No. 13249 IN THE SUPREME COURT OF THE STATE OF MONTANA 1977

MONTANA DEPARTMENT OF REVENUE, STATE OF MONTANA, Petitioner and Appellant,

THE AMERICAN SMELTING AND REFINING COMPANY, Defendant and Respondent.

Appeal from: District Court of the First Judicial District, Honorable Peter Meloy, Judge presiding. Counsel of Record: For Appellant: Terry B. Cosgrove argued, Helena, Montana Theodore W. $.e~oozeargued, Salem, Oregon For Respondent: Hughes, Bennett and Cain, Helena, Montana George T. Bennett argued, Helena, Montana Charles Smith, Helena, Montana For Amicus Curiae: William D. Dexter appeared, Olympia, Washington

Submitted: January 27, 1977 Decided :

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# 1977 Filed

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## 191972.Mr. Chief Justice Paul G. Hatfield delivered the Opinion of the Court. This isan appeal by the Montana Department of Revenue (DOR) from

a judgment entered inthe district court, Lewis and Clark County, affirmi

ng a final decision ofthe State Tax Appeal Board (STAB). The STAB decision ordered a recomputation of the deficiency assessment leviedby DOR against American Smeltingand Refining Company (ASARCO)

# . In1972 the auditors of the Mu1tistateTax Commission conducted

an audit ofASARCO's records for the tax years 1967-1970. Subsequent to this audit, additional corporation license taxes were assessed against ASARCO by DOR. The amount of this deficiency assessment isthe underlying issue upon appeal

# . ASARCO isa New Jersey corporation engaged innational and international operations inthe business ofmining, smelting, refining, manufacturing, buying and selling nonferrous metals and minerals. ASARCO basicallyengages intwo separate, but relatedareas ofoperation. The first isa primary metal operation consisting of the mining, milling, smelting and refiningof nonferrous metals. The second isa nonferrous a1loy operation consisting of the manufacture and sale of alloy products. For the tax years inquestion ASARCO owned mines inColorado, Washington, Arizona, New Mexico and Idaho inaddition tomines inCanada and other foreign countries. Itoperated smelters and refineries inTexas, Maryland, Colorado, Montana, Missouri, Arizona, Nebraska, New Jersey, Washington and California for the years inquestion. Alloy manufacturing plants

were located inTexas, New Jersey, California, Oklahoma and Indiana. ASARCO sales offices were located inNew York, Baltimore, Boston, Cincinnati, Cleveland, Detroit, Milwaukee, Philadelphia, Rochester and St. Louis. ASARCO owns and operates a smelter inEast Helena which is itsprincipal operation inMontana. This smelter receives lead ores and concentrates from company mines as well as unrelated suppliers. The smelted, but unrefined lead product isthen shipped toother units ofASARCO for further treatment and eventual sale. Anaconda Company purchased various by-products

### of the East Helena smelter for theyears in question. In addition to the East Helena smelter ASARCO owns certain active and inactivemining properties in

### Montana. Prior to 1962 ASARCO reported itsincome from itsMontana properties by separate accounting, pursuant to section 84-1503, R.C.M. 

### 1947. Under thatmethod ASARCO determined the gross receipts from itsMontana properties and deducted all expenses incurred by or attributable to such properties to arrive atMontana income. Where overhead expenses such as the cost of transportation were attributabletomore than one state, they were apportioned to determine the Montana portion. In 1962 ASARCO 

### recognized that itsbusiness was unitary in nature and itcould no longer use separate accounting for itsincome. Pursuant to section 84-1503 itrequested permission from DOR 

### tochange from separate accounting tothe unitarymethod of accounting. Permission was granted by DOR 

### and a "hybrid" system of reporting income was instituted. Under this hybrid system, all but 

### a negligible amount of total company income from rents, royalties, dividends, interest and sales of tangible and intangible properties was allocated to sources outsideMontana. After deductions for the allocated income, ASARCO's operating net income was apportioned to Montana sources by the use of a three factor formula. An 

### in-depth examination of ASARCO's hybrid system indicates the following procedure was used to compute tax 1 iabilityfor the years in 

### question. ASARCO classified the income listed below as nonbusiness income under DORIS 

### 1967 regulations, deducted itfrom itsapportionable income, and allocated itas indicated: (a) Income from mine royalties paid by the lessees of ASARCO's Keystone Mine previously operated by ASARCO and located in the Stateof Colorado was allocated to the Stateof Colorado; (b) Income from patents and copyrights on items developed by ASARCO's research department and used in

