Opinion ID: 2181168
Heading Depth: 1
Heading Rank: 2

Heading: NCR's Domestic Placement Income

Text: During the years 1976 and 1977, NCR received income generated from various short-term investments totalling $17,856,121 and $22,138,461, respectively. Of that income, NCR concedes, amounts of $6,440,986 in 1976 and $4,044,691 in 1977 were from unitary business sources such as finance charges and loans and advances to subsidiaries and agents, and thus were properly subject to Maryland's apportionment tax. But the remainder of that interest income  $11,415,135 in 1976 and $18,093,770 in 1977  was derived from other sources. NCR refers to this other-source income as domestic placement income (DPI). The sources of the DPI, it asserts, were nonunitary. If NCR is correct in this assertion, the DPI was not subject to apportionment in Maryland. The `linchpin of apportionability' for state income taxation of an interstate enterprise is the unitary business principle. F.W. Woolworth Co. v. Taxation and Revenue Dept., 458 U.S. at 362, 102 S.Ct. at 3134, 73 L.Ed.2d at 826 (quoting ASARCO, Inc. v. Idaho State Tax Comm'r, 458 U.S. at 319, 102 S.Ct. at 3110, 73 L.Ed.2d at 796); Container Corp., supra, contains a precise description of the unitary business formula as it has been applied: The unitary business/formula apportionment method is a very different approach to the problem of taxing businesses operating in more than one jurisdiction. It rejects geographical or transactional accounting, and instead calculates the local tax base by first defining the scope of the unitary business of which the taxed enterprise's activities in the taxing jurisdiction form one part, and then apportioning the total income of that unitary business between the taxing jurisdiction and the rest of the world on the basis of a formula taking into account objective measures of the corporation's activities within and without the jurisdiction. This Court long ago upheld the constitutionality of the unitary business/formula apportionment method, although subject to certain constraints. Container Corp., 463 U.S. at 165, 103 S.Ct. at 2940, 77 L.Ed.2d at 553. Apportionment under the unitary business formula, however, is not without its restrictions. The due process and commerce clauses do not allow states to tax a corporation's interstate activities unless there exists a `minimal connection' or `nexus' between the interstate activities and the taxing State, and `a rational relationship between the income attributed to the State and the intrastate values of the enterprise.' Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207, 219-220, 100 S.Ct. 2109, 2118, 65 L.Ed.2d 66, 79 (1980) (quoting Mobil Oil Corp. v. Comm'r of Taxes, supra, 445 U.S. at 436-437, 100 S.Ct. at 1231, 63 L.Ed.2d at 520). In Xerox Corp. v. Comptroller, supra , Chief Judge Murphy discussed for the Court the two parts of the due process test: The first of the two parts of the due process test  the existence of a minimal connection or nexus  concerns a State's jurisdiction to tax a business's income. The second part of the test  whether there is a rational relationship between the taxing State and the intrastate values of the taxpayer's enterprise  deals with constitutional limits on the application of a particular apportionment formula. Xerox, 290 Md. at 145, 428 A.2d at 1218-1219. Prong one of the test is satisfied by demonstrating the existence of unitary business, part of which is carried on in the taxing state. Hellerstein, State Income Taxation of Multijurisdictional Corporations, Part II: Reflections on ASARCO and Woolworth,  81 Mich.L.Rev. 157, 168 (1982) (hereinafter State Income Taxation). Once the requisite nexus has been shown, the taxpayer then bears the burden of demonstrating that the income it seeks to exclude from taxation was derived from unrelated business activity that constituted a discreet business enterprise. See Container Corp., supra, 463 U.S. at 164, 103 S.Ct. at 2939-2940, 77 L.Ed.2d at 552; Exxon Corp, supra, 447 U.S. at 223-224, 100 S.Ct. at 2120, 65 L.Ed.2d at 81; Mobil Oil, supra, 445 U.S. at 442, 100 S.Ct. at 1234, 63 L.Ed.2d at 524. NCR does not dispute the fact that it maintained several offices in this State. The nexus between it and Maryland was sufficient for imposition of the State income tax. Rather, NCR's contention is that its DPI was derived from sources that were not part of its unitary business and thus the DPI should not have been apportioned to Maryland. To test this contention, we turn initially to what the Tax Court had to say about the DPI. The Tax Court observed that NCR receives ... [DPI] from short term interest bearing instruments, primarily certificates of deposit, backers of acceptances, commercial paper, government notes and municipal bonds. The agency accepted NCR's claim that the banks, government agencies, and other organizations which issue these short term interest bearing instruments are not part of the unitary