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 DistrictCourt of theFirstJudicialDistrict, In and fortheCounty 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

&_ .-. - ClerkMr. Chief Justice Frank I. Haswell delivered the Opinion of theCourt. The Department of Revenue (DOR) appealed theLewisand Clark County District Courtjudgment reversing the StateTax 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 unitarybusiness. The DistrictCourtheld thatassessment of income taxes based on appropriation of income was thus improper. This Court reversed the DistrictCourt 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 casesdecided subsequent toour decision. Weaffirmour previous decision. The factsarewellstated inour initialopinion, Ward Paper Box Co. v. DOR (1981), Mont. 

## ,638 P.2d 1053, 38 St.Rep. 4147. However, theywillbe brieflyset outhere. Ward filedMontana corporation licensetax returns for 1971 through 1975 based on the segregated income from its Montana operations alone. DOR audited Ward's records, determined thatWard was a unitarybusiness 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 partof Ward's total income. Ward protested this assessment to STAB which affirmed the assessment by DOR. Ward fileda 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 DistrictCourt

# . 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 inmanufacture, saleand distributionof paper boxes and paper box products in the States of Kansas, Missouri, Colorado, South Carolina and Virginia. The Montana divisionsconsistedof two cattle ranches, one inMeagher County and one inPowell County. For theyears 1971 through 1975, Ward used the separateaccountingmethod for filing 

### itsMontana 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 earnedby thosedivisions. During the same time period, Ward filed tax returns under the unitary apportionment method in the other states inwhich 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 factsregarding Ward's operationsduring theyears 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 federaland statereports, hiring theaccountants toprepare 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. Thisfigurewas notbased on theamount of time actually spent on each division by home officepersonnel. Ward's divisions didnotexchange equipment orpersonnel and did not purchase products jointly. There was no joint advertisingprogram among thevariousdivisionsand no

common salesmen. There were two accounts maintained for each division,

an expense bank account and a payroll account. Each division's expense bank accountwas maintained ina 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, theywould be transferred from the separate division expense account intoa general account and would be utilized wherever needed by any of the separate divisions. The president of the company would make thedecision astothe transfer. Excess funds would be invested, if not needed by any of the divisions. A portion of the short-term investment income was attributable tofunds generated inMontana, yet the portion attributable to funds earned inMontana could not be specificallyidentifiedor 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 expensebank account. The payroll account for each ranch division was maintained ina Montana bank and checks could be written onthe account by the ranch manager. However, the home office personnel maintained the records, balanced the books and made thedeposits. There was some central management of the corporation. From the evidence presented atthehearing, 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 thebuying and sellingof cattle, required the approval of the chairman of the board or the president of thecorporation. We reversed the decision of the District Court and held that the ranch divisions were part of Ward's unitary business. Our decisionwas founded upon the statutory definition of a unitary business. Section 15-31-301(2), PICA, defines the unitarybusinessprinciple. Itreads: "(2) A corporation engaged in a unitary business within and without Montana must apportion itsbusiness income asprovided 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 independentbusinesses." This rule applied throughout the entireperiod of the dispute, first as an administrative regulation and then as the above statuteinwhich thatregulat'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 outsideMontana. 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),458U.S. I -

### S.Ct. 

## , 73 L.Ed.2d 819, 50 USLW 4457,and ASARCO, Inc. v. Idaho StateTax 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 incomeproduced 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, 98S.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 infiveforeign subsidiaries. The StateSupreme Court approved this practice, and ASARCO appealed to the United States Supreme Court. The Court applied theunitarybusiness principle, best explained in Mobil Oil, supra. It found that the subsidiaries inquestionwere separatebusiness entities. ASARCO had amajority interest inSouthern Peru Copper Corporation, butdue toamanagement 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 officersor hireany staff. Intwo other subsidiaries, ASARCO onlyheld minority interests, and the court held they were autonomous operations. Finally, theMexican subsidiarywas oncewholly owned by ASARCO but a Mexican law forced it todivest 51percent of itsownership. Idaho urged the Court to expand the unitary business principletoinclude any income received by aparent corporationthatwould add tothegeneralcapitalof thatcorporation. 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 theNew Mexico Supreme Court's approvalof thisaction.

### 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 ofmanagement. 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 ownmanagement decisions and determined their own policies. Each subsidiary catered to local needs and tastes. Each subsidiary was considered autonomous and thus

a separate and discretebusiness. There are certain factors that distinguish thepresent

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 auspicesof the board and officers. Third, and most important, there is a striking difference betweenthe present case and the United States Supreme Court cases regarding the independence of the business entities. In applying the standardutilizedby theSupreme Court vie must affirm our initial decision. To ascertain whether the subsidlarles were part of a unitary business, the Supreme Court had todetermine whether therewas functional lntegratlon and centralized management in the relationship between theparent and subsidiary. Inother words, the Court focused on the relative independence of the subsidiary. In the case atbar, we find that the ranch divisions had very little independence from the overall Ward operation. The ranch divisionsand Ward were functionally integrated. Even though a speclficproduct did not evolve from such integratlon, functional integration existed with respect to the operation of the division. Therewas alsoa largeamount 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 appropriationof 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 toperform 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 officerscontrolled 

### - alldivisionsof Ward, including the ranch divisions. They approved or made 

### - allmajor decisions with respect to ranching activity such as buying equipmentand 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 approachwhen filingcorporation income tax forms in the other stateswhere 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 StatesSupreme Court todetermine if the subsidiaries In question were part of a unitary business is consistent wltn the standard codified insection 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 statutealsokeys upon thedependence upon the "out of state" operation and whether the entity is cdpable of separatemaintenance asan independent business. Russell Stover alsoquestionstheconstitutionalityof the formula used to apportion to 

### tne state income to be taxed. We do not consider this issue for the following

reasons. Firstof all, thisquestionwas 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 toinsure that it isnot deemed waived. Affirmed. 

# ~~wuL.4, 

# %wW.QJq

Chief Justice