Case Name: PHILLIPS, Commissioner, etc. v. SINCLAIR REFINING COMPANY
Court: Court of Appeals of Georgia
Jurisdiction: Georgia
Decision Date: 1947-10-08
Citations: 76 Ga. App. 34
Docket Number: 31626
Parties: PHILLIPS, Commissioner, etc. v. SINCLAIR REFINING COMPANY.
Judges: MacIntyre, P. J., and Gardner and Townsend, JJ., concur. Parker, J., concurs specially. Sutton C. J., dissents.
Reporter: Georgia Appeals Reports
Volume: 76
Pages: 34–57

Head Matter:
31626.
PHILLIPS, Commissioner, etc. v. SINCLAIR REFINING COMPANY.
Decided October 8, 1947.
Rehearing denied October 30, 1947.
Eugene Cook, Attorney-General, Claude .Shaw, Assistant Attorney-General, for plaintiff in error.
Alston, Foster, Sibley & Miller, contra.

Opinion:
Felton, J.
The several grounds of the amended motion concern only the questions raised by the general grounds and all will be treated generally.
As stated, the general demurrer to the petition for refund was overruled and no exception was taken to it. Therefore, if the taxpayer has proved his allegations, under the law of the case, he would be entitled to recover, even though the ruling was erroneous for the reason that unless a taxpayer can show directly what profits accrued to it in the State of Georgia, and does not get permission to use a formula which he contends more accurately ascertains the profits realized in Georgia, he is only authorized to use the formula prescribed in Code, § 92-3113 (Ann. Supp.), and use it as prescribed. In this case the taxpayer used the formula but did not use it as prescribed. It included the refining business, which is not in Georgia, in the formula, but did not use the pipeline business or pipeline property. The ruling which this court made in Mexican Petroleum Corp. v. Head, 64 Ga. App. 529 (13 S. E. 2d, 887), has no bearing whatever on this case. That case simply holds that if profits in Georgia can be ascertained without the use of the formula, the formula cannot be used. It did not hold that where you cannot directly determine profits in Georgia'you can use the formula by including only part of the total business of the taxpayer. It will be noted that the taxpayer does not rest its case on a substitute formula which it received permission to use in lieu of the statutory formula. It seems to have based its claim on a misconception of the case cited aboAm and others of similar import.
The overruling of the demurrer eliminates all questions but one, and that is, did the taxpayer sustain by proof the allegations of the petition for refund? Paragraph 17 of the petition alleged: "Neither the cost price to petitioner of the petroleum products AAdiich it markets, nor the selling price thereof, nor the profits realized from their sale, whether in Georgia or elsewhere, are affected, directly or indirectly, by the fact that petitioner carries on the business of transporting crude oil under filed tariffs. The two businesses are entirely disconnected." The ruling on the demurrer poses a distinct issue; if the pipeline business is separate and distinct the taxpayer is authorized to include two out of three of the phases of business in which it is engaged instead of all as required by the statute; if it is not separate and distinct it was not authorized to use the formula as it did and was not entitled to a refund. We think the evidence fails to show that the whole business of the taxpayer was not unitary in character and fails to show that the pipeline department was separate and distinct. The fact that the taxpayer owned a pipeline and transported oil for the public under rates filed by the taxpayer with the Interstate Commerce Commission, and transported oil to its own refineries for the owners of the oil and collected transportation charges from the owners of the oil is not conclusive. The taxpayer may well be said to have known in advance what oil it would purchase. The plan adopted amounted to no more than the taxpayer's purchasing the oil at the well, transporting it, and paying itself the transportation charges. The transportation charge is a part of the cost of the oil at the refinery and the cost of the finished product at the retail outlet. The argument that the transportation cost to the taxpayer forms a part of the cost price of the finished product when it transports oil which it buys just as much as it would if the taxpayer paid the transportation to a third party is fallacious because one entity cannot say that a nine million dollar profit on transportation is cost of goods sold by it. If it made a profit of nine million dollars, the cost to it was not nine million dollars. The fact that if Sinclair had transported oil for third parties, none of which it bought and refined and sold, the pipeline business could have been a unitary business, does not alter the unescapable conclusion that the pipeline was- not a unitary business under the facts of this case. If it had not bought and refined and sold any of the oil which it transported through its pipelines, then the question whether the cost of such transportation entered into the cost of products sold in Georgia would not be involved. Moreover, the very fact of owning refineries and sales outlets was responsible for the large profits in transportation even if Sinclair could have made the same profit hauling oil for others which it did not purchase. On this point Mr. Wagon, Assistant Comptroller, testified on cross-examination: "It is true that the Sinclair Refining Corporation would not carry or purchase 72.69% of all the oil transported over the pipeline unless it had manufacturing and retail outlets over the country. Likewise, it would not make that profit unless it kept the pipeline running at full speed for some shipper. However, begin a public utility we carried oil for all shippers who desired our services in 1941 and the figure shows that only something like 27% of the amount of oil carried was transported for private shippers. It is necessary for us to have retail outlets in order for the pipeline to make the nine and one-fourth million dollars net profit