Title: RUSSELL STOVER CANDIES INC v DEPT

State: montana

Issuer: Montana Supreme Court

Document:

No. 80-375 IN THE S U P R E P I I E COURT OF THE STATE OF MONTANA 1981 WARD PAPER BOX COMPANY, a Missouri corp. , Respondent and Appellant, DEPARTMENT OF REVENUE OF THE STATE OF MONTANA, Appellant and Respondent. Appeal from: District Court of the First Judicial District, In and for the County of Lewis & Clark, The Honorable Peter Meloy, Judge presiding. Counsel of Record: For Appellant: Terry B. Cosgrove, Helena, Montana (Special Asst. Atty. General), Argued For Respondent : Ward A. Shanahan; argued, Helena, Montana G~ugh, Shanahan, Johnson & Waterman, Helena, Montana Submitted: September 21, 1981 Decided : 2 i Filed: QEC 2 ."L 4 9 8 1 Clerk M r . 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. T h i s is an appeal by the Department of Revenue (DOR) from a judgment of the D i s t r i c t Court of L e w i s and C l a r k County v a c a t i n g an assessment of 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 t h e Ward Paper Box Company (Ward) f o r t h e y e a r s 1971 through 1975. W e r e v e r s 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 tax r e t u r n s f o r t h e y e a r s i n q u e s t i o n based on t h e segregated 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 to s e p a r a t e accounting o f 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 use of a t h r e e f a c t o r formula which apportioned to Montana a p a r t of Ward I s t o t a l income. Ward p r o t e s t e d t h i s assessment t o t h e S t a t e Tax Appeal Board ( STAB) . STAB af 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 ~ i s t r i c t Court of L e w i s and C l a r k County. O n August 4 , 1980, t h e District Court reversed t h e STAB d e c i s i o n . DOR now a p p e a l s from t h e judgment of t h e District Court. Ward is a Missouri c o r p o r a t i o n q u a l i f i e d and doing busi- 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 its common s t o c k is owned by M r . Louis Ward. Ward's a c t i v i t i e s c o n s i s t 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 of Montana a r e 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 of two c a t t l e r a n c h e s , one i n Meagher County and one i n Powell County. F o r t h e y e a r s 1971 through 1975, Ward used t h e s e p a r a t e accounting method f o r f i l i n g its Montana tax 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 tax of $50. During t h o s e y e a r s t h e o p e r a t i n g costs 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 those 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 states 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 included as p a r t of its total u n i t a r y b u s i n e s s . I n t h o s e states t h e losses s u s t a i n e d by t h e ranch d i v i s i o n s were used to of £ s e t income earned b y t h e paper 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 I 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 are 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 ice 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 included p r e p a r i n g f e d e r a l and state 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 to 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 m e n t s and b a l a n c i n g check books. 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 $ 6 0 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 t h e home o f f ice p e r s o n n e l . Ward's d i v i s i o n s d i d n o t exchange equipment or p e r s o n n e l and d i d n o t purchase p r o d u c t s j o i n t l y . There w a s no j o i n t adver- 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 t w o 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 a c c o u n t . Each d i v i s i o n ' s expense bank a c c o u n t w a s maintained 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 a c c o u n t . I f t h e d i v i s i o n d i d n o t immediately need t h e