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Show PAGE -- Attorney General Opinion OPINION NO. 70-0- 65 November 25, 1970 BY: REQUESTED BY: PREPARED Vernon L. Holman, Chairman, Commission of Utah State Tax Vernon B. Romney, Attorney General Bruce M. Hale, Assistant Attorney General 1. Are payments made by a mining company under the Federal Insurance Contribution Act and for Unemployment Compensation paid QUESTIONS: the Federal Government deductible items as labor costs to arrive at "net annual proceeds, of a metalliferous mine or mining claims. 2. Are payments made by a mining company for "fringe benefits" such as pensions, retirements, and insurance for the benefit of employees also deductible as labor costs. ANSWERS: 1. Yes. 2. See Opinion. Question The 1 relevant statute to be interpreted is as follows: 8. Net annual proceeds Definitions Basis for tax Deductions. The words, "net annual proceeds," of a metalliferous mine or mining claim are defined to be the gross proceeds realized during the preceding calendar year from the sale or conversion into money or its equivalent of all ores from such mine or mining claim extracted by the owner or lessee, contractor or other person working upon or operating the property, including all dumps and tailings, during or previous to the year for which the assessment is made; provided, that in cases where the ores arc sold under a contract exist"59-5-5- ing between a parent and a subsidiary company or between companies which arc wholly or partially owned by a common parent or between companies otherwise affiliated and the gross proceeds realized from the ore is disproportionate to its reasonable fair cash value, the tax commission shall place a value on the ore which is equal to its reasonable fair cash value, and said amount shall be taken as the basis for the tax. The following, and no other, deductions may be taken: (1) The amount of money actually expended during the year for labor, tools, appliances and supplies used in the mining operations, including the labor of the lessee and his employees and the amount expended by the lessee for tools, appliances, and supplies used by him inlahis mining operation; provided, the personal bor of lessees shall be computed at the prevailing wage. actual office, engineering, and clerical expenses and the salaries of employees, other than corporate officers within The (2) the and necessary state." "59-5-5- rated. 9. No Deductions not allowed, enumededuction shall be allowed for: Federal taxes accruing from operations outside of this state, and taxes paid in other (4) states. " In the interpretation of a statute, in attempting to ascertain the intent of the legislature in its passage, it is proper to look to the origin of the act or of the section being construed, and the sources from which it was derived. It is also a general rule of interpretation to assume that the legislature in the enactment of a statute was aware of established rules of law applicable to the subject matter of the statute, which are presumed to have been within the knowledge of and considered by the legislature. Hence, in ascertaining the legislative intent in the enactment of a statute, the state of the common law prior to its adoption is given FRIDAY, DECEMBER 4, 1970 THE DAILY RECORD FOUR some consideration. annual proceeds" had attained a definite and well understood meaning which must have formed an integral part of what the legislature intended to accomplish by the use of the foregoing quoted wording. This meaning was: "What is annually realized from the product of the mine, over and above all the costs and expenses of obtaining such proceeds and converting the 6ame into money." (Emphasis added) Mercur Mining and Milling Company v. Spry. 16 Utah 222, 52 P. 382 (1898). quotation, defining the term "net annual proceeds," was also followed in the case of Tintic Standard Mining Company v. Utah The above County. 80 Utah 491, 497, 15 P.2d 633 (1932), and by the Federal Court in Salt Lake County v. Utah Copper Company, 294 F. 199, and these cases were followed and approved in United States Smelting. Refining and Mining Company v. Haynes. Ill Utah 172, 176 P.2d 622 (1947). It should be noted that the foregoing definition of "net annual proceeds" was liberally construed by the case law with respect to the "gross proceeds realized" and, hence, the liberal definition was to include "all of the costs and expenses" of obtaining the proceeds and converting them into money. The present statute, as amended, is substantially similar to its predecessor statute with respect to the relevant sections, and it would therefore appear that in amending the statute, the legislature intended to retain the prior definitions of net annual proceeds to allow federal insurance contributions and unemployment compensation contributions to be paid to the Federal Government as deductible labor costs under the statute. In accordance