Case Name: KENNECOTT COPPER CO. et al v. STATE TAX COMMISSION
Court: Utah Supreme Court
Jurisdiction: Utah
Decision Date: 1950-08-24
Citations: 118 Utah 140
Docket Number: No. 7298
Parties: KENNECOTT COPPER CO. et al v. STATE TAX COMMISSION.
Judges: WADE, WOLFE, and McDONOUGH, JJ., concur.
Reporter: Utah Reports
Volume: 118
Pages: 140–160

Head Matter:
KENNECOTT COPPER CO. et al v. STATE TAX COMMISSION.
No. 7298.
Decided Aug. 24, 1950.
(221 P. 2d, 857).
Rehearing denied Jan. 2, 1951.
See 61 C.J. Taxation, Sec. 841. Franchise tax computed after deducting federal tax, 35 A.L.R. 1457. See, also Am. Jur., 733.
C. C. Parsons, W. M. MeCrea, A. D. Moffat, Calvin Behle, all of Salt Lake City, for plaintiffs.
Wayne Christoffersen, Salt Lake City, for defendant.

Opinion:
LATIMER, Justice.
Certiorari to the State Tax Commission to review a decision assessing a franchise deficiency tax against the petitioner, Kennecott Copper Company.
This controversy was developed before the State Tax Commission on an agreed statement of facts, as augmented by a brief formal hearing. The testimony. given at the hearing was limited in its scope and was largely for the purpose of explaining and amplifying the facts stated in the stipulation, with the result that the parties argue little over the facts. Insofar as necessary to a proper determination of the issues involved, the facts are as follows:
The Kennecott Copper Corporation is a New York corporation doing business in this and other states. It owns and operates the Utah Copper Mine, the Bingham and Garfield Railway Company and certain mills all located in this state. The corporation franchise tax returns of the railroad company are consolidated with those of the Utah Copper Division of Kenneeott and for all purposes herein the transportation operations are included as part of the Utah Copper Division operations. The ores from the Utah Copper Mine are carried to Kennecott's Magna and Arthur mills over the Bingham and Garfield Railway and there milled. Under a contract arrangement with certain smelting companies the mill concentrates are then smelted and the product of the smelting (blister copper) is then transported by Kenneeott to refineries which are outside the State of Utah. Kenneeott has no interest in any of the smelters or in any of the common carriers used to transport the smelted products outside the state. The refined product is sold for Kennecott's account by Kenneeott Sales Corporation, a wholly owned subsidiary, and one which receives an agreed commission for its services. Ken-necott's operations are extensive, it purchases large quantities of supplies and equipment in and out of this state, and it engages the services of and pays a substantial number of employees in states where it operates.
At some date prior to the year in controversy, there had been a change in the operation of the Utah Mining property and Kenneeott, in effect, merged the affairs of the Utah Copper Company with those of other divisions. However, a separate accounting system was maintained for the Utah Copper Division. For the taxable years 1985 to 1941 inclusive, the Utah State Tax Commission and Kenneeott had a controversy as to the method of determining the proper proportion of Kennecott's Utah Copper Division income to be allocated to the State of Utah and over the proper formula for determining the amount to be allowed this division for depletion under the corporation franchise tax act. While that controversy was pending before this court, a settlement was reached between the parties and by stipulation the proceedings were dismissed under date of May 27, 1942. By that settlement, it was agreed that 66.926 percent of Kennecott's Utah Copper Division income alone was to be allocated to this state. In addition, the terms of that agreement settled all questions concerning Ken-necott's Utah Copper Division franchise tax liability for the years 1935 to 1941 inclusive.
Subsequently, the Utah Copper Division filed a franchise tax return for the year 1942 and paid the amount it claimed due by using the formula agreed upon in the settlement agreement for the prior years. The State Tax Commission refused to accept the tax report furnished by the Company and by letter of March 10, 1945, proposed certain adjustments which were opposed by Kennecott. The Tax Commission concluded that Kennecott had improperly computed the Utah Division's tax liability and a deficiency assessment was imposed.