funds, 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 a c c o u n t 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 as 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 i n v e s t m e n t income was a t t r i b u t a b l e to 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 to funds earned i n Montana could n o t b e s p e c i f i c a l l y i d e n t i f i e d or 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 - 3 - enough income to meet expenses, a d d i t i o n a l funds would be t r a n s - f e r r e d from Ward's g e n e r a l a c c o u n t to t h e ranch d i v i s i o n ' s expense bank a c c o u n t . The p a y r o l l a c c o u n t f o r each ranch d i v i s i o n w a s maintained i n a Montana bank and checks could be w r i t t e n on t h e a c c o u n t by t h e ranch manager. However t h e home o f f ice 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 w a s 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 e v i d e n c e 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 ice 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 finan- 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 , such as t h e purchase of 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 of t h e chairman of t h e board or t h e p r e s i d e n t of t h e c o r p o r a t i o n . Based on its f i n d i n g s r e g a r d i n g Ward I s o p e r a t i o n , STAB h e l d t h a t Ward was a u n i t a r y b u s i n e s s and t h a t t h e D O R had pro- p e r l y a s s e s s e d t h e a d d i t i o n a l t a x e s a g a i n s t Ward. The District Court r e v e r s e d t h e STAB d e c i s i o n , and DOR a p p e a l s . Two i s s u e s are r a i s e d on a p p e a l : 1. Whether t h e Montana ranch d i v i s i o n s were p a r t of Ward's u n i t a r y b u s i n e s s r e q u i r i n g Ward to a p p o r t i o n its total income f o r Montana c o r p o r a t i o n and l i c e n s e t a x purposes. 2. Whether t h e p r o p e r s t a n d a r d of review was used by t h e D i s t r i c t Court i n reviewing t h e STAB d e c i s i o n . I n o r d e r t o r e s o l v e t h e f i r s t i s s u e we must l o o k a t t h e p e r t i n e n t s t a t u t o r y language i n e f f e c t f o r t h e y e a r s 1971 t h r o u g h 1975, t h e y e a r s f o r which Ward was a s s e s s e d a d d i t i o n a l cor- p o r a t i o n l i c e n s e t a x e s . I n 1971 and 1972 s e c t i o n 84-1503, R.C.M. 1947, provided i n p e r t i n e n t p a r t : " I f t h e income of any c o r p o r a t i o n from s o u r c e s w i t h i n t h e state cannot be p r o p e r l y s e g r e g a t e d from income w i t h o u t t h e s t a t e , t h e n , i n t h a t e v e n t , t h e amount of t h e n e t income r e t u r n e d s h a l l be t h a t p r o p o r t i o n of t h e t a x p a y e r ' s t o t a l n e t income which t h e t a x p a y e r ' s g r o s s b u s i n e s s done i n t h e s t a t e of Montana b e a r s t o t h e t o t a l g r o s s b u s i n e s s of t h e t a x p a y e r , and apportionment s h a l l be made under t h e r u l e s and r e g u l a t i o n s p r e s c r i b e d by t h e s t a t e board of e q u a l i z a t i o n , g i v i n g c o n s i d e r a t i o n t o sales, p r o p e r t y and p a y r o l l and such o t h e r f a c t o r s as may be deemed a p p l i c a b l e . . ." A 1973 amendment of t h i s s e c t i o n s u b s t i t u t e d t h e words " d e p a r t m e n t of revenue" f o r "board of e q u a l i z a t i o n . " The s e c t i o n was amended a g a i n i n 1974 and as amended s t a t e d i n p a r t : "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 b u s i n e s s is u n i 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 or c o n t r i b u t o r y to t h e o p e r a t i o n of t h e b u s i n e s s o u t s i d e t h e state 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 are c l o s e l y a l l i e d and n o t c a p a b l e of s e p a r a t e maintenance as independent b u s i n e s s [ e s ] ." T h i s same r u l e was found i n t h e a d m i n i s t r a t i v e r e g u l a t i o n s p r i o r to t h e 1974 amendment of s e c t i o n 84-1503. The r e g u l a t i o n s which c o n t a i n e d t h i s r u l e were e f f e c t i v e f o r t a x y e a r s beginning on or a f t e r J a n u a r y I, 1967. I n Mont. Dept. o f Rev. v. Am. Smelting & ~ e f i n i n g ( 1 9 7 7 ) , 173 Mont. 316, 567 P.2d 9 0 1 ( h e r e i n a f t e r c i t e d as ASARCO), t h i s Court h e l d t h a t t h e purpose of t h e 1974 amendment was to c l a r i f y t h e s t a t u t e ; w e s t a t e d t h a t t h e unamended v e r s i o n of t h e sta- t u t e w a s n o t i n c o n f l i c t w i t h t h e r e g u l a t i o n s i n e f f e c t p r i o r to t h e 1974 amendment and we upheld t h e a d m i n i s t r a t i v e r e g u l a t i o n s . T h e r e f o r e , t h e r u l e quoted above a p p l i e d d u r i n g t h e e n t i r e p e r i o d i n d i s p u t e , f i r s t as 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 as a s t a t u t e i n which t h a t r e g u l a t i o n was c o d i f i e d . I f Ward was a u n i t a r y b u s i n e s s , it was r e q u i r e d to appor- t i o n its b u s i n e s s income f o r t h e purpose of t h e Montana cor- p o r a t i o n l i c e n s e t a x . If t h e b u s i n e s s w a s u n i t a r y , t h e income from s o u r c e s w i t h i n Montana could n o t be " p r o p e r l y s e g r e g a t e d v from income w i t h o u t t h e s t a t e . S e g r e g a t i n g t h e income by s o u r c e does n o t n e c e s s a r i l y " p r o p e r l y s e g r e g a t e " t h e Montana income from t h e o u t - o f - s t a t e income t h e r e b y making t h e use of t h e s e p a r a t e accounting method p r o p e r , any s t a t e m e n t i n ASARCO, s u p r a , t h a t might be i n t e r p r e t e d t o t h e c o n t r a r y n o t w i t h s t a n d i n g . The United S t a t e s Supreme Court h a s d e c l a r e d t h a t a state is n o t precluded from t a x i n g a c o r p o r a t i o n under t h e a p p o r t i o n - ment method even i f t h e s o u r c e of income may be a s c e r t a i n e d by s e p a r a t e g e o g r a p h i c a l a c c o u n t i n g as long as t h e i n t r a - s tate and e x t r a - s t a t e a c t i v i t i e s are p a r t of a s i n g l e u n i t a r y b u s i n e s s . Mobil O i l Corp. v. C o m l r of Taxes of Vermont (1980), 445 U.S. 425, 100 S.Ct. 1223, 6 3 L.Ed.2d 510. I f t h e o p e r a t i o n of Ward's b u s i n e s s w i t h i n Montana was dependent upon or c o n t r i b u t o r y to its o p e r a t i o n o u t s i d e t h e s t a t e o r i f t h e Montana ranch d i v i s i o n s and t h e o u t - o f - s t a t e paper box d i v i s i o n s were c l o s e l y a l l i e d and n o t c a p a b l e of s e p a r a t e main- t e n a n c e a s independent b u s i n e s s e s , t h e n t h e Montana ranch d i v i - s i o n s were p a r t of a " u n i t a r y b u s i n e s s . " W e f i n d from t h e f a c t s of t h i s case 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 to its opera- t i o n o u t s i d e Montana. The Montana d i v i s i o n s were dependent upon t h e out-of -state o p e r a t i o n f o r c e n t r a l s e r v i c e s which included t h e p r e p a r a t i o n of f e d e r a l and state r e p o r t s , t h e h i r i n g of 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 , t h e p r e p a r a t i o n of f i n a n c i a l s t a t e m e n t s , t h e keeping of r e c o r d s , and t h e balancing of check books; f o r 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 s 1 expense bank account were i n s u f f i c i e n t to meet t h e d i v i s i o n s 1 e x p e n s e s ; and f o r major management d e c i s i o n s which included t h e purchase of equipment and t h e buying and s e l l i n g of c a t t l e . Ward I s o p e r a t i o n w i t h i n Montana also c o n t r i b u t e d t o its o p e r a t i o n and n e t income o u t s i d e t h e s