Court Opinion

ID: 9611525
Source: CourtListenerOpinion
Date Created: 2023-08-22 03:57:35.04922+00
Date Added: 2024-06-11T09:19:27.628966
License: Public Domain

*671Judge Hunter
dissenting.
My reading of Polaroid Corp. v. Offerman, 349 N.C. 290, 507 S.E.2d 284 (1998), cert. denied, 526 U.S. 1098, 143 L. Ed. 2d 671 (1999) causes me to disagree with the majority opinion. Therefore, I respectfully dissent.
It is undisputed in the record before us that although Lenox argues that “[f]rom 1970 until 1988, . . . ArtCarved . . . remained a functionally and financially distinct entity from Lenox,” Lenox never filed tax returns with either the Internal Revenue Service or with the State of North Carolina “separat[ing] the income or gross receipts associated with the ArtCarved division from the general business receipts of Lenox.” Instead, Lenox’s tax returns always showed the assets of ArtCarved as producing a “business income” for Lenox as opposed to “nonbusiness income.” Furthermore:
On all tax returns filed with North Carolina . . . Lenox . . . affirmatively treated ArtCarved as an integral part of its unitary business operations, part of which were conducted in this State.
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At no time . . . did Lenox separate the expenses associated with the ArtCarved division, such as administrative expenses for overhead or salary associated with the personnel of the ArtCarved division, from the general administrative expenses of Lenox. At no time were the expenses associated with the assets of the ArtCarved division, such as depreciation, insurance, overhead, [or] taxes, separated from the general business expenses of Lenox. Rather, Lenox classified the expenses associated with the ArtCarved division, its personnel and assets as “business” expenses rather than “nonbusiness” expenses, which it deducted against its “business income” reducing the amount of business income subject to taxation in North Carolina.
Nevertheless, the majority believes that because Lenox is now ceasing to operate ArtCarved, its fine jewelry division, Lenox should be given the advantage of claiming that income derived from the sale of ArtCarved is “nonbusiness” income. I cannot agree.
Lenox admits that when it sold its line of melamine dinnerware in 1986, it reported the sale as a business income loss which resulted in reducing its taxable income. Lenox further admits that when it sold *672its candle division in 1987, it reported the sale as a business income loss as well, again resulting in a reduction of Lenox’s taxable income for the year. Thus, I do not believe it to be consistent with our tax laws that Lenox now be allowed to claim the sale of its fine jewelry division as nonbusiness income. I realize that Lenox attempts to distinguish the dinnerware and candle division sales from this present fine jewelry division sale by arguing that with the prior two it “did not sell its brand name and attendant goodwill,” so that it continues to sell dinnerware and candles. However, I do not believe that matters. All three divisions were “integral parts” of Lenox’s trade or business operations and thus, the sale of each produced business income as defined by N.C. Gen. Stat. § 105-130.4(a)(l) (1999). Thus, I believe the majority errs when it opines that
[w]hen the taxable income results from something other than a liquidation of the asset, courts apply the functional test in a straightforward manner, focusing exclusively on whether the asset was integral to the corporation’s regular business. But . . . when the asset is sold pursuant to a complete or partial liquidation, courts focus on more than whether or not the asset is integral to the corporation’s business. Instead they concentrate on the totality of the circumstances, including the nature of the transaction and how the proceeds are used. In this regard, whether the liquidation results in a complete cessation of the company’s involvement in that line of business is particularly relevant. . . .
(Emphasis added.)
I acknowledge, along with the majority, that Lenox’s disposition of its ArtCarved division does not fall within the definition of business income as applied by the “transactional test.” However, I do not agree that it does not comply with the definition of business income as applied by the “functional test.” The majority correctly states that the functional test “focuses on income from tangible and intangible property if the acquisition, management, and/or disposition of the property constitute integral parts of the corporation’s regular trade or business.” The majority further acknowledges that “[u]nder this test, the extraordinary nature or infrequency of the transaction is irrelevant,” instead, “[i]f the asset or property was integral to the corporation’s trade or business, income generated from the sale of that asset is business income, regardless of how that income is received.” (Citing Polaroid Corp. v. Offerman, 349 N.C. 290, 306, 507 S.E.2d 284, *673296 (1998)). Nevertheless, the majority then goes on to analyze a great many cases determined throughout the nation, in an effort to prove that the “application of the functional test” is not as straightforward as its definition. Again, I cannot agree.
