Case Title: RUSSEL STOVER CANDIES INC v DEPT

Citation: 

Docket Number: 

State: montana

Court: Montana Supreme Court

Date: 1983-05-19T00:00:00Z

Document:
No. 80-375 IN THE SUPRE??E COURT OF THE STATE O F Pl0NTATJ.A 1983 RUSSELL STOVE2 CANDIES, I N C . , Respondent and Appellant, DEPART'MENT O F KEVENUF: OF TI-IE STATE O F F I O T J T A E J A , Appellant and Respondent. Appeal f r o n : The D i s t r i c t Court of t h e F i r s t J u d i c i a l D i s t r i c t , I n and f o r t h e County of Lewis E Clark., The Honorable P e t e r Neloy, Judge p r e s i d i n g * Counsel of Record: For Appellant: Ward A. Shanahan: Gough, Shanahan, Johnson & Vaterman, Helena, Montana Terry E. Cosgrove; Luxan & Y u r f i t t , .Eel-ena, Yontana Michael Rieley, Dept. of Revenue, ITelena, Xontana Submitted: March 31, 1983 Decided: May 1 9 , 1983 F l l e d : MAY 1 9 1983 &_ .- . - Clerk Mr. Chief J u s t i c e Frank I. Haswell d e l i v e r e d t h e Opinion of t h e Court. The Department of Revenue (DOR) appealed t h e L e w i s and Clark County District Court judgment r e v e r s i n g t h e S t a t e Tax Appeal Board 's (STAB) d e t e r m i n a t i o n t h a t t h e Montana d i v i - s i o n s of t h e Ward Paper Box Co. (Ward), a p p e l l a n t , now R u s s e l l S t o v e r Candies, I n c . , were t a x a b l e a s p a r t o f a u n i t a r y b u s i n e s s . The D i s t r i c t Court h e l d t h a t a s s e s s m e n t of income t a x e s based on a p p r o p r i a t i o n of income was t h u s improper. T h i s Court r e v e r s e d t h e D i s t r i c t Court d e c i s i o n . R u s s e l l S t o v e r appealed t o t h e United S t a t e s Supreme C o u r t which v a c a t e d our judgment and remanded t h e c a s e t o t h i s Court f o r r e c o n s i d e r a t i o n i n l i g h t of two United S t a t e s Supreme Court c a s e s d e c i d e d subsequent t o our d e c i s i o n . W e a f f i r m our p r e v i o u s d e c i s i o n . The f a c t s a r e w e l l s t a t e d i n our i n i t i a l o p i n i o n , Ward Paper Box Co. v. DOR ( 1 9 8 1 ) , Mont. , 638 P.2d 1053, 38 St.Rep. 4147. However, t h e y w i l l be b r i e f l y set o u t h e r e . Ward f i l e d Montana c o r p o r a t i o n l i c e n s e t a x r e t u r n s f o r 1971 through 1975 based on t h e s e g r e g a t e d income from its Montana o p e r a t i o n s a l o n e . DOR a u d i t e d Ward's r e c o r d s , determined t h a t Ward was a u n i t a r y b u s i n e s s n o t e n t i t l e d t o s e p a r a t e a c c o u n t i n g of its Montana o p e r a t i o n s and income, and a s s e s s e d a d d i t i o n a l c o r p o r a t i o n l i c e n s e t a x e s a g a i n s t Ward by u s e of a t h r e e - f a c t o r formula which a p p o r t i o n e d t o Montana p a r t of Ward's t o t a l income. Ward p r o t e s t e d t h i s assessment t o STAB which a f f irmed t h e assessment by DOR. Ward f i l e d a p e t i t i o n f o r review i n t h e D i s t r i c t Court of L e w i s and C l a r k County. On August 4, 1980, t h e D i s t r i c t Court r e v e r s e d t h e STAB d e c i s i o n . DOR appealed t o t h i s Court from t h e judgment of t h e D i s t r i c t Court . Ward was a Missouri c o r p o r a t i o n q u a l i f i e d and doing b u s i n e s s i n Montana, m a i n t a i n i n g its p r i n c i p a l p l a c e of b u s i n e s s i n Kansas C i t y , Kansas. A l l of i t s common s t o c k was owned by Louis Ward d u r i n g t h e p e r i o d i n q u e s t i o n . Ward's a c t i v i t i e s c o n s i s t e d of seven d i v i s i o n s ; t h e d i v i - s i o n s l o c a t e d o u t s i d e Montana were involved i n manufacture, s a l e and d i s t r i b u t i o n of paper boxes and paper box p r o d u c t s i n t h e S t a t e s of Kansas, M i s s o u r i , Colorado, South C a r o l i n a and V i r g i n i a . The Montana d i v i s i o n s c o n s i s t e d of two c a t t l e ranches, one i n Meagher County and one i n Powell County. For t h e y e a r s 1971 through 1975, Ward used t h e s e p a r - a t e a c c o u n t i n g