Court Opinion

ID: 9792641
Source: CourtListenerOpinion
Date Created: 2023-08-31 02:32:54.953022+00
Date Added: 2024-06-11T07:37:44.137653
License: Public Domain

Six, J.,
dissenting: I disagree with the majority’s analysis of the interplay among Western Natural Gas Co. v. McDonald, 202 Kan. 98, 446 P.2d 78 (1968), K.S.A. 79-3271(a), K.A.R. 92-12-73(b), and K.S.A. 79-3289. K.S.A. 79-3289 is a legislative signal endorsing multistate uniformity (the Kansas enactment “shall be construed as to effectuate its general purpose to make uniform the law of those states which enact it”), Kansas adopted the multistate tax compact, K.S.A. 79-4301 et seq., in 1967. Article IV(l)(a) of the compact defines “Business Income” as the term is defined in K.S.A. 79-3271(a) in the Uniform Division of Income Tax Purposes Act (UDITPA) enacted in 1963.
The purposes of the multistate compact, K.S.A. 79-4301, Art. I, are to:
“(1) Facilitate proper determination of state and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionment disputes.
“(2) Promote uniformity or compatibility in significant components of tax systems.
“(3) Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration.
“(4) Avoid duplicative taxation.”
“The Multistate Tax Compact was developed in 1967 under the aegis of the Council of State Governments, in part at least to offset the severe criticism levelled by the Willis Committee against the widespread diversity in State apportionment and allocation methods. It became effective in 1967 on adoption by seven States; there are now 18 member States (and the District of Columbia), concentrated largely in tire Midwest, the West, and the South, and in addition *653there are 10 associate member States. In furtherance of the Compact’s stated purpose to ‘promote uniformity or compatibility in significant components of tax systems,’ UDITPA is incorporated in the Compact. The Multistate Tax Commission (MTC), composed of one member from each party State, is the governing and administering agency of the Compact. It is empowered to adopt uniform regulations relating to income, capital stock, gross receipts and sales or use taxes, if two or more party States have uniform or similar provisions; these regulations are merely advisory and not binding on any State, unless it adopts them itself. The MTC is also authorized to conduct joint audits on behalf of member States requesting them, and to issue subpoenas and seek their judicial enforcement, in order to enable the Commission to examine taxpayers’ books, records and other documents.” Hellerstein and Hellerstein, State and Local Taxation, p. 653 (5th ed. 1988).
I agree with BOTA’s discussion of the effect of K.A.R. 92-12-73(b). The point decided in Western Natural Gas was that income from the sale of oil and gas leases in a liquidation sale of the entire assets of the taxpayer constituted nonbusiness income. The sale of intangible personal property was taxable at the commercial domicile of the taxpaying corporation. Amoco Production Co. v. Armold, Director of Taxation, 213 Kan. 636, 646, 518 P.2d 453 (1974). We are not considering a complete liquidation in the case at bar. We are entitled to revisit Western Natural Gas to review its decisional basis in contrast to the issues currently before us.
In the case at bar, we are reviewing multistate income taxation under the policy of uniformity inherent in a uniform act. The Department of Revenue asserts that the issue is whether BOTA erred in approving the formula assignment of 6.4140% of the Chief Automotive gain to Kansas. The Secretary of the Department of Revenue is given authority to adopt rules and regulations not inconsistent with the Income Tax Act. K.S.A. 79-3236. K.A.R. 92-12-73, which sets forth the functional test for business income in subsection (b), is one of several uniform regulations adopted in Kansas in 1979. BOTA found that “many states having statutes with language identical to K.S.A. 79-3271(a) have adopted both the tránsactional and functional tests.” K.S.A. 79-3271(a) is Uniform Act § 1(a). BOTA held that “based upon United States Supreme Court holdings, the functional test does not violate constitutional requirements.” Finally, BOTA distinguished Chief’s facts from those in Western Natural Gas:
*654“Even if the impact of regulations adopted subsequent to Western Natural Gas are overlooked, Western Natural Gas does not prevent a reviewing court from taking a position that a broadly-defined transactional test exists in Kansas ... or that the functional test exists short of property disposed of in conjunction with a liquidation.”
BOTA held that the second clause of K.S.A. 79-3271(a) sets out an alternative functional test for business income. The second clause states:
“ ‘Business income’ . . . 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 business operations.”
Under the functional test, gain from the sale of property is business income if the property was used in the taxpayer’s business operations. BOTA observed that “an entity’s sale of a production equipment item or a facility used to manufacture its inventory would satisfy the functional test.”
The Kansas regulations create a rebuttable presumption that income constitutes business income consistent with multistate tax compact regulations. The burden is on Chief Automotive to show that, the capital gain at issue constitutes nonbusiness income.