business of NCR. It then concluded that since NCR has shown that the short term investments involved were not part of its unitary operations, i.e., the production and sale of business machines ... apportionment of this interest income ... would violate the due process clause because this income does not represent profits derived from the functionally integrated unitary business of NCR operating in Maryland. The circuit court agreed with this analysis, but the Court of Special Appeals rejected it, holding that the Tax Court (and the circuit court) had applied an incorrect legal standard. Comptroller v. NCR Corp., 71 Md. App. at 133, 524 A.2d at 101. We agree with the Court of Special Appeals. NCR assails the Court of Special Appeals for what the taxpayer perceives as that court's failure to give proper deference to the Tax Court's findings, as required by the emphatic teaching of Ramsay, Scarlett & Co. v. Comptroller, 302 Md. 825, 490 A.2d 1296 (1985). The Court of Special Appeals understood and accepted that teaching. Judge Bishop, writing for the intermediate appellate court, pointed out: As we explained in section II [of the opinion], a tax court receives considerable deference regarding its factual and law to fact determinations. A reviewing court may not disturb findings of fact if they are supported by substantial evidence in the record. Ramsay, Scarlett, 302 Md. at 834, 490 A.2d 1296.... Similarly, determinations involving mixed questions of fact and law must be affirmed if, after deferring to the Tax Court's expertise and to the presumption that the decision is correct, a reasoning mind could have reached the Tax Court's conclusion. ... [A]ccord Ramsay, Scarlett, 302 Md. at 838, 490 A.2d 1296. Comptroller v. NCR, 71 Md. App. at 133, 524 A.2d at 101 [other citation omitted]. But as the Court of Special Appeals also recognized, if the Tax Court's legal conclusions are wrong, a reviewing court may substitute the correct legal principles. Ramsay, Scarlett, 302 Md. at 834, 490 A.2d 1296.... Id. See also Washington Nat'l Arena v. Comptroller, 308 Md. 370, 378-380, 519 A.2d 1277, 1281-1282 (1987). We now explain why the Tax Court (and the circuit court) erred as a matter of law. Factually, the Tax Court was unassailably correct in finding that the banks, government agencies, and other organizations that produced the DPI are not part of the unitary business of NCR. But legally, the Tax Court was wrong in concluding that the interest payers had to be a part of NCR's business for apportionment to apply. If that legal standard is correct, then Maryland could not apportion the income derived by NCR from the sale of a cash register to any out-of-state supermarket unaffiliated with NCR, for the supermarket also would not be part of NCR's unitary business. In other words, the focus of the inquiry is on the relationship of the activity in question with the unitary business, not on the identity of the business payer. Xerox, 290 Md. at 144, 428 A.2d at 1218. The Tax Court derived its legal standard from dicta in Mobil, supra . In that case the Supreme Court affirmed the apportionability by Vermont of dividend income from Mobil's foreign subsidiaries and affiliates. The Court cautioned, however, that not all dividend income of an interstate unitary business is necessarily taxable. Where the business activities of the dividend payor have nothing to do with the activities of the recipient in the taxing State, due process considerations might well preclude apportionability, because there would be no underlying unitary business. 445 U.S. at 442, 100 S.Ct. at 1234, 63 L.Ed.2d at 523-524. This view was applied in ASARCO, supra . ASARCO's general unitary business was the mining, smelting, and refining of nonferrous metals in various states. Its specific activities in Idaho (the taxing state) had to do with silver mining. The income Idaho sought to apportion consisted chiefly of dividends and interest from certain foreign and domestic subsidiaries. The Supreme Court accepted Idaho's own fact-finding which showed that the degree of control ASARCO exercised over the subsidiaries was insufficient to bring them within ASARCO's unitary business. Under these circumstances, the Court rejected Idaho's argument that corporate purpose should define unitary business ... [and that] intangible income should be considered a part of a unitary business if the intangible property ... is `acquired, managed or disposed of for purposes relating or contributing to the taxpayer's business.' 