Court Opinion

ID: 3988440
Source: CourtListenerOpinion
Date Created: 2016-07-06 10:44:29.603985+00
Date Added: 2024-06-11T07:44:21.493565
License: Public Domain

I concur in the holding that subsection (8) of Section 80-13-21, R.S. Utah 1933, grants authority to depart from the rules where that is required to be fair either to the state or to the taxpayer. The very reading of subsection (8) precludes any other construction. In determining the "portion of net income assignable to business done within this state" the commission "may" use the rules set out in the main opinion. This does not mean that the Commission may ignore the rules and choose its own. "May" has the meaning of "should," i.e., should follow the rules unless the rules fail to accomplish the overarching purpose as revealed by subsection (8). It is only in case an application of the rules as laid down fails to "allocate to this state the proportion of net income fairly and equitably attributable to this state" (subsection (8), or, on the other hand, where the rules would subject the taxpayer to so-called double taxation that the Commission may depart from them. This conclusion is fortified by the fact that the word "may" is used, together with the fact that the entire purpose of the rule is to arrive at a figure "fairly calculated to assign to this state the portion of the net income reasonably attributable to the business done within the state and to avoid subjecting the taxpayer to double taxation." Hence where an application of the rules substantially fails to assign to this state the portion of net income reasonably attributable to the business done here or results in undue hardship on the taxpayer through double taxation, it is reasonable to *Page 381 
conclude that in either such case the Tax Commission "may" vary the rules. Whether subsection (8) alone might provide a constitutional standard need not, in view of the above interpretation, be decided. That standards no less indefinite have been held sufficient to meet constitutional requirements appears by the cases of Field v. Clark, 143 U.S. 649,12 S. Ct. 495, 36 L. Ed. 294; St. Louis, I.M.  S.R. Co. v.Taylor, 210 U.S. 281, 28 S. Ct. 616, 52 L. Ed. 1061;Inter-Mountain Rate Case, 234 U.S. 476, 34 S. Ct. 986,58 L. Ed. 1408; Avent v. United States, 266 U.S. 127, 45 S. Ct. 34,69 L. Ed. 202; New York Central Securities Corp. v. UnitedStates, 287 U.S. 12, 53 S. Ct. 45, 77 L. Ed. 138; Federal RadioCommission v. Nelson Brothers Bond  Mortgage Company,289 U.S. 266, 53 S. Ct. 627, 77 L. Ed. 1166, 89 A.L.R. 406; Hampton,Jr.,  Co. v. United States, 276 U.S. 394, 48 S. Ct. 348,72 L. Ed. 624; Buttfield v. Stranahan, 192 U.S. 470,24 S. Ct. 349, 48 L. Ed. 525; United States v. Shreveport Grain Elevator Company, 287 U.S. 77, 53 S. Ct. 42, 77 L. Ed. 175; NewYork Central Securities Corp. v. United States, 287 U.S. 12,53 S. Ct. 45, 77 L. Ed. 138; Interstate Commerce Act, § 5, 49 U.S.C.A. § 5. The office of subsection (8) as herein defined will have applicability later in this opinion.
I also concur in the holding that the income from intangibles whose situs is not in Utah cannot be allocated to Utah. My concurrence, however, is not based so much on the wording of subsections (1) and (2) of Section 80-13-21, R.S. Utah 1933, set out in the court's opinion, as on more fundamental considerations. Subsections (1) and (2) may apply to banks or investment and real estate companies. If "business done" has the meaning of "doing business" as that term is applied to foreign corporations applying to "do business" within the state, I can see how the investment of surplus or reserves by a manufacturing or merchandising corporation in stocks, bonds, and real estate might not be "business done." In the case of trust companies, banks, investment corporations, and the like a main element of *Page 382 
their business is investing and receiving the returns from investments. It is perhaps somewhat inaccurate to speak of interest or dividends received by manufacturing corporations by investment of its surplus cash either temporarily or permanently in the stocks or bonds of other corporations as "derived from business done," when the corporation is not doing that sort of business.
