Gansat v. State, Dept. of Rev.

• Decision Date: 13 January 2009
• Docket Number: No. DA 08-0026.,DA 08-0026.
• Citation: 201 P.3d 132,2009 MT 5,348 Mont. 333
• Parties: GANNETT SATELLITE INFORMATION NETWORK, INC., Petitioner and Appellant, v. STATE of Montana, DEPARTMENT OF REVENUE, Respondent and Appellee.
• Court: Montana Supreme Court

201 P.3d 132

2009 MT 5

348 Mont. 333

GANNETT SATELLITE INFORMATION NETWORK, INC., Petitioner and Appellant, v. STATE of Montana, DEPARTMENT OF REVENUE, Respondent and Appellee.

No. DA 08-0026.

Supreme Court of Montana.

Submitted on Briefs October 8, 2008.

Decided January 13, 2009.

For Appellant: Michael W. Green and Joseph P. Mazurek, Crowley, Haughey, Hanson, Toole & Dietrich, Helena, Montana, Scott D. Smith, Attorney at Law, Washington, D.C.

For Appellee: Brendan R. Beatty and Derek R. Bell, Special Assistant Attorneys General, Department of Revenue, Helena, Montana.

For Amicus: Bruce J. Fort, Multistate Tax Commission, Santa Fe, NM, Lawrence A. Anderson, Attorney at Law, Great Falls, Montana (Multistate Tax Commission).

Justice BRIAN MORRIS delivered the Opinion of the Court.

¶ 1 Gannett Satellite Information Network, Inc. (GANSAT) appeals an order of the First Judicial District, Lewis and Clark County. The District Court upheld the Montana State Tax Appeal Board (STAB)'s May 17, 2007, order that defined "business income" under § 15-31-302(1), MCA. We affirm.

¶ 2 We review the following issue on appeal:

¶ 3 Did the District Court properly interpret the definition of "business income" in § 15-31-302(1), MCA, to include both a "transactional test" and an independent "functional test" for determining the existence of business income?

FACTUAL AND PROCEDURAL BACKGROUND

¶ 4 Gannett owns an affiliated group (Gannett Group) of newspaper publishing and television broadcasting corporations. GANSAT is a first-tier subsidiary of Gannett. GANSAT publishes the Great Falls Tribune and distributes the USA Today within Montana. GANSAT was the only member of the Gannett Group doing business in Montana in 2000. As a result, GANSAT served as the "taxpayer" for corporation license tax purposes and was the only member of the Gannett Group to file a Montana corporation license tax return.

¶ 5 Gannett acquired Cablevision's cable television business as part of its acquisition of Multimedia, Inc. (Multimedia), in 1995. Cablevision, a subsidiary of Multimedia, became a second-tier subsidiary of Gannett. Gannett sold Cablevision for over $2.5 billion in 2000. GANSAT deducted the gain recognized from the sale of Cablevision as nonbusiness income on its 2000 Montana corporation license tax return.

¶ 6 The State of Montana Department of Revenue (DOR) denied GANSAT's deduction. GANSAT appealed to STAB. GANSAT argued that DOR improperly had included Cablevision in the same unitary group with Gannett and GANSAT. GANSAT further argued that DOR improperly had denied a nonbusiness income deduction for the gain generated from the Cablevision sale pursuant to § 15-31-302(1), MCA.

¶ 7 STAB granted partial summary judgment to DOR. STAB announced in an initial ruling that § 15-31-302(1), MCA, clearly states "two separate clauses which must be considered in determining whether income is business or nonbusiness income ... a `transactional' and a `functional' test for business income." STAB did not determine whether GANSAT actually owed corporate tax on the sale of Cablevision. STAB separately determined that Gannett, GANSAT, and Cablevision comprised the same unitary group for the purpose of determining corporate tax owing in Montana.

¶ 8 GANSAT and DOR filed a joint interlocutory appeal with the District Court pursuant to § 15-2-305, MCA. The parties requested the District Court to rule on STAB's construction of § 15-31-302(1), MCA, as containing two separate tests for business income, due to the effect of this conclusion of law on the remaining issues before STAB. The District Court granted the petition for an interlocutory appeal. The District Court affirmed STAB's interpretation of § 15-31-302(1), MCA, as containing a transactional test and a functional test for determining business income. GANSAT appeals.

STANDARD OF REVIEW

¶ 9 We review de novo an agency's conclusions of law to determine if they are correct. Pesarik v. Perjessy, 2008 MT 337, ¶ 9, 346 Mont. 236, ¶ 9, 194 P.3d 665, ¶ 9. The same standard of review applies to both the District Court's review of the administrative decision and our subsequent review of the District Court's decision. Owens v. Montana Dept. of Revenue, 2007 MT 298, ¶ 12, 340 Mont. 48, ¶ 12, 172 P.3d 1227, ¶ 12.