Kennecott filed a petition for redetermination of the assessment. In the petition, it alleged that the mining, processing, sale and distribution of metal was an operation of Kennecott and not of a division; that the single purpose of the company was the production and sale of refined metals; that the mining of the crude ores and their concentration and smelting was accomplished within the State of Utah; that the delivery of the refined metals and their sale and distribution were accomplished wholly outside the state; that the operation was indivisible; that Kenne-cott's business within the State of Utah was wholly interstate in character; that it had not transacted any intrastate business and was not, therefore, subject to tax; that the action of the Tax Commission in disallowing the items claimed in Kennecott's return was in violation of the provisions of Title 80, Chapter 13, Sections 3, 6, 7 and 8, Revised Statutes of Utah, 1933; that the method of computing the tax used by the company had been settled by agreement between the commission and the taxpayer and that the return Was filed in accordance with this agreement; that the adjustments proposed by the State Tax Commission were arbitrary and unreasonable and a departure from the settlement and compromise agreement; that the commission was estopped from departing from the settlement agreement of 1942; that in its return for the year 1942 Kenneeott had used the formula agreed upon by the compromise and settlement agreement; and that its return was filed pursuant to that formula. This petition, filed in 1945, covered in detail the objections made to the deficiency assessment, but no requests were made to allow the Utah Division to change either its method of accounting or its manner of determining its depletion allowance.
While a number of items were called into dispute before the State Tax Commission, the Commission concluded the taxpayer was entitled to certain claimed deductions and the parties have by agreement or assignment of error limited the remaining allowances or deductions in dispute to three items. The first of these is whether the federal income tax must be deducted before applying the statutory formula to determine the amount allowed for depletion. The second disputed item involves the question as to whether any net income, if derived from transportation, smelting, refining and selling, must be deducted from Utah Copper Division's net income before applying the statutory factor applicable to depletion. The third item depends upon whether subsidy payments made by the federal government for overproduction of ore must be included as part of Kennecott's Utah Copper Division income.
The Commission, in its findings, ruled against the taxpayer on all three of the disputed items. In addition, the Commission refused to compute Kennecott's tax liability on a changed method of accounting or to permit Kenneeott the right to change from a percentage method of determining depletion to a cost method or to a method not specifically provided for by statute. It is from these adverse rulings that the taxpayer appeals, and in this court it raises five assignments of error which cover the disputed items in the tax report and other rulings of the Commis-ion claimed' by Kennecott to be prejudicial. The errors assigned are as follows: (1) That the Tax Commission erred in refusing to follow the requirements of Section 80 —13—21, U. C. A. 1943, which would permit Kennecott to allocate to Utah a proportionate part of its total income from all sources as distinguished from allocating a proportionate part of the Utah Division's income to this state; (2) the State Tax Commission erred in not permitting Kennecott a reasonable allowance for depletion; (3) that the commission misinterpreted the Utah statutes prescribing the percentage formula for determining depletion; (4) that the Tax Commission erred in discriminating against Kennecott; (5) that the Tax Commission erred in including in the tax base subsidies paid to Kennecott by the federal government.
We summarily dispose of petitioner's last contention. Petitioner tried substantially this same question in the United States District Court for the district of Utah. On appeal the Circuit Court of Appeals in the case of Salt Lake County v. Kennecott Copper Corporation, 10 Cir., 163 F. 2d 484, held that the subsidies paid by the federal government were properly included as part of the gross proceeds realized from the sales or conversion of ore. The Circuit Court of Appeals relied on two previous decisions of this court, namely, United States Smelting, Refining & Mining Co. v. Haynes, 111 Utah 172, 176 P. 2d 622, and Combined Metals Reduction Company v. State Tax Commission, 111 Utah 156, 176 P. 2d 614. Pet-titioner substantially concedes that these decisions render its contention on this point untenable. Moreover, this court in the recent case of Kennecott Copper et al v. State Tax Commission, 116 Utah 556, 212 P. 2d 187, again held that for tax purposes subsidy payments were to be in- eluded as part of the gross proceeds realized from the property. Their inclusion in gross income is therefore required.
