Bunge Corp. v. Secretary of Dept. of Revenue and Taxation

• Citation: 419 So.2d 1288
• Decision Date: 30 August 1982
• Docket Number: No. 5-62,5-62
• Parties: BUNGE CORPORATION v. SECRETARY OF the DEPARTMENT OF REVENUE AND TAXATION.
• Court: Court of Appeal of Louisiana (US)

Page 1288

419 So.2d 1288

BUNGE CORPORATION v. SECRETARY OF the DEPARTMENT OF REVENUE AND TAXATION.

No. 5-62.

Court of Appeal of Louisiana,

Fifth Circuit.

Aug. 30, 1982.

Rehearing Denied Oct. 18, 1982.

George F. Riess, Monroe & Lemann, New Orleans, for plaintiff-appellant.

Howard M. Romaine, Dept. of Revenue and Taxation, Baton Rouge, for defendant-appellee.

Before CHEHARDY, KLIEBERT and CURRAULT, JJ.

CURRAULT, Judge.

This appeal arises from a judgment of the Twenty-ninth Judicial District Court affirming the Board of Tax Appeals' decision upholding an assessment by the defendant, Department of Revenue and Taxation, against plaintiff, Bunge Corporation.

The Bunge Corporation filed a corporate income tax return with the State of Louisiana for the fiscal year ending March 31, 1975. The return indicated that the Bunge Corporation had a total net income from all sources in the amount of Thirty-four Million, Seventy-seven Thousand, Two Hundred Nineteen and No/100 Dollars ($34,077,219.00). Following an audit of the records of the Bunge Corporation, the Department of Revenue and Taxation determined that Bunge had failed to include in its income monies received by its subsidiary corporation, Bunge Export Corporation (Bunge Export). Bunge Corporation followed the accounting procedure prescribed by the Federal Internal Revenue Code, Section 991 et seq., establishing, for the purpose of federal taxation, a new type of corporation known as a "domestic international sales corporation," commonly referred to as "DISC." This new type of corporation is purely a creature of federal law established simply for decreasing and deferring the Federal Income Tax on income earned through sales of products in foreign markets.

The DISC Statute allows domestic corporations to defer federal income tax on a certain percentage of profits earned in exporting by allowing these corporations to form subsidiary DISC corporations and assigning up to 50 percent of their export business profits to their DISC. These payments to the subsidiary DISC are called "commissions." The DISC Statute further requires that the subsidiary return half of the "commissions" each taxable year to the parent company as "dividends," whether or not actually distributed. The remaining commissions not returned to the parent as dividends are the DISC's "accumulated income." The federal scheme is such that the "accumulated income" in the DISC subsidiary is deferred from federal income taxation until such time as it may be distributed back to the parent corporation.

As Louisiana has no comparable provisions reducing the income tax on corporations engaged primarily in the export of goods, it adjusted the income and expense of Bunge Corporation, disallowing to Bunge the "commission expense" paid to its subsidiary DISC corporation, Bunge Export, which adjustment increased the Bunge Corporation's income upward by Twenty-five Million, Eight Hundred Ninety Thousand, Twenty-one and No/100 Dollars ($25,890,021.00). This upward adjustment generated an additional income tax due in the amount of Two Hundred Fifty Thousand, Eight Hundred Forty-one and No/100 Dollars ($250,841.00). The Department of Revenue and Taxation made the adjustment under the provisions of LSA-R.S. 47:95 upon the determination that allocation was necessary in order to clearly reflect the income of the business.

On June 20, 1979, the Department, through its Reviewing Auditor, L. Kent LaPlace, assessed the tax in the amount of Two Hundred Fifty Thousand, Eight Hundred Forty-one and No/100 Dollars ($250,841.00) against the Bunge Corporation. Also assessed was interest from the tax to date. From that assessment, Bunge Corporation appealed to the Board of Tax Appeals. The Board of Tax Appeals ordered judgment in favor of the Secretary of the Department of Revenue and Taxation and against Bunge Corporation assessing an income tax against Bunge for the fiscal year ending March 31, 1975, in the amount of Two Hundred Fifty Thousand, Eight Hundred Forty-one Dollars ($250,841.00) plus interest until paid.

Bunge appealed this decision to the Twenty-ninth Judicial District Court, for the Parish of St. Charles, Honorable Thomas J. Malik, Judge, and judgment was rendered and reasons therefor filed May 11, 1981, upholding the judgment of the Board of Tax Appeals. Bunge now appeals the decision of the trial court.