Western Natural Gas approved the transactional test set forth in the first clause of K.S.A. 79-3271(a). Since Western Natural Gas, most of the uniform act states have formally recognized the functional test by adopting the Multistate Tax Commission (MTC) uniform regulations. The MTC Apportionment Regulations “treat gains and losses from sales or exchanges of property (tangible or intangible, real or personal) as business income 'under the functional test,’ namely, 'if the property while owned by the taxpayer was used in the taxpayer’s trade or business.’ ” Hellerstein and Hellerstein, State Taxation ¶ 9.15[2], p. 9-96 (2d ed. 1993).
K.S.A. 79-4301, Art. VII, Uniform Regulations and Forms, contemplates the adoption of uniform regulations for submission to member states. The MTC’s functional test regulation IV.l.(c)15(2) was adopted in Kansas as K.A.R. 92-12-73(b) in 1979:
“Gain or loss from the sale, exchange or other disposition of real or tangible or intangible personal property constitutes business income if the property while *655owned by the taxpayer was used in the taxpayer’s trade or business. However, if such property was utilized for the production of nonbusiness income or otherwise was removed from the property factor before its sale, exchange or other disposition, the gain or loss will constitute nonbusiness income.”
Western Natural Gas was apparently the first decision to construe § 1(a) of the uniform act. However, the opinion contains no discussion of the legislative intent or judicial history of § 1(a). Instead, our reasoning in Western Natural Gas was based upon an analogy to Kansas bulk sales law and the Webster’s Dictionary definition of the word “regular.” Because the oil and gas leases were sold in the complete liquidation of the taxpayer, we held that the gain was not business ¡income. Thus, Western Natural Gas set out the transactional test in which the crucial inquiries are the frequency or regularity of the activity. As the California State Board of Equalization explained:
“We are aware that recent decisions in Kansas and New Mexico have rejected the functional test for business income under those states’ versions of the Uniform Act. (Western Natural Gas Co. v. McDonald, 202 Kan. 98 [446 P.2d 781] (1968); McVean & Barlow, Inc. v. Bureau of Revenue, 88 N.M. 521 [543 P.2d 489] (1975)). Since the Uniform Act is intended ‘to make uniform the law of those states which enact it’ (Rev. & Tax. Code, § 25138), these decisions are entitled to great weight in determining the proper construction of section 25120. In reaching their decisions, however, the Kansas and New Mexico courts did not consider the fact that the Uniform Act’s definition of "business income’ was derived from prior California law. Nor did they examine the uniform regulations interpreting that definition, and in fact the decisions are directly contrary to the regulations of the Multistate Tax Commission. Under these circumstances we do not find the opinions of the Kansas and New Mexico courts persuasive and therefore respectfully decline to follow their decisions. [Emphasis added].” Appeal of Borden, Inc., Cal. Tax Rep. (CCH) ¶ 205-616, p. 14, 897-59.
Most of the uniform act states have adopted the functional test through their uniform regulations, court decisions, or administrative practices. Hellerstein, ¶ 9.06 (citing CCH State Tax Guide (All States) ¶ 10-000 and P-H All States Guide ¶ 564). (25 states are indicated as having adopted the uniform act and 18 states plus the District of Columbia are listed as having adopted the compact. Kansas is on both lists.)
The interpretation of a statute by an agency charged with its enforcement is normally entitled to a great deal of judicial def*656erence. Kansas Bd. of Regents v. Pittsburg State Univ. Chap, of K-NEA, 233 Kan. 801, 809, 667 P.2d 306 (1983). In order for a court reviewing a decision by BOTA to find a lack of substantial evidence, the decision must be so wide of the mark that it is outside the realm of fair debate. In re Tax Appeal of Horizon Tele-Communications, Inc., 241 Kan. 193, 203, 734 P.2d 1168 (1987).
I agree with the majority that administrative regulations do not supplant statutory law or preempt judicial statutory construction. However, guided by thé policy of multistate uniformity mandated by the legislature in K.S.A. 79-3289, K.S.A. 79-3271, and the multistate compact, I conclude from revisiting Western Natural Gas that K.A.R. 92-12-73(b) is a proper exercise of administrative authority. See K.S.A. 77-425. I would modify the Western Natural Gas observation, “It is not the use of the property in the business which is .the determining factor under the statute.” 202 Kan. at 101. The modification would recognize both the transactional and functional tests. Such a modification is justified by legislative endorsement of the multistate compact, the legislative policy of uniformity, and multistate income tax uniformity developments occurring since our opinion in Western Natural Gas 26 years ago.
Lockett and Davis, JJ., join the foregoing dissenting opinion.