Court Opinion

ID: 9597670
Source: CourtListenerOpinion
Date Created: 2023-08-22 01:01:50.010334+00
Date Added: 2024-06-11T18:01:38.867404
License: Public Domain

CROCKETT, Justice
(special and supplemental concurrence).
Although the Tax Commission purported to follow the formula method (Massachusetts Formula) authorized under 80-13-21 (6) U.C.A.1943,1 review of this case clearly indicates that it regards the result obtained *321from a literal application of that formula as producing an unrealistic and inequitable result insofar as the taxpayer is concerned. Illustrative of this are the figures for 1942 as set forth in the Commission’s brief as a typical year. (All sums are given in round figures.) In that year the Utah Mine produced 86 million dollars gross income which Kennecott reduced to S.8 million dollars for Utah tax purposes. Some of the deductions are, of course, not subject to question: operating expenses — 44 millions, federal taxes — 20 millions. Subtracting the depletion allowance of 13 million dollars (contested by the Commission and now modified to some extent by the majority opinion) leaves a net of 9 million dollars. It is the manner of application of the statutory formula to this sum, resulting in the figure of 5.8 millions for Utah tax purposes that gives rise to disagreement.
A general survey of the source of income and the manner in which it is earned pointedly supports the view of the Commission that the above allocation is inequitable to this State. It is here that the valuable asset exists which is being depleted by the production of the gross income; and here 5,000 employees are engaged in producing the ores and administering Kennecott’s western mining division. To this approximately 64% of the net income from the Utah Mine is allocated. Contrasted to this, 36% of the net income from the Utah Mine is claimed allocable to the activities of Kennecott’s general administrative offices and only 28 employees which constitute the Kennecott Sales Corporation in New York.
The disparity just referred to is further emphasized by the fact that the sale of gold and silver (roughly 12% of total sales) is made automatically to the Federal Government, while the sale of copper under Federal control (which existed throughout a large part of the period in question) involves little more than order taking. Still, under the formula, 36% of the income from the Utah Mine must be attributed to these sales and administrative efforts.
Of this 36%, a large portion (331%% of the total) is allocated outside of this State in the sales factor of the formula due to the mere fact that the sale is effected in a foreign state. If the sales were made in Utah, virtually all of the income would be allocated here. Under the instant facts altogether too great importance is thus placed on the location of the place of sale. However reasonable the formula may be where selling efforts might justify approximately one-third of the total effort required to produce .the income, it is unrealistic and inequitable in the instant case because it fails to take cognizance of the true source and manner of production of this income and the method in which sales are made.
*322It also seems plain that the statute authorizing allocation by the formula, subsection (6), as now written, lends itself to a type of operation by the taxpayer whereby no tax is paid to Utah or any other state on part of its net income. By contending for the use of the formula the taxpayer succeeds in having 33^4% of its income (practically all of the gross receipts from sales) allocated outside of this State in the sales factor of the formula as above mentioned. The sales are made by Kennecott Sales Corporation of New York, a wholly owned subsidiary of Kennecott. But on the books of the parent company, its subsidiary and divisions, only $1 per ton for copper and $3.50 per ton for molybdenite is credited as income (by way of sales commission) to Kennecott Sales Corporation in New York. The remainder is shown on the books as income to the Utah Division with the commissions being charged to the Utah Division as an expense. In New York, therefore, no part of the 331/3 % of the Utah Division’s net income allocated outside the State in the sales factor of the formula would be taxed as income to the Kennecott Sales Corporation.
Furthermore, it seems clear beyond dispute that none of this income attributed to sales outside the State is taxed to the parent company, Kennecott, either; and that it evades having this portion of its income reported in any state.
Two salient facts point to the foregoing', conclusion:
First, the Utah franchise tax was 3% of the net income after Federal taxes, as compared to a franchise tax of before Federal taxes in New York. Consequently, there is no likelihood that the in-’ come was reported and taxed in New York in preference to reporting it in Utah.
Second, any doubt whatever that might exist is effectively obviated by the manner in which this issue was evaded at the hearing before the Commission as evidenced by the following colloquy:
Mr. Gilmour (for the commission) : “May I also inquire what your position is going to be on the request that we made with respect to whether or not Kennecott files returns in other states with respect to the income which they are here contending should be excluded from Utah?”
Mr. Parsons (for Kennecott): “I think I have made our position clear; I have tried to at any rate. What taxes Kennecott may or may not pay outside the state of Utah, what tax returns it may file to tax collecting agencies outside the state of Utah, is of no concern to the state of Utah or this Commission and we are not going to furnish you that information. Frankly, I don’t know what it is and I am *323not going to find out; and if you ask the witness that question, it will he my advice to the witness that he refuse to answer on advice of counsel. That question isn’t at issue. It isn’t in this case as we see it.”
At another point Mr. Fernald, a witness for Kennecott, was asked on cross-examination the following question:
Mr. Gilmour: “Does Kennecott Copper Corporation assign or return any portion of the net income of the Utah Mines Division to any other state for state income or franchise tax purposes?”
After an objection to the question as “irrelevant and immaterial and incompetent” was overruled, the record shows that counsel responded as follows:
Mr. Parsons: “It is my instruction to the witness not to answer that question.”
Mr. Gilmour: “Do we understand from that instruction, Mr. Parsons, that you are instructing your witness to refuse to answer a question which the Tax Commission thinks is relevant to the issues of the case?”