First of all, it must be noted that:
North Carolina’s definition of business income is slightly broader than the definition found under the Uniform Act. Specifically, North Carolina’s definition reads “acquisition, management, and/or disposition of the property,” as opposed to the definition in UDITPA, which uses the conjunction “and” rather than “and/or.” Moreover, North Carolina’s definition utilizes the term “corporation” instead of “taxpayer.” These distinctions are irrelevant to the case sub judice.
Polaroid Corp. v. Offerman, 349 N.C. 290, 294, 507 S.E.2d 284, 288 n.3 (emphasis added). It must be noted that the Polaroid court found the distinctions irrelevant because the case had nothing to do with the disposition of corporate property. The majority seems to feel that because the court in Polaroid found the distinctions irrelevant, they are also irrelevant in the case at bar. However, because the present case is only about the disposition of corporate property, I believe it is this particular distinction in North Carolina’s statute upon which this case turns.
“[T]he legislature is always presumed to act with full knowledge of prior and existing law and . . . where it chooses not to amend a statutory provision that has been interpreted in a specific way, we may assume that it is satisfied -with that interpretation.” Id. at 303, 507 S.E.2d at 294. Thus where, as here, the legislature chose to add “or” to the statute, we are compelled to presume that it intended to create the new distinction. Therefore, the fact that our state statute requires only that the “disposition of the property constitute integral parts of the corporation’s regular trade or business operations,” and not the “acquisition and management” as well, serves as notice that as long as the asset handled by the corporation produced income as an integral part of the corporation’s regular trade or business operations, that income is business income. N.C. Gen. Stat. § 105-130.4(a)(l).
I am further convinced because “ ‘an interpretation by the Secretary of Revenue is prima facie correct....’” Polaroid, 349 N.C. at 302, 507 S.E.2d at 293 (quoting In re Petition of Vanderbilt Univ., *674252 N.C. 743, 747, 114 S.E.2d 655, 658 (1960)). See also N.C. Gen. Stat. § 105-246 (Supp. 1994). Therefore, our Supreme Court held that the burden is on the taxpayer to rebut the presumption. Polaroid, 349 N.C. at 302, 507 S.E.2d at 293. North Carolina’s Secretary of Revenue “has adopted the UDITPA approach of defining business income to include both the transactional test and the functional test.” Id. Thus, in its Administrative Rule 17 NCAC 5C .0703(2) (June 2000), regarding business and nonbusiness income, business income is defined as “[a] gain or loss from the sale, exchange, or other disposition of real or personal property... if the property while owned by the taxpayer was used to produce business income. . . .” Id. (emphasis added). In the case at bar, I do not believe that Lenox has rebutted that presumption, and I would so hold.
It is undisputed that ArtCarved was an integral part of Lenox’s business, used to produce income, while it was owned by Lenox. Yet, Lenox argues and the majority agrees that because selling ArtCarved was a “partial liquidation,” the sale does not generate business income because it falls outside of the transactional or functional tests set out in Polaroid. However, although I agree with the majority that “the transaction here can be categorized as a partial liquidation^] [and that] [b]y selling off ArtCarved, Lenox divested its fine jewelry division,” I cannot agree that this partial liquidation status removes the income gained from Polaroid’s application and instead requires a “totality of the circumstances” application, as determined by the majority. I recognize that our Supreme Court opined in a footnote that a finding that the assets sold constitute integral parts of the corporation’s regular trade or business is irrelevant in these cases. “[T]rue liquidation cases are inapplicable to these situations because the asset and transaction at issue are not in furtherance of the unitary business, but rather a means of cessation.” Polaroid, 349 N.C. at 306, 507 S.E.2d at 296 n.6. Lenox thus argues that Polaroid set out a third test for liquidation cases, which I believe is incorrect. Nevertheless, I find that Lenox’s divestment of ArtCarved is not a “true liquidation,” and thus it is in furtherance of the unitary business.
According to Black’s Law Dictionary, liquidation is “[t]he act or process of converting assets into cash, esp. to settle debts.” Black’s Law Dictionary 942 (7th ed. 1999). Furthermore, partial liquidation is defined as “[a] liquidation that does not completely dispose of a company’s assets . . . and the corporation continues to operate in a restricted form.” Id. Both the United States Supreme Court and our own Supreme Court discuss a “complete liquidation, [as one in *675which] all of the assets of the corporation are distributed in complete liquidation” with the intent of ceasing the corporation’s entire business operations, Hillsboro National Bank v. Commissioner, 460 U.S. 370, 399, 75 L. Ed. 2d 130, 156 n.36. (1983), and “thereby terminating the existence of the [corporation] . . . .” Shuford v. Building & Loan Asso., 210 N.C. 237, 239, 186 S.E. 352, 353 (1936). Thus, although the Polaroid court did not define “true liquidation,” I believe we are safe in assuming that a “true liquidation” (as mentioned by Polaroid') is the same as a complete liquidation — and as such, because Lenox admits its divestment of ArtCarved was only a “partial liquidation” and not a complete liquidation, Lenox’s corporate restructuring does not qualify. Therefore, I disagree with Lenox and the majority in their rationalization that as a partial liquidation, Lenox’s restructuring should not come under the functional test.
