Opinion ID: 2381232
Heading Depth: 1
Heading Rank: 7

Heading: Was Silent Hoist's Portfolio Income Correctly Included in Its Apportioned Income Base?

Text: The linchpin of apportionability is the finding of a unitary-business. Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425, 439, 100 S.Ct. 1223, 1232, 63 L.Ed. 2d 510, 522 (1980). If ever there was a unitary enterprise, this appears to be one. The taxpayer has sought to rely upon two 1982 decisions of the Supreme Court: ASARCO, supra, 458 U.S. 307, 102 S.Ct. 3103, 73 L.Ed. 2d 787; and Woolworth, supra, 458 U.S. 354, 102 S.Ct. 3128, 73 L.Ed. 2d 819. Both of these cases are remote from Silent Hoist in terms of the economic transactions. In each case, the primary issue was that the taxing state sought to include in the taxpayer's base the income, not of the taxpayer, but of foreign subsidiaries not doing any business in the taxing state by taxing the dividends received from the subsidiaries. ( ASARCO also dealt with income from portfolio investments, to be discussed in fn. 8, infra, (at 22)). Here we deal not with consolidated returns, income of subsidiaries or foreign commerce issues. We deal with one entity, Silent Hoist. Concededly, one such entity may not be unitary. But it is a rare case. The Supreme Court has never adopted a single test for determining what is a unitary business. A commentator has described the Court as adher[ing] to its catholic approach by stressing a number of factors, many of them familiar for determining when a business is unitary. W. Hellerstein, State Income Taxation, 79 Mich.L.Rev. 113, 150 (1980). In Container, supra, the Court reemphasized that the final point that needs to be made about the unitary business concept is that it is not, so to speak, unitary. 463 U.S. at 167, 103 S.Ct. at 2941, 77 L.Ed. 2d at 554-55. However, under any test that has been approved, the taxpayer meets the measure of a unitary business. Silent Hoist meets the test, in Exxon terms, of enjoying the benefits from an umbrella of centralized management and controlled interaction. 447 U.S. at 224, 100 S.Ct. at 2120, 65 L.Ed. 2d at 81. The interaction between the various aspects of plaintiff's business need not involve measurable flows of cash. Rather, the question is whether there have been unquantifiable transfers of value    among the components of a single enterprise. Container, supra, 463 U.S. at 164, 103 S.Ct. at 2940, 77 L.Ed. 2d at 553. Silent Hoist meets the Butler Bros. test of three unities of ownership, operation, and use. Unity of ownership means that the activities outside the tax jurisdiction, together with the in-state activities are owned by the same taxpayer; unity of operation means that there is a centralized executive structure with central purchasing, advertising, accounting and management; and unity of use is found in a centralized executive force and a general system of operations. See Butler Bros. v. McColgan, 17 Cal. 2d 664, 111 P. 2d 334 (1941), aff'd, 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991 (1942). Silent Hoist also meets the dependent upon or contributory test. See Ramsay, Scarlett & Co., Inc. v. Comptroller, 302 Md. 825, 490 A. 2d 1296 (1985) (test not met in circumstances); F.W. Woolworth Co. v. Director, Div. of Taxation, 45 N.J. 466 (1965); Crawford Mfg. Co. v. State Comm'n of Revenue and Taxation, 180 Kan. 352, 357, 304 P. 2d 504, 510 (1956). This concept is closely related to the concept of mutual benefit. Western Auto Supply Co. v. Commissioner of Taxation, 245 Minn. 346, 357, 71 N.W. 2d 797, 805 (1955). Applying each of the above enumerated tests, and bearing in mind that the taxpayer has the burden of proof, Mobil, supra, 445 U.S. at 439-40, 100 S.Ct. at 1232-1233, 63 L.Ed. 2d at 522, it is clear from this record that the taxpayer has made no showing that its business falls without the tests. Here, as noted, and as distinct from the Supreme Court cases in which multinational corporations and their subsidiaries were involved, we are discussing only one corporation, Silent Hoist. It is for this reason that the divident payor v. divident recipient test enunciated by the Supreme Court in Mobil, Exxon, ASARCO, Woolworth and Container and relied upon by Silent Hoist is not applicable. In those cases the question involved, for the most part, dividends paid from major subsidiaries to their parent. The inquiry was whether the parent, the recipient of the dividend income, controlled the subsidiary, the divident payor. The test to be developed here involving one corporation is whether the unities apply within the internal operations of Silent Hoist. The focus must be on Silent Hoist's investment activity and other aspects of its corporate business and the role the investment activity plays in those other activities. First, the record establishes that all of Silent Hoist's business is controlled by one chief executive officer, Mr. Wunsch, who testified that he made all the major corporate decisions regarding manufacturing, real estate, and investment. What emerges from the record is a corporation run and controlled by one man. Wunsch managed the company with the assistance of a vice-president in charge of sales and another in charge of engineering. Thus, Wunsch's involvement in the three aspects of the business was evident. On a far less substantial showing of centralized management, the Supreme Court of Montana held in Russell Stover Candies, Inc. v. Dep't of Revenue, 665 P. 2d 198 (Mont. 1983) that the taxpayer's