This line of conjecture need not be further pursued because a state could not constitutionally tax, either directly as income or as the measuring rod for an excise tax, the income of a foreign corporation derived from bonds, stocks, or real estate, where the stocks or bonds are in foreign corporations or the real estate outside the state and the income therefrom never reaches or reposes in the state. People ex rel. Alpha Portland CementCo. v. Knapp, 230 N.Y. 48, 129 N.E. 202 (Cardozo, J.); Bass,etc., Ltd., v. State Tax Commission, 266 U.S. 271,45 S. Ct. 82, 69 L. Ed. 282 (dictum contra to the Knapp case in indicating a distinction between tax on net income direct and use of same as a measuring rod); Cooley on Taxation, Vol. 2, 4th Ed., 1850, Section 923. Subsections (1) and (2) may be intended to be a recognition of this principle.
I cannot concur in the interpretation of subsection 6(e) (1st) relating to sales, nor in the treatment accorded that section, nor in the results said to flow from said interpretation by the main opinion. My reasons for dissenting from such interpretation are as follows:
1. I do not think we are warranted in transposing clauses and phrases in a statute in order to give that statute a meaning different from that which it has without the transposition, when the statute as written is susceptible of a reasonable interpretation and not inconsistent with but in accord with the probable intention of the legislature. I shall amplify hereunder.
2. In order to arrive at the result desired by the main opinion, not only the transpositions but emendations as *Page 383 
indicated by the opinion are necessary. This is in aggravation of the erroneous process of interpretation.
3. The transpositions plus the emendations do not bring the result designed for them by the opinion.
4. The same sentence with which liberties of transposition and emendation are taken occurs in subsection (6)(d) in regard to designation of the salaries or wages of employees assignable to Utah. A like transposition of the clauses in that sentence would spell hob with subsection (6)(d). I cannot bring myself to agree that a complicated modifier may in one paragraph have its phrases juggled while the same modifier remains inviolate in another paragraph.
I elaborate regarding these reasons: Subsection (6)(e) (1st) reads:
"Sales, except those negotiated or effected in behalf of the corporation by agents or agencies chiefly situated at, connected with or sent out from premises for the transaction of business owned or rented by the corporation outside this state, and sales otherwise determined by the tax commission to be attributable to the business conducted on such premises."
This subsection must be read in connection with subsection 6 (a), (b), and (c), and the following ideas be kept in mind. This overarching purpose is to determine what part of the net income of a corporation doing business inside and outside the State of Utah, not covered by subsections (3) and (4) is attributable to Utah. After that net income added to the other net income as provided for in subsections (3) and (4) is found, three per cent of such final figure gives the tax imposed for the privilege of doing business in Utah. Hence, the net income is always to be found, not for a direct tax on it but to furnish the measure for the imposition of a franchise tax. Furthermore, subsection (6), (a), (b) and (c) furnish rules designed to obtain in an equitable manner the "net income reasonably attributable to the business done within this state." The legislature evidently thought that a formula which would be "fairly *Page 384 
calculated to assign to this state" such net income other than that derived as set out in subsections (3) and (4) would be to divide the total net income derived from everywhere into three parts and as to each part use an allocating fraction as provided for in (a)(b) and (c) of subsection (6). In this way it was contemplated a rough but equitable method of making a proper allocation would be obtained. If a corporation had much property here as compared to its total property, but did little business here, it would on the first third of its total net income from sales, under subsection (6)(a), pay a disproportionate tax, but this might be compensated for under subsection (6)(c), depending on how subsection (6)(e) (1st) is interpreted. Usually the proportions of its total wages and salaries attributable to Utah, calculated under subsection (6)(b), related to the total wages and salaries paid everywhere would represent a fair proportion of net income allocable to Utah, compared to total net income from all sales. And frequently the inequities which might ensue from the use of just one of the fractions defined by subsection (6) (a), (b) and (c), would be compensated by the use of the three fractions each based on a third of the total net income (excluding that set out in subsections (3) and (4). But here and there by the use of all these fractions a marked inequity might still remain either against the state or against the taxpayer, in which case subsection (8) comes into play.