DISCUSSION

¶ 10 Did the District Court properly interpret the definition of "business income" in § 15-31-302(1), MCA, to include both a "transactional test" and an independent "functional test" for determining the existence of business income?

¶ 11 The "unitary business principle" permits a state to tax a corporation on an apportionable share of the multistate business carried on in the taxing state. Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768, 778, 112 S.Ct. 2251, 2258, 119 L.Ed.2d 533 (1992). Montana, like many other states that use this method of taxation, has adopted almost verbatim the Uniform Division of Income for Tax Purposes Act (UDITPA). See § 15-1-601, MCA; compare Unif. Div. of Income for Tax Purposes Act, 7A U.L.A. 147-198 (West 2002); see also Hoechst Celanese Corp. v. Franchise Tax, 25 Cal.4th 508, 106 Cal.Rptr.2d 548, 22 P.3d 324, 331 (2001). The UDITPA has two main objectives: (1) to promote uniformity in allocation practices among the states that impose taxes on the income of corporations, and (2) to relieve the pressure for congressional legislation in this field. Approximately twenty-two states have adopted the UDITPA. Hoechst, 106 Cal.Rptr.2d 548, 22 P.3d at 331.

¶ 12 Montana is also a full-member of the Multistate Tax Commission, the administrative agency for the Multistate Tax Compact (Compact). Section 15-1-601, MCA. The National Conference of Commissioners on Uniform State Laws created the Compact to promote uniformity and compatibility in significant components of state tax systems and to avoid duplicative taxation. Section 15-1-601, Art. I, MCA; Polaroid Corp. v. Offerman, 349 N.C. 290, 507 S.E.2d 284, 288 (1998), abrogated on other grounds, Lenox Inc. v. Tolson, 353 N.C. 659, 548 S.E.2d 513 (2001). The Compact's almost word-for-word incorporation of the UDITPA seeks to promote uniformity among the states with respect to taxation of interstate and foreign commerce. Polaroid, 507 S.E.2d at 288.

¶ 13 Montana uses the UDITPA's definitions to divide all corporate income into two categories — "business income" and "nonbusiness income." Compare UDITPA § 1, 7A U.L.A. 147; with §§ 15-31-302 and 15-1-601, Art. IV, MCA. All business income is "apportioned to this state" through a formula based on the property, sales, and payroll of the taxpayer. Sections 15-31-305 to 312, MCA. Montana allocates nonbusiness income generally to the state in which the taxpayer is domiciled. Section 15-31-304, MCA; see also Hoechst, 106 Cal.Rptr.2d 548, 22 P.3d at 331. The classification of corporate income as business or nonbusiness determines the tax treatment.

¶ 14 We turn to the definition of business income as set forth in § 15-31-302(1), MCA. The statute defines "[b]usiness income" as "income arising from the transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations." Section 15-31-302(1), MCA. "Nonbusiness income" simply "means all income other than business income." Section 15-31-302(4), MCA. GANSAT and DOR debate the proper construction of the statutory definition of business income.

¶ 15 GANSAT and DOR agree that the first clause of § 15-31-302(1), MCA, constitutes the "transactional test." This first clause provides that business income means "income arising from transactions and activity in the regular course of the taxpayer's trade or business." The parties dispute the import of the second clause. The second clause provides that business income "includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations."

¶ 16 GANSAT contends that the District Court's interpretation of the statute renders the first clause "mere surplusage." GANSAT instead suggests that the second clause modifies the first clause. GANSAT argues that Montana's definition of business income consists of a single transactional test. DOR agrees with the District Court that the second clause constitutes a separate "functional test" for determining whether certain income is business income. The Multistate Tax Commission supports DOR's position that the statutory definition of business income contains a separate functional test.

¶ 17 A majority of jurisdictions interpret the UDITPA's definition of business income to include a separate functional test for business income. Hoechst, 106 Cal.Rptr.2d 548, 22 P.3d at 336. Some glean the functional test from the UDITPA's plain language. See, e.g., Polaroid, 507 S.E.2d at 289-93; The Kroger Company v. The Dept. of Revenue, 284 Ill.App.3d 473, 220 Ill.Dec. 566, 673 N.E.2d 710, 714 (1996). Others find the definition of business income ambiguous, and construe the statute to include the functional test using extrinsic aids, such as the UDITPA's legislative history and the UDITPA's policy and goals. See, e.g., Hoechst, 106 Cal. Rptr.2d 548, 22 P.3d at 332-41. All of these jurisdictions conclude that the functional test includes corporate income as business income if it arises from the disposition of an asset that the taxpayer had used in the regular course of its business. See, e.g., Hoechst, 106 Cal.Rptr.2d 548, 22 P.3d at 337.

¶ 18 By contrast, a minority of jurisdictions interpret the UDITPA's definition of business income as containing only the transactional test. Hoechst, 106 Cal.Rptr.2d 548, 22 P.3d at 336. Under this view, the word "includes" as used in the statute makes the second...