Likewise, we dispose of petitioner's contention that federal taxes need not be deducted before applying the statutory formula to determine the depletion allowance. In New Park Mining Company v. State Tax Commission, 113 Utah 410, 196 P. 2d 485, 486, we passed on the identical question. Mr. Justice WOLFE, speaking for the court, disposed of the same contention in the following language:
"We have heretofore set out, the essential provisions of Section 80 — 13—7 and 80 — 13—8, U. C. A. 1943. The former statute defines net income as 'gross income less the deductions allowed by Section 80 — 13—8.' The latter enumerates the various items to he deducted from gross income to determine net income. In making their argumnt plaintiffs have either overlooked or wholly ignored subsection (3) of Section 80 — 13—8. That subsection provides, in language which could hardly be made more clear, and certainly cannot be said to be ambiguous or uncertain, that taxes 'paid or accrued within the taxable year' are one of the items to be deducted from gross income in order to determine net income. And subsection (9) (b) provides, in terms of equal clarity, that the allowance for depletion shall be 33% per cent of the net income from the property. This is determinative of the case, for even if there were administrative interpretation such as plaintiffs assert, this court could not permit such an interpretation to stand in flat contradiction to the clear terms of the statute. Since the statute, by its express terms provides that taxes shall be deducted from gross income to determine net income, it follows that plaintiffs were not entitled to compute depletion, before deducting federal taxes. "
For a proper disposition of the first assignment of error, it is necessary to refer to the history of Kennecott's accounting practice and the method used by it in reporting the Utah Copper Division to the State Tax Commission. Since the inception of the corporation franchise tax act the State Tax Commission has considered the Utah operations of Kennecott as a separate and distinct unit for corporation franchise tax purposes, and so has Kennecott. Its books are kept on that principle and all corporate franchise tax returns, except the one in dispute, have been pre pared and filed by Kennecott on that basis. The receipts, expenditures, costs of operation, income and deductions are determined by treating the Utah Mines Divisions as a separate unit. This method must be used for certain purposes as the depletion deduction to be allowed by both the federal and state agencies must be determined on the income from the property located within this state and the franchise tax herein disputed must be computed by determining the amount of income allocated to the business transacted in this state. It would be impractical for both state and federal agencies to deal with the complicated tax problems involved unless the affairs of the Utah Copper Division were separable from Kennecott's other operations. Apparently Kennecott did not consider filing its tax returns on any basis other than that of a separate operating unit until the present difficulty arose in 1942, and it subsequently asserted its right to change its method of accounting for franchise tax purposes because it concluded the State Tax Commission had unfairly departed from the principles used in the compromise settlement for the previous years. However, the request for this change does not appear to be included as one of the grounds set forth in the petition for redetermination and, apparently, was not made until some time in 1948. Had the request been granted at that late date it would have resulted in a substantial change in accounting procedure and would have complicated and not simplified what was already a difficult tax question. It must be kept in mind that the proposed change did not seek to apportion the income of the Utah Division alone, but sought to determine the net income assignable to this state by pooling all divisions of Kenne-cott and then applying the formula prescribed by the statute.
Kennecott relies on Section 80 — 13—21, U. C. A. 1943, which deals with inclusion and exclusion of income received from within and without the state and which sets forth the rules for determining net income allocated to this state. The section provides a method for determining the portion of net income assignable to business done within this state and it mentions income received from rents, interest, dividends, and gains from the sale of capital assets, and sets forth certain definite rules with respect to allocation. It then provides for a method of determining the remainder of income allocated to this state and prescribes a formula for determining the portion of the income so alloted. In a general way, the formula requires a determination of three factors: (1) The value of the property located in this state as compared to the value of property wherever situated; (2) the amount of wages, salaries, commissions, paid in this state as compared to the same expenditures made to all employees wherever working; and (3) the gross receipts from business assignable to this state as compared to the gross receipts from all business regardless of where transacted.