The Tax Commission contends that such is the situation in the instant case because the amount of sales attributable to Utah under subsection (6)(c) is zero. This is because no sales have been made except by agents or agencies chiefly situated at or connected with or sent out from premises located outside of this state, even though the actual sales have been made by such agents or agencies in this state and to customers located in this state, and of goods processed and/or stored in this state. Subsection (6)(c) makes the numerator of the multiplying fraction for the last third of the total net income (excluding that defined by subsections *Page 385 
(3) and (4), the gross receipts from business attributable to Utah. The denominator of the multiplying fraction is the total gross receipts. The company's total gross receipts for 1935-36 were $55,511,709.30, but the numerator was zero for the reason above stated; hence, the multiplying fraction for the last third of the net income is zero. Both the Tax Commission and the appellant Company construed subsection (6)(e) (1st) so as to make the numerator of the multiplying fraction of the (c) third of the "remainder of the net income" as zero. But the Commission found a situation which called for the application of subsection (8) and sought to use the "sales price of all goods which were actually located in Utah at the time of sale, whether manufactured or packed in Utah or outside Utah, and irrespective of the destination of the shipments" as the numerator for the multiplying fraction for the last third of the net income so as to make an allocation as regards that third which was "fairly calculated to assign to this state the portion of net income reasonably attributable to the business done within this state." It remained for this court to construe said subsection (6)(e) (1st) as it has been construed in this case.
With this background, I revert again to the four reasons:
First: Subsection (6)(e) (1st) makes good sense as it reads. It excepts from all sales those made by agents accredited to or moving out of premises outside this state. The extra phrases "for the transaction of business" and "owned or rented by the corporation" simply describe the premises. The language, it may be admitted, is clumsy, but the central thought rather definitely conveyed is that one must determine the premises or offices to which the agents who made the sales were accredited, i.e. attached to, sent out from, situated at, or connected with; and if those premises were outside the State of Utah the receipts from those sales were excepted from the proceeds of sales which constituted gross receipts in Utah. Why such sales were excepted I shall endeavor later to point out. *Page 386 
I do not think we can pick up the phrase "for the transaction of business," which by the plain reading of the paragraph modifies the noun "premises," and place it in a position where it modifies the phrase "outside the state." The change in meaning is drastic. Before transposition the test of excepted sales was whether they could be credited to agencies outside of Utah, i.e., agencies or agents accredited to premises outside of Utah. After the transposition the test is whether the sales which are excepted were made out of the state. It is quite true that sales made by salesmen moving from premises outside the state and made to customers outside the state must in any case be exempt, especially if the goods sold are not stored, or do not originate in the state. It is questionable whether, under any circumstances, this state may, even as a numerator of a multiplying fraction, use the gross receipts of sales made outside of the state by persons working from offices within the state whether or not such sales involve goods stored or originating within the state. (For reasons see hereunder.)
Hence, the transposition does not effect exemption of such sales which were by the language already excepted. What it attempts to do, which was not accomplished by the language as it stands, is to include sales made in the State of Utah, i.e., using Utah purchasing power when made by agents accredited tooutside premises. Receipts from sales made by agents accredited to Utah premises to Utah customers were included as gross receipts made in Utah by the language before transposition. Conceding that the transposition accomplishes a result to be desired, it plainly constitutes judicial legislation and cannot be done under any rule of statutory construction known to the law.
Second: The emendations between brackets in the paragraph as set out in the opinion are not explanations of something which must be implied from the language as transposed, but additions necessary to bring the paragraph as transposed to fit the intent of the transposer. Take the bracketed phrase "within the state" placed after the word "corporation." *Page 387 
Were it not there, how would we know that the writer intended to limit the word "premises" to those "within the state"? As an aside, there appears to be some inconsistency between "sales [within the state]" and sales made "from premises * * * [within the state]" transacted outside of the state. If an agent connected with premises inside the state transacted business outside the state, how does he make a sale [within the state]?
Likewise, in the case of the bracketed phrase "[owned or rented by the corporation within this state for the transaction of business outside this state]." This must be inserted again in order to give "premises" that signification. Moreover, would it not be unusual for a corporation, especially a foreign corporation, desiring to do business in Utah to set up premises within this state solely "for the transaction of business outside of the state"? There would seem to be something queer about the executives of foreign corporations who qualified to do business in Utah in order that they might set up agencies here to do business outside this state. The court's opinion as will be later shown is compelled to introduce the word "chiefly" in connection with the "business outside the state" in order to get around this difficulty. Furthermore, if it was the purpose of (6)(e) (1st) to confine the proceeds from sales made to customers in Utah or sales made in Utah to customers outside of Utah, the idea might have been conveyed in very simple language.