### ASARCO's operations and licensed toothers,

was a1located to commercial domici1 e;(c) Income from rental of housing units on mining properties and rented toemployes was allocated tothe state where such rental units are 1

ocated: (d) Interest income from United States obligations

## ,customers notes and bonds, notes on the sale of a plant and General Cable stock, from state and municipal bonds, time certificates, bankers acceptances, and commercial paper was allocated tothe state of commercial domicile; (e) Gains from the sales of tangible properties were allocated to the state of sale; (f) Dividends paid on stocks were allocated to state ofcommercial domicile;(g) Gains from the sale of stock were allocated to the state of commercial domicile; and (h) Income from securities deposited with Montana state agencies and from money deposited inMontana was allocated toMontana. The percentage of apportionable income or loss attributable to Montana sources was calculated by the use of this formula: Montana property 

## + Montana Payroll 

### + Montana Sales Total ASARCO Total ASARCO Total ASARCO Property Payroll Sales - % Averaged by dividing by 3 The percentage obtained was then multiplied by ASARCO's total apportionable income todetermine the Montana contribution. DOR contends the hybrid system used by ASARCO tocalculate its Montana income incorrectly interpreted section 84-1503, R.C.M. 1947. That section atthe time inquestion, stated: "Ifthe income of any corporation from sources within the state cannot be properly segregated from income without the state, then, inthat 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 inthe state of Montana bears tothe 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; provided, however, that the state board of equalization shall

### ,upon the presentation of satisfactoryevidence, determine that the income from sources within the state of Montana may be properly segregated from income from sources without the state of Montana and shall allow separate accounting. The board shall publishnot less than once ayear, all rules and regulations pertaining to this section. All decisions by the board under this section shall be subject tojudicial review inan action prosecuted by the corporation inthe districtcourt of Lewis and Clark county. The taxpayer cannot change from one method of accounting toanother method of accounting without firstobtaining permission from the board.

## " DOR interprets the above statute as creating only two methods of determining income from sources within Montana--separate accounting or apportionment of total net income. Separate accounting isavailable only if income from sources within the state may be segregated from sources without the state. Inthe absence ofthe above conditions, total business net income must be apportioned. DOR determined that the income classified by ASARCO as nonbusiness income was, infact, business income as defined by DOR's 1967 regulations. DOR therefore restored this income bapportionable net income. Inaddition, DOR included inapportionable net income the net income of six ofASARCO's wholly owned subsidiaries. DOR contends that ASARCO and the six subsidiary corporations were engaged ina unitary business and therefore the combinationwas merely an extension ofthe apportionment method of taxation dictated by section 84-1503. Pursuant to DOR's calculations ofASARCO's Montana income additional corporate license taxes were assessed. Protest was made by ASARCO and a hearingwas held before the director of DOR. The director's decision affirmed the deficiency assessment. Thereafter ASARCO appealed to STAB which reversed the director's decision. DOR then petitionedthe district court, Lewis and Clark County, requesting a review ofthe STAB order. On December 17, 1975, the district court entered judgment affirming the decision ofSTAB. DOR appeals the district court judgment. Three issues are before the Court upon appeal: 1) Whether DOR had the authority, pursuant to sections 84-1503 and 84-1508, R.C.M. 1947, toadopt itsRegulations 1001-1020 (Chapter 10)

### concerning rules for the apportionmentof corporate net income? 2) Whether ASARCO was correct in its deduction of a1leged nonbusiness income from apportionablenet income prior to apportionment? 3) Whether the income from six ofASARCO's wholly owned subsiarieswas properly included in apportionablenet income? On December 30, 1966,

### DOR adopted its Regulations 1001-1020 (Chapter 10). 

### These regulations were effectivewith respect to taxyears beginning on and after January 

### 1, 1967. Included within these regulations

are specific rules for allocation and apportionmentof corporate income derived from sources both within and without Montana. In addition key terms are specificallydefined as to their application to the regulations. The regulationsprovide for two methods of accounting for income; apportionmentaccording to a three-factor formula and separate accounting. Separate accounting is allowed only in situations where income can be specificallysegregated as to source.Apportionment of incomemust be used in all other cases. The apportionment system adopts whatmay be categorized

as 

### a "businessvs. nonbusiness" test in regard to determining what income is apportioned and what income may be allocated to source. Under this system all business income is apportioned by use of the three-factor formula while only nonbusiness income may be allocated to source. Business income is defined as all incomearising from transactionsand activity in the regular

course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition,management and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations. Nonbusiness income is defined as all income other than business income. ASARCO urges these regulations were ineffectiveas applied to it 

