Title: Leathers v. Jacuzzi, Inc.

State: arkansas

Issuer: Arkansas Supreme Court

Document:

Timothy J. LEATHERS, Commissioner, Arkansas
Department of Finance and Administration v.
JACUZZI, INC.

96-136                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
               Opinion delivered December 16, 1996


1.   Taxation -- 1982 instruction booklet did not provide for
     filing combined returns -- chancellor erred in so finding. --
     Appellant's contention that the chancellor erred in finding
     that its 1982 instruction booklet provided for filing of
     combined returns was correct; the instruction booklet stated
     that "DISC corporations are treated as regular business
     corporations" and "Business corporations, financial
     institutions, domestic insurance companies and DISC
     corporations should use Ark. Form 1100 CT"; the booklet thus
     indicated that the two corporations should have each filed a
     separate return.

2.   Taxation -- appellant's refusal to allow four combined returns 
     was not because corporations had in effect filed consolidated
     returns -- chancellor erred in so finding. --  
     Appellant's contention that the chancellor erred in finding
     that the Department refused to allow the four combined returns
     on ground that the corporations had in effect filed
     "consolidated" returns was correct; in refusing to allow the
     corporations to file the amended combined returns, the
     Commissioner noted that Arkansas statutes authorize
     consolidated returns, but, Arkansas Corporate Income Tax Law
     does not specifically require or allow combined reporting;
     therefore, the Revenue Division would not utilize unitary
     combined reporting to tax multistate or multinational
     corporations; also, the Revenue Division would not accept
     returns filed on a unitary combined report basis.

3.   Taxation -- combined reporting -- differentiated from
     consolidated reporting. -- Consolidated reporting is based on
     the principle that a group of corporations is taxed on their
     consolidated taxable income, representing principally the
     results of its dealings with the outside world after the
     elimination of intercompany profit and loss; in a combined
     report, the combined income of the affiliated group is not
     computed for the purpose of taxing such income, but rather as
     a basis for determining the portion of income from the entire
     unitary business attributable to sources within the state that
     is derived by members of the group subject to the state's
     jurisdiction; a combined report is an accounting method
     whereby each member of a group carrying on a unitary business
     computes its individual taxable income by taking a portion of
     the combined net income of the group; a consolidated return is
     a taxing method whereby two corporations are treated as one
     taxpayer.

4.   Taxation -- statute cited by chancellor did not support his
     ruling -- Ark. Code Ann. 26-51-805 (1987) did not mandate
     filing of combined return or filing of any specific type of
     return. -- The chancellor's ruling that combined returns were
     mandated under the facts so as to achieve a clear reflection
     of income and expenses of the two corporations pursuant to
     Ark. Code Ann.  26-51-805 (1987) was in error; the cited
     statute involved consolidated corporate income tax returns;
     consequently, it did not support the chancellor's ruling that
     the statute "mandates" the filing of a combined return; the
     statute did not "mandate" the filing of a combined return or
     the filing of any specific type of return. 

5.   Taxation -- combined reporting -- Ark. Code Ann.  26-51-718
     contains discretionary provision upon which combined reporting
     can be allowed -- statute found to be permissive in terms of
     allowing state to accept combined reporting. -- Although there
     is no express provision in the Uniform Division of Income Tax
     for Tax Purposes Act that required or allows combined
     reporting, Ark. Code Ann.  26-51-718 contains discretionary
     language upon which combined reporting can be allowed; the
     administrative law judge found that the foregoing statute was
     permissive in terms of allowing a state to accept "combined
     reporting," and the appellate court did not disagree with this
     interpretation.

6.   Taxation -- combined method of apportionment consistent with
     apportionment method -- Commissioner has discretionary power
     to require or permit apportionment on combined basis of income
     of taxpayer that is part of unitary business. --  The combined
     method of apportionment reporting is wholly consistent with,
     and a natural extension of, the apportionment method; the
     absence of any statutory reference to the unitary method of
     reporting does not forbid its use; unity of the use and
     management of a business that is scattered through several
     states may be considered when a State attempts to impose a tax
     on an apportionment basis; the enterprise of a corporation
     that manufactures and sells its manufactured product is
     ordinarily a unitary business, and all the factors in that
     enterprise are essential to the realization of profits; the
     entire income of a corporation, generated by interstate as
     well as intrastate activities, may be fairly apportioned among
     the States for tax purposes by formulas utilizing in-state
     aspects of interstate affairs; Ark. Code Ann.  26-51-718
     (1987) grants the Commissioner the discretionary power to
     require or permit the apportionment on a combined basis of the
     income of a taxpayer that is part of a unitary business.

7.   Taxation -- chancellor erred in ruling that appellee's filing
     of combined returns was not prohibited by law -- appellee
     failed to petition appellant for permission to use combined
     method. -- Appellee was not entitled to the relief granted by
     the chancellor because it did not apply to the Commissioner to
     be permitted to use the combined reporting method of
     accounting in accordance with section 26-51-718; Ark. Code
     Ann.  26-51-718 deals with the allocation and apportionment
     provisions of the UDITPA section; a taxpayer who wishes to
     deviate from the standard formulary apportionment has to
     petition for a change; a taxpayer cannot petition by filing a
     return.

