Title: MONT DEPT OF REVENUE v ASARCO
Citation: N/A
Docket Number: 13249
State: Montana
Issuer: Montana Supreme Court
Date: July 11, 1977

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~ooze argued, 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 : 'mL 1 - 1 1 9 7 7 Filed JUL 1 9 1972. Mr. Chief Justice Paul G. H a t f i e l d delivered the Opinion o f the Court. This i s an appeal by the Montana Department o f Revenue (DOR) from a judgment entered i n the d i s t r i c t court, Lewis and Clark County, a f f i r m - i ng a f i n a l decision o f the State Tax Appeal Board (STAB). The STAB decision ordered a recomputation o f the deficiency assessment l e v i e d by DOR against American Smel t i n g and Refining Company (ASARCO) . I n 1972 the auditors o f the Mu1 t i s t a t e Tax Commission conducted an audit o f ASARCO's records f o r the tax years 1967-1970. Subsequent t o t h i s audit, additional corporation license taxes were assessed against ASARCO by DOR. The amount o f t h i s deficiency assessment i s the underlying issue upon appeal . ASARCO i s a New Jersey corporation engaged i n national and i n t e r - national operations i n the business o f mining, smelting, refining, manu- facturing, buying and s e l l i n g nonferrous metals and minerals. ASARCO b a s i c a l l y engages i n two separate, but r e l a t e d areas o f operation. The f i r s t i s a primary metal operation consisting o f the mining, m i l l i n g , smelt- ing and r e f i n i n g o f nonferrous metals. The second i s a nonferrous a1 l o y operation consisting o f the manufacture and sale o f a l l o y products. For the tax years i n question ASARCO owned mines i n Colorado, Washington, Arizona, New Mexico and Idaho i n addition t o mines i n Canada and other foreign countries. It operated smelters and r e f i n e r i e s i n Texas, Maryland, Colorado, Montana, Missouri, Arizona, Nebraska, New Jersey, Wash- ington and California f o r the years i n question. A l l o y manufacturing plants were located i n Texas, New Jersey, California, Oklahoma and Indiana. ASARCO sales o f f i c e s were located i n New York, Baltimore, Boston, Cincinnati, Cleveland, Detroit, Milwaukee, Philadelphia, Rochester and S t . Louis. ASARCO owns and operates a smelter i n East Helena which i s i t s prin- c i p a l operation i n Montana. This smelter receives lead ores and concentrates from company mines as well as unrelated suppliers. The smelted, but un- refined lead product i s then shipped t o other u n i t s o f ASARCO f o r f u r t h e r treatment and eventual sale. Anaconda Company purchased various by-products of the East Helena smelter for the years in question. In addition to the East Helena smelter A S A R C O owns certain active and inactive mining properties i n Montana. Prior to 1962 A S A R C O reported i t s income from i t s Montana properties by separate accounting, pursuant to section 84-1503, R.C.M. 1947. Under that method A S A R C O determined the gross receipts from i t s Montana properties and deducted all expenses incurred by or attributable to such properties to arrive a t Montana income. Where overhead expenses such as the cost of trans- portation were attributable to more than one state, they were apportioned to determine the Montana portion. In 1962 ASARCO recognized that i t s business was unitary in nature and i t could no longer use separate accounting for i t s income. Pursuant to section 84-1503 i t requested permission from DOR to change from separate accounting to the unitary method of accounting. Permission was granted by DOR and a "hybrid" system of reporting income was instituted. Under this hybrid system, a l l b u t a negligible amount of total company income from rents, royalties, dividends, interest and sales of tangible and intangible properties was allocated to sources outside Montana. 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 fol lowing procedure was used to compute tax 1 iabil i t y for the years i n question. A S A R C O classified the income listed below as nonbusiness income under DORIS 1967 regulations, deducted i t from i t s apportionable income, and allocated i t as indicated: (a) Income from mine royal t i e s paid by the lessees of ASARCO's Keystone Mine previously operated by A S A R C O and located in the State of Colo- rado was allocated to the State of Colorado; (b) Income from patents and copyrights on items developed by ASARCO's research department and used i n ASARCO's operations and licensed to others, was a1 located to commercial domici 1 e; (c) Income from rental o f housing u n i t s on mining properties and rented t o employes was allocated t o the state where such rental u n i t s are 1 ocated : (d) Interest income from United States obl igations , customers notes and bonds, notes on the sale o f a plant and General Cable stock, from state and municipal bonds, time c e r t i f i c a t e s , bankers acceptances, and commercial paper was allocated t o the state o f commercial