with the foregoing methods of statutory interpretation, the sections should be read as a whole and possibly correlated with the entire code on the principle of revenue and taxation. It is, therefore, the opinion of this office that the legislature must have intended to include any and all expenditures actually made that were "ordinary and necessary" expenditures for labor as a deduction under U.C.A. (1), (1953). They must have known that F.I.C.A. taxes and Unemployment Compensation were not only "ordinary and necessary business expenses" under the basic requirements for deducting business expenses in relation to the taxpayer's trade or business under the Internal Revenue Code, Section 162 (a) , but they must have also known that Internal Revenue Code, Section 164, allows a deduction for all taxes paid or accrued during the taxable year. The Internal Revenue Code, Section 3111 (a) and 3301, manditorily imposes these taxes on the employer and provides for their collection. See also Title 42 of U. S. Code. 59-5-- Taxation of mining property under the net annual proceeds from the taxation of under the franchise and privilege taxation section of corporations the code. The state law passed by our legislature is similar to the federal "ordinary and necessary" test for business expenses and also allows "taxes paid or accrued" as a deduction from gross income in (1) & (3) (1953). In tocomputing "net income." U.C.A. modern day's society it could hardly be said reasonably that the taxes imposed by the Federal Government are not a real, ordinary and necessary cost in converting extracted minerals into money. formula is not essentially different in nature 59-1- statute that is to be interpreted according to the foregoing principles of statutory interpretation was properly passed The in accordance with Article XIII, Section 4, of the Constitution of the State of Utah, assessing mining and mining claims, "as the legislature shall provide." It should be noted that the Constitution allows the legislature complete leeway, yet the legislature chose to use the already established "net annual proceeds" method of assessment. When the statute was adopted and passed, the words "not I 3-7 In substantiating the opinion that the above outlined be included as a deduction as a cost of whole body of the law, it should be noted taxes were intended to labor, and reading the that subsection (1) of the statute defines the deduction as the actually expended" during the year for labor and then subsection (2) goes on to separately state that the "salaries "amount of money of employees" are deductible expenses in computing net annual proceeds. This wording would lead one to believe that the legislature intended the word "labor" to include more than only "salaries" paid. (4), the legislature only disallowed as a Also, in U.C.A. deduction federal taxes accruing "from operations outside of the state and taxes paid in other states." This would leave the negative inference that they intended to also allow federal taxes as a deduction if paid for operations. There are cases holding that payroll taxes and insurance were includible as costs of "labor" in determining the amount of the general contractor's lien. Mathes v. Thunderbird Village Inc., 59-5-- 59 389 P.2d 343, 347, 236 Or. 425. In conclusion, it is the opinion of this office that pay- ments made by a mining company under the Federal Insurance Contribution Act and payments made for Unemployment Compensation paid to the Federal Government are deductible items of labor cost as being ordinary and necessary with relation to the trade or business of a metalliferous mine or mining claim. Question 2 Fringe benefits such as pensions, retirements and insurance for the benefit of employees to be deductible as labor costs must also meet the foregoing standard ar.d be ordinary and necessary labor costs. They should be liberally construed with regard to the current law on the qualification of such plans as ordinary and necessary business expenses. The law of Franchise and Privilege Taxation, U.C.A. (12), (1953), allows contributions to pension trusts by employers as a deduction, providing that said contributions are reasonable in amount. It should also be noted that with regard to the statute, this money should be actually expended during the year. Therefore, it is also our opinion that the deduction of fringe benefits should be liberally construed, on the basis of the facts of each plan to determine whether or not said benefits are ordinary and necessary as labor costs. 59-13- Upon enactment, the statute becomes a part of, and is to be read in connection with, the whole body of law, and should be interpreted in the light of general and long established principles thereof. A statute is not to be isolated from the great body of 339. law of which it forms a part. 50 Am. Jur. Statutes 58 -7, Respectfully submitted. VERNON B. ROMNEY Attorney General |