method f o r f i l i n g its Montana t a x r e t u r n s and i n each y e a r p a i d t h e minimum c o r p o r a t i o n l i c e n s e t a x o f $50. During t h o s e y e a r s t h e o p e r a t i n g c o s t s and d e p r e c i a - t i o n expenses of t h e Montana d i v i s i o n s exceeded t h e income earned by t h o s e d i v i s i o n s . During t h e same t i m e p e r i o d , Ward f i l e d t a x r e t u r n s under t h e u n i t a r y apportionment method i n t h e o t h e r s t a t e s i n which it was o p e r a t i n g , and t h e Montana ranch d i v i s i o n s were i n c l u d e d a s p a r t of its t o t a l u n i t a r y b u s i n e s s . I n t h o s e s t a t e s t h e l o s s e s s u s t a i n e d by t h e ranch d i v i s i o n s w e r e u s e d t o o f f s e t income e a r n e d by t h e p a p e r box d i v i s i o n s . The f a c t s r e g a r d i n g Ward's o p e r a t i o n s d u r i n g t h e y e a r s i n q u e s t i o n a r e f o r t h e most p a r t u n c o n t e s t e d . The home o f f i c e i n Kansas C i t y provided a d m i n i s t r a t i v e s e r v i c e s f o r a l l d i v i s i o n s of Ward's o p e r a t i o n which i n c l u d e d p r e p a r i n g f e d e r a l and s t a t e r e p o r t s , h i r i n g t h e a c c o u n t a n t s t o p r e p a r e t a x r e t u r n s , keeping t h e books, p r e p a r i n g f i n a n c i a l s t a t e - ments and b a l a n c i n g checkbooks. Each of t h e d i v i s i o n s was charged an a r b i t r a r y f i g u r e of $60 p e r month f o r t h e home o f f i c e s e r v i c e s . T h i s f i g u r e was n o t based on t h e amount of t i m e a c t u a l l y s p e n t on each d i v i s i o n by home o f f i c e person- n e l . Ward's d i v i s i o n s d i d n o t exchange equipment o r person- n e l and d i d n o t p u r c h a s e p r o d u c t s j o i n t l y . There was no j o i n t a d v e r t i s i n g program among t h e v a r i o u s d i v i s i o n s and no common salesmen. There were two a c c o u n t s maintained f o r each d i v i s i o n , an expense bank account and a p a y r o l l account. Each d i v i s i o n ' s expense bank a c c o u n t was m a i n t a i n e d i n a bank i n Kansas C i t y . Any monies g e n e r a t e d by a d i v i s i o n were d e p o s i t e d i n t h a t d i v i s i o n ' s s e p a r a t e expense account. If t h e d i v i s i o n d i d n o t immediately need t h e f u n d s , t h e y would be t r a n s f e r r e d from t h e s e p a r a t e d i v i s i o n expense a c c o u n t i n t o a g e n e r a l account and would be u t i l i z e d wherever needed by any of t h e s e p a r a t e d i v i s i o n s . The p r e s i d e n t of t h e company would make t h e d e c i s i o n a s t o t h e t r a n s f e r . Excess funds would be i n v e s t e d , i f n o t needed by any of t h e d i v i - s i o n s . A p o r t i o n of t h e s h o r t - t e r m investment income was a t t r i b u t a b l e t o funds g e n e r a t e d i n Montana, y e t t h e p o r t i o n a t t r i b u t a b l e t o funds earned i n Montana could n o t be s p e c i - f i c a l l y i d e n t i f i e d o r s e g r e g a t e d . I f e i t h e r of t h e Montana ranch d i v i s i o n s d i d n o t g e n e r a t e enough income t o meet expenses, a d d i t i o n a l f u n d s would be t r a n s f e r r e d from Ward's g e n e r a l account t o t h e ranch d i v i s i o n ' s expense bank account. The p a y r o l l a c c o u n t f o r e a c h r a n c h d i v i s i o n was maintained i n a Montana bank and checks could be w r i t t e n on t h e account by t h e ranch manager. However, t h e home o f f i c e p e r s o n n e l maintained t h e r e c o r d s , balanced t h e books and made t h e d e p o s i t s . There was some c e n t r a l management of t h e c o r p o r a t i o n . From t h e evidence p r e s e n t e d a t t h e h e a r i n g , STAB found t h a t t h e home o f f i c e made a l l of t h e d e c i s i o n s r e g a r d i n g t h e f i n a n c i a l a f f a i r s of t h e c o r p o r a t i o n and t h a t major d e c i - s i