Assessor and the additional liability is attributable to information
which was required to be reported but was not reported in the
return.

Title 36 M.R.S.A. § 5270(2) provides, 

If the taxpayer omits from gross income an amount properly
includible therein which is in excess of 25% of the amount of
gross income stated in the return, an assessment may be made
within 6 years after the return was filed.  For purposes of this
subsection, there shall not be taken into account any amount
which is omitted in the return if such amount is disclosed in
the return, or in a statement attached to the return, in a
manner adequate to apprise the assessor of the nature and
amount of such item.

The court determined that the requirements of neither section 5270(2),
nor section 141(2)(A) had been met to extend the statute of limitations
period.  The court did not address Koch's argument that only section
5270(2) applied to this income tax case, and that section 141(2)(A), being
of general applicability, should not be applied.{2} 
	[¶6]  The Assessor contends that both extender provisions apply and
that the limitations period should be extended to six years if the
requirements of either provision are met.  It is a basic maxim of statutory
construction that:

[w]here one statute deals with a subject in general terms, and
another deals with a part of the same subject in a more detailed
way, the two should be harmonized if possible; but if there is
any conflict, the latter will prevail, regardless of whether it was
passed prior to the general statute, unless it appears that the
legislature intended to make the general act controlling.
 

See Butler v. Killoran, 1998 ME 147, ¶ 11, 714 A.2d 129 (quoting 2B
Sutherland, Statutory Construction § 51.05, at 174 (1992 & Supp. 1998)). 
Section 141(2)(A) is codified within the uniform administrative provisions of
Part 1 of Title 36 and is generally applicable to the entire tax code.  Section
5270(2) is codified within Part 8 of Title 36 which applies specifically to
income taxes.{3}  Section 141(2)(A) applies when taxpayers understate their
tax liability by more than 50%.  Section 5270(2) applies when taxpayers
understate their gross income by more than 25%. 
	[¶7]  Koch contends that the extender provision in section 141 is
generally applicable to tax assessments, but that when the tax assessment
involves income tax, as does this case, the extender provision in section
5270(2), and not section 141, must be applied.  Although consistent with
the rule of statutory interpretation that specific statutory provisions take
precedence over general provisions, this construction overlooks the initial
part of that maxim requiring statutory sections to be read in harmony if
possible.  See Butler, 1998 ME 147, ¶ 11, 714 A.2d 129.  The
interpretation urged by the Assessor harmonizes the two statutes.  When the
assessment arises outside the income tax context, section 141(2) applies to
extend the limitations period.  When the assessment arises in the area of
income taxes, section 5270(2) applies when there is an underreporting of
gross income by 25% or more, and section 141(2) applies when the tax
liability reported is less than 50% of the liability determined by the
Assessor.  There is nothing in the language of either statute that prohibits
the simultaneous application of both sections to extend the period of
limitations.  The Legislature could have excluded the application of section
141(2)(A) in the income tax context, but it did not do so.{4}
	[¶8]  The Superior Court concluded that the extender provision of
section 5270(2) did not apply to extend the three year limitations period. 
The court found that, although Koch's 1987 and 1989 tax returns
underreported gross income by more than 25%, there was information
attached to the returns that was "adequate to apprise the assessor of the
nature and amount" of that omitted income within the meaning of that
section, thus precluding the Assessor from relying on the extender
provision.{5} 
	[¶9]  The court also applied a similar standard to conclude that
section 141(2)(A) did not extend the limitations period to six years.  The
trial court found,

[T]he information provided by [Koch] was adequate to inform
the Assessor that there was a basis to view [Koch] as part of a
multi-corporate unitary business.  Thus, this information cannot
be viewed as "not reported in the return" to trigger the
extender provision of § 141(2)(A).