458 U.S. at 326, 102 S.Ct. at 3114, 73 L.Ed.2d at 801 (quoting from Idaho's brief) [emphasis in original]. In so doing the Court reasoned that [Idaho's] definition of unitary business would destroy the concept. The business of a corporation requires that it earn money to continue operations and to provide a return on its invested capital. Consequently all of its operations, including any investment made, in some sense can be said to be for purposes related to or contributing to the [corporation's] business. When pressed to its logical limit, this conception of the unitary business limitation becomes no limitation at all. Id. (quoting from Idaho's brief) [emphasis in original]. What is important about ASARCO is its factual foundation. The subsidiaries in question there were discrete business enterprises, that is, they had no connection whatsoever with ASARCO's Idaho activities. The interest payers here involved were also not part of NCR's business machine enterprise, nor were they controlled by NCR. But to paraphrase Mobil, only if the income was earned in the course of activities unrelated to [NCR's unitary activities in Maryland] would Maryland be prevented from taxing it. Mobil, 445 U.S. at 439, 100 S.Ct. at 1232, 63 L.Ed.2d at 522, quoted in ASARCO, 458 U.S. at 317, 102 S.Ct. at 3109, 73 L.Ed.2d at 795. Several cases illustrate approaches other states have taken to the problem. In Champion Int'l Corp. v. Bureau of Revenue, 88 N.M. 411, 540 P.2d 1300 (App. 1975), Champion International challenged tax assessments by New Mexico's Commissioner of Revenue on short-term investments and highly liquid assets from which interest income was derived. Id. at 414, 540 P.2d at 1303. This income was used when needed for future business activity. Id. The court found that a normal and customary practice by Champion was to invest excess capital, not needed for business purposes, in short-term securities [and that] ... this was a specific function done in the regular course of Champion's business. Id. at 414, 540 P.2d at 1303. Consequently, it concluded that the interest income was business income within the meaning of N.M. Stat. Ann. § 72-15A-17(A) (Repl.Vol. 10, pt. 2, 1973 Supp.). As to Champion's constitutional claims, the court said The Commissioner's decision does not tax out-of-state activity. Neither does the tax statute. The taxation is not beyond the state's taxing authority. Champion's claim of unconstitutionality based on taxation of out-of-state activity, and its claim that the imposition of the tax is beyond the taxing authority of New Mexico, are both groundless. 88 N.M. at 417, 540 P.2d at 1306. Of like tenor is Atlantic Ritchfield Co. v. State, 198 Colo. 413, 601 P.2d 628 (1979). Atlantic Ritchfield concerned Colorado's authority to tax interest income and capital gains derived from the sale of certain of Atlantic Ritchfield's corporate assets, located outside of Colorado. The Court engaged in a lengthy discussion of whether the interest and capital gains were business income within the context of Colo. Rev. Stat. § 24-60-1301, Art. IV(1)(a) (1973). Noting that [h]istorically, Ritchfield, as part of its business operations, has regularly engaged in major acquisitions and dispositions of the same type involved here, [and that] ... [s]uch acquisitions and dispositions of assets constitute a systematic and recurrent business practice, the court concluded the capital gains and interest constituted business income. 198 Colo. at 418, 601 P.2d at 632. The court summarily dismissed Atlantic Ritchfield's due process claim concluding that the apportionment formula is reasonably related to Ritchfield's business activities in Colorado and, therefore, is constitutional. Id. In Qualls v. Montgomery Ward & Co., Inc., 266 Ark. 207, 585 S.W.2d 18 (1979), the Supreme Court of Arkansas upheld state taxation of Montgomery Ward's interest income derived from loans and advances to out-of-state corporate relatives which were not part of its unitary business. In addressing Montgomery Ward's due process challenge, the court reasoned that Income earned in Arkansas went into Ward's working capital. In the regular course of Ward's business, loans and advances to related corporations earned interest which also went into working capital, a part of which was used to carry on operations in Arkansas. The interest goes into a fund that will be used, in part, in Arkansas, and the supplies and services received from the borrowers contribute to the conduct of Ward's business in Arkansas. These facts provide the necessary nexus, not to justify taxation of the total amount of this interest income, but to justify taxing that portion attributable to Arkansas under the three-factor apportionment formula. Id. at 230, 585 S.W.2d at 30. [4] These cases, of course, all were decided before Mobil, Exxon, and ASARCO. But similar results were reached in two post- ASARCO cases involving facts like the ones before us. In Lone Star Steel Co. v. Dolan, 668 P.2d 916 (Colo. 1983), the Supreme Court of Colorado upheld a state tax on Lone Star's interest income derived from short-term loans made to its out-of-state parent. Lone Star had argued that under ASARCO the interest paid by [its parent was] ... not apportionable because [the parent was]... not engaged in a unitary business with [it].... Id. at 924. The court, citing Justice O'Connor's dissent in ASARCO (458 U.S. at 337, 102 S.Ct. at 3120, 73 L.Ed.2d at 808) and the majority's response in note 21 of that case ( id. at 324 n. 21, 102 S.Ct. at 3113 n. 21, 73 L.Ed.2d at 800 n. 21), concluded that ASARCO was not controlling. 