### for the tax years 1967-1970 for two reasons: 1. 

### DOR by virtue of section 84-1503had the authority to adopt rules and regulations only as to the apportionmentof such income as could not be segregated as to source. 2. The regulations adopt a "business vs. nonbusiness" income test -6-rather than the "source" of income test found insection 84-1503 and are therefore fatally inconsistent. Any contention that DOR lacks the authority toadopt rules and regulations interpreting taxation statutes iswithout merit. Inregard to the statute inquestion, the power toadopt rules and regulations isclearly and unambiguously statedwithin the text of the statute. Furthermore section 84-1508, R.C.M. 1947, gives DOR power to provide "such other regulations as may from time totime be found necessary." We affirmed this principle inState ex rel. Fulton v. District Court, 139 Mont. 573, 366 P.2d 435. The crux of this entirecase isthe interpretation of section 84-1503 and DOR Regulations 1001-1020. There isno merit inASARCO's contention that DOR has only authority toadopt rules and regulations for the apportionment of income incapable of segregation as tosource. The function of the Supreme Court when construing a statute is simply toascertain and declarewhat is insubstance stated therein, and not to insertwhat has been omitted or toomit what has been inserted. Dunphy

v. Anaconda Co., 151 Mont. 76, 438 P.2d 660; InreTransportation ofSchool Children, 117 Mont. 618, 161 P.2d 901;Section 93-401-15, R.C.M. 1947. The fundamental ruleof statutory construction isthat the intent of the legislature controls. Matter of Senate Bill No. 23, Chapter 491, Montana Session Laws of 1973, 168 Mont. 102, 540 P.2d 975, 32 St.Rep. 954; Hammill v. Young, 168 Mont. 81, 540 P.2d 971, 32 St.Rep. 935; Dunphy v. Anaconda Co., supra; Section 93-401-16, R.C.M. 1947. Where the intent ofthe legislaturecan be determined from the plainmeaning ofthewords used, the courts may not go further and apply any other means of interpretation. State ex rel. Huffman

v. District Court, 154 Mont. 201, 461 P.2d 847; Dunphy v. Anaconda Co., supra. Here, the plainmeaning ofthe words used by the legislature unmistakably discloses its intent. DOR clearly has the authority toadopt rules and regulations as tothe apportionment of corporate income without regard to source. There also isno merit inASARCO's second contention. ASARCO argues

### that section 84-1503contains a "source of income" test to be used in determining apportionable incomevs. allocatable income. ASARCO concludes that this apparent conflictwith the business vs. nonbusiness income test found in the regulationsmakes the regulations ineffectiveas applied to ASARCO. As support for its theory of inconsistencybetween the statute and the regulations, ASARCO points out that section 84-1503 was amended in 1974,and the amended statute conforms to the regulations. In the construction of an amendatory act it will be presumed that the legislature,in passing it, intended to make some change in the existing law,and therefore the Court should endeavor to give effect to the amendment. Pilgeram v. Hass et al., 118

### Mont. 431, 167 P.2d 339; Nichols v. School District No. 3, 87Mont. 181,

### 287 P.624. However this presumption of change is not conclusive. This Court stated in School District No. 12v. Pondera County, 89Mont. 342, 297 P. 498,

### that a change in a statute may be made merely to expressmore clearly the original intent of the legislature. Such is the case here. The unamended statute is not

a model of cleardraftmanship in regard to guide1ines for the apportionment of corporate income. DOR thereforeadopted Regulations 1001-1020 to provide clearguidelines for taxpayer compliance. The legislature thereafter saw fit to clarify the section by the 1974amendmentto section 84- 

### 1503. The unamended version of section 84-1503 is not in conflictwith the regulations and thereforeASARCO must report its income in compliance with those regulations. Regarding ASARCO's second issue,we find the hybrid system of reporting incomeused by ASARCO to be invalid under section 84-1503. As above, the

crux of this issue is the interpretationof section 84-1503and Regulations 1001-1020. 

