Court Opinion

ID: 9584495
Source: CourtListenerOpinion
Date Created: 2023-08-21 22:48:54.520835+00
Date Added: 2024-06-11T15:08:00.762682
License: Public Domain

*151Mr. Justice WOLFE,
in his concurring opinion, arrives the same conclusion. He states his interpretation of that subsection to be as follows: “I concur in the holding that subsection (8) of Section 80 — 18—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 other hand, where the rules would subject the taxpayer to so-called double taxation that the Commission may depart from them.”
The problem that concerns us here is not that the commission seeks to force the taxpayer to a non-statutory basis. On the contrary, the Commission has permitted the taxpayer to file on a basis selected by it which the taxpayer seeks to change because the amount of tax has become onerous. Such a request may be entirely legitimate but when as here there are factors which cannot be determined with any degree of satisfaction, the request is made some six years after the tax has accrued and the only reason assigned is that the change may substantially reduce the tax liability, the showing is not sufficient to convince us that the Commission was arbitrary and capricious in denying the request. Petitioner’s contention in this respect is overruled.
To determine the validity of the second assignment of error it is necessary that we refer to section 80 — 13—8, *152U. C. A. 1943, subsections (9) (a) and (b), which provide as follows:
“(9) (a) The basis upon which depletion, depreciation, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in Section 80 — 13—14 for the purpose of determining the gain or loss upon the sale or other disposition of such property, except as hereinafter in this section provided.
“(b) The allowance for depletion shall be thirty-three and one-third per cent of the net income from the property during the taxable year, computed without allowance for depletion, or on the basis provided in subsection (9) (a), as the taxpayer may elect. The basis which the taxpayer elects under this subsection shall be the basis used in subsequent accounting periods and shall be changed thereafter only with the consent of the tax commission.” (Emphasis supplied)
Section 80 — 13—14, U. C. A. 1943, referred to in (9) (a) above, deals with the basis for determining gains or losses from the sale or other disposition of property acquired after December 31, 1930. That basis has been referred to as cost depletion. Up until this controversy arose, petitioner always elected to compute depletion under subsection (9) (b) rather than (9) (a).
If we were to limit our discussion to the provisions of these two sub-paragraphs it would appear that there are only two methods for determining depletion; one is the percentage method and the other is the cost method. Petitioner, however, calls our attention to subparagraph (8), of Section 80 — 13—8, U. C. A. 1943, which provides as follows: “(8) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar condition in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the tax commission. In the case of leases, the deduction shall be equitably apportioned between the lessee and the lessor.” (Emphasis supplied.)
Its contention is that if depletion be limited to the two methods prescribed in subscription (9) that such a construction overlooks the underscored provision of subsection (8). That phrase could be construed to mean that the most appropriate selection of the two methods prescribed by statute should be dicated by the peculiar  conditions of each case. Or it may well be that the legislature intended to confer authority upon the Commis-ion to use another method if a situation arose which would make both the percentage depletion and cost depletion un*153reasonable. We need not determine those questions as Kennecott had its option to select the method it desired to use and over the period of years it has continued to use the percentage depletion method. This seemed to be an entirely satisfactory method until the State Tax Commission commenced requiring Federal taxes to be deducted before applying the depletion percentage. The statute requires the taxpayer to continue to use the selected method unless consent of the Commission is obtained to change. This statute, while permitting a change, presupposes a timely request and not one made long after the return is submitted and a deficiency determined. A change in the administrative regulations might be good grounds for requesting a change in accounting practice, but again, the request should not be unduly delayed and some substantial reason for the change should be advanced by the taxpayer so that the Commission is not faced with repeated requests to change systems merely for the purpose of escaping tax liability.
Petitioner sought to convince the Commission and seeks to convince this court that a more equitable and fair basis would be by adopting the formula used by the Federal Government. The formula used in Federal returns permits 15 percent of the gross proceeds, but not to exceed 50 percent of the net, to be deducted. The adoption of that method for the year in question might be more advantageous to Kennecott but that reason alone  does not require the State Tax Commission to permit its use. Petitioner had previously selected one of the methods set up by the legislature and the burden is upon it to establish that the peculiar conditions existing in its case are such as to reasonably require the Commission to permit the adoption of another method. Assuming that the Commission might, if conditions justify, adopt a basis of determination different from the two provided by statute, we are not convinced that the petitioner has es*154tablished an abuse of discretion on the part of the Commission merely because another system might reduce the tax load. That the tax liability is larger than it would be if petitioner were granted permission to switch systems does not compel a finding of arbitrariness. To hold otherwise would require the Commission to abandon the statutory methods each time the taxpayer asserted the tax was excessive.
The third and fourth assignments of error are largely interrelated and will be discussed together. In connection with these assignments it is well to point out Kennecott’s unusual method of operation. The Utah Division either performs or is directly involved in digging the ore from the ground; transporting the ore, concentrates, the blister copper, milling the ore at the mills; having the ore smelted at smelters; and, eventually selling the metals recovered. The transportation systems and the smelters are not owned by Kennecott but the mills and selling organization are. After the ores are milled they are shipped to smelters for the account of Kennecott- and title to the product remains in Kennecott until such time as the minerals are sold by the Kennecott Sales Corporation. The problem that is unique and that is brought into focus by this operation is that by statute, depletion is limited to net income received from the property, and the post-mining operations of Kennecott invade fields not usually associated with extraction and sale of ores. Kennecott claims that the costs of all these post-mining activities should be charged against its gross income to arrive at its net income for depletion purposes, but that no net income is attributable to these post-mining operations. The State Tax Commission, on the other hand, takes the narrower view that section 80 — 13—8 (9) (b), U. C. A. 1943, requires that depletion be limited to a percentage of the net income from the property and that part of Kennecott’s Utah Copper Division net income is realized from its milling, smelting, and sales operations *155and not realized from the Mining property. As a consequence of the view taken by the Tax Commission, the deficiency tax was computed by splitting total net income between net income from the property and net income from smelting, refining, transportation and selling, or what we shall designate as fabrication and sales income.