o n s r e g a r d i n g t h e r a n c h e s , s u c h a s t h e p u r c h a s e o f equipment and t h e buying and s e l l i n g of c a t t l e , r e q u i r e d t h e a p p r o v a l o f t h e chairman of t h e board o r t h e p r e s i d e n t o f t h e c o r p o r a t i o n . W e r e v e r s e d t h e d e c i s i o n o f t h e D i s t r i c t Court and h e l d t h a t t h e ranch d i v i s i o n s were p a r t o f Ward's u n i t a r y b u s i n e s s . Our d e c i s i o n was founded upon t h e s t a t u t o r y d e f i n i t i o n of a u n i t a r y b u s i n e s s . S e c t i o n 15-31-301(2), PICA, d e f i n e s t h e u n i t a r y b u s i n e s s p r i n c i p l e . I t r e a d s : " ( 2 ) A c o r p o r a t i o n engaged i n a u n i t a r y b u s i n e s s w i t h i n and w i t h o u t Montana must a p p o r t i o n its b u s i n e s s income a s provided f o r under 15-31-305. A b u s i n e s s is uni- t a r y when t h e o p e r a t i o n of t h e b u s i n e s s w i t h i n t h e s t a t e is dependent upon o r c o n t r i b u t o r y t o t h e o p e r a t i o n o f t h e b u s i n e s s o u t s i d e t h e s t a t e o r i f t h e u n i t s of t h e b u s i n e s s w i t h i n and w i t h o u t t h e s t a t e a r e c l o s e l y a l l i e d and n o t c a p a b l e o f s e p a r a t e m a i n t e n a n c e a s independent b u s i n e s s e s . " T h i s r u l e a p p l i e d throughout t h e e n t i r e p e r i o d of t h e d i s p u t e , f i r s t a s an a d m i n i s t r a t i v e r e g u l a t i o n and t h e n a s t h e above s t a t u t e i n which t h a t regulat'ion was c o d i f i e d . W e concluded from t h e f a c t s of t h e c a s e t h a t Ward's o p e r a t i o n w i t h i n Montana was dependent upon and c o n t r i b u t i n g t o i t s o p e r a t i o n o u t s i d e Montana. Thus, t a x i n g a p p o r t i o n e d income of Ward's o v e r a l l o p e r a t i o n was n o t v i o l a t i v e of t h e due process clause. After our decision, Russell Stover Candies, Inc., acquired all interest in Ward. It then appealed to the United States Supreme Court. The United States Supreme Court vacated tne judgment and remanded the cause to this Court for further considera- tion in light of two United States Supreme Court cases: F.W. Woolworth Co. v . Taxation and Revenue Dept., New Mexico (1982), 458 U.S. I - S.Ct. , 73 L.Ed.2d 819, 50 USLW 4457, and ASARCO, Inc. v. Idaho State Tax Commission (1982), 458 U.S. - I - S.Ct. , 73 L.Ed.2d 787, 50 USLW 4962. We affirm our initial decision. In both of the above cases, taxpayer corporations were appealing state court decisions allowing revenue departments to include income earned through investment subsidiaries in the total "business income" to be apportioned for taxing purposes. The Supreme Court determined that the subsidi- aries were separate and discrete businesses and income from such entities could not increase the income of the parent corporation that was to be apportioned. Taxing such income was a violation of the due process clause as no relationship exists between income produced by subsidiaries and the value of transacting business within the state. Mobil Oil Corp. v. Commissioner of Taxes (1980), 445 U.S. 425, 100 S.Ct. 1223, 63 L.Ed.2d 510; Ploorman Mfg. Co. v. Bair (1978), 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197. In ASARCO, Idaho tried to levy corporate income taxes on the corporation based on income, increased by dividends, interest and stock sales from ASARCO's major interests in f i v e f o r e i g n s u b s i d i a r i e s . The S t a t e Supreme Court approved t h i s p r a c t i c e , and ASARCO appealed t o t h e United S t a t e s Supreme Court. The Court a p p l i e d t h e u n i t a r y b u s i n e s s p r i n c i p l e , b e s t e x p l a i n e d i n Mobil O i l , s u p r a . It found t h a t t h e s u b s i d i - a r i e s i n q u e s t i o n were s e p a r a t e b u s i n e s s e n t i t i e s . ASARCO had a m a j o r i t y i n t e r e s t i n Southern Peru Copper C o r p o r a t i o n , b u t due t o a