In the Matter of the Appeal of Mid-America Products, Inc., Docket No. 95-5999-DT
Corporate Income Tax
This appeal involves the computation of the income tax credit authorized by KSA 79-32,153
BEFORE THE BOARD OF TAX APPEALS OF THE STATE OF KANSAS
IN THE MATTER OF THE APPEAL
OF MID-AMERICAN PRODUCTS, INC.,
FROM AN ORDER OF THE DIRECTOR OF
TAXATION ON ASSESSMENT OF
CORPORATE INCOME TAX.
Docket No. 95-5999-DT
O R D E R
Now, on this 20th day of November, 1996, the above captioned matter comes on for consideration and decision by the Board of Tax Appeals of the State of Kansas.
This Board conducted a hearing in this matter on May 2, 1996. Appearing on behalf of the Taxpayer were Eric F. Melgren, Attorney at Law, Darrell Dugan, President, Mid-American Products, Inc. , and by Bill Kohler, Financial Officer, Mid-American Products, Inc. Appearing on behalf of the Kansas Department of Revenue were James Bartle, Attorney at Law and Earl agent, Auditor for the Department of Revenue. The Board finds and concludes as follows:
1. The Board has jurisdiction of the subject matter and of the parties, a proper and timely appeal of an order issued by the designee of the Director of Taxation having been filed pursuant to K.S.A. 74-2438. Prior to the hearing of this matter, there was an issue concerning a penalty assessed by the Department of Revenue. However, at the hearing, the Department indicated that it has dropped the penalty issue. Therefore, there is no issue before the Board concerning a penalty.
FINDINGS OF FACT
2. This appeal involves the computation of the income tax credit authorized by the Job Expansion and Investment Tax Credit Act, K.S.A. 79-32,153 et seq. for fiscal years ending ("FYE") January 31, 1989 through January 31, 1992. The Taxpayer, a holding company, through its operating subsidiary, Burnham Products, Inc., is engaged in manufacturing and fabricating various parts and products for use by the aerospace industry. The Taxpayer's business is located in Wichita, Kansas. The Taxpayer for several years operated a facility on West Harry Street where it manufactured a product called fiber-lok and also other aircraft related parts. The Taxpayer refers to these products as low-tech products. The industry began shifting from the low-tech products to products requiring higher specifications. However, the Taxpayer's West Harry facility was not capable of producing these "high-tech" products.
3. In order to expand into the high-tech field, the Taxpayer acquired a new facility on South Custer street. This facility is approximately two miles from the West Harry facility. This new facility allowed the Taxpayer to begin production of high-tech parts and to produce tooling. The Taxpayer kept the West Harry facility and continues to produce low-tech products at that location.
4. The employment levels at the West Harry location have remained constant or gradually declined. The Taxpayer's growth in employment is related to the acquisition of the South Custer facility and production of high-tech products at that location.
5. The Taxpayer's Kansas income tax returns for the years at issue reflect claimed credits totaling $96,562. See DOR Exhibits 1-4. The Department of Revenue (hereinafter referred to as "Department") audited the Taxpayer's books and records for the years at issue. The Department audit indicated an allowable income tax credit of $74,538 or $22,024 less than the amount claimed by the Taxpayer. In a Notice of Assessment of Additional Income Tax dated May 13, 1993, the Department assessed $35,295 in additional income tax, penalty and interest against the Taxpayer. See DOR Exhibit 5. The Taxpayer protested the Department's Notice of Assessment by filing a Petition for Hearing with the Director. The Taxpayer submitted additional information with the Petition which resulted in the Department's auditor revising his computations. The revised computations indicate total allowable income tax credits of $77,087. The revision resulted in additional amount of income tax, penalty and interest being adjusted from $35,295 to $28,069. See Affidavit of Earl Agent.
6. The parties entered into, and filed with the Director of Taxation (hereinafter referred to as "Director"), a Joint Stipulation which sets forth the Taxpayer's employment an investment as a "qualified business facility," as that term is defined in K.S.A. 79-32,154(b), for the relevant periods at issue.