domicile; (e) Gains from the sales o f tangible properties were allocated t o the state o f sale; ( f ) Dividends paid on stocks were allocated t o state o f commercial domicile; (g) Gains from the sale o f stock were allocated t o the state o f commercial domicile; and (h) Income from securities deposited w i t h Montana state agencies and from money deposited i n Montana was allocated t o Montana. The percentage o f apportionable income o r loss a t t r i b u t a b l e t o Montana sources was calculated by the use o f t h i s formula: Montana property + Montana Payroll + Montana Sales Total ASARCO Total ASARCO Total ASARCO Property Payroll Sales - - % Averaged by d i v i d i n g by 3 The percentage obtained was then m u l t i p l i e d by ASARCO's t o t a l apportionable income t o determine the Montana contribution. DOR contends the hybrid system used by ASARCO t o calculate i t s Montana income i n c o r r e c t l y interpreted section 84-1503, R.C.M. 1947. That section a t the time i n question, stated: "If the income o f any corporation from sources w i t h i n the state cannot be properly segregated from income without the state, then, i n t h a t event, the amount o f the net i n - come returned shall be t h a t proportion o f the taxpayer's t o t a l net income which the taxpayer's gross business done i n the state o f Montana bears t o the t o t a l gross business o f the taxpayer, and apportionment shall be made under the r u l e s and regulations prescribed by the state board o f equal ization, giving consideration t o sales, property and payroll and such other factors as may be deemed appli- cable; provided, however, t h a t the state board o f equal- i z a t i o n shall , upon the presentation o f satisfactory evidence, determine t h a t the income from sources w i t h i n the state o f Montana may be properly segregated from income from sources without the state o f Montana and shall allow separate accounting. The board shall pub- l i s h not less than once a year, a l l rules and regulations pertaining t o t h i s section. A l l decisions by the board under t h i s section shall be subject t o j u d i c i a l review i n an action prosecuted by the corporation i n the dis- t r i c t court o f Lewis and Clark county. The taxpayer cannot change from one method o f accounting t o another method o f accounting without f i r s t obtaining permission from the board. " DOR interprets the above statute as creating only two methods o f determining income from sources w i t h i n Montana--separate accounting o r apportionment o f t o t a l net income. Separate accounting i s available only i f income from sources w i t h i n the state may be segregated from sources without the state. I n the absence o f the above conditions, t o t a l business net income must be apportioned. D O R determined t h a t the income c l a s s i f i e d by ASARCO as nonbusiness income was, i n fact, business income as defined by DOR's 1967 regulations. DOR therefore restored t h i s income bapportionable net income. I n addition, DOR included i n apportionable net income the net income o f s i x o f ASARCO's wholly owned subsidiaries. DOR contends t h a t ASARCO and the s i x subsidiary corporations were engaged i n a u n i t a r y business and therefore the combina- t i o n was merely an extension o f the apportionment method o f taxation dic- tated by section 84-1503. Pursuant t o DOR's calculations o f ASARCO's Montana income additional corporate license taxes were assessed. Protest was made by ASARCO and a hear- i n g was held before the d i r e c t o r o f DOR. The d i r e c t o r ' s decision affirmed the deficiency assessment. Thereafter ASARCO appealed t o STAB which re- versed the d i r e c t o r ' s decision. D O R then petitioned the d i s t r i c t court, Lewis and Clark County, requesting a review o f the STAB order. O n December 17, 1975, the d i s t r i c t court entered judgment a f f i r m i n g the decision o f STAB. DOR appeals the d i s t r i c t court judgment. Three issues are before the Court upon appeal: 1) Whether DOR had the authority, pursuant t o sections 84-1503 and 84-1508, R.C.M. 1947, t o adopt i t s Regulations 1001-1020 (Chapter 10) concerning rules for the apportionment of corporate net income? 2) Whether ASARCO was correct in its deduction of a1 leged non- business income from apportionable net income prior to apportionment? 3) Whether the income from six of ASARCO's wholly owned subsi- aries was properly included in apportionable net income? On December 30, 1966, DOR adopted its Regulations 1001-1020 (Chapter 1 0 ) . These regulations were effective with respect to tax years beginning on and after January 1 , 1967. Included within these regulations are specific rules for allocation and apportionment of corporate income derived from sources both within and without Montana. In addition key terms are specifically defined as to their application to the regulations. The regulations provide for two methods of accounting for income; apportionment according to a three-factor formula and separate accounting. Separate accounting is allowed only in situations where income can be specifically segregated as to source.Apportionment of income must be used in all other cases. The apportionment system adopts what may be categorized as a "business vs. 