8.   Administrative law & procedure -- proper judicial review of
     administrative agency of executive branch -- trial court
     exceeded its authority -- reversed and remanded. -- The
     appellant is a part of the executive branch; in a judicial
     review of the action of an administrative agency of the
     executive department, a trial court cannot, on appeal,
     substitute its judgment for that of the executive department,
     but is restricted to considering whether, as a matter of law,
     the agency acted fraudulently, arbitrarily, or capriciously,
     whether the administrative action was substantially supported
     by substantial evidence, and whether the agency's actions
     were within the scope of its authority; here, the judicial
     branch attempted to exercise the power of the executive
     branch; the case was reversed and remanded. 


     Appeal from Pulaski Chancery Court; Collins Kilgore,
Chancellor; reversed and remanded.
     Joyce Kinkead, for appellant.
     Friday, Eldredge & Clark, by:  James M. Saxton and Barry E.
Coplin, for appellee.

     Robert H. Dudley, Justice.
     The sole issue in this case is whether Jacuzzi, Inc., and
Jacdisc, Inc., its domestic international sales corporation, are
entitled to file combined income-tax returns.  The Arkansas
Department of Finance and Administration policy does not permit
combined returns, and the Department did not authorize the
corporations to file combined returns.  The administrative law
judge upheld the Department's actions and ruled that the two
corporations could not file combined returns.  The chancellor
reversed on the ground that combined returns would give a "clear
reflection of income and expenses" of the two corporations.  We
reverse.
     Jacuzzi, Inc., has multistate and multinational sales and
operations.  It formed Jacdisc, Inc., as a wholly owned subsidiary
domestic international sales corporation, or DISC, to take
advantage of federal tax provisions.  In conformity with the
federal tax provisions, Jacdisc received "bookkeeping" commissions
on international sales of products that were purchased from
Jacuzzi.  Both corporations have the same management, personnel,
facilities, and accounting operations.
     In 1980 and 1981 Jacuzzi and Jacdisc each filed separate
Arkansas income-tax returns.  In 1982 and 1983 the two corporations
filed combined returns and, at the same time, filed amended returns
for the years 1980 and 1981.  The amended returns were filed as
combined returns.  Neither corporation had requested or received
permission from the Commissioner to file combined returns.  The
Department disallowed the four combined returns on the ground that
Arkansas corporate income-tax law does not specifically require or
allow combined reporting and sent Jacuzzi a notice of proposed
assessment.  Jacuzzi countered with a claim for a refund and
pursued and exhausted its administrative remedies.  In an
administrative hearing that combined the assessment and claim for
refund, the administrative law judge ruled that the applicable
Arkansas income-tax statutes do not authorize combined reporting,
but that the Uniform Division of Income for Tax Purposes Act
(UDITPA) permits the Department to accept combined reporting.  The
administrative judge concluded that, although the Department could
accept combined reporting under UDITPA, the Department policy was
not to accept such returns; therefore, Jacuzzi was not entitled to
relief.
     Jacuzzi filed this suit in chancery court and asked that the
court order the Department to accept its income-tax returns on a
combined basis with Jacdisc and to decree that it was entitled to
the refunds.  The chancellor ruled that a combined return was
mandated in order to achieve a clear reflection of income and
expenses of the corporations and granted relief to Jacuzzi.       
The Department appeals.
     The Department's primary point of appeal is that the
chancellor erred in ruling that Arkansas law does not prohibit, but
rather requires, the filing of combined returns in order to achieve
a clear reflection of income.  Included within the primary point of
appeal are a number of subpoints.
     In the first of its subpoints the Department contends that the
chancellor erred in finding that its 1982 instruction booklet
provided for filing of combined returns.  The argument is well
taken.  The instruction booklet states that "DISC corporations are
treated as regular business corporations" and "Business
corporations, financial institutions, domestic insurance companies
and DISC corporations should use Ark. Form 1100 CT."  The booklet
thus indicates that the two corporations should each file a
separate return.
     In its second subpoint, the Department contends that the
chancellor erred in finding that the Department refused to allow
the four combined returns on ground that the corporations "had in
effect filed `consolidated' returns." This argument is also well
taken.  In refusing to allow the corporations to file the amended
combined returns, the Commissioner wrote that Arkansas statutes
authorize consolidated returns, but, "Arkansas Corporate Income Tax
Law does not specifically require or allow combined reporting. 
Therefore, the Revenue Division will not utilize unitary combined
reporting to tax multistate or multinational corporations.  Also,
the Revenue Division will not accept returns filed on a unitary
combined report basis."
     Consolidated reporting is based on the principle that a group
of corporations is taxed on their consolidated taxable income,
"representing principally the results of its dealings with the
outside world after the elimination of intercompany profit and
loss."  3 Boris I. Bittker & Lawrence Lokken, Federal Taxation of
Income, Estates, and Gifts  90.5 at 90 (2d ed. 1988).  Combined
reporting is distinguished from consolidated reporting as follows:
In a combined report ... the combined income of the
affiliated group is not computed for the purpose of
taxing such income, but rather as a basis for determining
the portion of income from the entire unitary business
attributable to sources within the state which is derived
by members of the group subject to the state's
jurisdiction.
Chesapeake Indus. v. Comptroller, 59 Md. App. 370, 376,