Court Opinion

ID: 9647058
Source: CourtListenerOpinion
Date Created: 2023-08-23 13:22:21.366674+00
Date Added: 2024-06-11T18:11:45.108181
License: Public Domain

Steele Hays, Justice, dissenting. I respectfully disagree with the majority, as I believe it has rushed to judgment in an area that will have substantial impact upon our state, and is at the same time, complex, transitional and, above all, abstruse. See P. Hartman, Federal Limitations on State and Local Taxation § 9:30 (Supp. 1990). While the United States Supreme Court has begun work on the unitary business principle, as the majority discussed, the application and impact of that principle has generated much litigation and very little harmony. Id. at 396. As evidenced just by the complexities of the discussion of this issue, answers are not easily ascertainable and few have been provided by the Supreme Court decisions. See e.g., P. Hartman, Federal Limitations on State and Local Taxation § 9 (1981 and Supp. 1990); J. Hellerstein, State Taxation, Corporate Income and Franchise Taxes §§ 8 and 9 (1983 and Supp. 1989); Constitutional Law 96 Harv. L. Rev. 62 (1982); C. Floyd, The Unitary Business inState Taxation: Confusion at the Supreme Court?, 1982 B. Y. U. L. Rev. 465. It has even been suggested that because of its complexities, the issue is one the courts are not equipped to handle: Given the limitations within which the court must operate, it is entirely possible that it would be infeasible for the court to examine all of the intricacies of the unitary business and formula apportionment in order to determine whether a business is unitary and fairly subjected to taxation by a standardized apportionment formula. Fair formula apportionment of divers kinds of business involves a substantial knowledge of the operations of a great variety of industries that are taxed, as well as technical problems of accounting. Courts are hardly equipped satisfactorily to handle such problems. Perhaps the complexities of the problem suggest some broad legislative guidance, fair to the states and the taxpayers, as part of a solution. [Our emphasis.] P. Hartman, Federal Limitations on State and Local Taxation, § 9:29 (1981). With that in mind, I think it improvident to decide, as the majority does, the constitutionality of a question that the Supreme Court itself has not yet passed on, and which still stands as good law. The argument presented by the state in this case is closely related to the issue in Qualls v. Montgomery, 266 Ark. 207, 585 S.W.2d 18 (1979), and has not yet been addressed by the United States Supreme Court, much less overruled, as pronounced by the majority. In Qualls, we addressed the question of interest from loans made by Ward to relative subsidiaries and corporations and whether that should qualify as “business income” and, hence, apportionable. Our current statute provides the same definition relevant in Qualls-. 26-51-701 (a) “Business income” means income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income and tangible and intangible property if the acquisition, management and disposition of the property constitue integral parts of the taxpayer’s regular trade or business operations. We held that the interest was business income, not, as the majority states, simply because funds were commingled, but because the loans constituted transactions in the “regular course of Ward’s business,” pursuant to the statutory definition. We addressed Ward’s contention that the corporate relatives were not part of a unitary business, and responded, in essence, that that question need not be answered if the income came from activities that were in the regular course of the taxpayer’s trade or business. Or, to put it in terms the United States Supreme Court would now employ, the fact that the loan transactions were part of Ward’s regular course of business, was sufficient to find these transactions were part of a unitary business. This is essentially what the state is arguing here—that the investment income is part of ITW’s unitary trade or business because the investment activities make up part of ITW’s regular trade and business. The Supreme Court’s discussions in those cases cited by the majority involved only whether there was unity between the taxpayer and the income source on the basis of the extent and quality of interconnectedness of the taxpayer and the questioned operation. The court did not address the question of an income source being part of the taxpayer’s unitary business, solely on the basis of the frequency or regularity of an activity, as was the situation in Qualls, and specifically here, as argued by the state, that investments were a regular and integral part of its business. This approach is not novel with either Qualls or the appellant. In fact, as pointed out in P. Hartman, Federal Limitations on State and Local Taxation § 9:30 at 437-439 (Supp. 1990), in ASARCO v. Idaho State Tax Comm’n, 458 U.S. 307 (1982), cited by the majority, ASARCO’s own counsel agreed that while not present in its case, investments could be an “adjunct to the actual conduct of the taxpayer’s own business,” and could be found to be part of a unitary business, and apportionable. And while the United States Supreme Court has not addressed this question, several lower courts have and the inclination is to allow apportionment in those cases. See e.g., Bendix Corp. v. Director Div. of Tax., 568 A.2d 59 (N.J. Super A.D. 1989); NCR Corp. v. Comptroller of the Treasury, 313 Md. 118, 544 A.2d 764 (1988); Welded Tube Co. of America v. Comm., 515 A.2d 911 (Pa. Comwlth 1986); Lone Star Steel Co. v. Dolan, 669 P.2d 916 (Colo. 1983). The other important factor which the majority fails to mention is the burden of proof in these cases. It is not incumbent upon the state to show sufficient nexus between the apportioned income and the taxpayer. Rather, there is no question but that the burden is on the taxpayer. The state’s taxation is of course presumptively constitutional, Fisher v. Perroni, 299 Ark. 227, 771 S.W.2d 766 (1989); Love v. Hill, 297 Ark. 96, 759 S.W.2d 550 (1988), and to overcome this presumption, the taxpayer has the “distinct burden of showing by clear and cogent evidence,” that the statutory scheme “results in extraterritorial values being taxes.” Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983); Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207 (1980). The question in this case then, boils down to whether ITW showed by clear and cogent evidence that taxation on the investment income was unconstitutional. There was evidence, as noted by the majority, to show a lack of interconnectedness between ITW and the companies or sources in which it had invested, that is to say, ITW did not have a majority share in its holdings and had no controlling interest, had no common officers or employees and did not provide any administrative services to the companies. While this may or may not have been clear and cogent evidence of interconnectedness, such a finding is not controlling here. Rather, we look at the evidence in light of the state’s argument that investing was a regular part of the business so as to make the investing operations part of ITW’s unitary business. There is no discussion of such evidence in either the appellee’s brief or the majority opinion, yet a mere glance at the record substantiates the state’s claim. The most critical evidence on this point was given by ITW’s vice president and treasurer, David Byron Smith, who testified that all the management of investments was handled through his office; that it was a significant part of the treasurer’s operations; that he would spend an hour or so each day working on investments, and that such investments were one of four priorities of the company. He further testified the money received from investments was used as working capital, and working capital was used for investment purposes, but the testimony was ultimately inconclusive on this point. In the face of this testimony, it is clear, to me at least, that ITW has failed to meet its burden. As the direction of the United States Supreme Court is unsettled, and the consequences far reaching, I cannot join the majority’s venture in this area, particularly, where the record has not been sufficiently developed on this question and the appellee’s burden of proof was consequently lacking.