Acme Royalty Co. v. Director of Revenue
| Decision Date | 26 November 2002 |
| Docket Number | No. SC 84226.,No. SC 84225.,SC 84225.,SC 84226. |
| Parties | ACME ROYALTY COMPANY and Brick Investment Company, Appellants, v. DIRECTOR OF REVENUE, Respondent. Gore Enterprise Holdings, Inc., Appellant, v. Director of Revenue, Respondent. |
| Court | Missouri Supreme Court |
Thomas C. Walsh, Juan D. Keller, John P. Barrie, B. Derek Rose, St. Louis, Edward F. Downey, Jefferson City, for Appellees.
Jeremiah W. (Jay) Nixon, Atty. Gen., James R. Layton, State Solicitor, Jefferson City, for Respondent.
Thomas C. Walsh, Juan D. Keller, John P. Barrie, B. Derek Rose, St. Louis, Edward F. Downey, Jefferson City, for Appellees in Docket No. SC84225.
Jeremiah W. (Jay) Nixon, Atty. Gen., James R. Layton, State Solicitor, Jefferson City, for Respondent in Docket No. 84226.
Michael R. Annis, Eric G. Enlow, St. Louis, Paul H. Frankel, Irwin M. Slomka, Morrison & Foerster, LLP, (Council on State Taxation) New York, for Amicus Curiae.
Introduction
The Director of Revenue assessed Acme Royalty Company ("ARC" or "Acme") and Brick Investment Company ("BIC"), collectively ("Appellants"), for income derived from the licensing of trademarks and trade names to a related corporation for the annual tax periods from 1992-96. Similarly, the Director assessed Gore Enterprise Holdings, Inc. ("Gore") for income derived from royalties received from a related company as a result of patents held by Gore for the tax periods from 1993-95. Acme, BIC and Gore each challenged the assessment.
The Administrative Hearing Commission ("AHC") ruled against the taxpayers, finding that they were subject to Missouri income tax. The taxpayers seek review, and the cases are consolidated for opinion.1 Review of this case will necessarily involve the construction of the revenue laws of this state. As such this Court has exclusive jurisdiction.2 The decision of the AHC is reversed and remanded.
Acme Royalty Company and Brick Investment Company are separate though related entities that have exclusive licensing contracts with Acme Brick Company ("ABC"), which is also a related company. ABC conducts a portion of its business in Missouri. ABC was formed in 1891, and since that time its principal business has been the manufacturing and distribution of clay bricks and other related building products. In 1968, ABC merged with Justin Boot Company, forming First Worth Company, which in turn became Justin Industries Inc. ("Justin"). Justin undertook a complete corporate reorganization in December 1991, separately incorporating its Acme brick company division under the name ABC. Justin transferred all of the assets of its brick company division to ABC; in exchange, Justin received all of the stock in ABC. Acme was also a result of Justin's reorganization. Similar to the creation of ABC, Justin transferred all of its trademarks3 to Acme in exchange for all of the stock in Acme. Acme and ABC were incorporated in the state of Delaware.
Acme subsequently entered into an exclusive licensing agreement with ABC that assigned the exclusive use of the trademarks owned by Acme to ABC. The agreement, which became effective January 1, 1992, provided that ABC would pay royalties to Acme for the use of the trademarks owned by that company. The amount of the royalty payment to ARC was to be equal to a percentage of the net sales of the licensed merchandise during each contract year.4
In December 1993, Acme Royalty Company Limited Partnership ("ARCLP") was formed. Acme attained a 99% limited partnership interest in ARCLP in exchange for the contribution of its trademarks. Brick Investment Company was formed for the purpose of becoming the general partner in ARCLP. BIC transferred to ARCLP the cash equivalent of one-percent of the value of the trademarks contributed by Acme in exchange for a one percent general partnership interest in ARCLP. As general partner, BIC was responsible for the day-to-day operations of ARCLP. ARCLP has held the Trademarks since its formation in 1994.
Since their formation, Acme and BIC have collectively received over $34 million in royalty payments. As a result of an audit of Missouri taxpayer ABC, the Director learned of the existence of Acme and BIC. The Director determined that Appellants were subject to Missouri income tax on their royalty income, attributing ABC's sales in Missouri to the Appellants as income from wholly within Missouri.