management agreement, it could n o t assume c o n t r o l of t h e s u b s i d i a r y . F u r t h e r , Southern Peru d i d n o t seek d i r e c t i o n from ASARCO. The m a j o r i t y o f M I M Holdings, Ltd., i n A u s t r a l i a was owned by ASARCO, b u t no c o n t r o l was a s s e r t e d nor d i d it e l e c t any board members, a p p o i n t any o f f i c e r s o r h i r e any s t a f f . I n two o t h e r s u b s i - d i a r i e s , ASARCO o n l y h e l d m i n o r i t y i n t e r e s t s , and t h e c o u r t h e l d t h e y were autonomous o p e r a t i o n s . F i n a l l y , t h e Mexican s u b s i d i a r y was once wholly owned by ASARCO b u t a Mexican law f o r c e d it t o d i v e s t 51 p e r c e n t of its ownership. Idaho urged t h e Court t o expand t h e u n i t a r y b u s i n e s s p r i n c i p l e t o i n c l u d e any income r e c e i v e d by a p a r e n t c o r p o r - a t i o n t h a t would add t o t h e g e n e r a l c a p i t a l of t h a t corpora- t i o n . The Court r e f u s e d t h i s i n t e r p r e t a t i o n because it would r e s u l t i n t a x i n g r e t u r n s on any c o r p o r a t e investment a s " b u s i n e s s income," even though r e c e i v e d from a t o t a l l y independent e n t i t y . The same g e n e r a l q u e s t i o n was r a i s e d i n Woolworth. The taxpayer c o r p o r a t i o n owned f o u r f o r e i g n s u b s i d i a r i e s . New Mexico a p p o r t i o n e d W o o l w o r t h ' s income f o r t a x i n g purposes and i n c l u d e d i n such income d i v i d e n d s p a i d by sub- s i d i a r ies. The c o r p o r a t i o n appealed t h e New Mexico Supreme C o u r t ' s a p p r o v a l of t h i s a c t i o n . As in ASARCO, the United States Supreme Court applied the unitary business principle and found the subsidiaries to be separate business entities. It determined that the potential to control is insufficient to find a unitary business. Moreover, mere financial advantage achieved from dividends does not warrant a finding that a subsidiary is part of a unitary business. The Court concluded that the contribution to income did not result from functional integration nor centraliza- tion of management. Functional integration was absent since the subsidiaries did all their own purchasing, staffing and training. Further, there was no centralized management. The subsidiaries had separate and distinct management personnel and training systems for such personnel. They made their own management decisions and determined their own policies. Each subsidiary catered to local needs and tastes. Each subsidiary was considered autonomous and thus a separate and discrete business. There are certain factors that distinguish the present case from the cases decided by the United States Supreme Court . First of all, in ASARCO and Woolworth, the questioned income was derived from foreign investments in the form of subsidiaries. Here, the ranch divisions were active operations of Ward. Secondly, in form, each subsidi- ary is a separate and distinct business. Each had separate directors, officers and staff. On the other hand, the ranch divisions were formally part of the Ward corporation. They were subject to Ward's policies and directives and had to operate under the auspices of the board and officers. Third, and most important, there is a striking difference between t h e p r e s e n t c a s e and t h e United S t a t e s Supreme Court c a s e s regarding t h e independence of t h e b u s i n e s s e n t i t i e s . I n applying t h e s t a n d a r d u t i l i z e d by t h e Supreme Court v i e must a f f i r m our i n i t i a l d e c i s i o n . To a s c e r t a i n whether t h e s u b s i d l a r l e s were p a r t of a u n i t a r y b u s i n e s s , t h e Supreme Court had t o determine whether t h e r e was f u n c t i o n a l l n t e g r a t l o n and c e n t r a l i z e d management i n t h e r e l a t i o n s h i p between t h e p a r e n t and s u b s i d i a r y . I n o t h e r words, t h e Court focused on t h e r e l a t i v e independence