Instead, I agree with the State’s argument that Lenox’s restructuring was a directed effort to boost its unitary business of manufacturing and selling consumer durable goods in the retail market. And although the company’s intent was to cease the manufacturing and selling of fine jewelry, the sale of that division was intended to enable the company to better focus on selling more of its other manufactured goods. Therefore, the sale of ArtCarved also was to benefit Lenox’s unitary business.
Furthermore, our Supreme Court has acknowledged that “the uniform definition of business income, as set forth in UDITPA, finds its origins in early California jurisprudence”; thus, the Court found California cases on point to be quite persuasive. Polaroid, 349 N.C. at 304, 507 S.E.2d at 294. Accordingly, I find In re Appeal of Triangle Publ’n., Inc., 1984 WL 16175, 1984 Cal. Tax Lexis 86 (Cal. St. Bd. of Equal. June 27, 1984) (per curiam) directly on point. In that case, California’s State Board of Equalization (“Board”) had to determine whether income gained by Triangle Publications’ (“Triangle”) sale of its media divisions, by installment contracts and afterward transferred to TFI (its wholly-owned subsidiary), was business income to the parent company, Triangle. Because California’s version of UDIPTA’s definition of business income requires that “acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business,” In re Appeal of Triangle Publ’n., Inc., 1984 WL 16175, at *2, 1984 Cal. Tax Lexis 86, at *4 (emphasis added), Triangle argued that the sale of its assets was an extraordinary or occasional sale and thus was not business income — even though while owned, Triangle had used the property to *676produce business income. Id. Citing earlier decisions it had rendered, the Board stated that it had “specifically rejected the reasoning of the Kansas and New Mexico decisions” opining the same view as argued by Triangle. Id. at *2, 1984 Cal. Tax Lexis at *7. (This rejection included McVean & Barlow, Inc. v. New Mexico Bureau of Rev., 88 N.M. 521, 543 P.2d 489 (Ct. App.), cert. denied, 89 N.M. 6, 546 P.2d 71 (Sup. Ct. 1975), upon which the majority relies.) Instead, the Board stated that California had readily accepted that there were two alternative tests under the Code, including the functional test; and under that test,
income from the disposition of an asset is generally business income if the asset produced business income while owned by the taxpayer, there is no requirement that the transaction giving rise to the income occur in the regular course of the taxpayer’s trade or business.
[Therefore,] [t]he income from the sales of the divisions and the building falls squarely within the ambit of the functional test. They were all reported by [Triangle] as parts of its unitary business, and any income or loss from them while owned by [Triangle] was apparently reported by [Triangle] as business in character. [Triangle’s] contention on appeal that the divisions were separate businesses directly contradicts, without basis, its own earlier characterization. . . .
In re Appeal of Triangle Publ’n., Inc., 1984 WL 16175, at *3, 1984 Cal. Tax Lexis 86, at *7-8 (emphasis added).
Comparing the case at bar to the Triangle case, I see no difference in what Lenox did and what Triangle did. Both corporations counted any income or loss from the asset sold as business income/loss while the asset was under their ownership. In addition, North Carolina’s statute does not require that the corporation’s acquisition and management of the asset be integral parts of the business along with the corporation’s disposition of the same asset. Thus, where California can find all three requirements exist as to Triangle, I believe this Court is bound upon the finding of only one.
Likewise, I am persuaded by another California case, In re Appeal of Borden, Inc., 1977 WL 3818, 1977 Cal. Tax Lexis 108 (Cal. St. Bd. of Equal. Feb. 3, 1977) (per curiam), upon which Triangle Publications was based. In Borden, the Board held that the key to both the transactional and functional tests is the concept of “unitary *677income.” In re Appeal of Borden, Inc., 1977 WL 3818, at *2, 1977 Cal. Tax Lexis 108, at *3-4. The Board stated that under prior California law,
income from tangible or intangible property was considered unitary income, subject to apportionment by formula, if the acquisition, management, and disposition of the property constituted integral parts of the taxpayer’s unitary business operations. Where that requirement was satisfied, income from such assets was considered unitary income even if it arose from an occasional sale or other extraordinary disposition of the property. . . .