### The intent of the legislature in regard to the determination of what income is apportionable income is clear and unambiguous. Section 84- 

### 1503provides for twomethods of accounting for income; separate accounting and apportionment. Section 84-1503provides a test for the determination of the correct

### method of accounting to be used by a corporation in reporting itsMontana corporation license tax. If income from all sources within Montana can "be properly segregated from income without the state" then and only then, may the separate accounting method be used. Furthermore if the separate accounting method is applicable, total net income must be allocated to source rather than the hybrid system used by ASARCO. ASARCO recognized itsbusiness was unitary in nature in 1962. It requested and was granted permission by DOR 

### to discontinue the separate accounting system then in

### use. Hence both parties agree that ASARCO must apportion itsincome and the question becomes what income is included in apportionable net income. The regulations are clear and simple. All business income isapportionable and nonbusiness income isallocated to source. ASARCO 

### argues that certain items of income listed above are nonbusiness income and therefore properly deductible from apportionable net income. This contention isincorrect. The regulations statethat business income includes income derived from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operation. After an in-depth examination of the income in question, we find this income isderived from sources that are integral portions of itsbusiness. This finding is in

### direct conflict with the district court's finding of fact which statethis income isnonbusiness income. The test of whether this income is in

### reality business or nonbusiness income isa matter of statutory interpretation. We feel therefore that the finding of the district court is in

### error. We 

### are confronted herein with 

### a conclusion of law, rather than a finding of fact. Listed below are examples of the relationship of this alleged nonbusiness income to ASARCO. 1) 

### Royalty Income--The royalty income arose from two sources, mine royalties and patent royalties. The mine royalties arose when ASARCO leased its Keystone mine in Colorado 

### toan unrelated mining concern. ASARCO had operated thismine prior to the leasing. The royalty was computed on the

### basis of mine production. The patent income arose from royalties paid for the use of devices developed by ASARCO1sresearch department. These devices were developed initially forASARCO1suse in itsvarious plants and mines. The main item included herein was a vertical feed furnace. 2) 

### Rental Income. The majority of this income isderived from homesites rented to employees working near ASARCO mines and plants. 

### Mr. Pecca, an ASARCO official, testified atthe DOR 

### hearing: "This isthe, it's almost exclusively rents received from employees working atthe company mines which are located in remote areas and the company isrequired to provide houses.

### " 3) Interest Income--The interest income arose from customers

### ' notes

on bonds, U. 

### S. government notes, notes taken on the saleof a plant and stock, stateand municipal bonds, and time certificates and other commercial paper. All were clearly 1 iquid securities and were therefore readily available for use in meeting company obligations and debts. 4) 

### Gains on the Sale of Stock--ASARC0 bought and sold stock in 

### various corporations during the years in question. Included within the sales

were stock of General Cable, Revere Copper, Kennicott Copper, and Hecla Mining Company. These corporations are all engaged in

### the business of either producing metal ore or manufacturing the refined product into goods. The stock was used by ASARCO for business purposes, such as gaining access to

raw materials or access to potential customers for itsrefined metals. Therefore all the above income was generated by the unitary business operation of ASARCO. 

### The concept of including income from the sale of tangible and intangible property and income derived from rents, royalties and interest within apportionable net income isnot new nor unique. In Sperry and Hutchinson Co. v. 

### Department of Revenue, 270 Or. 

### 329, 527 P.2d 

### 729, 731, short term securities held to satisfythe need for liquid capital were held to be apportionable. The Oregon court stated: 'IS & 

### H 

### argues that because this income isthe return on an intangible itmust be allocated to legal situs. Nothing in

### our former law requires such an arbitrary

### result and our current law expressly prohibits it." 527 P.2d 731. The current law referred to by the Oregon court is in pertinent part identical to the DOR 

### regulations here in question. 

### A similar result dealing with 

### short term intangibles was reached in

### Montgomery Ward & 

### Co., Inc. 

### v. Comm. of Taxation, 276 Minn. 479, 151 N.W.2d 294. In Cleveland-Cliffs Iron Co. 

### v. Michigan Corporation and Securities Commission, 351 Mich. 652, 88 N.W.2d 564, 572, the issue was whether an investment portfolio containing certain steel stocks should be included in determining the book net worth of the corporation. The court held the stocks

were closely related to the company's business, quoting with 

### approval from Flint 

### v. Stone Tracy Company, 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed. 389: "Nor can itbe justly said that investments have no real relation to the business transacted by a corporation. The possession of large assets is a business advantage of great value; it

### may give credit which will result in

### more economical business methods; itmay give a standing which shall facilitate purchases; itmay enable the corporation to enlarge the field of itsactivities and in many ways give itbusiness standing and prestige." 88 N.W.2d 572. See also: Great Lakes Pipe Line Co. 