Third: The opinion appears to interpret the language after transpositions and emendations as excepting receipts from sales made out of the state if made by some salesman working out of a Utah office, but whose chief business is to cover territory outside of Utah when the sales are of goods "within the state." Constitutionally speaking, such sales may not perhaps be included as a part of Utah's business whether the goods are within or without the state, even for the purpose of making the numerator for the multiplying fraction. Gwin, White  Prince v.Henneford, 305 U.S. 434, 59 S. Ct. 325, 83 L. Ed. 272. I shall have something to *Page 388 
say about this matter at the time I give my ideas on the interpretation which should be placed on subsection (6)(e) (1st). At this time I have considerable doubt whether the transpositions and emendations are capable of such limitation. The paragraph as transposed and interpolated seems to exempt sales made by salesmen working out of Utah offices to customers outside of Utah, whether or not that salesman's territory is chiefly in the state of Utah or chiefly outside of the State of Utah, and regardless of whether the goods are in or out of the State of Utah. The interpretation which the opinion puts on the paragraph as transposed and interpolated reads one element into the paragraph as transposed and interpolated, which I do not derive from the revision, i.e., the element that the salesman must not only be simply connected with a Utah office but that even if so connected receipts from his sales are exempt if his sales territory is chiefly outside of the State of Utah. This means that we must read into the paragraph as transposed and interpolated another word, to wit: the word "chiefly" in connection with "transactions out of the state." Then there immediately occurs to the mind how such interpretation would be administered. Suppose the salesman covers Utah and other states about equally, varying only at times more intensively in one than in another. It would be very difficult to determine in many cases whether his transactions were chiefly outside or inside the state. Would the receipts of such sales be exempt or included in the numerator?
Fourth: Subsection (6)(d) gives the key for figuring wages, salaries, and commissions of employees assignable to Utah so as to furnish the numerator of the multiplying fraction under subsection (6)(b). It reads:
"The amount assignable to this state of expenditures of the corporation for wages, salaries, commissions or other compensation to its employees shall be such expenditure for the taxable year as represents the compensation of employees not chiefly situated at, connected *Page 389 
with or sent out from, premises for the transaction of business owned or rented by the corporation outside this state."
If we make the same transpositions in this paragraph as are made by the opinion in (e) (1st) the same language of this paragraph would read "shall be such expenditures for the taxable year as represent the compensation of employees not chiefly situated at, connected with, or sent out from premises owned or rented by the corporation [within the state] for the transaction of business outside this state." It can be seen what havoc this transposition makes with this clause. Subsection (6)(d) meant to include all wages, salaries and other compensation of those not chiefly connected with or sent out from outside plants. That was easy to furnish. It would include the compensation of all those chiefly connected with Utah offices, even though they may travel and sell elsewhere. But under the transposition the compensation of employees not chiefly connected with premises within the state who do business outside of the state must be included — a result exactly the reverse of what the paragraph intended. If we leave the "not" out in the transposition (another bit of judicial legislation) we get a result which requires the corporation to return only the compensation of salesmen working out of Utah offices when they transact business outside the state. But what of those who sell within the state or who sell in this and other states as a total territory? If it is answered that in this case the meaning is clear without transposition, the reply must be two-fold, i.e., that it is also clear in subsection (6)(e) (1st) and that in any case it is very unlikely that the legislature would have used exactly the same clause with its phrases intended in one paragraph to modify "premises" and in the other to modify "for the transaction of business."
For the above reasons I believe the holding of the opinion as to the meaning of subsection (6)(e) (1st) to be erroneous but even at the expense of a prolonged opinion, it is only fair after a detailed critical analysis of the opinion not to leave the subject without indicating my own view as to *Page 390 
its meaning. I think it means just what it says. The commission is to determine the receipts from sales everywhere and deduct therefrom those which must be credited to offices outside the state of Utah, because made by agents connected with or working out of said offices, regardless of whether the goods sold are in or out of Utah, regardless of whether they were sold by one whose territory is chiefly outside of Utah, and even though those salesmen come into Utah and sell to Utah customers. I think as a rough way at arriving at a numerator for the multiplying fraction for subsection (6)(c) the legislature thought that by taking the receipts from sales made by salesmen working out of Utah offices regardless of where made and permitting other states to take the receipts from sales of salesmen working out of offices in those other states, even though the sales were made in Utah and to Utah customers, it would average up fairly well and on a give and take proposition give Utah as much as she gave. The thought was that such sales business as was accredited to Utah offices would furnish a fair measure of the business done in Utah because in a sense when that office did the business it was Utah business.
