### 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, Judgepresiding.

Counsel of Record: For Appellant: Terry B. 

### Cosgrove, Helena,Montana

(SpecialAsst. Atty. General), Argued For Respondent: 

### Ward A. Shanahan; argued, Helena,Montana G~ugh, Shanahan, Johnson & 

### Waterman, Helena, Montana

Submitted: September 21, 1981 Decided: 

### 2

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Filed: 

## QEC

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ClerkMr. 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 filedMontana 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 unitarybusiness not entitled to separate accounting of its Montana operations and income, and assessed additional corporation license taxes againstWard by use of a three factor formula which apportioned to Montana a part of Ward Istotal income.Ward protested this assessment to the StateTax Appeal Board (STAB)

# . STAB affirmed 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. Allof its common stock is owned by Mr. Louis Ward. Ward's activities consistof 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 consistof two cattleranches, one inMeagher County and one inPowell County. For the years 1971through 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 timeperiod, Ward filed tax returns under the unitary apportionment method in the other 

### states inwhich it



### was operating and the Montana ranch divisionswere included as partof 

### its total unitarybusiness. In those 

### states the 

### losses sustained by the ranch divisions 

### were used to of£set income earned by the paper box divisions. The factsregardingWard Isoperations during the years in question 

### are for the 

### most part uncontested. The home off

### ice in Kansas City provided administrative services for alldivisions 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 arbitraryfigure of $60permonth for the home office services. This figure

### was not based on the amount of 

### timeactually spent on each divisionby thehome office personnel. Ward's divisionsdid not exchange equipment 

### or personnel and did not purchase products jointly. There 

### was no joint advertising program among the variousdivisions and no common salesmen. There 

### were two accountsmaintained for each division, an expense bank account and a payroll account. Each division's expense bank account 

### wasmaintained in

### a bank inKansas City. Any monies generated by a division

### were deposited in thatdivision's separate expense account. If the division did not immediately need the funds, they would be transferred from the separate divisionexpense 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 anyof the divisions. A portion of the short-term investment income 

### was attributable to funds generated inMontana, yet the portion attributable to funds earned inMontana could not be specifically identified 

### or segregated. If eitherof the Montana ranch divisionsdid not generate -3-enough income 

### to meet expenses, additional funds would be transferred fromWard's general account 

### to the ranch division's expense bank account. The payroll account foreach ranch division

### wasmaintained ina Montana bank and checks could be writtenon 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 office made allof the decisions regarding the financial affairsof 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 regardingWard Isoperation, STAB held thatWard was 

### a unitarybusiness and that the DOR had properlyassessed the additional taxes againstWard. 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 unitarybusiness requiringWard to apportion 

### its total income forMontana corporation and license tax purposes. 2. Whether the proper standard of review

### was used by the District Court in reviewing the STAB decision. Inorder to resolve the first issue 

### we must look at the pertinent statutorylanguage in effect for the years 1971through 1975, the years for which Ward 

### was assessed additional 

### corporation license taxes. In 1971and 1972 section84-1503, R.C.M. 1947, provided inpertinent 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 shallbe thatproportion of the taxpayer's totalnet income which the taxpayer's grossbusiness done in the stateof Montana bears tothe total gross business of the taxpayer, and apportionment shall be made under the rules and regulationsprescribed by the stateboard of equalization, giving consideration to 

### sales, property and payroll and such other factors as may be deemed applicable

# ..

# ."

A 1973amendment of this section substituted the words "departmentof revenue" for "board of equalization." The sectionwas amended again in 1974 and 

### as amended stated inpart: "A corporation engaged ina unitarybusiness 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 closelyallied and not capable of separatemaintenance 

### 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 thisrule 

### were effective for tax years beginning on 

### or afterJanuary I, 1967. In Mont. Dept. of Rev. v. Am. Smelting & ~efining (1977), 173Mont. 316, 567 P.2d 901 (hereinafter cited 

### as ASARCO), this Court held that the purpose of the 1974amendment was 

### to clarify the statute; we stated that the unamended version of the statutewas 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 entireperiod indispute, firstas an administrative regulation and then as a statute inwhich that regulation was codified. IfWard 

### was a unitarybusiness, 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-stateincome therebymaking the use of the separate accounting method proper, any statement inASARCO, supra, thatmight 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 separategeographical accounting as long as the intra-s

### tate and extra-state activities 

### are part of a single unitary business. Mobil OilCorp. v. Comlrof 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 itsoperation outside the state

or if the Montana ranch divisions and the out-of-state paper box divisions were closelyallied and not capable of separatemaintenance as independent businesses, then the Montana ranch divisions

### were part of a "unitarybusiness." We find from the factsof this

### case thatWard'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 toprepare tax returns, the preparation of financial statements, the keeping of records, and the balancing of check books; for financing when funds in the ranch divisions1expense bank account were insufficient to 

### meet the divisions1expenses; and formajor management decisions which included the purchase of equipment and the buying and selling of cattle. Ward Is 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 inMontana was both dependent upon and contributory to its operation outside the state, the Montana ranch divisions

### were part of Ward's unitarybusiness 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 byWard 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 inMobil OilCorp., 445 U.S. at436-437, stating: 

### -- "Itlong has been established that the income of a business operating in interstatecommerce 

### is not immune from fairlyapportioned state taxation. (Citeomitted.) 

### ' [TIhe entirenet income of a corporation, generated by interstate aswell as intrastate activities, may be fairly apportioned among the States for tax purposes by formulas utilizing in-state aspects of interstate affairs.' (Citeomitted.) 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 Stateand 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 business1within the State

# .

# .." Mobil OilCorp., 

### -- 445 u.S. at437, citingWisconsin v. J. C. Penny Co. (1940), 311 U.S. 435, 444-445. Ward clearlyavailed itself of thisprivilege inMontana. The "rational relationship" requirement is 

### met in this

case also. Ward was operated as a unitarybusiness 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 Istotal income attributed to Montana under Montana's three-factor apportionment formula 

### isrationallyrelated 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 StateTax Appeal Board entered October 1, 1979 in Docket No. CT-1978-3 is reinstated.

Chief Justice