7. In an Order dated May 30, 1995, the Designee of the Director upheld the Department' adjusted assessment in the total amount of $28,069. The Taxpayer made this appeal to this Board of the Order upholding the adjusted Assessment.
8. The primary issue is the proper amount of credit to be allowed in FYE 1991 and 1992 for the Taxpayer's employment and investment increases initiated in FYE 1990. The schedules prepared by both parties refer to the credit associated with the FYE 1990 investment as the Level 4 credit. The Taxpayer claims a Level 4 credit of $7,039 in FYE 1991 and $5,546 in FYE 1992. The Department allowed a Level 4 credit of $0 in both years.
9. The Joint Stipulation indicates that the Taxpayer's total qualified employees rose form 83 in FYE 1989 to 104 in FYE 1990. However, in FYE 1991 the number of qualified employees decreased to 83 and then increased to 89 for FYE 1992. Using the new employment figures provided by the Taxpayer in Taxpayer Exhibit 7, pp. 4-7, overall employment (both facilities) rose from 133 in FYE 1989 to 154 in FYE 1990, decreased to 133 in FYE 1991, and then increased to 139 in 1992. According to the Taxpayer's figures the number of "high-tech" employees rose from 115 in FYE 1989 to 135 in FYE 1990, decreased to 115 in FYE 1991, and finally increased to 121 in FYE 1992. See Taxpayer Exhibit 8, p. 2. The Taxpayer's "high-tech" figures are based upon the Taxpayer considering the Taxpayer's qualified business facility as the South Custer Facility and not including the West harry facility. The original Taxpayer figures and those included in the parties' stipulation were based upon total employment and investment for both facilities.
10. Two factors utilized in the formula to determine a taxpayer's qualified business facility income are the property factor and the payroll factor. The Taxpayer includes in the property factor $91,890 spent in FYE 1992 on construction in progress (hereinafter referred to as "CIP"). The Department does not include this amount in the numerator of the property factor.
11. As stated previously, the primary issue is the amount of Job Expansion and Investment Tax Credit (hereinafter referred to as the "credit"), as provided in K.S.A. 79-32,153 et seq., to be allowed in FYE 1991 and 1992 for the Taxpayer's employment and investment increases initiated in FYE 1990. This issue may be broken down into four sub-issues.
(1) Whether the Taxpayer's investments and employment at both facilities must be used, or whether only the investment and employment at the South Custer facility are to be used.
(2) Whether the credit should be determined the first year and not recalculated in the nine subsequent years, or whether it should be recalculated each year.
(3) Whether a taxpayer must maintain at least two qualified employees at the qualified facility each year for which the credit is claimed, or whether the two employee requirement is an aggregate to be calculated throughout the full ten years for which the credit is claimed.
(4) Whether the value of CIP during a taxable year, which is not completed by the end of that taxable year, should be included in the property factor, which determines the maximum amount of credit that may be taken against taxable income.
12. The Taxpayer argues that only its South Custer facility is a qualified business facility as defined in K.S.A. 79-32,154(b). The West Harry facility should not be considered a part of the same facility as the South Custer facility because it was in existence prior to the South Custer facility and because it is located approximately 2 miles from the South Custer facility. Therefore, the investment and employment levels at the West Harry facility should not be included in computing the credit.
13. The Taxpayer contends that the $350 per employee credit established under K.S.A. 79-32,153 is, by the express language of the statue, allowed for the year in which commercial operations commence and for each of the nine succeeding taxable years. The statute does not envision that the amount of credit, either for employees or for investment, is to be recomputed annually during the nine succeeding year period.
14. The Taxpayer argues that K.S.A. 79-32,153(a) does not require that the employees be engaged and maintained throughout the ten year prior for the credit. The statute only imposes a threshold requirement that two employees must be "engaged or maintained" in order to claim the credit. The use of "or" indicates that it can be one or the other. The Taxpayer's qualified business facility investment and related employment occurred over several years. Therefore, the Taxpayer claimed an additional credit in each successive year for the incremental amount of its increased investment and employment levels. The two employee "engaged or maintained" requirement is a threshold for the entire investment project, and not one which must be met each year. At least two additional employees have been maintained throughout the entire period of the investment.