Mr. Parsons: “I think the record is perfectly clear.”
It is undoubtedly true that, had the Commission been so inclined, it could have made a finding on that issue adverse to the taxpayer because of this arbitrary refusal to cooperate in furnishing pertinent information. It is well settled that where a party suppresses or refuses to give evidence which is available to it, that an inference may be drawn that the fact, if disclosed, would be adverse to the interests of such party.2
Conceding that ordinarily it is no concern of the taxing state whether taxes payable by the taxpayer in another state are collected, it is nevertheless the writer’s opinion that the information here sought was relevant and material as bearing on how Kennecott regarded its operation in New York in relation to the operation carried on in Utah in order to determine the amount of income properly allocable here. Further, I see no escape from the conclusion that it was material for the Commission to find out this fact because, when a computation according to the statutory formula “does not allocate to this state the proportion of net income fairly and equitably attributable to this state” it has the duty and prerogative under Section 80-13-21(8) to devise a formula which will produce such result.
*324It is further my opinion that the Utah State Tax Commission, the constitutional body empowered to administer the tax laws of our State,3 to conduct hearings and determine such matters as were then under consideration, should not be subjected to the indignity of having counsel for the taxpayer presume to overrule its ruling that a witness should answer questions on matters the Commission deemed material.
I am neither unaware nor unappreciative of the fact that Kennecott Copper Corporation is a very large mining operator and taxpayer and that its operations within this State and the taxes it pays are both of great importance to our economy. Nevertheless, it is entitled to only the same consideration as every other taxpayer: equal and exact justice under the law. Neither its size nor its importance in our economy should cause any bias or prejudice for or against it or in any way becloud the true issue. It is of the utmost importance here, as it is with every taxpayer, when the issue is joined, that the Tax Commission be furnished all pertinent information in order that it may correctly determine the income attributable to business done within this State.
It is entirely proper for the Tax Commission to bear in mind that we have great mineral resources which are being depleted, and this, to a large extent, by absentee owners; and that in fairness to this state and its citizens, it is essential that the net income of such operations should be fairly and equitably allocated here for computation of the franchise tax imposed for the privilege of thus doing business. It was in recognition of this need, and the realization of the impossibility of arriving at such a result in every case under the formula authorized under subsection (6) that the Legislature enacted subsection (8) which expressly permits other means of computing the income to be allocated to this state when the formula does not, in the opinion of the Commission, produce a fair and equitable result.
From the fact that it is so indisputably clear that Kennecott does not report and pay taxes on the portion of income in question in New York, it follows that so far as its New York books are concerned, it must consider this income as attributable to Utah; yet in Utah it refuses to report such income as allocated here and seeks to exclude it by taking refuge in the statutory formula. If this is not tax evasion, then I would like to have someone explain why not and point out the error of my conclusion on that point. In view of this, it seems to me that the Commission was entirely justified in believing that the resulting tax is not fair and equitable. That being so, it is to be conceded that the Commission should not have attempted to fol*325low the formula under subsection (6), but should have proceeded under express power granted it by subsection (8) to devise a formula which would make a fair allocation of the taxpayer’s income to Utah.
I agree that inasmuch as the Commission elected to proceed under subsection (6), we are bound by that statute as phrased by the Legislature, and for reasons stated in the majority opinion, are powerless to affirm a decision of the Commission which assigns to this state in the sales factor of the formula, gross receipts for sales made outside of the state. Nor is it properly within the prerogative of this court to devise another formula for the allocation of income in some other way. That power is reposed in the Tax Commission. Our function is limited to an inquiry into, and a determination of the lawfulness of the decision of the Commission.4 The performance of our duty requires us to remand the case to the Tax Commission for further proceedings and the computation of a tax on a correct basis when that appears to be necessary.
For the reasons stated in this opinion I earnestly urge upon my colleagues the necessity, the propriety, and the justice of remanding this matter to the Commission so that in the light of the opinion of this court that it incorrectly proceeded under subsection (6), it may take such further proceedings as it deems proper under the prerogative given it under subsection (8) which provides:
“If in the judgment of the tax commission the application of the foregoing rules does not allocate to this state the proportion of net income fairly and equitably attributable to this state, it may * * * make such allocation as is fairly calculated to assign to this state the portion of net income reasonably attributable to the business done within this state * *
to the end that a tax may be assessed against this taxpayer which in the judgment of the Tax Commission is equitable and just. This would of course have to be done with due regard to the fact that any formula so devised must be equitable to this taxpayer and also to others similarly situated. That this may present difficulties does not obviate the fact that it is necessary and proper that such result be accomplished.

. Now Sec. 59-13-20(6), U.C.A.1953.

. Holmes v. Hatch, 11 Cal.2d 376, 80 P.2d 70; Cf. Starkweather v. Conner, 44 Ariz. 369, 38 P.2d 311; Coeur D’Alenes Lead Co. v. Kingsbury, 59 Idaho 627, 85 P.2d 691; Stricker v. Billingsley, 169 Okl. 145, 36 P.2d 474; Saddler v. Watkins, 169 Okl. 279, 36 P.2d 760.

. Const. Art. XIII, Sec. 11, implemented by Title 59, U.C.A.1953.

. See. 80-13-47, U.C.A.1943.