1997 -NMCA- 4, Conoco, Inc. v. State Taxation and Revenue Dept.
| Decision Date | 01 May 1995 |
| Docket Number | No. 15372,15372 |
| Parties | , 1997 -NMCA- 4 CONOCO, INC., Plaintiff-Appellant, v. STATE of New Mexico TAXATION AND REVENUE DEPARTMENT, Defendant-Appellee. |
| Court | Court of Appeals of New Mexico |
The issues in this appeal involve the New Mexico Taxation and Revenue Department's (the Department) denial of Conoco, Inc.'s (the taxpayer) refund claims for certain tax years and the Department's imposition of an assessment for the tax year 1991.
The taxpayer sought a refund of corporate income taxes paid to the State of New Mexico for the tax years 1988, 1989, and 1990, based on what its tax liability would have been had foreign dividends and Subpart F 1 income been excluded from its apportionable tax base. The Department denied the taxpayer's claims for refunds. The taxpayer also reduced its tax payments for the 1991 tax year on the same basis, prompting the Department to issue Assessment No. 1,638,288 against the taxpayer for that year.
After a formal hearing, the Department's hearing officer denied the taxpayer's claims for refunds and reduced the Department's assessment against the taxpayer consistent with modifications to the standard apportionment formula allowed for previous years. The taxpayer appeals.
We conclude that the hearing officer properly denied the taxpayer's claims for refunds. We also conclude that the hearing officer properly reduced the Department's assessment against the taxpayer for the 1991 tax year. We thus affirm.
The taxpayer is a wholly owned subsidiary of E.I. DuPont de Nemours and Company (DuPont), a Delaware corporation. The taxpayer's headquarters and principal place of business are located in Houston, Texas. DuPont and its domestic and foreign subsidiaries, 2 including the taxpayer, constitute a unitary business enterprise. Part of DuPont's unitary business enterprise consists of integrated oil and gas activities that are conducted on a worldwide basis, primarily through the taxpayer.
The taxpayer itself conducts business in all fifty states and in the District of Columbia. It also conducts business activities worldwide through the ownership of stock in domestic and foreign subsidiaries. The taxpayer owns one-hundred percent of the stock of most of its foreign subsidiaries. Although its subsidiaries conduct business in approximately twenty-five countries, they typically conduct business only in the country in which they were incorporated. The taxpayer receives dividends from both its domestic and foreign subsidiaries.
In tax years 1988, 1989, and 1990, without petitioning the Department as required by NMSA 1978, Section 7-4-19 (Repl.Pamp.1993), 3 the taxpayer applied the Detroit formula of factor relief 4 to its tax base in calculating its New Mexico tax liability. In late 1992, shortly after the United States Supreme Court's decision in Kraft General Foods v. Iowa Department of Revenue & Finance, 505 U.S. 71, 112 S.Ct. 2365, 120 L.Ed.2d 59 (1992), the taxpayer filed amended New Mexico corporate income tax returns for the tax years 1988, 1989, and 1990. Additionally, in its 1991 return, the taxpayer totally excluded foreign subsidiary dividends as well as domestic subsidiary dividends from its tax base. Before filing its 1991 return, the taxpayer made estimated tax payments for the tax year 1991, which were $93,569 more than the tax computed for tax year 1991, based on the exclusion of foreign subsidiary dividends from the tax base. In the amended returns, the taxpayer contended that tax refunds were due because the Supreme Court's decision in Kraft required the Department to allow the taxpayer to deduct both domestic and foreign subsidiary dividends. The exclusion of foreign subsidiary dividend income for tax years 1988, 1989, and 1990, resulted in even lower taxes for the taxpayer than did the self-applied Detroit formula. The taxpayer claimed refunds in the following amounts: 1988: $87,064; 1989: $33,474; 1990: $144,854; and 1991: $93,569.
The taxpayer applied the Detroit formula in its calculations of its initial filings for tax years 1988, 1989, and 1990, and paid its taxes on that basis. Application of the Detroit formula, as proposed by the Department, to those tax years resulted in the same amount of taxes due as the taxpayer had already paid, but higher taxes than the taxpayer claimed on its amended returns based on the total exclusion of foreign subsidiary dividends from the tax base. Consequently, the Department denied the taxpayer's claims for refunds for the tax years 1988, 1989, and 1990. For tax year 1991, the Department also denied the taxpayer's claim for a refund in the amount of $93,569 based on the exclusion of foreign subsidiary income. The Department then issued Assessment No. 1,638,288 against the taxpayer, asserting that corporate income tax, penalties, and interest for the 1991 tax year were due. The taxpayer protested both the refund denials and the assessment, pursuant to NMSA 1978, Section 7-1-24 (Repl.Pamp.1993). A formal administrative hearing before the hearing officer was held. In his decision, the hearing officer upheld the Department's application of the Detroit formula to calculate the taxpayer's New Mexico corporate income tax for tax years 1988-1991. The taxpayer appeals this determination.