 
In arguing the correctness of the Superior Court's conclusion, Koch
contends that enough information was contained in the material filed with
Koch's tax returns to adequately alert the Assessor to Koch's actual tax
liability as a multi-corporate business.  Thus, Koch contends that the
information should be deemed reported for purposes of section 141(2)(A),
preventing the extender provision from applying.  The statutory language,
however, does not support such a construction.  We agree with the Assessor
that the trial court improperly applied the "clue test" set out in section
5270(2) to determine if the requirements of section 141(2)(A) were met. 
Unlike section 5270(2), section 141(2)(A) contains no language precluding
the extension of the limitations period if the Assessor should be alerted to
the actual tax liability of the taxpayer by the presence of certain "clues,"{6}
i.e., there is information attached to the return that should alert the
Assessor to the fact that there may be a substantial underreporting of tax
liability.  Section 141(2)(A) refers only to the reporting of information, does
not contain language referring to disclosures "in a manner adequate to
apprise the Assessor" as does section 5270(2), and indeed has no "clue
test" at all.  See Whittier, 681 A.2d at 2.  
	[¶10]  The facial requirements of section 141(2)(A) to trigger an
extension of the limitations period have been met.  Koch did not file the
required Schedule CB{7} in 1987 and 1989.  The CB schedule lists the names
of all business entities engaged in the multi-corporate business, the total
federal taxable income, and the property, payroll, and sales of each business
in Maine and everywhere else.  Although Koch did list the total expected tax
liability of Koch Industries, Inc. as a consolidated group, and did include a
listing of all affiliated members, the financial figures of each member of the
affiliated group, the precise numbers that are needed to determine the
amount of income subject to tax in Maine, were not reported anywhere in
the 1987 or 1989 returns.  The additional tax liability determined by the
Assessor is attributable to the information that was not so reported.  "The
tax liability shown on the return [was] less than 50% of the tax liability
determined by the State Tax Assessor and the additional liability is
attributable to information which was required to be reported but was not
reported in the return."  36 M.R.S.A. § 141(2)(A).  
	[¶11]  Accordingly, section 141(2)(A) applies to extend the
limitations period to six years, making the assessment proper.
	The entry is:
Judgment vacated. Remanded to the Superior
Court for entry of judgment for the State Tax
Assessor.
Attorney for plaintiff:

John M. R. Paterson, Esq., (orally)
Bernstein, Shur, Sawyer & Nelson, P.A.
P O Box 9729
Portland, ME 04104-5029

Attorneys for defendant:

Andrew Ketterer, Attorney General
Clifford B. Olson, Esq., (orally), Asst. Atty. Gen.
6 State House Station
Augusta, ME 04333-0006

FOOTNOTES******************************** {1} . In its request for reconsideration, Koch challenged the Assessor's characterization of Koch as a unitary business and contended that the assessments for 1987 and 1989 were time barred. Because Koch no longer disputes the Assessor's characterization, the only issue before us is whether the 1987 and 1989 assessments were time barred. The assessments for the years 1990 through 1992 are not the subject of this appeal. {2} . In Gordon v. Halperin, 447 A.2d 62 (Me. 1982), we did not decide which of the two statute of limitation provisions applied in an income tax case because the tax deficiency assessment was not time barred under either provision. Id. at 63. {3} . Section 5270 was originally enacted in 1969. See P. & S.L. 1969, ch. 154, § F, 1. In 1979, in an attempt to standardize the Maine tax laws and increase their internal consistency, the Legislature enacted a series of provisions, including section 141. See P.L. 1979, ch. 378, § 4; 2 Legis. Rec. 1394 (1979). As part of the same Public Law, the Legislature repealed all subsections of section 5270 except subsection (2). See P.L. 1979, ch. 378, §§ 39-41. Thus, the Legislature was aware that the two statute of limitations extender provisions co-existed. {4} . Koch also contends that section 5270(2) should be the exclusive statute of limitations extender provision applicable to income tax assessments because that interpretation is most favorable to it. We disagree. Limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the State. See Bufferd v. Commissioner, 506 U.S. 523, 527 n.6 (1993) (citing Badaracco v. Commissioner, 464 U.S. 386, 392 (1984)). In the absence of an explicit intent on the part of the Legislature to preclude application of section 141(2)(A) in the income tax context, the statute of limitations can be extended to six years in favor of the government if the requirements of either extender provision are met. {5} . Because we determine that the provisions of 36 M.R.S.A. § 141(2)(A) apply to extend the limitations period to six years and thus to validate the 1994 assessments, we do not address whether the Superior Court's findings as to the inapplicability of the extender provision of section 5270(2) are clearly erroneous. {6} . The "clue test" originated in the United States Supreme Court decision Colony v. Commissioner, 357 U.S. 28, 36 (1958). The Supreme Court explained the Legislature's intent when enacting a federal statute nearly identical to § 5270(2): "Congress manifested no broader purpose than to give the Commissioner an additional two years to investigate tax returns in cases where, because of a taxpayer's omission to report some taxable item, the commissioner is at a special disadvantage in detecting errors. In such instances the return on its face provides no clue to the existence of the omitted item. On the other hand, when, as here, the understatement of a tax arises from an error in reporting an item disclosed on the face of the return the Commissioner is at no such disadvantage." Id. If there are sufficient "clues" to alert a tax assessor that underreporting of tax liability has occurred, the statute of limitations period will not be extended. {7} . Any taxable corporation that has a Maine nexus and is a member of an affiliated group, whether unitary or not, must include a completed Schedule CB (combined reporting) with its corporate income tax return.