t a t e . The Montana d i v i - s i o n s f u r n i s h e d Ward w i t h a s u b s t a n t i a l t a x w r i t e - o f f t h e r e b y s a v i n g t h e c o r p o r a t i o n as a whole a s u b s t a n t i a l amount i n t a x e s . A l s o a p o r t i o n of Ward s short-term investment income was a t t r i - b u t a b l e to funds g e n e r a t e d i n Montana. S i n c e Ward's o p e r a t i o n i n Montana was both dependent upon and c o n t r i b u t o r y t o its o p e r a t i o n o u t s i d e t h e s t a t e , t h e Montana ranch d i v i s i o n s were p a r t of Ward's u n i t a r y b u s i n e s 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 . The respondent Ward contends t h a t t h e DORIS assessment of a d d i t i o n a l t a x e s a g a i n s t it i n t h i s c a s e is an a t t e m p t to s u b j e c t income earned by Ward i n o t h e r states t o t h e Montana c o r p o r a t i o n l i c e n s e t a x i n v i o l a t i o n of t h e due p r o c e s s c l a u s e of t h e F o u r t e e n t h Amendment of t h e u n i t e d S t a t e s C o n s t i t u t i o n . W e d i s a g r e e . The u n i t e d S t a t e s Supreme Court r e c e n t l y addressed t h i s i s s u e i n Mobil O i l Corp., 445 U.S. a t 436-437, s t a t i n g : -- " I t long has been e s t a b l i s h e d t h a t t h e income of a b u s i n e s s o p e r a t i n g i n i n t e r s t a t e commerce is n o t immune from f a i r l y apportioned s t a t e t a x a t i o n . ( C i t e o m i t t e d . ) ' [TI h e e n t i r e n e t income of a c o r p o r a t i o n , g e n e r a t e d by i n t e r s t a t e a s w e l l a s i n t r a s t a t e a c t i v i t i e s , may be f a i r l y a p p o r t i o n e d among t h e S t a t e s f o r t a x purposes by formulas u t i l i z i n g i n - s t a t e a s p e c t s of i n t e r s t a t e a f f a i r s . ' ( C i t e o m i t t e d . ) For a S t a t e to tax income g e n e r a t e d i n i n t e r s t a t e commerce, t h e Due P r o c e s s Clause of t h e F o u r t e e n t h Amendment impo- ses two r e q u i r e m e n t s : a 'minimal c o n n e c t i o n 1 between t h e i n t e r s t a t e a c t i v i t i e s and t h e t a x i n g S t a t e , and a r a t i o n a l r e l a t i o n s h i p between t h e income a t t r i b u t e d to t h e S t a t e and t h e i n t r a s t a t e v a l u e s of t h e e n t e r p r i s e . ( C i t e o m i t t e d . ) " The "minimal connection1' o r l'nexus" is e s t a b l i s h e d " i f t h e c o r p o r a t i o n a v a i l s i t s e l f of t h e ' s u b s t a n t i a l p r i v i l e g e of c a r r y i n g on b u s i n e s s 1 w i t h i n t h e S t a t e . . ." Mobil O i l Corp., -- 445 u.S. a t 437, c i t i n g Wisconsin v. J. C. Penny Co. ( 1 9 4 0 ) , 311 U.S. 435, 444-445. Ward c l e a r l y a v a i l e d i t s e l f of t h i s p r i v i l e g e i n Montana. The " r a t i o n a l r e l a t i o n s h i p " requirement is m e t i n t h i s c a s e a l s o . Ward was o p e r a t e d a s a u n i t a r y b u s i n e s s and a s d i s c u s s e d e a r l i e r its o p e r a t i o n i n Montana was both dependent upon and c o n t r i b u t o r y t o its o p e r a t i o n o u t s i d e t h e s t a t e . T h e r e f o r e , t h e p o r t i o n of Ward I s total income a t t r i b u t e d t o Montana under Montana's three-f a c t o r apportionment formula is r a t i o n a l l y r e l a t e d to t h e i n t r a s t a t e value of t h e c o r p o r a t i o n . The second i s s u e r a i s e d by a p p e l l a n t DOR is whether t h e D i s t r i c t Court used t h e proper s t a n d a r d of review of STAB'S f i n - d i n g s and r u l i n g . Since we a r e r e v e r s i n g t h e District Court judgment, t h i s i s s u e is i r r e l e v a n t t o a d e t e r m i n a t i o n of t h i s a p p e a l . The judgment of t h e District Court is reversed and t h e o r d e r of t h e S t a t e Tax Appeal Board e n t e r e d October 1, 1979 i n Docket N o . CT-1978-3 is r e i n s t a t e d . Chief J u s t i c e