15. The Taxpayer argues that CIP value should be included in the fractional factors used to compute the amount of the allowable credit. The Department relied on regulations relating to the apportionment of corporate business income within and without the state, which is under a separate provision of the Kansas Income Tax Act, to conclude that CIP should not be included. Such provisions are inapplicable to the credit at issue herein.
16. K.S.A. 79-32,154(g)(1) provides that in developing the property factor, the "average value of the taxpayer's real and tangible personal property owned or rented and used in connection with the operation of the qualified business facility during the tax period" is to be used as the numerator. The Taxpayer argues that CIP was owned by the Taxpayer and was being used in connection with the operation of the qualified business facility. In the context of the statutes at issue herein, operation of the qualified business facility includes ongoing expansion of the facility. Therefore, CIP value should be included in the calculations.
DEPARTMENT OF REVENUE ARGUMENTS
17. The Department argues that the burden of proof is on the Taxpayer. Tax assessments by authorized state officials are presumed to be valid and the burden rests with the Taxpayer to affirmatively demonstrate that the assessment is invalid, inaccurate or otherwise inconsistent with applicable law. Tax credits are allowed solely as a matter of legislative grace. Credits are allowed only when granted by clear statutory language, and a person claiming such relief must show that he comes within the scope of the applicable.
18. K.S.A. 79-32,153
. allows for a credit to be claimed for a period of ten years. A taxpayer who invests in a "qualified business facility" and hires at least two "qualified business facility employees" as a direct result of its investment is entitled to claim a credit in the year in which the investment is made. However, in order to continue to claim the credit in each of the nine years thereafter, at least two of these employees must be "maintained."
19. The Taxpayer should not be allowed to limit its credit computations to only the high-tech portion of its business. Such a methodology inconsistent with the method used by the Taxpayer to compute the credit on its income tax returns and is inconsistent with the figures agreed to by the parties in their Joint Stipulation. The same computational methodology must be used for each of the ten years of the credit.
20. Furthermore, since both high-tech and low-tech employees worked at the Taxpayer's qualified business facility, there is no legitimate justification for considering only the high-tech employees in calculating the credit. K.S.A. 79-32,154(d) defines "qualified business facility employee" to be "a person employed by the taxpayer in the operation of a qualified business facility." There is no statutory basis for treating certain individuals employed at the facility as qualified employees but not others. Under the Taxpayer's theory, if a low-tech area, the person could be claimed as an additional qualified employee even though there has been no net increase in employment at the facility. This would make the credit available to taxpayers who merely reassign existing employees instead of those who actually create new jobs and increase overall employment.
21. The amount of money spent in FYE 1992 on CIP should not be included in the numerator of the Taxpayer's property factor. K.S.A. 79-32,154(g)(1) defines the property factor numerator as being "the average value of the taxpayer's real and tangible personal property owned or rented and used in connection with the operation of the qualified business facility during the tax period." By definition, CIP consists of assets and improvements not yet placed in service. Therefore, they cannot be "used" in the operation of the Taxpayer's facility. The use of such property will not occur until after construction is completed and will not occur during the tax period when it is classified as CIP.
22. Furthermore, CIP is excluded form the property factor for income apportionment purposes under the Uniform Division of Income for Tax Purposes act (UDITPA"), K.S.A. 79-3271
. K.A.R. 92-12-85 provides that "[p]roperty or equipment under construction during the tax period (except inventoriable goods in process) shall be excluded from the factor until such property is actually used in the regular course of the trade or business of the taxpayer." Since the definition of the property factor in K.S.A. 79-32,154(g)(1) makes direct reference to section of UDITPA, the same analysis should apply in both instances.
FINDINGS AND CONCLUSIONS
23. The Director of Taxation is the Secretary of Revenue's designee for administering and enforcing the various Kansas tax acts. The doctrine of operative construction provides that the interpretation of a statute by one charged with its enforcement is entitled to great deference.