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 income arising from transactions and 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 bus- iness operations. Nonbusiness income is defined as all income other than business income. ASARCO urges these regulations were ineffective as applied to it for the tax years 1967-1970 for two reasons: 1. DOR by virtue of section 84-1503 had the authority to adopt rules and regulations only as to the apportionment of 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" o f income t e s t found i n section 84-1503 and are therefore f a t a l l y inconsistent. Any contention t h a t DOR lacks the a u t h o r i t y t o adopt r u l e s and regulations i n t e r p r e t i n g taxation statutes i s without merit. I n regard t o the s t a t u t e i n question, the power t o adopt r u l e s and regulations i s c l e a r l y and unambiguously stated w i t h i n the t e x t o f the statute. Furthermore section 84-1508, R.C.M. 1947, gives DOR power t o provide "such other regu- l a t i o n s as may from time t o time be found necessary." W e affirmed t h i s p r i n c i p l e i n State ex r e l . Fulton v. D i s t r i c t Court, 139 Mont. 573, 366 P.2d 435. The crux o f t h i s e n t i r e case i s the i n t e r p r e t a t i o n o f section 84-1503 and DOR Regulations 1001-1020. There i s no m e r i t i n ASARCO's con- t e n t i o n t h a t DOR has only a u t h o r i t y t o adopt r u l e s and regulations f o r the apportionment o f income incapable o f segregation as t o source. The function o f the Supreme Court when construing a s t a t u t e i s simply t o ascertain and declare what i s i n substance stated therein, and not t o i n s e r t what has been omitted o r t o omit what has been inserted. Dunphy v. Anaconda Co., 151 Mont. 76, 438 P.2d 660; I n r e Transportation o f School Children, 117 Mont. 618, 161 P.2d 901 ; Section 93-401-15, R.C.M. 1947. The fundamental r u l e o f statutory construction i s t h a t the i n t e n t o f the l e g i s - l a t u r e controls. Matter o f Senate B i l l No. 23, Chapter 491, Montana Session Laws o f 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 i n t e n t o f the l e g i s l a t u r e can be determined from the p l a i n meaning o f the words used, the courts may not go further and apply any other means o f interpretation. State ex r e l . Huffman v. D i s t r i c t Court, 154 Mont. 201, 461 P.2d 847; Dunphy v. Anaconda Co., supra. Here, the p l a i n meaning o f the words used by the l e g i s l a t u r e unmistakably discloses i t s intent. DOR c l e a r l y has the a u t h o r i t y t o adopt r u l e s and reg- ulations as t o the apportionment o f corporate income without regard t o source. There also i s no m e r i t i n ASARCO's second contention. ASARCO argues that section 84-1503 contains a "source of income" test to be used in determining apportionable income vs. allocatable income. ASARCO concludes that this apparent conflict with the business vs. nonbusiness income test found in the regulations makes the regulations ineffective as applied to ASARCO. As support for its theory of inconsistency between 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., 1 1 8 Mont. 431, 167 P.2d 339; Nichols v. School District No. 3, 87 Mont. 181, 287 P.624. However this presumption of change is not conclusive. This Court stated in School Dis- trict No. 12 v. Pondera County, 89 Mont. 342, 297 P. 498, that a change in a statute may be made merely to express more clearly the original intent of the legislature. Such is the case here. The unamended statute is not a model of clear draftmanship in regard to guide1 ines for the apportion- ment of corporate income. DOR therefore adopted Regulations 1001-1020 to provide clear guidelines for taxpayer compliance. The legislature there- after saw fit to clarify the section by the 1974 amendment to section 84- 1503. The unamended version of section 84-1503 is not in conflict with the regulations and therefore ASARCO must report its income in compliance with those regulations. Regarding ASARCO's second issue, we find the hybrid system of report- ing income used by ASARCO to be invalid under section 84-1503. As above, the crux of this issue is the interpretation of section 84-1503 and 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- 1503 provides for two methods of accounting for income; separate accounting and apportionment. Section 84-1503 provides a test for the determination of the correct method of accounting to be used by a corporation in reporting i t s Montana 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 account- ing method i s applicable, total