Home/Utah Supreme Court/Continental Telephone Co. of Utah v. State Tax Commission

Continental Telephone Co. of Utah v. State Tax Commission

539 P.2d 447, 1975 Utah LEXIS 750
CourtUtah Supreme Court
DecidedAugust 15, 1975
Docket13842, 13843
StatusPublished
Cited by10 cases

This text of 539 P.2d 447 (Continental Telephone Co. of Utah v. State Tax Commission) is published on Counsel Stack Legal Research, covering Utah Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Continental Telephone Co. of Utah v. State Tax Commission, 539 P.2d 447, 1975 Utah LEXIS 750 (Utah 1975).

Opinion

*448 CROCKETT, Justice:

The plaintiffs, Midland Telephone Company, providing service in Grand County, and Utah Telephone Company, 1 providing service in Box Elder County, are both subsidiaries of Continental Telephone Corporation, a corporation with nationwide operations. They claimed as deductions on their Utah tax returns, payments transferred to Continental in connection with the preparation and payment of consolidated federal tax returns for the tax years 1965 through 1970. The Tax Commission partially disallowed plaintiffs’' claimed deductions for payment of federal income taxes, by reducing the deductions allowable for the federal transfer payments to Continental to the proportion that plaintiffs’ federal taxable income bears to the total amount of federal taxes actually paid by Continental. Plaintiffs seek reversal of the Tax Commission’s decision and full allowance on their state returns of the amounts they paid to Continental.

Plaintiffs contend that the deductions taken by them for payment of federal taxes are expressly authorized by Section 59-13-7, U.C.A.1953, quoted below; and that the deduction and allocation made by the Tax Commission is not justified either under Section 59-13-17, U.C.A.1953, or Utah Corporation Franchise Tax Regulation 13, upon which the Commission based its action.

Continental Telephone Corporation, the parent corporation, is headquartered in Washington, D. C. It has a large number of operating telephone utilities as subsidiaries as well as some non-utility subsidiaries and operates in 42 states and several foreign countries. The subsidiaries here involved, Midland and Utah Telephone Companies, operate within and derive all their income within this State. This is so reported on their tax returns in question. They are also subject to the regulation and supervision of the Utah Public Service Commission and accounting methods approved by it, including the joining with other subsidiaries of Continental in filing its consolidated federal income tax return. The steps taken in computation, payment, and intersystem accounting of the consolidated federal income tax by Continental for each of the years in question are allowable under federal law. Pursuant to a closing agreement with the Internal Revenue Service, (hereinafter called I.R.S.) the consolidated federal return of Continental and its subsidiaries is prepared on a “separate company” basis, with Continental acting as an agent for each subsidiary in dealings with the I.R.S. Continental files a declaration of estimated taxes, remits quarterly payments, and at the end of the tax year files the return and pays any remaining tax, all on a consolidated basis.

Each of the subsidiaries, including Midland and Utah, computes its declaration of estimated federal taxes separately at the beginning of the tax year and remits its quarterly payments to Continental. At the close of the tax year, the federal taxable income is computed by each subsidiary for itself as a separate corporation, and each subsidiary forwards these figures to Continental for preparation of the consolidated return, together with any further payment that would be due on a separate company basis. Remittances of all members of the Continental group are made by actual transfers of funds and are not merely accounting entries. Continental’s preparation of the consolidated return involves combining the separately computed net taxable incomes of each subsidiary with the net operating losses of other subsidiaries. Under present federal law, the filing of a consolidated return permits an economically related group of corporations to report on a basis of transactions entered into with outsiders, which means, in general, gain or loss on intercompany transactions between the *449 related corporations is eliminated from income of the reporting corporation. 2

In the taxable years in issue here, the net amount due the I.R.S. under Continental’s consolidated return was less than the sum of all the tax payments remitted separately to that company by the profit producing members of the Continental group. This was because some of the Continental subsidiaries had operating losses, so that the consolidated income of the Continental group totalled less than the incomes reported by the profit making subsidiaries, including these two plaintiffs.

When any current operating loss is utilized, Continental remits funds to that member, to the extent of the tax effect of the loss which could have been carried back to prior years under the Internal Revenue Code of 1954, if that member had filed a separate return with the I.R.S. The effect of any remaining unused portion of net operating loss is offset as to that member in the future and, thereafter, Continental remits funds to such member at the then current tax rate. The result is that any newly acquired loss incurring subsidiary, while its losses are used to offset current total group net taxable income, does hot immediately receive a refund from Continental, but only upon establishing a pattern of profits is a refund then remitted to such a subsidiary based on its losses.

In the computation by plaintiffs of their Utah tax for each of the years in question, each deducted federal taxes in an amount computed by multiplying its taxable income, separately computed, by the then current federal income tax rate, less the appropriate amount of Federal investment credit earned, 3 and deducted that amount on its Utah tax return. Upon separate audits by the Tax Commission staff, the following tax deficiencies were assessed:

UTAH TELEPHONE COMPANY

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Cite This Page — Counsel Stack

Bluebook (online)
539 P.2d 447, 1975 Utah LEXIS 750, Counsel Stack Legal Research, https://law.counselstack.com/opinion/continental-telephone-co-of-utah-v-state-tax-commission-utah-1975.