Court Opinion

ID: 9533947
Source: CourtListenerOpinion
Date Created: 2023-08-07 04:35:47.350184+00
Date Added: 2024-06-11T13:29:14.266256
License: Public Domain

Fontron, J.,
dissenting: I respectfully suggest that under rules *653of appellate procedure to which this court has long adhered, the instant case should be reversed, period.
The Uniform Division of Income for Tax Purposes Act, K. S. A. 79-3271 to 79-3293, was adopted by the Kansas Legislature in 1963 “to provide for uniform allocation and apportionment of the state income taxes of any taxpayer doing a multi-state business.” (Western Natural Gas Co. v. McDonald, 202 Kan. 98, 99, 446 P. 2d 781.) According to an article by Keesling and Warren, California’s Uniform Division of Income for Tax Purposes Act, appearing in 15 UCLA Law Review 156, the Uniform Act was both drafted and sponsored by the National Conference of Commissioners on Uniform Laws, to promote uniformity in allocation practices among the states which impose taxes on or measured by income of corporations, and to relieve the pressure for congressional legislation in that field. (See, also, dissenting opinion of Chief Justice Callister in Kennecott Copper Corp. v. State Tax Com’n, 27 Utah 2d 119, 493 P. 2d 632.) It was no doubt in furtherance of such worthy objectives that the legislature enacted § 19 of the Act, now K. S. A. 79-3289, which reads as follows:
“This act shall be so construed as to effectuate its general purpose to make uniform the law of those states which enact it.”
Adoption of the Uniform Act effected a philosophical change in the method of computing the taxable income of multi-state taxpayers. Whereas, under the former statute, G. S. 1949, 79-3217, use of the direct allocation or separate accounting method was the general rule, under the provisions of the Uniform Act, the apportionment or three-factor method became the prescribed method of allocating income, and any other system, including the separate accounting method, became the exception. The burden of proving an exception warranting the use of one of the alternative methods spelled out in K. S. A. 1973 Supp. 79-3288, that is, where the apportionment provisions of the Act do not fairly represent the extent of taxpayer’s business activity in this state, rests upon the party who would invoke the exception. This, I believe, is the sense of the following proviso to 79-3288:
“. . . That the burden of proof of any contrivance to evade taxes under this act shall rest upon the director of taxation or secretary of revenue.”
In the case of Donald M. Drake Co. v. Dept. of Rev., 263 Or. 26, 32, 500 P. 2d 1041, the Supreme Court of Oregon said that the use of any method other than apportionment should be exceptional and the party who seeks to invoke the exception has the burden of proof.
*654My disagreement with the majority of the court stems from the fact there is nothing in the record before the court to establish that the apportionment or three-factor formula does not, in fact, reflect the extent of Amoco’s business activity in the state. So far as this record is concerned there is a complete absence of evidence produced either at the hearing before the director, at the hearing before the board of tax appeals or at the hearing in district court (where the reasonableness of the board’s order was in issue) which tended to prove that the apportionment formula inadequately or inaccurately represented the extent of the taxpayer’s business in Kansas. As I have said, the director had the burden of proving that the statutorily mandated three-factor formula was not capable of reflecting the extent of Amoco’s Kansas business activities. As judged from the record, the director failed to sustain the burden which was his, and his failure in such respect should spell the end of this lawsuit.
The opinion of the court recites that the majority is unable to conclude, from the record here presented, that application of the formula or apportionment method clearly represents the business activities of Amoco in this state. I respectfully submit it is not the function of this court, on appeal, to conclude that the apportionment formula reflects the scope of Amoco’s business activities in this state, clearly or otherwise; it is the court’s appellate function to determine whether there is a basis in the evidence for the director’s order requiring Amoco to pay income taxes computed on the separate accounting method. At the risk of being tediously repetitious, I repeat that the burden is on the director to establish that the apportionment formula does not fairly represent the extent of Amoco’s business activities in Kansas and that it is not an accurate method of computing Amoco’s Kansas income tax liability. There is no burden on the taxpayer to prove the converse of that proposition. Neither is Amoco required to prove that the director’s order will result in its having to pay more than 100 percent of its total tax liability, as the majority opinion would seem to suggest.
In issuing his order assessing additional taxes against Amoco for the years 1968 and 1969, the director found that the separate accounting system used by the taxpayer in all prior years fairly represented the extent of the taxpayer’s business activity in this state. However, the director failed to point out any factual basis for the finding, apparently preferring to rely on his other findings that *655Amoco had used the separate accounting method in prior years and had not petitioned for permission to make a change. Even the court majority has said, and properly so, that the latter findings provided no basis for requiring Amoco to report on a separate accounting basis.
At oral argument counsel for the director, when queried as to what evidence the record contained to support the director’s order, could point only to the corporate income tax returns filed for 1968 and 1969 on the basis of the three-factor system and the unsigned information returns for the same years furnished the director at his request, but figured on the separate accounting basis. It is true, as the majority opinion points out, there was a large disparity between the taxable income shown in the returns filed by Amoco and the taxable income shown in the unsigned information returns furnished the director. It is my opinion, however, that the contrasting returns showed no more than this: that where tax was figured according to the apportionment formula it was much less than if computed on the separate accounting basis. But the size of the tax is not the statutory criterion. Under the Uniform Act, tax liability is related to business activity within the state, and use of the separate accounting method is permissible only when the apportionment method does not fairly represent the extent of such business activity.
The adoption of the Uniform Act was the result of legislative decision. The mandate of the legislature is clear: The taxable income of a multi-state corporation attributable to Kansas is to be computed on the apportionment basis except where that method does not clearly reflect the extent of the taxpayer’s Kansas business activity. In such case the director may require separate accounting to be used, but the burden rests upon him to justify his action. It hardly needs to be said that the legislative mandate is controlling.
It may be, as the district court appears to have assumed, that the apportionment system of accounting is, per se, inappropriate for computing tax liability within the oil industry, but it is for the legislature to decide whether the business activities of a taxpayer engaged in the oil and gas trade are to be excluded from the provisions of the Uniform Act. Unless legislative action to such effect is taken, it is incumbent on the director to follow the provisions of the Act with respect to a taxpayer engaging in oil and gas operations, and to require separate accounting only where there *656is evidence that apportionment does not fairly represent the extent of its business activities in this state. As tending to bear on this point the majority points out that during 1968 and 1969 twenty-one states in which Amoco was doing business had income tax and of these only thirteen had adopted the Uniform Act. However, we were advised upon oral argument that now all but two have adopted the Act or turned to the apportionment method.
In summary, it is my opinion that the record contains no substantial evidence either to sustain the director’s order assessing additional taxes based on the separate accounting method, or to support the conclusions reached by the board of tax appeals and by the district court to the effect that the director acted reasonably and within statutory requirements. Our rule has been, and I trust still is, that a finding which is not based on substantial competent evidence is not sufficient to support a judgment. (J. R. Watkins Co. v. Waldo, 117 Kan. 250, 255, 230 Pac. 1051; Potts v. McDonald, 146 Kan. 366, 369, 69 P. 2d 685.)
Since, in my opinion, the judgment of the court below lacks substantial evidentiary support, I respectfully submit it should be reversed, not that another bite at the cherry may be taken, but that judgment might be entered in favor of the prevailing party.
Fatzer, C. J., joins in the foregoing dissent.