Atlantic Richfield Co. v. State

Citation601 P.2d 628
Decision Date10 October 1979
Docket NumberNo. 27913,27913
PartiesATLANTIC RICHFIELD COMPANY, Plaintiff-Appellant, v. The STATE of Colorado and Joseph F. Dolan, Executive Director of the Departmentof Revenue of the State of Colorado, Defendants-Appellees.
CourtSupreme Court of Colorado

Holland & Hart, William E. Murane, Alan E. Boles, Denver, for plaintiff-appellant.

John D. MacFarlane, Atty. Gen., David W. Robbins, Deputy Atty. Gen., Edward G. Donovan, Sol. Gen., Chris J. Eliopulos, Sp. Asst. Atty. Gen., Denver, for defendants-appellees.

William D. Dexter, for amicus curiae Multistate Tax Commission.

CARRIGAN, Justice.

Atlantic Richfield Company (Richfield) appeals from a district court judgment which affirmed a determination by the Executive Director of the Department of Revenue (Director) that Richfield owed $38,533.00 in Colorado income tax for 1969-1973. We affirm the district court.

Richfield is a large, integrated oil company engaged in exploring for, producing, refining and marketing crude oil, other petroleum products and petrochemicals. It is a Pennsylvania corporation but maintains its principal place of business and commercial domicile in California. In Colorado, where Richfield is duly qualified to conduct business, its activities consist principally of exploring for and producing oil and natural gas.

Richfield and Sinclair Oil Company (Sinclair) agreed to merge in November 1968. Prior to merger, Sinclair had been an integrated oil company with large crude oil reserves located primarily in Texas. Sinclair had operated four refineries in the United States and had marketed gasoline in all but the far western states. Richfield's business purpose for the merger was to provide it nationwide diversified operations and greater financial resources.

In December 1968, to forestall an anticipated anti-trust challenge to the merger, Richfield agreed to sell all of Sinclair's properties in the northeastern United States to the British Petroleum Company, an unrelated and unaffiliated corporation. Notwithstanding this precautionary effort by Richfield, the United States Department of Justice filed a federal court action to prevent the merger. This action alleged that the merger would substantially reduce competition and tend to create a monopoly in certain gasoline markets. The federal court granted a temporary restraining order and later a preliminary injunction forbidding the merger. United States v. Atlantic Richfield, 297 F.Supp. 1060 (S.D.N.Y.1969); United States v. Atlantic Richfield, 297 F.Supp. 1061 (S.D.N.Y.1969).

Richfield thereupon amended its original agreement with British Petroleum to include, along with the sale of Sinclair's marketing properties in the northeastern region of the United States, those in the southeastern region as well. Certain assets of Richfield were also sold to British Petroleum as part of this transaction. As a result of this agreement, the federal court vacated its preliminary injunction. United States v. Atlantic Richfield, 297 F.Supp. 1075 (S.D.N.Y.1969).

On March 4, 1969, the Sinclair merger was consummated for an aggregate consideration of $2.2 billion. That same day, the sale to British Petroleum was closed. Under the terms of the sale agreement, British Petroleum agreed to pay Richfield $350,700,000 in interest-bearing installments. Of this total sale price, $130,700,000 represented good will. None of the assets sold to British Petroleum were located in Colorado.

On August 28, 1970, the federal court entered a final consent judgment. United States v. Atlantic Richfield, 1970 CCH Trade Cases p. 73,280 (S.D.N.Y.1970). The judgment ordered Richfield to divest itself, within three years after entry of the judgment, of substantially all the assets formerly owned by Sinclair in the Rocky Mountain and central regions. Accordingly, on December 29, 1972, with Justice Department approval, Richfield sold these assets to Pasco, Inc., an unrelated corporation, for approximately $148,000,000. The sale to Pasco resulted in an overall capital gain to Richfield in 1972. However, if only those former Sinclair assets located in Colorado are considered, Richfield suffered a net loss of $293,798.

