Comptroller of the Treasury v. Ramsay, Scarlett & Co., Inc.

• Decision Date: 06 April 1984
• Docket Number: No. 706,706
• Citation: 473 A.2d 469,58 Md.App. 327
• Parties: COMPTROLLER OF THE TREASURY v. RAMSAY, SCARLETT & CO., INC. Sept. Term 1983.
• Court: Court of Special Appeals of Maryland

Page 327

58 Md.App. 327

473 A.2d 469

COMPTROLLER OF THE TREASURY v. RAMSAY, SCARLETT & CO., INC.

No. 706 Sept. Term 1983.

Court of Special Appeals of Maryland.

April 6, 1984.

Gerald Langbaum, Asst. Atty. Gen., with whom were Stephen H. Sachs, Atty. Gen. of Md. and John K. Barry, Asst. Atty. Gen., on brief, for appellant.

Neil S. Kurlander, Baltimore, for appellee.

Argued before LOWE, LISS and ADKINS, JJ.

ADKINS, Judge.

For income tax purposes, Article 81, § 316(c), Annotated Code of Maryland, provides for allocation of business income of a corporation which conducts business "partly within and partly without this State."

[S]o much of the business income of the corporation as is derived from or reasonably attributable to the ... business of the corporation carried on within this State, shall be allocated to this State and any balance of the business income shall be allocated outside this State. The portion of the business income derived from or reasonably attributable to the ... business carried on within this State may be determined by separate accounting where practicable, but never in the case of a unitary business; ... where separate accounting is [not] allowable ... the portion of the business income of the corporation allowable to this State shall be determined in accordance with a three-factor formula.... [Emphasis supplied].

During the income tax years 1974-1977 inclusive, appellee Ramsay, Scarlett & Company, Inc., headquartered in Baltimore, conducted operations in Virginia and Louisiana in addition to those it maintained in Maryland. It excluded from its Maryland returns income from the Louisiana activities. The Comptroller, being of the view that all of Ramsay Scarlett's enterprises constituted a unitary business, disallowed this separate accounting and assessed Ramsay Scarlett pursuant to the three-factor formula. This produced an aggregate increase of taxes in the amount of $31,840, exclusive of interest. Ramsay Scarlett appealed to the Maryland Tax Court, which reversed, concluding that the Louisiana enterprise was not part of a unitary business. The Circuit Court for Baltimore City affirmed.

The Comptroller has now brought the matter here. Both parties agree that the question presented is:

Did Ramsay Scarlett conduct a unitary business in Maryland, Virginia ¹ and Louisiana, thereby precluding it from using separate accounting with respect to its Louisiana operations in arriving at the amount of its income taxable in Maryland?

In addition, we must consider the appropriate scope of review of a decision of the Tax Court. We place the legal issues in context by summarizing the pertinent facts.

Facts

From the record we learn that Ramsay Scarlett is a Maryland corporation with its principal place of business in Baltimore. Established in 1926, it is and during the tax years in question was engaged in steamship agency and stevedoring operations in that city. In about 1958 it entered the Louisiana market with a bulk terminal business. Later it extended its activities to Virginia, where both agency and stevedoring operations are conducted. ¹

The Louisiana business has always been an unincorporated division of Ramsay Scarlett. During the period pertinent to this case, the Louisiana activities consisted chiefly of warehousing (export bagging), an enterprise which, like the Louisiana bulk storage of liquid chemicals, was not conducted in Baltimore. Lesser portions of the Louisiana operation consisted of barge loading and unloading, stevedoring, and steamship agency work.

Day-to-day management of the Louisiana division was handled by a manager who reported directly to Ernest Levering, the corporation's president, in Baltimore. The manager's salary was set by the board of directors in Baltimore. The manager could be fired by board action. Functions such as purchasing of supplies, banking, borrowing, solicitation and choice of customers, fees charged, credit terms, billing, and selection of accounting and legal assistance were all handled locally in Louisiana, as was hiring and firing of local personnel, who were paid local wages.

Nevertheless, the board of directors had authority to make major policy decisions affecting Louisiana. For example, the board had to approve purchases of major equipment, such as cranes, and purchase of a warehouse in Louisiana was made only after board approval. This home-office supervision was only lightly exercised, however. President Levering visited Louisiana only two or three times a year. Visits to Baltimore by the Louisiana manager were even less frequent. Written communications between Levering and Richard Daniels, the Louisiana manager, were but occasional, as were telephone conversations. Levering could not recall any occasion on which he had disapproved a proposal made by Daniels, and the president characterized his supervision of the Louisiana branch as "supervision in name only...." Primarily, he "just want[ed] to be kept advised of what occur[red]."