Pursuant to the audit of ABC, the Director issued notices of deficiency to the Appellants, assessing Missouri income tax based on Acme's receipt of royalties from ABC and on ARCLP's receipt of the royalties after its formation. Appellants protested the notices of deficiency. The Director upheld the assessments, and in its findings of fact and conclusions of law, the AHC agreed with the Director, upholding the assessments.
III.
The dispositive point of this appeal is the exclusive licensing agreement between ARC and ABC, the payments that resulted, and whether those payments constitute sales in the State of Missouri attributable to the Appellants. This Court finds that Appellants had no Missouri source income because they had no sales in Missouri.5
This Court reviews the AHC's interpretation of this revenue statute de novo.6 The seminal rule of statutory construction directs this Court to determine the true intent of the legislature, giving reasonable interpretation in light of the legislative objective.7 Taxing statutes in particular are to be strictly construed in favor of the taxpayer and against the taxing authority when any ambiguity exists.8
Section 143.431.1 states "The taxable income of a corporation ... shall be so much of its federal taxable income ... as is derived from sources within Missouri as provided in section 143.451." Section 143.451 begins with a restatement of the rule that "Missouri taxable income of a corporation shall include all income derived form sources within this state." The section then goes on to explain the allocation of income derived partially within and partially outside the state, but fails to give a further definition of the phrase "derived from sources within this state." Accordingly, this Court looks to its prior decisions to determine whether the Appellant's income in question is Missouri source income.
The basic requirement for there to be Missouri source income is that there is some activity by the taxpayer in Missouri that justifies imposing the tax.9 Although corporate activities can be immeasurably diverse, for multi-state income tax purposes they fall into three succinct categories: property, payroll and sales.10 While Appellants are "related" to ABC, a Delaware corporation that conducts business and pays taxes in Missouri, they are separate legal entities, and as such each must have its own property, payroll or sales in Missouri to be taxed in Missouri.
The Director's brief states that having property, payroll or sales is not a requirement for taxation when the transactions are between related companies. In an attempt to distinguish the holding in Central Cooling,11 the Director asserts that the case stands only for the principle that common ownership will not allow a corporation to avoid the tax consequences arising from the creation of separate corporate entities. While the holding in Central Cooling, does stand for that principal, it undoubtedly must also stand for the reverse. The corporate subdivision instituted by the Appellants created separate legal entities, and they should be treated as such.
As this Court has previously held, in order for the Appellants to be liable for taxes in Missouri, they must have had some activity: property, payroll, or sales, in the State of Missouri.12 ARC is a Delaware corporation; all of its offices, board meetings and employees are located or held in Delaware. Appellant BIC is also a Delaware corporation; it holds its board meetings in Fort Worth, Texas, and pays taxes in that state.
Aside from the current litigation, neither ARC, BIC, nor ARCLP has ever done business, owned property, maintained employees or agents, conducted sales or distributed payroll in Missouri. The licensing agreement between the Appellants and ABC was negotiated and executed entirely outside of the state of Missouri. In addition to the licensing agreement, the Appellants have absolutely no sales — in Missouri or elsewhere — because they sell no products at all. The income the Director attempts to reach is outside the scope of Missouri taxation because the Appellants have no contact, and specifically no sales, within the state.
IV.
The decisions of the AHC are reversed, and the cases are remanded.
WOLFF, J., dissents in separate opinion filed.
The economic reality of these cases is simple. The "taxpayers" — or, in light of the result here, perhaps one should say the tax-evaders — are entities that own intellectual property, i.e., patent and trademark rights. These entities, sited in Delaware, license these rights to related corporations that manufacture products sold in Missouri. One holds patents on "Goretex" fabric for outdoor clothing. The other entity holds trademark rights to "Acme" bricks. Without the participation of these "taxpayers," the Gore clothing would not repel water while "breathing" and the Acme product would be a mere unadorned brick. Thus, these "taxpayers" own the intellectual property essential to the products as they are marketed and sold in Missouri. The income derived from sales in this state is Missouri-source income.
It defies economic reality to hold that income derived from the Missouri market — in which these "taxpayers" participate through their related manufacturing companies — is not taxable here.
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