American Bakeries Co. v. Johnson, 453

• Decision Date: 22 May 1963
• Docket Number: No. 453,453
• Citation: 131 S.E.2d 1,259 N.C. 419
• Parties: AMERICAN BAKERIES COMPANY, v. W. A. JOHNSON, Commissioner of Revenue of North Carolina.
• Court: North Carolina Supreme Court

Page 1

131 S.E.2d 1

259 N.C. 419

AMERICAN BAKERIES COMPANY, v. W. A. JOHNSON, Commissioner of Revenue of North Carolina.

No. 453

Supreme Court of North Carolina.

May 22, 1963

Atty. Gen. T. W. Bruton, Asst. Atty. Gen. Peyton B. Abbott, Raleigh, for the State.

Smith, Leach, Anderson & Dorsett, Raleigh, for plaintiff.

Joyner & Howison, amicus curiae, for Southern Ry. Co.

DENNY, Chief Justice.

Two questions are presented for determination on this appeal:

1. Whether dividends paid to the plaintiff (taxpayer) by its subsidiary corporation derived from the earnings of the subsidiary's manufacture and sales of bakery products outside of North Carolina, are subject to income taxes imposed by North Carolina pursuant to the provisions of G.S. § 105-134.

2. Whether the North Carolina Commissioner of Revenue is limited in adjustment of plaintiff's income tax returns to the area of Federal changes when changes in the Federal income tax returns are made by the Federal authorities; and more than three years have passed since the filing and due date of such returns; and plaintiff complies with the statute regarding filing reports of the Federal changes with the North Carolina Commissioner.

The appellant, American Bakeries Company, is a Delaware corporation with its principal office in Chicago, Illinois. Its subsidiary, Cushman's Sons, Inc., is a New York corporation, owns no property in North Carolina, is not domesticated in this State, and has never carried on any business activities in North Carolina.

American Bakeries Company voluntarily paid all taxes due the State of North Carolina pursuant to the formula arrived at pursuant to the provisions of G.S. § 105-134, except the taxes assessed by the State on dividends received by the appellant from its subsidiary, Cushman's Sons, Inc., during the years 1953 and 1954. These taxes were paid under protest.

On the facts found, the court below concluded that the business of American Bakeries Company in North Carolina, and the business of its subsidiary, Cushman's Sons, Inc., is unitary. The court below likewise found that 'American Bakeries Company is engaged exclusively in the wholesale bakery business and manufactures bakery products for sale to business customers not owned or controlled by American Bakeries Company, such as some of the chain grocery stores'; and that 'Cushman's Sons, Inc., engages in the retail bakery business and manufactures its own bakery products which it sells to the general public, including restaurants and cafes.'

In Maxwell, Com'r v. Kent-Coffey Mfg. Co., 204 N.C. 365, 168 S.E. 397, 90 A.L.R. 476, this Court said:

'That term (unitary) is simply descriptive, and primarily means that the concern to which it is applied is carrying on one kind of business--a business, the component parts of which are too closely connected and necessary to each other to justify division or separate consideration, as independent units. By contrast, a dual or multiform business must show units of a substantial separateness and completeness, such as might be maintained as an independent business (however convenient and profitable it may be to operate them conjointly), and capable of producing a profit in and of themselves.

'Conceding that a unitary business may produce an income which must be allocated to two or more states in which its activities are carried on, such a business may not be split up arbitrarily and conventionally in applying the tax laws. It would seem to be necessary that there should be some logical reference to the production of income * * *.'

As we interpret our tax laws, the mere fact that a foreign corporation engaged in business in North Carolina and other states, owns a subsidiary corporation in another state, which subsidiary does no business in North Carolina and owns no property in this State but is engaged in a similar business to that of the parent corporation, such factual situation does not of itself require the parent corporation to prorate the dividends received from such subsidiary to all the states in which the parent corporation does business.

Certainly the parent corporation controls and supervises its subsidiary, but the stipulations and facts found below clearly establish the fact that Cushman's Sons, Inc. is not a customer of American Bakeries Company or engaged in selling its products. In other words, this subsidiary is not a retail outlet for the parent corporation, but manufactures its own bakery products and sells them to the retail trade, not to or through the parent corporation.

In the case of Hans Rees' Sons v. North Carolina ex rel. Maxwell, 283 U.S. 123, 51 S.Ct. 385, 75 L.Ed. 879, Chief Justice Hughes, speaking for the Court, said:

'Undoubtedly the enterprise of a corporation which manufactures and sells its manufactured product is ordinarily a unitary business, and all the factors in that enterprise are essential to the realization of profits. The difficulty of making an exact apportionment is apparent, and hence, when the state has adopted a method not intrinsically arbitrary, it will be sustained until proof is offered of an unreasonable and arbitrary application in particular cases. But the fact that the corporate enterprise is a unitary one, in the sense that the ultimate gain is derived from the entire business, does not mean that for the purpose of taxation the activities which are conducted in different jurisdictions are to be regarded as 'component parts of a single unit' so that the entire net income may be taxed in one state regardless of the extent to which it may be derived from the conduct of the enterprise in another state. * * *

'When, as in this case, there are different taxing jurisdictions, each competent to lay a tax with respect to what lies within, and is done within, its own borders, and the question is necessarily one of apportionment, evidence may always be received which tends to show that a state has applied a method, which, albeit fair on its face, operates so as to reach profits which are in no just sense attributable to transactions within its jurisdiction.'

In Cargill, Inc. v. Spaeth, 215 Minn. 540, 10 N.W.2d 728, the plaintiff, Cargill, Inc., was organized under the laws of Delaware, where it maintained a statutory office for the purpose of continuing its right to exist and function as a corporation, but transacted no business in that State. The corporation had its general business office in Minneapolis, where all its corporate business was transacted. Its business consisted of merchandising, warehousing, and handling of grain and other commodities. Its operations extended to substantially...