In appealing defendant-appellant has assigned several specifications of error:

(1) That the trial court erred in holding Bunge Corporation formed Bunge Export Corporation solely for the purpose of channelling certain gross income to another corporation so as to exempt it from state income taxes;

(2) That the trial court erred in holding Bunge Export Corporation does not qualify under the definition of a domestic international sales corporation as defined in the Federal Internal Revenue Code;

(3) That the trial court erred in holding Bunge Export Corporation has no assets, no employees, no offices and had a total expense during the year in question of $15.00;

(4) That the trial court erred in holding it was not the intent of the United States Congress to allow a corporation with the characteristics of Bunge Export Corporation to qualify as a domestic international sales corporation;

(5) That the Department of Revenue and Taxation exceeded its authority under LSA-R.S. 47:95 in reallocating income from Bunge Export to Bunge Corporation and in disregarding certain dividends from Bunge Export to Bunge Corporation; and

(6) That the addition of Bunge Export's accumulated DISC income to that of Bunge Corporation under LSA-R.S. 47:95 places an impermissible burden on interstate and foreign commerce thus invalid under Article I, Section 8, Clause 3, the Commerce Clause, of the Constitution of the United States and such an action is a violation of Article VI, the Supremacy Clause, of the Constitution of the United States.

Errors Nos. 1-4

The decision in the Court below that Bunge Export did not qualify under the definition of a domestic international sales corporation was based on four findings. Those findings were characterized in the Court's written reasons as findings of fact and constitute appellant's specification of Errors 1 through 4.

In the proceedings below, neither the petition of Bunge nor the answer of the Department formulates the status of Bunge Export as a DISC as an issue. The record further indicates that the Department never contested the status of Bunge Export as a DISC for federal internal revenue purposes. Indeed on appeal both Bunge and the Department stipulated that the holding of the trial court as to these factual findings was erroneous.

When the factual findings of a trial court have been alleged as erroneous, the proper standard of review is whether or not the factual findings are "clearly wrong." In Arceneaux v. Domingue, 365 So.2d 1330 (La.1978), the Supreme Court clearly stated that there must be

... a reasonable factual basis for the finding in the trial court; there must be a further determination that the record establishes that the finding is not clearly wrong (manifestly erroneous). Id. at 1333.

After applying the Arceneaux standard of review of facts on appeal, we conclude that the factual findings comprising appellant's Errors 1 through 4 are clearly wrong (Manifestly erroneous). Accordingly, the judgment of the trial court is amended to be consistent with the factual findings of this court.

Error No. 5

The Secretary of the Department of Revenue and Taxation acted under the authority of Louisiana Revised Statute 47:95 ¹ which in essence permits the Department to apportion or allocate gross income if it is determined that such apportionment or allocation is necessary in order to prevent evasion of taxes or clearly reflect the income of any such organizations (corporations). Bunge argues the Secretary exceeded the authority of LSA-R.S. 47:95 when she employed that statute to reallocate Bunge Export's "accumulated income" to Bunge to clearly reflect Bunge's income. LSA-R.S. 47:95 was patterned on federal law and has a parallel construction almost verbatim to 26 U.S.C.A. § 482 ².

The purpose of 26 U.S.C.A. § 482, as is the purpose of R.S. 47:95, is to place a controlled taxpayer on tax parity with an uncontrolled taxpayer, thereby determining the true taxable income from the property and business of a controlled taxpayer. Treasury Regulation § 1.482-1(b)(1); Northwestern National Bank of Minneapolis v. United States, 556 F.2d 889, 891 (CA 8 1977).

Special treatment, however, is given to 26 U.S.C.A. § 482 by the Federal DISC Statute ³. As previously discussed, this special treatment provides tax deferral on the "accumulated income" of qualified DISC corporations. The Bunge Corporation, in computing its income for federal income tax purposes, made use of the special tax provisions of the DISC Statute. Accordingly, the Internal Revenue Service found no distortion of Bunge's income. Bunge also made use of the Federal DISC Statute in computing its income for State income tax purposes.

The Louisiana income tax law, however, contains no provisions giving special tax treatment to a DISC similar to the special tax treatment provided by the Federal DISC Statute. Bunge, in its argument, would have Louisiana recognizing, for purposes of its income tax, the special tax treatment of the Federal DISC Statute, even if the Louisiana Legislature has not passed similar legislation.

The argument that Louisiana should automatically recognize the deferral provided by the federal statute is completely without justification. Louisiana does not recognize many federal deductions or shelters and we know of no authority nor has appellant guided this court to any authority which makes it incumbent upon this state to adopt all federally recognized deductions or shelters. This court will not infer into law any taxation deferral scheme where the Louisiana Legislature has not acted.

We cannot...