of t h e s u b s i d i a r y . I n t h e c a s e a t b a r , w e f i n d t h a t t h e ranch d i v i s i o n s had v e r y l i t t l e independence from t h e o v e r a l l Ward o p e r a t i o n . The ranch d i v i s i o n s and Ward were f u n c t i o n a l l y i n t e g r a t e d . Even though a s p e c l f i c p r o d u c t d i d n o t e v o l v e from such i n t e g r a - t l o n , f u n c t i o n a l i n t e g r a t i o n e x i s t e d w i t h r e s p e c t t o t h e o p e r a t i o n of t h e d i v i s i o n . There was a l s o a l a r g e amount of c e n t r a l i z e d management. S i n c e t h e ranch d i v i s i o n s a r e n o t s e p a r a t e and d i s c r e t e b u s i n e s s e n t i t i e s b u t p a r t of a u n l t a r y b u s i n e s s , t h e S t a t e was c o r r e c t i n t a x i n g Ward, based on a p p r o p r i a t i o n of Ward's t o t a l income. The Nontana d i v i s i o n s d i d n o t have t h e c a p a c i t y t o o p e r a t e independent of Ward. The r a n c h e s depended upon t h e o u t - o f - s t a t e o p e r a t i o n f o r a c t u a l s e r v i c e s i n c l u d i n g p r e p a r a t i o n of f e d e r a l and s t a t e r e p o r t s , t a x r e t u r n s and financial s t a t e m e n t s and h i r i n g a c c o u n t a n t s t o perform such s e r v i c e s . The home o f f i c e a l s o k e p t a l l r e c o r d s and books and provided f i n a n c i n g when funds i n t h e ranch d i v i s i o n expense account were i n s u f f i c i e n t . F u r t h e r , t h e d i r e c t o r s and o f f i c e r s c o n t r o l l e d - a l l d i v i s i o n s of Ward, i n c l u d i n g t h e ranch divisions. They approved o r made - a l l major d e c i s i o n s with r e s p e c t t o ranching a c t i v i t y such a s buying equipment and buying arid s e l l r n g c a c t l e . I f such d e c i s i o n s were n o t made, t h e ranches simply would s t a n d i d l e . F u r t h e r , w e b e l i e v e t h a t Ward a d m i t t e d c h a t r h e ranches were p a r t of a u n i t a r y b u s i n e s s by u t i l i z i n g t h e u n l t a r y b u s i n e s s approach when f i l i n g c o r p o r a t i o n income t a x forms i n t h e o t h e r s t a t e s where it o p e r a t e d . I t c o n s i d e r e d t h e r a n c h e s p a r t of i t s u n i t a r y b u s l n e s s t o set o f f income earned i n t h o s e s t a t e s w i t h l o s s e s i n c u r r e d i n Montana. However, t o m i n i m i z e t a x a s s e s s m e n t i n Montana, Ward a s s e r t e d t h a t it was a s e p a r a t e e n t i t y . W e a l s o conclude t h a t t h e s t a n d a r d u t i l i z e d by t h e Unlced S t a t e s Supreme Court t o d e t e r m i n e i f t h e s u b s i d i a r i e s I n q u e s t i o n were p a r t of a u n i t a r y b u s i n e s s is c o n s i s t e n t wltn t h e s t a n d a r d c o d i f i e d i n s e c t i o n 15-31-381(2), MCA. A s previously d i s c u s s e d , t h e Court focused upon t h e indepen- dence of t h e e n t i t y and whether it was c a p a b l e of s e p a r a t e maintenance. Our s t a t u t e a l s o keys upon t h e dependence upon t h e " o u t of s t a t e " o p e r a t i o n and whether t h e e n t i t y is cdpable of s e p a r a t e maintenance a s an independent b u s i n e s s . R u s s e l l S t o v e r a l s o q u e s t i o n s t h e c o n s t i t u t i o n a l i t y of t h e formula used t o a p p o r t i o n t o t n e s t a t e income t o be taxed. W e do n o t c o n s i d e r t h i s i s s u e f o r t h e f o l l o w i n g r e a s o n s . F i r s t of a l l , t h i s q u e s t i o n was n o t r a i s e d i n t h e l n i t i a l a p p e a l t o t h i s Court. Second, t h e United S t a t e s Supreme C o u r t d i d n o t a d d r e s s t h i s i s s u e i n i t s remand o r d e r . F i n a l l y , n e i t h e r p a r t y a d e q u a t e l y b r i e f e d t h i s I s s u e . I n f a c t , t n e a p p e l l a n t mentions it f o r t h e s o l e purpose t o i n s u r e t h a t it is n o t deemed waived. Affirmed. ~~wuL.4, %wW.QJq Chief J u s t i c e