668 P.2d at 925. The Colorado court distinguished ASARCO thus: ASARCO could legitimately be viewed as engaging in two businesses: nonferrous metal mining and discrete business enterprises. Because the Court concluded that these two functions were not the same unitary business, it held the dividends and interest to be nontaxable in Idaho. It cannot reasonably be said, however, that Lone Star is engaged in two separate businesses  the integrated steel business and the short-term lending business. Instead, it is engaged in only one business  the integrated steel business  and it lends money to its parent in furtherance of the goals, and to aid the operations, of its unitary business.       Consequently, we hold that the interest from Lone Star's short-term loans to Northwest results from Lone Star's unitary steel business. Id. at 925 [emphasis supplied]. Silent Hoist & Crane v. Taxation Div. Director, 100 N.J. 1, 494 A.2d 775, cert. denied, 474 U.S. 995, 106 S.Ct. 409, 88 L.Ed.2d 359 (1985), involved a similar situation. There Silent Hoist contested New Jersey's apportionment of income generated from the purchase of real property in New York and from investment of corporate funds in securities. The court found the income to be properly apportionable to New Jersey. Although, it recognized 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, [the court found that] ... the evidence [did] ... not establish that any of the alleged operations were conducted as a discrete business enterprise. Id. at 20-21, 494 A.2d at 785. Among the factors considered critical to the court's determination were that (1) a single employee exercised control over all of Silent Hoist's business operations; (2) the corporation utilized but a single bank account, in which all receipts were deposited and out of which nearly all expenses were paid; (3) and the real property in question was purchased and maintained with corporate funds. Id. at 19-21, 494 A.2d at 784-785. Consideration of the combination of [all] these factors [led the court] ... indisputably to the conclusion that Silent Hoist [was] a unitary corporation. Id. at 21, 494 A.2d at 785-786. In short, the Tax Court was legally wrong when it concluded that it had to exclude the DPI from apportionment merely because the interest payers were independent of NCR. In its most recent discussion of the unitary issue, the Supreme Court said that unitariness is demonstrated by 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 Corp., 463 U.S. at 166, 103 S.Ct. at 2940, 77 L.Ed.2d at 554. The evidence before the Tax Court did not show that the investments which produced the DPI were passive. They were actively monitored and carefully timed so as to meet NCR's operating needs. And they did not arise out of a distinct business operation  that is, a money-lending operation, as opposed to the business machine business. As NCR's Mr. Jones testified before the Tax Court: The funds are turned over and are available for whatever business reason may be necessary at that time, such as debt retirement, [or] acquisition. Record Extract at 47. Mr. Jones also explained that the DPI money was mingled in a general fund, along with income from the sales of equipment. Money from that fund (including DPI) would even be used to fund daily operations [w]here we have a negative cash position. If the day's receipts do not equal the day's disbursements, then we would be in a negative position and that negative position would have to be funded. And those funds would come from the general funds. Record Extract at 103-104. This uncontradicted testimony strongly suggests, as did the evidence in Lone Star, that the interest income was received and used in furtherance of NCR's unitary business. Nor is there anything in the record to suggest that none of the DPI was available for support of NCR's activities in Maryland. We may contrast this record with that in ASARCO, where [t]he trial court ... found [that ASARCO had] ... `sufficient cash flow from mining to provide operating capital for all mining operations without reliance upon cash flow from ... income from intangibles.' 458 U.S. at 324 n. 21, 102 S.Ct. at 3113 n. 21, 73 L.Ed.2d at 800 n. 21 (quoting from the trial record). We shall not, of course, indulge in the Tax Court's fact-finding function. It was NCR that had the burden of proving that its DPI should be excluded from Maryland apportionment. Container Corp., 463 U.S. at 164, 103 S.Ct. at 2939-2940, 77 L.Ed.2d at 552, Xerox, 290 Md. at 138-139, 428 A.2d at 1215. As was the case in Mobil, NCR has failed to sustain that burden. Mobil, 445 U.S. at 442, 100 S.Ct. at 1234, 63 L.Ed.2d at 523-524. Given that failure, and the Tax Court's use of an incorrect legal standard, we hold that the DPI is subject to apportionment here.