in-state cattle ranch divisions and out-of-state paper box divisions formed parts of a unitary business. See also Commissioner of Revenue v. Associated Dry Goods, Inc., 347 N.W. 2d 36 (Minn. 1984), cert. den., ___ U.S. ___, 105 S.Ct. 124, 83 L.Ed. 2d 66 (1984) (separate divisions formed a unitary business where corporation had a single board of directors and a single set of officers and shareholders, administrative services were centralized, and there was a commingling of funds); ARMCO, Inc. v. Hardesty, 303 S.E. 2d 706 (W. Va. 1983), rev'd on other grounds, 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed. 2d 540 (1984) (activities of steel group, wire rope group, and metal products division are parts of unitary business). Here, the evidence does not establish that any of the alleged operations were conducted as a discrete business enterprise. Clearly, the investment operation was not a discrete business enterprise; it was merely incidental to the company's manufacturing business. Also, the real estate in New Jersey never was a separate and discrete business operation from the investment or manufacturing aspect of the business. The Clifton site was originally purchased by Silent Hoist to be the new location of its manufacturing business which it contemplated moving from New York City. The building was completed in 1971. Wunsch exercised control over the building before it was leased. Moreover, presumably, the funds used to purchase the property were derived from general corporate funds, including the manufacturing business, or from the sale of securities. From Silent Hoist's financial records, it appears that the Bloomfield real estate was not rented during certain of the tax years in question; thus, presumably, the substantial expenses for that operation were paid out of general corporate funds. The financial records of the company offer strong evidence that the real estate, investment and manufacturing business were closely integrated and run as a unitary business. There was one bank account for the entire corporation, into which all receipts were deposited and out of which nearly all expenses were paid. There was a direct monetary flow of value from one segment of the business to another. The source of funds and application of funds also establish the integration of the business. From the financial records, it appears that the proceeds of securities liquidated, added to the corporation's single bank account, were used as working capital in the manufacturing aspect of the business and to buy New Jersey property and presumably to service the debt on it; and that the corporation's centralized administrative services, included the preparation of tax returns and financial statements for the real estate business. Furthermore, in filing its New York Corporation Franchise Tax Return on a unitary basis, Silent Hoist made use of its New Jersey real estate depreciation allowance and losses to offset its manufacturing and investment income. The real estate depreciation provided substantial cash flow benefits for the entire business. We agree with Silent Hoist that a corporation will not be deemed a unitary corporation merely because the income from a subsidiary or a division adds to the richness of the corporation, or that the occasional oversight with respect to capital structure, debt and dividends that a parent gives a subsidiary is enough to establish a unity relationship, or that the single set of accounting records of the corporation will be sufficient to establish a unitary business. We do not hold that any of these factors alone would be sufficient to find that Silent Hoist is a unitary corporation. Rather, we hold that it is the combination of these factors which leads indisputably to the conclusion that Silent Hoist is a unitary corporation. New Jersey, like the United States Supreme Court, has been eclectic in its approach to the several tests for finding a unitary business. See Woolworth, supra, 45 N.J. 466. What we focus on here, as did the Woolworth Court, is economic reality. All that the Supreme Court asks is that we assure ourselves that there be some sharing or exchange of value not capable of precise identification or measurement  beyond the mere flow of funds arising out of a passive investment or a distinct business operation. Container, supra, 463 U.S. at 166, 103 S.Ct. at 2940, 77 L.Ed. 2d at 554. As we have seen, Silent Hoist's investment capital was capable of being pledged, liquidated or converted to other uses of the company's sales or real estate operations. To describe this economic power as passive does not reflect economic reality. The taxpayer would have us divide this investment income from the organic whole of the business enterprise. This is, however, not a matter of constitutional law, but a matter of tax preference. Our job is not to rewrite the State's Corporation Business Tax but to apply it as intended. New Jersey's tax policy is quite distinct from the majority of states. We do not seek to allocate non-business income to the place of commercial or legal domicile. On the other hand, we accommodate our tax policy to the modern business complex by specifically excluding all dividends from subsidiaries (at least 80% owned) and 50% of other dividend income. [8] We are more than satisfied here that there was a distinct sharing of the value of common management, accounting and operations that takes the portfolio income of this taxpayer well within the concept of a unitary business.