Maryland
Tax Court Finds Inclusion of Foreign Dividend Gross-Up for Financial
Institutions Unconstitutional
A
Maryland financial institution franchise tax statute requiring
foreign dividend gross-up income to be included in the computation
of the tax violates the foreign Commerce Clause, the Maryland Tax
Court held. [General Motors Acceptance Corp. v. State Dep't of
Assessments and Taxation, Md. Tax Ct., No. 98-FR-00-0699,
11/1/01]
General Motors Acceptance Corp. disputed an
assessment of financial institution franchise tax for the years 1994
through 1996 resulting from the department's disallowance of a
deduction for foreign dividend income included in GMAC's federal
taxable income under I.R.C. Sec. 78 (foreign dividend "gross-up").
In its appeal to the Maryland Tax Court, GMAC argued that
the statute requiring the inclusion of Sec. 78 gross-up income, Md.
Code Ann., Tax-Gen. Sec. 8-204(b)(2), violates the Equal Protection
Clause because the statute requires financial institutions to pay
Maryland income tax on Sec. 78 dividends, while all other taxpayers
are relieved by Md. Code Ann., Tax-Gen. Sec. 10-307(d) from paying
tax on such dividends. GMAC also argued that the statute violates
the foreign Commerce Clause by treating dividends received from
foreign subsidiaries less favorably than those received from
domestic subsidiaries. Finally, GMAC argued that the statute
violates the Due Process Clause by taxing "fictitious" income never
earned or realized.
In its Memorandum of Grounds for
Decision, the Maryland Tax Court held that the statute violates the
foreign Commerce Clause, citing Kraft General Foods, Inc., v.
Iowa Department of Revenue and Finance, 505 U.S. 71 (1992). If
GMAC's subsidiary had been domiciled in the United States, the
disputed taxation by Maryland would not have been imposed, and
therefore foreign commerce is subjected to a more burdensome tax
treatment than domestic commerce, the tax court reasoned. The tax
court concluded that the same discrimination was invalidated by the
U.S. Supreme Court in Kraft.
Editor's Note:
Effective for all taxable years beginning after December 31, 2000,
the financial institution franchise tax is terminated, and financial
institutions are instead subject to tax under the state's income
tax.
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