Kansas Board of Regents v. Kansas-National Educational Ass'n,
233 Kan. 801, 809, 667 P.2d 306 (1983). However, the Board of Tax Appeals is the highest administrative tribunal established by law to consider state and local tax issues.
Mobil Pipeline Co. v. Rohmiller
, 214 Kan. 905, syl. 7, 919-921, 522 P.2d 923 (1974). In
, the Kansas Supreme Court concluded that the Board of Tax Appeals functions independently of the Director of Property Valuation in matters of administrative judgment and decision. On Appeal from the Director's determination of assessed valuation, the Board has the power and authority to exercise its judgment anew and independent of the Director and the judgment of the Board supersedes the judgment of the Director. In
, the appeal was for a decision of the Director of Property Valuation. However, there is no justification or legal reason to treat an appeal from the Director of Taxation differently.
24. Pursuant to K.S.A. 74-2437(a) the Board of Tax Appeals is specifically given the authority to approve or disapprove rulings and interpretations by the Director of Taxation. K.S.A. 74-2438 provides that any person aggrieved by any finding, ruling, order, decision or other final action of the Director of Taxation may appeal to this Board. Under K.S.A. 74-2438 a hearing before the Board shall be a de novo hearing unless the parties agree to submit the case on the record made before the Director. In this matter, the parties did not agree to submit the matter on the record made before the Director. A hearing was held before the Board at which the parties submitted evidence and made their respective arguments. The Board is to review and make a decision based on the evidence and arguments submitted by the parties. The Board is the fact finder and it is the Board's findings and conclusions that are reviewable on appeal.
25. A taxpayer challenging an assessment by the Department has the burden of proving that the assessment is invalid, inaccurate or not in compliance with applicable law. As indicated by the Department, tax credits are allowed solely as a matter of legislative grace. Tax credits are allowed only when granted by clear statutory language, and a person claiming a credit must show that he comes within the scope of the applicable statute.
26. The Board agrees with, and adopts as its findings and conclusions, the arguments set forth by the Department. Specifically, K.S.A. 79-32,153 et seq. allows for a credit to be claimed for a period of ten years. A taxpayer who invests in a "qualified business facility" and hires at least two "qualified business facility employees" as a direct result of its investment is entitled to claim a credit in the year in which the investment is made. However, in order to continue to claim the credit in each of the nine years thereafter, at least two of these employees must be "maintained." The "engaged" language refers to the first year, which is the year that the investment was made and the employees were hired. The "maintained" language refers to the other nine successive years in the ten-year credit period. The Taxpayer hired 21 new employees in FYE 1990 as a direct result of its investment. However, none of these 21 positions were "maintained." The result is the same under the Taxpayer's analysis using only the high-tech employees hired in 1990. Therefore, the Taxpayer qualifies for the credit the fist year but does not qualify for the successive nine years. The Board notes that the six employees added back in FYE 1992 were used by the Taxpayer to obtain a new ten-year investment credit for the ten-year period 1992-2001. The Taxpayers cannot use the same six employees to obtain a credit for a ten-year period beginning in 1990 and a ten-year period beginning in 1992.
27. The Department's position is consistent with the intent of the Legislature to promote sustained expansion of employment opportunities in Kansas. A taxpayer must not only establish its entitlement to the credit, but must also establish the amount of the allowable credit in each of the ten years for which the credit is claimed. K.S.A. 79-32,153(a) states that a minimum of two employees must be engaged or maintained "for the taxable year for which the credit is claimed." Since the credit may be claimed over a ten year period, this statutory requirement must be satisfied not only in the year of the investment, but also in each successive year of the ten-year period. Furthermore, K.S.A. 79-32,154(d) includes provisions for determining the number of qualified employees eligible for the credit, and those provisions are expressly applicable to person employed "during any taxable year." The term "any taxable year" has to refer to any of the ten years in the credit period and not merely the initial year.
28. The credit must be redetermined each year that the credit is claimed. Otherwise a taxpayer would be entitled to claim ten years worth of the credit for employees whose employment lasted only twelve months. The credit is not intended to provide long-term tax incentives for the hiring of mere temporary employees.