### v. Commissioner of Taxation, 272 Minn. 403, 138N.W.2d 612. Concerning the final issue, DOR iscorrect in 

### itscontention that net income and apportionment factors of six of ASARCO's wholly owned subsidiariesmust be included in

### ASARCO's computation of apportionable net income. This ismerely an extension of the unitary method of taxation. Simply stated, the traditional concept of a combination of various units of a corporation for unitary method tax computation isextended to a combination of various related or affiliated corporations. In the instant case, the six affiliatedcorporations are clearly separate and distinct from ASARCO. However all arewholly owned by ASARCO and share common members of their respective boards of directors with 

### ASARCO. A 

### close relationship exists between ASARCO's business operation and the subsidiaries in that the subsidiaries all provide ASARCO with

### material, services,

or a market for itsproducts. From the discussion of the individualcorporation's operations listedbelow, it isclear the corporations are dependent upon each other and each inturn contributes tothe other's business success. 1) Federated Metals of Canada--Federated Metals isa Canadian corporation which basicallyoperates the same business inCanada as ASARCO's American operation. ASARCO provides Federated with certain central services such as operations technology and accounting and financial services. Inaddition, sales between the two corporations are significant. 2) ASARCO Mercanti1 e Company--ASARC0 Mercanti1 e isengaged solely inthe purchase and sale ofmachinery for ASARCO's subsidiaries. All central services are provided by ASARCO. 3) Enthone, Inc.--Enthone isa Connecticut corporation engaged in the manufacture and sale ofmetal finishing chemicals and supplies used in metal plating. About 16%of Enthone's raw materials were purchased from ASARCO. Central services were provided by ASARCO. 4) International Metal Company--This company isASARCO's exclusive sales outlet for materials delivered to foreign countries. ASARCO provides a11 central services. 5) Lone Star Lead Construction Co.--Lone Star isa Texas corporation engaged inliningtanks with lead for protectionagainst corrosive contents. The vast majority of its lead requirements are purchased from ASARCO

# . 6) Northern Peru Mining Co.--A1 1 production from Northern Peru's mines are sold toASARCO and refined initsplants. Inaddition tothe foregoing, Mr. Pecca testifiedas toother services provided by ASARCO to all itssubsidiaries. These include: 1. ASARCO handles central insurance of the subsidiaries. 2. Services provided by ASARCO are billedtothe subsidiaries, including top management. 3. All United States and state returns are prepared by ASARCO 

### for the subsidiaries. 4. Legal services are provided by ASARCO for the subsidiarieswhenever necessary. 5. Essential capital isprovided for the subsidiaries, who do not go to outside sources without first going toASARCO. Coca Cola Company v. Department of Revenue, 271 Or. 517, 533 P.2d 788, 790, 792, ison all fours with the instant case. There the Oregon court said: "The principal issue inthis case iswhether the income from Coca Cola and itswholly owned subsidiaries may be combined and the apportionment formula applied tothe sum todetermine the income properly attributableto Oregon.

### " 533 P.2d 790. The Oregon court first stated that inorder toproperly combine the incomes of the parent and subsidiary, the business operation must be unitary. The unitary testwas defined as whether the business units, or inthis case corporations, are dependent upon each other and contribute to the operation of the other's business. Zale-Salem, Inc. v. Tax Com., 237 Or. 261, 391 P.2d 601. Unquestionably this test ismet inthe instant case. The Oregon court inCoca Cola Company then stated: "We must now decide whether the fact that Coca Cola and itswholly owned subsidiaries are organized as separate corporate entities precludes the Department of Revenue from combining their incomes to reflect the true character of their unitary business. We hold that itdoes not.

"The question isfundamentally one ofwhether a business should stand ina better positionfor purposes of determining income merely because itchooses to use a mu1tiplecorporation organizational scheme. We do not feel that itshould. We agree with the following statement of the California Supreme Court: 

### "'

## * * 

## * [Alccepting, as we must, the application of the law to unincorporated wholly controlled branches or businesses located inother jurisdictions as set forth inButler Brothers v. McColgan, 17 Cal.2d 664, 111 P.2d 334; Id., 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991, the conclusion is irresistiblethat the same ruleshould apply to incorporatedwholly controlled branches or businesses so located. 

## * * *' Edison California Stores v. McColgan, supra at473-74, 183 P.2d at 17." The decision ofthe district court is reversed. This case isremanded to the district court with instructions to enter judgment infavor ofthe

### Montana Department of Revenue in

### the amount

# 07the original defi iency 

# 5 assessment.

Chief Justice 

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Justices