This construction brings up the question as to whether Utah may, even in fixing a numerator in a multiplying fraction, use for that numerator the receipts from sales made in other states by salesmen working out of Utah offices. But the interpretation of subsection (6)(e) (1st) advanced by the court's opinion does not completely avoid this question. The question is an intricate one on which at this time I express no opinion. In the recent case of Gwin, White  Prince v. Henneford, supra, it was held that the state of Washington could not use a percentage of the gross receipts from services rendered by a Washington corporation as a marketing agent for fruit growers' cooperative organizations in making sales and deliveries in other states as a measure of the franchise tax for engaging in business activities in the State of Washington. But in that case the corporation had agencies in other states and foreign countries *Page 391 
and was required to qualify in those states which left it open to taxation on receipts derived from sales in those states. This placed an unconstitutional burden on interstate commerce. The result would apparently have been the same if the selling corporation had been able to carry on its interstate commerce without qualifying for the doing of business in other states for reasons stated in Western Live stock v. Bureau of Revenue,303 U.S. 250, 58 S. Ct. 546, 548, 82 L. Ed. 823, 115 A.L.R. 944, and cases cited therein. See, also, Crew Levick Co. v.Pennsylvania, 245 U.S. 292, 38 S. Ct. 126, 62 L. Ed. 295. Whether the effect would be any different if the gross receipts from such sales were to be used as a numerator of a multiplying fraction of a portion or all of the total net income is an open question on which no opinion need here be given. Suffice it to say for my purposes that if the construction of subsection (6)(e) (1st) herein advocated were adopted and such construction found to encounter unconstitutionality, subsection (8) would permit the commission to substitute a formula which would prevent such double taxation as would be unconstitutional and at the same time allocate to this state the business fairly attributable to it in reference to sales.
But under the facts of this case the commission found that the application of subsection (6)(e) (1st) interpreted as I have construed it brought a result of zero for the numerator and therefore eliminated the multiplying fraction for 1/3 of the net income from sales. It thus would have no constitutional question under those facts to grapple with. It found and was entitled to find that by the peculiar facts of this case an application of the rule of subsection (6)(c) would work a failure to "allocate to this state the proportion of net income fairly and equitably attributable to this state." In this situation the Tax Commission was empowered under subsection (8) to apply a formula which would be "fairly calculated to assign to this state the portion of net income reasonably attributable to the business done within this state" from "such information as it may be able to obtain," *Page 392 
according to a formula which would not bring about unconstitutionality. In view of the fact that I am dissenting from this part of the court's opinion, I do not feel called upon to state whether the use by the commission of the figure representing goods stored in Utah, to wit, $2,122,110.26, attempted to be backed up by figures of what business the Utah Packing Corporation did the previous year in all the states was a proper substitute. But I again call attention to the fact that there is considerable doubt as to whether a state may take the total gross income from sales where a substantial portion of that income results from sales outside of the state as a measure of the franchise tax. It is not yet clear from the Crew Levick Co. case, supra, or the Henneford case, supra, or the other United States Supreme Court cases whether such is forbidden only if the situation is one where other states have levied or are in a position to tax those sales, but not forbidden where the situation is such that the other states could not do that and were therefore not in a position to burden interstate commerce. The expressions seem to me to be broad enough to prevent use of total gross or total net income where a substantial part is derived from out of state operations even though the corporation is doing business in other states in such a way that those states may not tax it; but I am not certain that the U.S. Supreme Court has had a case in which the facts squarely present the question. My present impression is that a fairer and constitutionally more certain formula would have been to take as the numerator of the multiplying fraction under subsection (6)(c) the amount of sales actually made to Utah buyers. This result will perhaps be the same as arrived at by the court's opinion, but does not take unwarranted liberties with subsection (6)(e) (1st) nor definitely change the meaning of that paragraph for all cases regardless of the application of subsection (8).