The State Tax Commission, being unable to obtain from Kennecott a breakdown of estimated income allocated to mining operations and to fabrication and sale, conceived and used a formula which it believed made a fair and reasonable allocation. Reduced to its simplest form, the formula was based on the supposition that mining income bore the same relationship to fabrication and sale income as mining costs bore to the post-mining operation costs. Stated another way, if the mining costs equalled the fabrication and sale costs then the income to be credited to mining operations would be equal to the income credited to the post-mining operations. By using the prepared formula, the Commission concluded that sixty-eight percent of Kennecott’s net income should be credited to mining operations and thirty-two percent to post mining activities. It may be that the use of the formula was inappropriate because of using estimated, questionable or unknown factors, but the final percentages used so closely approximated the allocation used by Kennecott when it submitted its original return that it is doubtful that any prejudice resulted.
Counsel for both the Commission and the petitioner have referred us to cases arising under different statutory provisions or administrative regulations. While they suggest paths to be followed, the difference in statutory guideposts requires a different approach in this case. Generally speaking, the phrase “income from the property” means the income from mining. The latter term is usually understood to mean not merely the extraction *156of ores or minerals from the ground, but also the ordinary treatment processes normally applied by operators in order to obtain the commercially marketable mineral product. In those cases where the operator sells direct to the smelter and payment is made on the net smelter returns, little difficulty is encountered. Here, however, we go far beyond that as Kennecott is the owner from the time of digging to the day of selling. Undoubtedly each of the post-mining processes appreciates the value of the product and this is reflected in increasing the net income to Kennecott. If the total net income were allocated to this state then we might be faced with the difficult question as to whether we were not on the one hand permitting the post-mining operations to increase the franchise tax due the state and on the other hand denying the taxpayer the right to the increased income for depletion calculations. However, when the taxpayer allocates the net income received from the appreciation to out of state net income, another question presents itself.
Because of the arithmetical difficulties to be encountered in computing the final tax, the parties have assumed the responsibility of making the final determination based on the principles we enunciate. Partly for this reason and partly because certain difference must be reconciled in analyzing this last contention and in illustrating our concept, we used only approximate figures.
When Kennecott filed its original 1942 return, it showed a total net income of $8,617,511.00 for the Utah Division. Because it contended all of this net income was not earned in the State of Utah, it used an allocation factor of 66.926 percent of the income attributable to business done in this state. (It should be noted at this point that this is the same factor used by the Commission in determining the deficiency tax.) By applying this factor to the total net income of the Utah Division, Kennecott determined that *157$5,803,351 of its total net income should be allocated to Utah. Both of the quoted figures are net income, after depletion, and $13,568,213 is shown in Kennecott’s books as the amount deducted for this item. The depletion deduction used was excessive because Kennecott did not take out federal taxes paid before determining the net income for depletion purposes. Accordingly, if we put back the amount taken out for depletion, we get a total net income, before depletion, of $22,185,807, and an allocated net income to Utah of $19,371,565. By applying the 33 1/3 percent depletion factor to these two amounts we get a depletion deduction of approximately $7,395,269 in the first instance, and $6,457,188 in the last instance. The State Tax Commission used a slightly higher total net income in determining the deficiency tax and split it 68 percent to mining income and 32 percent to post-mining income. By so doing, it allowed a depletion deduction of $6,455,813.
We cast aside any attempt to reconcile the differences in total net income as we believe our holding will make it possible for the parties to determine the exact amount. We believe that if the taxpayer claims that all net income is not earned in this state, that the portion allocated to business done outside this state must, of necessity, not be income from the property within the meaning of our statute. We are unable to determine whether the post-mining activities produce 32% of the net income of the Utah Division, but Kennecott claims they do and the Tax Commission has conceded that point in this case. The taxpayer in its petition for redetermination alleges that its operations are indivisible but it, nevertheless, makes a percentage allocation between the activities carried on in this state and the post-mining activities performed elsewhere. Therefore, if any net income is attributable to business done elsewhere, it must come from operations which would not be considered ordinary treatment processes normally applied by operators. The taxpayer in this instance is in *158a rather inconsistent position to assert that net income pertaining to business performed outside this state can be considered as net income from the property. By splitting its income between this state and other places, the taxpayer has established that it can assign portions of its income to mining operations and to post-mining activities.
We need not place our approval on the formula used by the Commission or arbitrarily determine the breakthrough point between mining operations and post-mining activities. All we need do in this case is to point out that there are. two possible paths for the taxpayer to take. The Commission might agree that it take either but it cannot traverse both. Either the net income is from property and should be allocated to this state, or the net income is from both the property and the post-mining activities and they are not so related that the net income cannot be roughly allocated to both sources. The lengths to which the taxpayer might go under its theory is aptly illustrated by the figures used in its first return. From an approximate net income, before depletion, in this state of $18,000,-000, Kenneeott seeks to establish a depletion allowance of $13,000,000. This is far in excess of the 33 1/3 percent provided for by statute.
In disposing of this last contention, we hold that if Ken-necott files its return on an allotted basis that it must allocate some of its net income to post-mining operations before computing depletion.
The case is remanded with instructions to determine and enter a deficiency judgment in accordance with the views herein expressed.
WADE, WOLFE, and McDONOUGH, JJ., concur.