The underlying principle in these cases is that any income from assets which are integral parts of the unitary business is unitary income. It is appropriate that all returns from property which is developed or acquired and maintained through the resources of and in furtherance of the business should be attributed to the business as a whole. And, with particular reference to assets which have been depreciated or amortized in reduction of unitary income, it is appropriate that gains upon the sale of those assets should be added to the unitary income.
Id. at *2, 1977 Cal. Tax Lexis at *4-5 (citations omitted) (emphasis added).
Again, I find no distinguishing factors between Borden and the case before us. It is undisputed that Lenox reported any income or loss with regard to ArtCarved as business income or loss while it owned ArtCarved. Thus, I would hold that income from the sale of ArtCarved was also business income.
Conversely, while the majority finds Laurel Pipe Line Co. v. Pennsylvania, 537 Pa. 205, 642 A.2d 472 (1994) analogous, I do not agree it is applicable. The distinguishing fact in that case is that Laurel had ceased to operate the pipeline at issue three full years before disposing of it. Thus, I agree with the Laurel court that “the pipeline was not disposed of as an integral part of Laurel’s regular trade or business. Rather, the effect of the sale was that the company liquidated a portion of its assets.” Id. at 211, 642 A.2d at 475. Therefore, I do not agree with the majority opinion, in its recitation of Laurel, that the court’s determination was based on “factors other than how the property was used by the corporation.” Instead, the only important factor was whether, while Laurel owned it, the *678pipeline constituted integral parts of Laurel’s regular trade or business. After three years of sitting dormant, how could it have reasonably been said that the disposed-of pipeline was integral to Laurel’s regular trade or business?
Likewise, while the majority cites McVean & Barlow, Inc. v. New Mexico Bureau of Rev., 88 N.M. 521, 543 P.2d 489 to support its position, I disagree that it applies. In McVean, the corporation was in the business of laying pipelines. In the course of a major reorganization, the corporation liquidated its “big-inch” pipeline business. Id. at 522, 543 P.2d at 490. The state Commissioner of Revenue held that because the taxpayer had “testified that he regularly bought and/or sold as much as five hundred thousand dollars worth of equipment annually, of the types the receipts of which are taxed in the instant assessment,” the taxpayer was in the business of buying and selling pipeline equipment and thus, income from the sale of its “big-inch” pipeline business was business income. Id. However, New Mexico’s Court of Appeals reversed the Commissioner’s ruling, opining that because the taxpayer’s “buying and selling of equipment was done in the course of replacing used or scrapped equipment used in the business with new,” the taxpayer was not in the business of buying and selling pipeline equipment. Id. Thus, the court stated:
“. . . It is not the use of the property in the business which is the determining factor under the statute. The controlling factor by which the statute identifies business income is the nature of the particular transaction giving rise to the income. To be business income the transaction and activity must have been in the regular course of taxpayer’s business operations.”
Id. at 523, 543 P.2d at 491 (emphasis added) (quoting Western Natural Gas Co. v. McDonald, 202 Kan. 98, 101, 446 P.2d 781, 783 (1968)). Therefore, the court held that McVean “was a partial liquidation of taxpayer’s business and a total liquidation of taxpayer’s big inch business. The sale of equipment did not constitute an integral part of the regular trade or business operations of taxpayer. This sale contemplated a cessation of taxpayer’s big inch business.” Id. at 524, 543 P.2d at 492.
Our Supreme Court has already held that “[w]hen determining whether a source of income constitutes business income under the functional test, the extraordinary nature or infrequency of the event is irrelevant." Polaroid, 349 N.C. at 296, 507 S.E.2d at 289 (emphasis added). Therefore, I believe the majority errs by relying on the *679McVean court’s reasoning when it is in direct conflict with our own Supreme Court’s holding.
Furthermore, under the functional test, the fact that the proceeds from the sale were distributed to its shareholders as a dividend does not preclude the gain from being business income. See Simpson Timber Co. v. Dept. of Revenue, 326 Or. 370, 373, 953 P.2d 366, 368 (1998) (proceeds gained from municipal condemnation of taxpayer’s timberland held to be business income even though taxpayer “distributed $49 million, of the [gain] to its shareholders as a ‘dividend.’ None of the delay compensation was reinvested in timberland anywhere”).
Having found no case law which deters me from my interpretation of Polaroid, I would hold that the sale of ArtCarved generated business income for Lenox. Thus, I would affirm the trial court’s ruling.