Court of Civil Appeals Rejects Constitutional Challenge to Add-Back Tax Statute

The Court  of Civil Appeals’ opinion in Surtees v. VFJ Ventures, Inc., No. 2060478 (Ala. Civ. App. Feb. 8, 2008), contains an interesting, lengthy discussion of Alabama’s add-back statute.  After it rejected the reasons that appellee VFJ offered to support the trial court’s finding that the corporate income tax assessment that the Alabama Department of Revenue made against VFJ pursuant to Alabama’s add-back statute was in error, the Court of Civil Appeals reviewed, and ultimately refused, VFJ’s constitutional challenge to the statute.  In doing so, the Court of Civil Appeals applied the following standard of review: “we ‘approach the question [of the constitutionality of a statute] with every presumption and intendment in favor of its validity, and seek to sustain rather than strike down the enactment of a coordinate branch of government.’. . . Moreover, where the validity of a statute is assailed and there are two possible interpretations, by one of which the statute would be unconstitutional and by the other would be valid, the courts should adopt the construction [that] would uphold it.’ . . . We must afford the Legislature the highest degree of deference, and construe its acts as constitutional if their language so permits.” Id. at 61-62 (internal citations omitted).

The trial court did not decide the constitutional issue because it found that the tax assessment was erroneous under one of the express exceptions to the add-back statute. The Court of Civil Appeals reached the constitutional challenge reluctantly, noting that, “’[a] court has a duty to avoid constitutional questions unless essential to the proper disposition of the case. . . . [B]road considerations of the appropriate exercise of judicial power prevent[] such determinations unless actually compelled by the litigation before the court.’”

The Court of Civil Appeals concluded that the add-back statute does not violate the commerce clause because, “Alabama’s add-back statute does not expressly impose a tax . . ., nor has the Department sought to impose a tax directly on those IMCOs. . . . We conclude that the add-back statute does not implicitly (or ‘effectively’) impose a tax on the IMCOs. Rather, the add-back statute disallows a deduction sought by the taxpayer, VFJ, which does have activities in Alabama sufficient to justify its paying corporate income tax in this state. . . . [D]eductions are a matter of legislative grace.”  The court also found that there is a rational relationship “between the income the Department seeks to add back pursuant to §40-18-35(b) and the income that is to be included in the determination of VFJ’s taxable income.  Accordingly, we hold that VFJ has not demonstrated that the add-back statute results in taxation of income that is not fairly attributable to Alabama.”