No. 80-375 

IN THE SUPRE??E COURT OF THE STATE OF Pl0NTATJ.A 

1983 

RUSSELL STOVE2 CANDIES, INC., 

Respondent and Appellant, 

DEPART'MENT OF KEVENUF: OF TI-IE STATE 

OF FIOTJTAEJA , 

Appellant and Respondent. 

Appeal fron: The District Court of the First Judicial District, 

In and for the County of Lewis E Clark., 

The Honorable Peter Neloy, Judge presiding* 

Counsel of Record: 

For Appellant: 

Ward A. Shanahan: Gough, Shanahan, Johnson & Vaterman, 

Helena, Montana 

Terry E. Cosgrove; Luxan & Yurfitt, .Eel-ena, Yontana 

Michael Rieley, Dept. of Revenue, ITelena, Xontana 

Submitted: March 31, 1983 

Decided: May 19, 1983 

Flled: MAY 19 1983 

&_ 

.- . - Clerk 
Mr. Chief Justice Frank I. Haswell delivered the Opinion of 

the Court. 

The Department of Revenue (DOR) appealed the Lewis and 

Clark County District Court judgment reversing the State Tax 

Appeal Board 's (STAB) determination that the Montana divisions of the Ward Paper Box Co. (Ward), appellant, now 

Russell Stover Candies, Inc., were taxable as part of a 

unitary business. The District Court held that assessment of 

income taxes based on appropriation of income was thus 

improper. This Court reversed the District Court decision. 

Russell Stover appealed to the United States Supreme Court 

which vacated our judgment and remanded the case to this 

Court for reconsideration in light of two United States 

Supreme Court cases decided subsequent to our decision. 

We affirm our previous decision. 

The facts are well stated in our initial opinion, Ward 

Paper Box Co. v. DOR (1981), Mont. , 638 P.2d 1053, 

38 St.Rep. 4147. However, they will be briefly set out here. 

Ward filed Montana corporation license tax returns for 

1971 through 1975 based on the segregated income from its 

Montana operations alone. DOR audited Ward's records, 

determined that Ward was a unitary business not entitled to 

separate accounting of its Montana operations and income, 

and assessed additional corporation license taxes against 

Ward by use of a three-factor formula which apportioned to 

Montana part of Ward's total income. 

Ward protested this assessment to STAB which af f irmed 

the assessment by DOR. Ward filed a petition for review in 

the District Court of Lewis and Clark County. On August 4, 

1980, the District Court reversed the STAB decision. DOR 

appealed to this Court from the judgment of the District 
Court . 

Ward was a Missouri corporation qualified and doing 

business in Montana, maintaining its principal place of 

business in Kansas City, Kansas. All of its common stock 

was owned by Louis Ward during the period in question. 

Ward's activities consisted of seven divisions; the divisions located outside Montana were involved in manufacture, 

sale and distribution of paper boxes and paper box products 

in the States of Kansas, Missouri, Colorado, South Carolina 

and Virginia. The Montana divisions consisted of two cattle 

ranches, one in Meagher County and one in Powell County. 

For the years 1971 through 1975, Ward used the separate accounting method for filing its Montana tax returns and 

in each year paid the minimum corporation license tax of 

$50. During those years the operating costs and depreciation expenses of the Montana divisions exceeded the income 

earned by those divisions. 

During the same time period, Ward filed tax returns 

under the unitary apportionment method in the other states 

in which it was operating, and the Montana ranch divisions 

were included as part of its total unitary business. In 

those states the losses sustained by the ranch divisions 

were used to offset income earned by the paper box 

divisions. 

The facts regarding Ward's operations during the years 

in question are for the most part uncontested. The home 

office in Kansas City provided administrative services for 

all divisions of Ward's operation which included preparing 

federal and state reports, hiring the accountants to prepare 

tax returns, keeping the books, preparing financial state- 
ments and balancing checkbooks. Each of the divisions was 

charged an arbitrary figure of $60 per month for the home 

office services. This figure was not based on the amount of 

time actually spent on each division by home office personnel. 

Ward's divisions did not exchange equipment or personnel and did not purchase products jointly. There was no 

joint advertising program among the various divisions and no 

common salesmen. 

There were two accounts maintained for each division, 

an expense bank account and a payroll account. Each 

division's expense bank account was maintained in a bank in 

Kansas City. Any monies generated by a division were 

deposited in that division's separate expense account. If 

the division did not immediately need the funds, they would 

be transferred from the separate division expense account 

into a general account and would be utilized wherever needed 

by any of the separate divisions. The president of the 

company would make the decision as to the transfer. Excess 

funds would be invested, if not needed by any of the divisions. A portion of the short-term investment income was 

attributable to funds generated in Montana, yet the portion 

attributable to funds earned in Montana could not be specifically identified or segregated. 

If either of the Montana ranch divisions did not 

generate enough income to meet expenses, additional funds 

would be transferred from Ward's general account to the 

ranch division's expense bank account. 

The payroll account for each ranch division was 

maintained in a Montana bank and checks could be written on 
the account by the ranch manager. However, the home office 

personnel maintained the records, balanced the books and 

made the deposits. 

There was some central management of the corporation. 