On review, this Court must determine whether the hearing officer's decision was: (1) arbitrary, capricious, or an abuse of discretion; (2) not supported by substantial evidence in the record; or (3) otherwise not in accordance with law. NMSA 1978, § 7-1-25(C) (Repl.Pamp.1993). Judicial review of administrative decisions is based on the whole record, see § 7-1-25(A); Duke City Lumber Co. v. New Mexico Envtl. Improvement Bd., 101 N.M. 291, 293, 681 P.2d 717, 719 (1984); Wing Pawn Shop v. Taxation & Revenue Dep't, 111 N.M. 735, 739, 809 P.2d 649, 653 (Ct.App.1991), requiring this Court to consider not only evidence in support of one party's contention, but also to look at evidence that is contrary to the finding, Trujillo v. Employment Sec. Dep't, 105 N.M. 467, 469, 734 P.2d 245, 247 (Ct.App.1987). We "must then decide whether, on balance, the agency's decision was supported by substantial evidence." Id.; see Wing Pawn Shop, 111 N.M. at 739, 809 P.2d at 653.
This appeal concerns the application of the Foreign Commerce Clause of the United States Constitution, Article I, Section 8, Clause 3, to New Mexico's statutory system of corporate income tax. The New Mexico corporate income tax statute uses the federal tax code's definition of "net income" with certain adjustments. Like the federal scheme, New Mexico allows corporations to take a deduction for dividends received from domestic subsidiaries, but not from foreign subsidiaries. Unlike the federal scheme however, New Mexico does not allow a credit for taxes paid to foreign countries.
To provide a context for understanding the various allowable filing methods and their relationship to the Foreign Commerce Clause issues raised by this case, we deem it necessary to review the interrelationship between the Foreign Commerce Clause, the Due Process Clause, and New Mexico's ability to tax income generated in foreign commerce.
It is fundamental under both the Due Process Clause and the Commerce Clause of the United States Constitution that a state may not, when imposing an income-based tax, tax value earned outside of its borders. See ASARCO Inc. v. Idaho State Tax Comm'n, 458 U.S. 307, 102 S.Ct. 3103, 73 L.Ed.2d 787 (1982). When dealing with income that has been earned by a multistate and multinational taxpayer, determining what income has been earned by that taxpayer within a particular state can be extremely complicated and has generated a significant amount of constitutional litigation. See, e.g., Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983); F.W. Woolworth Co. v. Taxation & Revenue Dep't, 458 U.S. 354, 102 S.Ct. 3128, 73 L.Ed.2d 819 (1982); Exxon Corp. v. Wisconsin Dep't of Revenue, 447 U.S. 207, 100 S.Ct. 2109, 65 L.Ed.2d 66 (1980); Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U.S. 425, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980); Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978). Because of the difficulty of precisely measuring a state's properly apportioned share of a multijurisdictional taxpayer's income, the United State Supreme Court has long held that the Constitution imposes no single formula on the states, Wisconsin v. J.C. Penney, 311 U.S. 435, 444-45, 61 S.Ct. 246, 85 L.Ed. 267 (1940), and has placed upon a taxpayer challenging a state's formula the burden of showing by clear and cogent evidence that a state tax results in the taxation of extraterritorial values. Container Corp., 463 U.S. at 170, 103 S.Ct. at 2942-43 (quoting Moorman Mfg., 437 U.S. at 274, 98 S.Ct. at 2345).
Historically, states attempted to account for their share of taxable income based upon systems of separate accounting, whereby a company's income earned within the geographical boundaries of the state was determined based on formal corporate entities or on an attempt to segregate transactions conducted within the state. This methodology, called separate accounting, has fallen into disfavor because it was subject to manipulation and imprecision and, significantly, either ignored or failed to capture the many subtle and often unquantifiable transfers of value that take place among the components of a large, complex enterprise. See generally Mobil Oil, 445 U.S. at 438-39, 100 S.Ct. at 1232-33.
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