net income must be allocated to source rather than the hybrid system used by A S A R C O . A S A R C O recognized i t s business was unitary in nature in 1962. I t requested and was granted permission b y DOR to discontinue the separate accounting system then i n use. Hence both parties agree that A S A R C O must apportion i t s income and the question becomes what income i s included in apportionable net income. The regulations are clear and simple. All business income i s appor- tionable and nonbusiness income i s allocated to source. ASARCO argues that certain items of income listed above are nonbusiness income and therefore properly deductible from apportionable net income. This contention i s in- correct. The regulations state that 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 reg- ular trade or business operation. After an in-depth examination of the in- come in question, w e find this income i s derived from sources that are integral portions of i t s business. This finding i s i n direct conflict with the district court's finding of fact which state this income i s nonbusiness income. The test of whether this income i s i n reality business or nonbusiness income i s a matter of statutory interpretation. W e feel therefore that the finding of the district court i s i n error. W e are confronted herein w i t h a conclusion of law, rather than a finding of fact. Listed below are examples of the relationship of this alleged nonbusiness income to A S A R C O . 1 ) Royalty Income--The royalty income arose from two sources, mine royalties and patent royalties. The mine royalties arose when A S A R C O leased i t s Keystone mine in Colorado t o an unrelated mining concern. A S A R C O had operated this mine 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 ASARCO1s research department. These devices were developed initially for ASARCO1s use in i t s various plants and mines. The main item included herein was a vertical feed furnace. 2) Rental Income. The majority of this income i s derived from homesites rented to employees working near A S A R C O mines and plants. M r . Pecca, an A S A R C O official, testified a t the DOR hearing: "This i s the, i t ' s almost exclusively rents received from employees working a t the company mines which are located in remote areas and the company i s required to provide houses. " 3) Interest Income--The interest income arose from customers ' notes on bonds, U. S. government notes, notes taken on the sale of a plant and stock, state and municipal bonds, and time certificates and other commercial paper. All were clearly 1 iquid securities and were therefore readily avail- able for use in meeting company obligations and debts. 4) Gains on the Sale of Stock--ASARC0 bought and sold stock i n 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 i n the business of either producing metal ore or manufacturing the refined product into goods. The stock was used by A S A R C O for business purposes, such as gaining access to raw materials or access to potential customers for i t s refined 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 i s not new nor unique. In Sperry and Hutch- inson Co. v. Department of Revenue, 270 Or. 329, 527 P.2d 729, 731, short term securities held to satisfy the need for liquid capital were held to be apportionabl e. The Oregon court stated: 'IS & H argues that because this income i s the return on an intangible i t must be allocated to legal situs. Nothing i n our former law requires such an arbitrary result and our current law expressly prohibits i t . " 527 P.2d 731. The current law referred to by the Oregon court i s in pertinent part identical to the DOR regulations here in question. A similar result deal- ing w i t h short term intangibles was reached i n Montgomery Ward & Co., Inc. v. C o m m . 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 w i t h approval from Flint v. Stone Tracy Company, 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed. 389: "Nor can i t be justly said that investments have no real relation t o the business transacted by a corpor- ation. The possession of large assets i s a business advantage of great value; i t may give credit which will result i n more economical business methods; i t may give a standing which shall f a c i l i t a t e purchases; i t may enable the corporation t o enlarge the field of i t s ac- t i v i t i e s and in many ways give i t business standing and prestige." 