The last paragraph of the section provides as follows: "(8) If in the judgment of the tax commission the application of the foregoing rules does not allocate to this state the proportion of net income fairly and equitably attributable to this state, it may with such information as it may be able to obtain make such allocation as is fairly calculated to assign to this state, the portion of net income reasonably attributable to the business done within this state and to avoid subjecting the taxpayer to double taxation."
The State Tax Commission apparently concluded that to permit the petitioner to prepare the return differently than had been the custom would not allocate to this state a proportion of the Utah Copper Division's net income fairly and equitably attributable to business done within this state. And that to require filing in accordance with the custom would not subject the Utah Division of Kenne- cott to double taxation. Accordingly, the Commission disregarded the request for change and treated the original accounting method as controlling.
We see no good reason for reversing the State Tax Commission on this ruling and see many practical difficulties had a different method been permitted. In some instances, the actual net income to be allocated to business transacted in this state cannot be fixed with certainty so the legislature set up one method and then clothed the Commission with the power to permit selection of another method if it would more accurately reflect the true net income. By the provision of subsection (8), 80— 13 — 21, U. C. A. 1943, supra, the legislature granted to the State Tax Commission some discretion to modify the prescribed statutory method and before we can interfere with the method imposed on or used by the taxpayer it must appear the commission acted arbitrarily and abused its discretion. We fail to discover a showing sufficient to permit our interference as no abuse of discretion has been established by the petitioner. Kennecott's books are kept on the basis used by the commission in determining the deficiency and must of necessity be so kept to furnish the desired information to both the federal and state authorities. The franchise tax reports filed up until the year 1947 were based on the prescribed system aside from certain contested items they suggest a fair and equitable means of determining the tax liability. To use the method set out in the first subparagraphs of the section might introduce variable factors, some imposible of ascertainment, such as the relative value of mines or mining property. The determination of this factor alone might lead to endless and unsatisfactory litigation. In addition it might unjustly discriminate against this state or the taxpayer in that the tax assessed might bear no reasonable relationship to the value of the ore extracted or the amount of business done in this state.
Petitioner refers us to the case of California Packing Corporation v. State Tax Commission, 97 Utah 367, 93 P. 2d 463, 468, as authority for its contention that the State Tax Commission acted arbitrarily in not permitting the company to belatedly change its accounting method. We quote from both opinions in that case to establish that we recognized the right of the State Tax Commission to rely on subparagraph (8) when strict compliance with the other rules and regulations might result in an inequitable allocation to the state or when the taxpayer is subjected to double taxation.
Mr. Justice LARSON,
author of the majority opinion, stated as follows:
"One further matter is presented in the issues as framed and argued. This involves the construction and meaning of subsection (8) of Section 80 — 13—21, reading as follows:
" 'If in the judgment of the tax commission the application of the foregoing rules does not locate to this state the proportion of net income fairly and equitably attributable to this state, it may with such information as it may be able to obtain make such allocation as is fairly calculated tO' assign to this state the portion of net income reasonably attributable to the business done within this state and to avoid subjecting the taxpayer to double taxation.' (Italics added.)
"We have italicized the clause that gives rise to the argument. The Company contends that the last clause is controlling and the Commission can depart from the statutory formula set forth in the first seven subsections of the section only when such departure is necessary 'to avoid subjecting the taxpayer to double taxation.' The Commission takes the position that the subsection is a general grant of power to depart from the statutory formula whenever that may be necessary in order to allocate to the state for tax computation purposes the proper proportion of the net income fairly attributable to business done in this state. And upon such construction the Commission justifies its action in redetermining the tax against the Company rather than upon the construction of subdivision (e) discussed and construed above. As far as statutory construction is concerned we think that subsection (8) is a general section authorizing the Tax Commission to depart from the formula set out in subsection (6) whenever the application of the provisions of that subsection does not allocate to the state the business fairly attributable to the state or whenever such application results in double taxation. But we do not think that the present case has been shown to be one calling for a departure from the statutory formula. "