Baltimore did handle some functions on a corporation-wide basis. Payroll for all administrative personnel, including Louisiana, was centrally processed. A single profit-sharing plan for all employees was administered in Baltimore. This was also true as to a health insurance plan. Additionally, because of cost savings, there was a central provision of workmen's compensation and general liability insurance.

The Louisiana operation did not rely on or obtain financial support from Baltimore. But by action of the Baltimore management, surplus Louisiana earnings were remitted to Baltimore and used to pay Baltimore bills as part of the "general [sic ] corporate situation" or invested. The income produced by investment of Louisiana funds also went "to the general operating revenue of Baltimore."

From this record the Tax Court found:

The Comptroller has identified some tangible connections between Ramsay Scarlett's Baltimore and Louisiana operations. However, the connections are incidental and most probably arise as a matter of convenience. There is no indication that either the Baltimore or the Louisiana branch depends on these connections; nor do they establish central management or control. On the contrary, the evidence tends to indicate that through separate day to day management; purchasing, sales, accounting, advertising and financing, each of these branches operates independently.

* * *

* * *

... In form, the Board of Directors did assume the normal corporate management power but the Comptroller has failed to indicate any instances where such power was actually exercised. Instead, the record indicates that the Board of Directors allowed the Louisiana branch to operate of its own force.

It concluded that "Ramsay Scarlett has shown that its Louisiana operation branch operates independently from its Maryland operation; [i.e. that there was not a unitary business] and the Comptroller has failed to establish that activities in Maryland have any substantive bearing on the Louisiana operation." As we have noted, the Circuit Court for Baltimore City affirmed, stating that "[t]he record contains substantial evidence to support the Tax Court's determination" and that "this Court perceives no error of law."

Before we address the Comptroller's contention that this holding was reversibly erroneous, we must consider the scope of judicial review of the Tax Court's decision.

Scope of Review

Article 81, § 229(o ) of the Code provides that a decision of the Tax Court shall be affirmed "if it is not erroneous as a matter of law and if it is supported by substantial evidence appearing in the record...." In Comptroller of the Treasury v. Diebold, Inc., 279 Md. 401, 407, 369 A.2d 77 (1977) (also a unitary business case) the Court of Appeals construed this statute ² and said:

judicial review of decisions of the Maryland Tax Court is severely limited.... We have held that the standard by which a result reached by the Tax Court is reviewed is whether a reasoning mind reasonably could have reached the factual conclusion which that agency reached, Fairchild Hiller Corp. v. Supervisor of Assessments, 267 Md. 519, 521, 298 A.2d 148, 149 (1973). The application of this test need not and must not be either judicial fact-finding or a substitution of judicial judgment for agency judgment.

That this limitation of judicial review is addressed to findings of fact made by the administrative agency is clear both from the language quoted and from the Court's citation of Fairchild Hiller, which involved precisely that point. The standard of judicial review as to factual determinations is like the "fairly debatable" rule frequently used in zoning cases and this, in turn, "is analogous to the 'clearly erroneous' standard commonly applied under Md.Rules 886 and 1086." Sedney v. Lloyd, 44 Md.App. 633, 637 n. 6, 410 A.2d 616 (1980). See also Comptroller of the Treasury v. Haskins, Valette, and Heacock, 298 Md. 681, 472 A.2d 70 (1984) and Ryan v. Thurston, 276 Md. 390, 392, 347 A.2d 834 (1975) (an on-the-record review of District Court decision, circuit court is bound by findings of fact unless clearly erroneous). Compare Board of Education v. Waeldner, 298 Md. 354, 361, 470 A.2d 332 (1984).

As to matters of law, it is clear that when courts deal with such issues as interpretation of statutes and legislative intent, they feel free to substitute their judgments for that of the agency. Supervisor of Assessments v. Carroll, 298 Md. 311, 469 A.2d 858 (1984); Supervisor of Assessments v. Sloan, 57 Md.App. 286, 469 A.2d 915 (1984); Maryland National Bank v. State Dept. of Assessments and Taxation, 57 Md.App. 269, 469 A.2d 907 (1984); State Dept. of Assessments and Taxation v. Glick, 47 Md.App. 150, 153, 422 A.2d 34 (1980); Supervisor of Assessments v. Washington Natl. Arena Limited Partnership, 42 Md.App. 695, 402 A.2d 148 (1979).

It is not always easy, however, to determine what is a question of law and what is a question of fact; see Palmer...