29. Since both high-tech and low-tech employees worked at the Taxpayer's qualified business facility, both types of employees are to be used in calculating the credit. K.S.A. 79-32,154(d) defines "qualified business facility employee" to be "a person employed by the taxpayer in the operation of a qualified business facility." There is not statutory basis for treating certain individuals employed at the facility as qualified employees but not others. The Board agrees with the Department that under the Taxpayer's theory, if a low-tech employee were reassigned to work in the high-tech area, that person could be claimed as an additional qualified employee even though there has been no net increase in employment at the facility. This would make the credit instead of those who actually create new jobs and increase overall employment. The Taxpayer appears to be attempting to focus on high-tech employees because the low-tech employment levels at the West Harry facility have remained constant or gradually declined.
30. K.S.A. 79-32,154(g)(1) defines the property factor numerator as being "the average value of the taxpayer's real and tangible personal property owned or rented and used in connection with the operation of the qualified business facility during the tax period." As indicated by the Department, by definition, CIP consists of assets and improvements not yet placed in service. Therefore, they cannot be "used" in the operation of the Taxpayer's facility. The use of such property will not occur until after the construction is completed and will not occur during the tax period when it is classified CIP. As such, the amount of money spent in FYE 1992 on CIP should not be included in the numerator of the Taxpayer's property factor.
31. The Board finds that the Taxpayer has not met its burden of showing that the Department's adjusted assessment is invalid, inaccurate or otherwise inconsistent with applicable law. The Board concludes that the Taxpayer's appeal should be denied, and the Department's adjusted assessment of tax and interest totaling $28,069 should be upheld.
IT IS THEREFORE ORDERED BY THE BOARD OF TAX APPEALS OF THE STATE OF KANSAS the findings and conclusions set forth herein are orders of this Board.
Any party to this appeal who is aggrieved by this decision may file a written petition for reconsideration with this Board as provide din K.S.A. 1995 Supp. 77-529. The written petition for reconsideration shall set forth specifically and in adequate detail the particular and specific respects in which it is alleged that the Board's order is unlawful, unreasonable, capricious, improper or unfair. Any petition for reconsideration shall be mailed to: Secretary, Board of Tax Appeals, DSOB Suite 451, 915 SW Harrison St., Topeka, KS 66612-1505.
A copy of the petition, together with all accompanying documents submitted shall be mailed to the opposing party at the same time the petition is mailed to the Board. Failure to notify the opposing party shall render any subsequent order voidable
. The written petition must be received by the Board within fifteen (15) days of the certification date of this order (allowing an additional three days for mailing pursuant to statute if the Board serves the order by mail). If at 5:00 pm on the last day of the specified period the Board has not received a written petition for reconsideration, this order will become a final order from which no further appeal is available.
IT IS SO ORDERED THE BOARD OF TAX APPEALS
AUGUST BOGINA, JR. P.E., CHAIRMAN
FRED J. HIRSCH, MEMBER
RITA MAICHEL, SECRETARY PERL M. BASS, MEMBER
(DID NOT PARTICIPATE)
TONY R. POLSOM, ATTORNEY J. LYN ENTRIKEN GOERING, MEMBER
ROBERT G. FREY, MEMBER
I., Rita Maichel, Secretary of the Board of Tax Appeals of the State of Kansas, do hereby certify that a true and correct copy of the order in Docket No. 95-5999-DT and any attachments thereto, was placed in the United States Mail, on this 5th day of December, 19962, addressed to:
Eric F. Melgren, Attorney Mid-America Products, Inc.
Foulston and Siefkin P.O. Box 12950
700 Fourth Financial Center Wichita, KS 67277
Wichita, KS 67202
and a copy was placed in capitol complex building mail addressed to:
James Bartle, Attorney
Director of Taxation %General Counsel, Dept. of Revenue
DSOB, 915 S. Harrison, 3rd Floor DSOB, 915 S. Harrison, 2nd Floor
Topeka, KS 66612 Topeka, KS 66612
IN TESTIMONY WHEREOF, I have hereunto subscribed my name at Topeka, Kansas.
Rita Maichel, Secretary
Return to KSA Listing