88 N.W.2d 572. See also: Great Lakes Pipe Line Co. v. Commissioner of Taxation, 272 Minn. 403, 138 N.W.2d 612. Concerning the final issue, DOR i s correct i n i t s contention that net income and apportionment factors of six of ASARCO's wholly owned sub- sidiaries must be included i n ASARCO's computation of apportionable net income. This i s merely 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 i s extended t o a com- bination of various related or affiliated corporations. In the instant case, the six affiliated corporations are clearly separate and distinct from A S A R C O . However a l l are wholly owned by A S A R C O and share common members of their respective boards of directors w i t h A S A R C O . A close relationship exists between ASARCO's business operation and the sub- sidiaries in that the subsidiaries a l l provide A S A R C O w i t h material, services, or a market for i t s products. From the discussion of the individual corporation's operations l i s t e d below, it i s clear the corporations are dependent upon each other and each i n t u r n contributes t o the other's business success. 1) Federated Metals of Canada--Federated Metals i s a Canadian corporation which b a s i c a l l y operates the same business i n Canada as ASARCO's American operation. ASARCO provides Federated w i t h c e r t a i n central services such as operations technology and accounting and f i n a n c i a l services. I n addition, sales between the two corporations are s i g n i f i c a n t . 2) ASARCO Mercanti 1 e Company--ASARC0 Mercanti 1 e i s engaged sol e l y i n the purchase and sale o f machinery f o r ASARCO's subsidiaries. A l l central services are provided by ASARCO. 3) Enthone, Inc. --Enthone i s a Connecticut corporation engaged i n the manufacture and sale o f metal f i n i s h i n g chemicals and supplies used i n metal plating. About 16% o f Enthone's raw materials were purchased from ASARCO. Central services were provided by ASARCO. 4) International Metal Company--This company i s ASARCO's exclusive sales o u t l e t f o r materials delivered t o foreign countries. ASARCO provides a1 1 central services. 5) Lone Star Lead Construction Co.--Lone Star i s a Texas corpor- a t i o n engaged i n l i n i n g tanks w i t h lead f o r protection against corrosive contents. The vast m a j o r i t y o f i t s lead requirements are purchased from ASARCO . 6) Northern Peru Mining Co. --A1 1 production from Northern Peru's mines are sold t o ASARCO and r e f i n e d i n i t s plants. I n addition t o the foregoing, M r . Pecca t e s t i f i e d as t o other ser- vices provided by ASARCO t o a l l i t s subsidiaries. These include: 1. ASARCO handles central insurance o f the subsidiaries. 2. Services provided by ASARCO are b i l l e d t o the subsidiaries, including top management. 3. A l l United States and state returns are prepared by ASARCO for the subsidiaries. 4. Legal services are provided by ASARCO f o r the subsidiaries whenever necessary. 5 . Essential c a p i t a l i s provided f o r the subsidiaries, who do not go t o outside sources without f i r s t going t o ASARCO. Coca Cola Company v. Department o f Revenue, 271 O r . 517, 533 P.2d 788, 790, 792, i s on a l l fours w i t h the i n s t a n t case. There the Oregon court said: "The principal issue i n t h i s case i s whether the income from Coca Cola and i t s wholly owned subsidiaries may be combined and the apportionment formula applied t o the sum t o determine the income properly a t t r i b u t a b l e t o Oregon. " 533 P. 2d 790. The Oregon court f i r s t stated t h a t i n order t o properly combine the incomes of the parent and subsidiary, the business operation must be unitary. The u n i t a r y t e s t was defined as whether the business units, o r i n t h i s case corporations, are dependent upon each other and contribute t o the operation o f the other's business. Zale-Salem, Inc. v. Tax Com., 237 O r . 261, 391 P.2d 601. Unquestionably t h i s t e s t i s met i n the i n s t a n t case. The Oregon court i n Coca Cola Company then stated: "We must now decide whether the fact t h a t Coca Cola and i t s wholly owned subsidiaries are organized as separate corporate e n t i t i e s precludes the Department o f Revenue from combining t h e i r incomes t o r e f l e c t the t r u e character o f t h e i r u n i t a r y business. W e hold t h a t it does not. "The question i s fundamentally one o f whether a busi- ness should stand i n a b e t t e r p o s i t i o n f o r purposes o f determining income merely because i t chooses t o use a mu1 t i p l e corporation organizational scheme. W e do not f e e l t h a t it should. W e agree w i t h the following statement o f the C a l i f o r n i a Supreme Court: " ' * * * [Alccepting, as we must, the application o f the law t o unincorporated wholly controlled branches o r businesses located i n other j u r i s d i c t i o n s as set f o r t h i n B u t l e r 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 i s i r r e s i s t i b l e t h a t the same r u l e should apply t o incorporated wholly controlled branches o r businesses so located. * * *' Edison C a l i f o r n i a Stores v. McColgan, supra a t 473-74, 183 P.2d a t 17." The decision o f the d i s t r i c t court i s reversed. This case i s remanded t o the d i s t r i c t court w i t h instructions t o enter judgment i n favor o f the Montana Department of Revenue i n the amount 07 the original defi iency 5 assessment. Chief Justice / i Justices