or conversely, it is necessary to have the pipeline in order to be able to supply the retail outlets. We have to have retail outlets in order to make a profit since our profit eventually is made by selling merchandise to the public. It is necessary to have retail outlets in order to make this profit. . . Q. Therefore, the fact that you had an outlet or where you could dispose of 72 percent of the crude oil shipped over that pipeline, therefore, necessarily greatly increased the profit of the pipeline department? A. It is well known, Mr. Shaw, that particularly with respect to pipeline operations that you get a bigger percentage of return net to gross the higher you put the capacity of the line; your expense don't increase so greatly even though your volume does." The fact that for every dollar of pipeline income 48.83% was profit, while for every dollar of income from manufacturing and sales 1.30% was profit, and the fact that the taxpayer received 46.82% return on its investment on pipeline properties and .02% on manufacturing and sales in vestment shows the disparity between the profits credited to the various departments. The taxpayer does not propose to suggest what would be a reasonáble profit to be credited to the pipeline départment in'order to show an excessive tax laid on business outside of Georgia. If the taxpayer could have and did own a private pipeline or other transportation system and saved nine million dollars as transportation charges, it certainly could not add 'that savings to the cost of goods sold. In this case the basic enterprise is manufacturing and selling and profits are captured in sales. The three departments insofar as oil transported and sold is concerned are of one cloth and cannot be separated in an income-tax return which requires the use of a formula. The proof does not sustain the allegation of separateness of businesses of the pipeline department and no evidence shows that the fórmula is arbitrary, unreasonable, or for any reason unjust as applied to this taxpayer. No shifting of profits was involved in the case of Hans Rees' Sons v. North Carolina, 283 U. S. 123 (51 Sup. Ct. 385, 75 L. ed. 879). That case, as well as nearly all the others cited bearing on the question, conceded that ordinarily a corporation which manufactures and sells its manufactured product is a unitary business and that all the factors in the enterprise are essential to the realization of profits. In that case it was simply held that a formula could not be employed which showed that about 80% of a taxpayer's total income came from business done in a certain State, when the evidence showed that the average income having its source in that State was 17% of the total for the year in question. It holds also that even if the business is unitary in character the use of a formula, not intrinsically arbitrary, cannot grossly overtax business done outside a state.
Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113 (41 Sup. Ct. 45, 65 L. ed. 165), treats such a business as is here involved, namely, manufacturing and selling, as a unitary business. The same is true of Maxwell v. Kent-Coffey Co., 204 N. C. 365 (168 S. E. 397). In that case the court said: "Conceding that a unitary business may produce an income which must be allocated to two or more States in which its activities are carried on, such a business may not be split up arbitrarily and conventionally in applying the tax laws. It would seem to be necessary that there should be some logical reference, to the production of income; the distinction should be founded on a corresponding difference in apportionment of productive capital, investment, or employment, within the unitary business. . . The mere statement of a witness as to the income separately derived from purchase, from manufacture, and from sale, without supporting data, showing the influence of each factor in producing profit, gain or income from. the separate operations—such as should be allocated to it independently—is merely an arbitrary guess. The bare fact of- sale produces no income. It is merely the act by which the income is captured; the capital, the organization, or efforts which produce the sale, are the things to be considered in ascertaining the amount of income to be credited to the sale. Certainly, in a unitary business, we must look further back than to the sale itself or the activities which actually produced it."
Other cases are cited by the taxpayer in line with the Georgia case of Mexican Petroleum Corporation v. Head, supra, to the effect that "theories of allocation can have no place in the inquiry, if net income within the State stands on its own footing unmixed with outside business." These cases have no bearing on this case because the taxpayer could not separate the Georgia profits and it used the formula improperly. Under the ruling on the general demurrer the taxpayer could use the formula as it did provided it proved the business to be not a unitary business as a whole, and proved the pipeline department itself and alone a unitary business. This we have held it did not do. We do not mean to say that it is not possible for one corporation to engage in two businesses, even manufacturing and selling, as separate businesses. We simply hold that the taxpayer was not so engaged under the facts of this case.
In view of this ruling it is unnecessary to rule in detail on the various findings of the court below. As a finding against the taxpayer was demanded under the law and the evidence, it is unnecessary to make any rulings on any of the other questions presented.
The court erred in favor of the refund and in overruling the motion for a- new trial.
Pursuant to the act of the General Assembly, approved March 8, 1945 (Ga. L. 1945, p. 232), requiring that the whole court consider any case in which one of the judges of a division may dissent, this case was considered and decided by the court as a whole.
Judgment reversed.
MacIntyre, P. J., and Gardner and Townsend, JJ., concur. Parker, J., concurs specially. Sutton C. J., dissents.