No. 80-375 

IN THE SUPREPIIE 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 4981 

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

Court. 

This is an appeal by the Department of Revenue (DOR) from 

a judgment of the District Court of Lewis and Clark County 

vacating an assessment of additional corporation license taxes 

against the Ward Paper Box Company (Ward) for the years 1971 

through 1975. We reverse. 

Ward filed Montana corporation license tax returns for the 

years in question 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 a part of Ward Is total 

income. 

Ward protested this assessment to the State Tax Appeal 

Board ( STAB) . STAB af f irmed the assessment by DOR. Ward filed a 

petition for review in the ~istrict Court of Lewis and Clark 

County. On August 4, 1980, the District Court reversed the STAB 

decision. DOR now appeals from the judgment of the District Court. 

Ward is a Missouri corporation qualified and doing business in Montana, maintaining its principal place of business in 

Kansas City, Kansas. All of its common stock is owned by Mr. 

Louis Ward. Ward's activities consist of seven divisions; the 

divisions located outside of Montana are 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 consist 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 of £set income earned 

by the paper box divisions. 

The facts regarding Ward Is operations during the years in 

question are for the most part uncontested. The home off ice 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 statements and balancing check 

books. 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 

the home off ice 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 

-3- 
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 off ice 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 off ice 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. 

Based on its findings regarding Ward Is operation, STAB 

held that Ward was a unitary business and that the DOR had properly assessed the additional taxes against Ward. The District 

Court reversed the STAB decision, and DOR appeals. 

Two issues are raised on appeal: 

1. Whether the Montana ranch divisions were part of 

Ward's unitary business requiring Ward to apportion its total 

income for Montana corporation and license tax purposes. 

2. Whether the proper standard of review was used by the 

District Court in reviewing the STAB decision. 

In order to resolve the first issue we must look at the 

pertinent statutory language in effect for the years 1971 through 

1975, the years for which Ward was assessed additional corporation license taxes. 

In 1971 and 1972 section 84-1503, R.C.M. 1947, provided 

in pertinent part: 

"If the income of any corporation from sources 

within the state cannot be properly segregated 

from income without the state, then, in that 

event, the amount of the net income returned 

shall be that proportion of the taxpayer's 

total net income which the taxpayer's gross 
business done in the state of Montana bears 

to the total gross business of the taxpayer, and 

apportionment shall be made under the rules and 

regulations prescribed by the state board of 

equalization, giving consideration to sales, 

property and payroll and such other factors as 

may be deemed applicable . . ." 

A 1973 amendment of this section substituted the words 

"department of revenue" for "board of equalization." 

The section was amended again in 1974 and as amended 

stated in part: 

"A corporation engaged in a unitary business 

within and without Montana must apportion its 

business income . . . 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 

business [es] ." 

This same rule was found in the administrative regulations prior 

to the 1974 amendment of section 84-1503. The regulations which 

contained this rule were effective for tax years beginning on or 

after January I, 1967. 

In Mont. Dept. of Rev. v. Am. Smelting & ~efining (1977), 

173 Mont. 316, 567 P.2d 901 (hereinafter cited as ASARCO), this 

Court held that the purpose of the 1974 amendment was to clarify 

the statute; we stated that the unamended version of the statute was not in conflict with the regulations in effect prior to 

the 1974 amendment and we upheld the administrative regulations. 

Therefore, the rule quoted above applied during the entire period 

in dispute, first as an administrative regulation and then as a 

statute in which that regulation was codified. 

If Ward was a unitary business, it was required to apportion its business income for the purpose of the Montana corporation license tax. If the business was unitary, the income 

from sources within Montana could not be "properly segregatedv 

from income without the state. 

Segregating the income by source does not necessarily 

"properly segregate" the Montana income from the out-of-state 
income thereby making the use of the separate accounting method 

proper, any statement in ASARCO, supra, that might be interpreted 

to the contrary notwithstanding. 

The United States Supreme Court has declared that a state 

is not precluded from taxing a corporation under the apportionment method even if the source of income may be ascertained by 

separate geographical accounting as long as the intra-s tate and 

extra-state activities are part of a single unitary business. 

Mobil Oil Corp. v. Comlr of Taxes of Vermont (1980), 445 U.S. 

425, 100 S.Ct. 1223, 63 L.Ed.2d 510. 

If the operation of Ward's business within Montana was 

dependent upon or contributory to its operation outside the state 

or if the Montana ranch divisions and the out-of-state paper box 

divisions were closely allied and not capable of separate maintenance as independent businesses, then the Montana ranch divisions were part of a "unitary business." 

We find from the facts of this case that Ward's operation 

within Montana was dependent upon and contributing to its operation outside Montana. The Montana divisions were dependent upon 

the out-of -state operation for central services which included 

the preparation of federal and state reports, the hiring of 

accountants to prepare tax returns, the preparation of financial 

statements, the keeping of records, and the balancing of check 

books; for financing when funds in the ranch divisions1 expense 

bank account were insufficient to meet the divisions1 expenses; 

and for major management decisions which included the purchase of 

equipment and the buying and selling of cattle. 

Ward I s operation within Montana also contributed to its 

operation and net income outside the state. The Montana divisions furnished Ward with a substantial tax write-off thereby 

saving the corporation as a whole a substantial amount in taxes. 

Also a portion of Ward s short-term investment income was attributable to funds generated in Montana. 
Since Ward's operation in Montana was both dependent upon 

and contributory to its operation outside the state, the Montana 

ranch divisions were part of Ward's unitary business during the 

years in question. 

The respondent Ward contends that the DORIS assessment of 

additional taxes against it in this case is an attempt to subject 

income earned by Ward in other states to the Montana corporation 

license tax in violation of the due process clause of the 

Fourteenth Amendment of the united States Constitution. We 

disagree. 

The united States Supreme Court recently addressed this 

issue in Mobil -- Oil Corp., 445 U.S. at 436-437, stating: 

"It long has been established that the income of 

a business operating in interstate commerce is 

not immune from fairly apportioned state 

taxation. (Cite omitted.) ' [TI he entire net 

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.' (Cite omitted.) For a State to tax 

income generated in interstate commerce, the Due 

Process Clause of the Fourteenth Amendment imposes two requirements : a 'minimal connection1 

between the interstate activities and the taxing 

State, and a rational relationship between the 

income attributed to the State and the 

intrastate values of the enterprise. (Cite 

omitted. )" 

The "minimal connection1' or l'nexus" is established "if the 

corporation avails itself of the 'substantial privilege of 

carrying on business1 within the State . . ." Mobil -- Oil Corp., 

445 u.S. at 437, citing Wisconsin v. J. C. Penny Co. (1940), 311 

U.S. 435, 444-445. Ward clearly availed itself of this privilege 

in Montana. 

The "rational relationship" requirement is met in this 

case also. Ward was operated as a unitary business and as 

discussed earlier its operation in Montana was both dependent 

upon and contributory to its operation outside the state. 

Therefore, the portion of Ward Is total income attributed to 

Montana under Montana's three-f actor apportionment formula is 
rationally related to the intrastate value of the corporation. 

The second issue raised by appellant DOR is whether the 

District Court used the proper standard of review of STAB'S findings and ruling. Since we are reversing the District Court 

judgment, this issue is irrelevant to a determination of this 

appeal. 

The judgment of the District Court is reversed and the 

order of the State Tax Appeal Board entered October 1, 1979 in 

Docket No. CT-1978-3 is reinstated. 

Chief Justice