From the evidence presented at the hearing, STAB found that 

the home office made all of the decisions regarding the 

financial affairs of the corporation and that major decisions regarding the ranches, such as the purchase of 

equipment and the buying and selling of cattle, required the 

approval of the chairman of the board or the president of 

the corporation. 

We reversed the decision of the District Court and 

held that the ranch divisions were part of Ward's unitary 

business. 

Our decision was founded upon the statutory definition 

of a unitary business. Section 15-31-301(2), PICA, defines 

the unitary business principle. It reads: 

"(2) A corporation engaged in a unitary 

business within and without Montana must 

apportion its business income as provided 

for under 15-31-305. A business is unitary when the operation of the business 

within the state is dependent upon or 

contributory to the operation of the 

business outside the state or if the 

units of the business within and without 

the state are closely allied and not 

capable of separate maintenance as 

independent businesses." 

This rule applied throughout the entire period of the 

dispute, first as an administrative regulation and then as 

the above statute in which that regulat'ion was codified. We 

concluded from the facts of the case that Ward's operation 

within Montana was dependent upon and contributing to its 

operation outside Montana. Thus, taxing apportioned income 

of Ward's overall operation was not violative of the 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 consideration 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 subsidiaries 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 
five foreign subsidiaries. The State Supreme Court approved 

this practice, and ASARCO appealed to the United States 

Supreme Court. 

The Court applied the unitary business principle, best 

explained in Mobil Oil, supra. It found that the subsidiaries in question were separate business entities. 

ASARCO had a majority interest in Southern Peru Copper 

Corporation, but due to a management agreement, it could not 

assume control of the subsidiary. Further, Southern Peru 

did not seek direction from ASARCO. The majority of MIM 

Holdings, Ltd., in Australia was owned by ASARCO, but no 

control was asserted nor did it elect any board members, 

appoint any officers or hire any staff. In two other subsidiaries, ASARCO only held minority interests, and the court 

held they were autonomous operations. Finally, the Mexican 

subsidiary was once wholly owned by ASARCO but a Mexican law 

forced it to divest 51 percent of its ownership. 

Idaho urged the Court to expand the unitary business 

principle to include any income received by a parent corporation that would add to the general capital of that corporation. The Court refused this interpretation because it 

would result in taxing returns on any corporate investment 

as "business income," even though received from a totally 

independent entity. 

The same general question was raised in Woolworth. 

The taxpayer corporation owned four foreign subsidiaries. 

New Mexico apportioned Woolworth's income for taxing 

purposes and included in such income dividends paid by subsidiar ies. The corporation appealed the New Mexico Supreme 

Court's approval of this action. 
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 centralization 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 subsidiary 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 
the present case and the United States Supreme Court cases 

regarding the independence of the business entities. 

In applying the standard utilized by the Supreme Court 

vie must affirm our initial decision. To ascertain whether 

the subsidlarles were part of a unitary business, the 

Supreme Court had to determine whether there was functional 

lntegratlon and centralized management in the relationship 

between the parent and subsidiary. In other words, the Court 

focused on the relative independence of the subsidiary. In 

the case at bar, we find that the ranch divisions had very 

little independence from the overall Ward operation. The 

ranch divisions and Ward were functionally integrated. Even 

though a speclfic product did not evolve from such integratlon, functional integration existed with respect to the 

operation of the division. There was also a large amount of 

centralized management. Since the ranch divisions are not 

separate and discrete business entities but part of a 

unltary business, the State was correct in taxing Ward, 

based on appropriation of Ward's total income. 

The Nontana divisions did not have the capacity to 

operate independent of Ward. The ranches depended upon the 

out-of-state operation for actual services including 

preparation of federal and state reports, tax returns and 

financial statements and hiring accountants to perform such 

services. The home office also kept all records and books 

and provided financing when funds in the ranch division 

expense account were insufficient. Further, the directors 

and officers controlled - all divisions of Ward, including the 

ranch divisions. They approved or made - all major decisions 

with respect to ranching activity such as buying equipment 
and buying arid sellrng cactle. If such decisions were not 

made, the ranches simply would stand idle. 

Further, we believe that Ward admitted chat rhe 

ranches were part of a unitary business by utilizing the 

unltary business approach when filing corporation income tax 

forms in the other states where it operated. It considered 

the ranches part of its unitary buslness to set off income 

earned in those states with losses incurred in Montana. 

However, to minimize tax assessment in Montana, Ward 

asserted that it was a separate entity. 

We also conclude that the standard utilized by the 

Unlced States Supreme Court to determine if the subsidiaries 

In question were part of a unitary business is consistent 

wltn the standard codified in section 15-31-381(2), MCA. As 

previously discussed, the Court focused upon the independence of the entity and whether it was capable of separate 

maintenance. Our statute also keys upon the dependence upon 

the "out of state" operation and whether the entity is 

cdpable of separate maintenance as an independent business. 

Russell Stover also questions the constitutionality of 

the formula used to apportion to tne state income to be 

taxed. We do not consider this issue for the following 

reasons. First of all, this question was not raised in the 

lnitial appeal to this Court. Second, the United States 

Supreme Court did not address this issue in its remand 

order. Finally, neither party adequately briefed this 

Issue. In fact, tne appellant mentions it for the sole 

purpose to insure that it is not deemed waived. 

Affirmed. 

~~wuL.4, %wW.QJq Chief Justice