Slightly over twenty per cent of the former Sinclair assets were sold by Richfield. During the time Richfield held the Sinclair properties it eventually sold to Pasco, it carried them on its records as current assets producing income, pursuant to its general business accounting methods. Moreover, Richfield treated as business expenses the expenses incurred in selling the Sinclair properties to British Petroleum and Pasco.

In preparing its Colorado income tax returns for 1969 through 1973, Richfield excluded from the computation of its taxable income both: (1) the capital gains from its sales of the prior Sinclair assets to British Petroleum and Pasco, and (2) the interest earned on the notes given by British Petroleum as consideration for the purchase of the Sinclair assets.

In 1975, the Colorado Department of Revenue recomputed Richfield's net Colorado taxable income for the years in question to include both the capital gains and the interest. On the basis of this recomputation the Department proposed a deficiency of $38,533 plus interest. Richfield protested this deficiency and, after an adverse determination by the Director, brought this suit. The district court upheld the Department of Revenue. This appeal is from that judgment.

I. Characterization of Capital Gains and Interest.

The principal question presented is whether, under the Multistate Tax Compact 1 the interest and capital gains from the sales of assets to British Petroleum and Pasco are "business" income, to be apportioned to and taxed by Colorado, or "non-business" income, allocable to and taxable by only states having the closest connection with the assets sold. Richfield contends that treating these items as "business" income, and apportioning them accordingly for tax purposes, would violate the commerce clause 2 and the Fourteenth Amendment of the United States Constitution.

For the subject years, Richfield had elected to be taxed pursuant to the Multistate Tax Compact, Section 24-60-1301, C.R.S.1973, which determines the Colorado taxable income of a corporation doing business both within and outside Colorado. The compact provides for taxation of a taxpayer's income by "apportioning" its business income and "allocating" its non-business income. Section 24-60-1301, Art. IV. Apportionment of business income is accomplished by aggregating all items of business income and apportioning that income among the compact taxing states according to a three-part formula based on property, payroll, and sales factors. Section 24-60-1301, Art. IV (9-17). The income thus apportioned to each state is subject to taxation by that state.

In contrast, allocation of non-business income earmarks each item of such income to be attributed to and taxed only by the state with which the asset that generated that income is most closely associated, according to standards set out in Section 24-60-1301, Art. IV.

The threshold step in this taxation process is to identify and segregate the taxpayer's "business" and "non-business" income. The compact defines "business" income as income

"arising from transactions and activity in the regular course of the...

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17 cases
  • National Realty and Inv. Co. v. Illinois Dept. of Revenue
    • United States
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    • June 20, 1986
    ...income if the property disposed of was used by the taxpayer in its regular trade or business operations. (Atlantic Richfield Co. v. State (1979), 198 Colo. 413, 601 P.2d 628, 631.) If either test is met, the income is business Taxpayer maintains that the income from the sale was nonbusiness......
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    ...the taxing authority of New Mexico, are both groundless. 88 N.M. at 417, 540 P.2d at 1306. Of like tenor is Atlantic Ritchfield Co. v. State, 198 Colo. 413, 601 P.2d 628 (1979). Atlantic Ritchfield concerned Colorado's authority to tax interest income and capital gains derived from the sale......
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    ...and occurred in its regular course of buying and selling, thereby qualifying as business income. See id.;Atl. Richfield Co. v. State, 198 Colo. 413, 601 P.2d 628, 632 (1979) (holding that gain from the sale of assets qualifies as business income when the taxpayer was engaged in the acquisit......
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    ...regularity of similar transactions and the former practices of the business are pertinent considerations. Atlantic Richfield Co. v. State, 198 Colo. 413, 601 P.2d 628, 631 (1979); Western Natural Gas, 446 P.2d at 784. Another relevant inquiry concerns the taxpayer's subsequent use of the in......
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