Albany Intern. Corp. v. Halperin

Decision Date12 July 1978
Citation388 A.2d 902
PartiesALBANY INTERNATIONAL CORPORATION v. Raymond L. HALPERIN.
CourtMaine Supreme Court

Doyle & Fuller by Craig H. Nelson (orally), Jon R. Doyle, Augusta, for plaintiff.

Jerome S. Matus, Asst. Atty. Gen., (orally), Augusta, for defendant.

Before DUFRESNE, C. J., and WERNICK, ARCHIBALD, DELAHANTY, and GODFREY, JJ.

GODFREY, Justice.

This case is before the Law Court on report by agreement of the parties pursuant to Rule 72(b) of the Maine Rules of Civil Procedure. Appellant Albany International Corporation brought a complaint in Superior Court pursuant to 36 M.R.S.A. § 5300 and Rule 80B, M.R.Civ.P., for review of a determination of the State Tax Assessor. The complaint challenged the Assessor's determination of a deficiency in the appellant's Maine income tax returns for the years 1969, 1970, and 1971. The version of the Maine Income Tax Law applicable to the controversy is section F of chapter 154 of the 1969 Private and Special Laws of Maine. 1

Appellant, a corporation domiciled in New York, manufactures three kinds of products: paper machine clothing, plastics, and industrial fabrics. Albany International has six divisions, of which only one, Globe Albany, operates in Maine as well as elsewhere. The Globe Albany Division is engaged solely in the manufacture and distribution of industrial fabrics. Though each division has its own president, board of directors, and accounting department, Albany International Corporation works with its divisions in establishing objectives and goals, provides accounting controls, determines capital budgets for the divisions, and does the financing for divisions in the United States. On the basis of those facts, the State Tax Assessor determined that in view of the degree of control over the various divisions that is vested in appellant and the relationship of the various divisions within the corporate structure, separate accounting by the Globe Albany Division under subsection (17) of 36 M.R.S.A. § 5211 was not required to represent fairly the extent of the taxpayer's business activity in Maine. That determination is not challenged on this appeal.

I

The Assessor reclassified certain items of income reported by appellant in the tax years 1969 through 1971 from "nonbusiness income" to "business income." The items involved income from capital gains, royalties, and interest derived by Albany International from the business of divisions other than the Globe Albany Division. The Assessor determined that those items of income arose from "transactions and activity in the regular course of the taxpayer's trade or business" within the definition of "business income" in subsection (A) of 36 M.R.S.A. § 5210. 2 He concluded therefore that they were properly treated as "business income" and apportionable to the State of Maine on the basis of the statutory formula set forth in 36 M.R.S.A. § 5211(8). 3

Appellant asserts that since the income in question arose solely from the activity of divisions which do not operate in Maine, it should not be treated as "business income" for Maine income tax purposes. With exceptions not pertinent here, the Maine income tax scheme establishes a formula which renders irrelevant the actual source of specific items of "business income" in the case of a taxpayer having income from business activity that is taxable both within and outside Maine. 4 In such a case the taxpayer's "business income" must be ascertained and then apportioned to Maine on the basis of the formulas prescribed in subsections 8 to 16 of 36 M.R.S.A. § 5211. Once the proper taxable entity is determined, all its "business income" must be included in order to determine the amount of income attributable to Maine. Otherwise the taxpayer's total income to be apportioned would be understated.

Appellant contends that its income from capital gains, royalties, and interest, derived from out-of-state transactions of other divisions of the corporation, or from out-of-state property of the corporation, should be treated as "nonbusiness income" 5 in the application of section 5211 of title 36. On that theory, the income in question would be "allocated" as a result of applying subsections 3 through 7 of section 5211, rather than "apportioned" partly to Maine under subsections 8 through 16 as described above. The rules in section 5211 for "allocation" of "nonbusiness income" are such that the income here in dispute, if classified as "nonbusiness income," received by divisions other than Globe Albany, would be "allocable," but not to Maine, and hence would not be includable in appellant's Maine taxable income.

The definition of "business income" in 36 M.R.S.A. § 5210(A) includes all income from transactions and activity in the regular course of the taxpayer's business. It includes income from property if the acquisition, management, and disposition of the property "constitutes integral parts" of the taxpayer's regular business operations. Appellant has not questioned the Assessor's classification of the income in question, from activity of other divisions of Albany International, as income in fact received in the regular course of business of those divisions or as derived in fact from property acquired, managed and disposed of as part of the appellant's regular business activity outside Maine.

Subsection 8 provides for the apportionment of "all business income." The "allocation" that subsections 3 through 7 provide for income from capital gains, royalties, and interest is to be applied only to "nonbusiness income." If some element of income is "business income" as defined in section 5210(A), it is not subject to the allocation formulas of subsections 3 to 7 of section 5211.

Appellant argues that the definition of "business income" should be construed to exclude income from transactions or activity in the regular course of the taxpayer's trade or business to the extent that it is derived from out-of-state activity having no connection with the business transacted in Maine. Appellant says that the income here in question, even if it was income arising from activity in the regular course of the taxpayer's business or from property acquired, managed or disposed of as part of the corporation's regular business operations was derived from operations of the taxpayer's divisions having no relationship with the business of Globe Albany in Maine. In effect, the taxpayer asks us to import into the definition of "business income" a requirement that the transactions from which it is derived have some connection with the taxpayer's regular business operations in Maine.

Thus to limit the meaning of "business income" in this part of the tax law would disregard the fact that the statute sets up a carefully articulated system designed to yield normally a fair measurement of the Maine taxable income of a multistate or multinational business. By including sections 5210 and 5211 as part of the Maine income tax law, the Maine Legislature adopted, substantially intact, the Uniform Division of Income for Tax Purposes Act, 6 which has been enacted, sometimes with modification, by twenty-seven states. The Act provides a method for attributing to a state, for the purpose of income taxation, a portion of the total business income of a multistate or multinational business that is carrying on some of its regular activity within the state. The formulas is subsections (8) to (16) of section 5211 for apportionment of "business income" provide a reasonable method of measuring, and attributing to the State of Maine, a portion of all the income arising from transactions in the regular course of the taxpayer's business. Included in that "business income" by express provision is income from tangible and intangible property if the acquisition, management, and disposition of the property "constitutes integral parts" of the taxpayer's regular trade or business operations. Rents or royalties from real or tangible personal property, capital gains, interest, dividends or patent or copyright royalties are to be allocated, rather than apportioned, only to the extent that they do not come within the statutory definition of "business income."

The arrangements for state income taxation of multistate or multinational businesses, established by sections 5210 and 5211 of the Maine tax law and by comparable provisions of the uniform act in twenty-six other states, would have to be dismantled, as a practical matter, if the appellant's view were to prevail. To import into the definition of "business income" a limitation of the kind appellant urges would make the applicability of section 5210(A) depend upon a showing of some connection between the local business and the production of particular income by one or more out-of-state elements of the business. It could not have been the purpose of this legislation to create a system for rationalizing state income taxation of multistate or multinational business concerns, only to render it practically ineffective by requiring a showing that various items of out-of-state income, received in the regular course of business, were...

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    ...a deduction from the Federal taxable income reported on the State return so as to reduce State taxable income. (Albany International Corp. v. Halperin (Maine 1978), 388 A.2d 902; Commonwealth v. Westinghouse Electric Corp. (1978), 478 Pa. 164, 386 A.2d 491.) Moreover, as we will next discus......
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