In re Tax Appeal of Broce Constr. Co.

Decision Date25 August 2000
Docket NumberNo. 83,418.,83,418.
Citation9 P.3d 1281,27 Kan. App.2d 967
CourtKansas Court of Appeals

James Bartle, of Legal Services Bureau, for appellant Kansas Department of Revenue.

Carol B. Bonebrake, of Cosgrove, Webb & Oman, of Topeka, for appellees.

Before GREEN, P.J., GERNON, J., and PHILIP C. VIEUX, District Judge, assigned.


This is an appeal by the Kansas Department of Revenue (the Department) from an order of the Kansas Board of Tax Appeals (BOTA) which denied conversion of Broce Construction Company, Inc.'s (Broce Kansas) corporate income tax returns for tax years ending (TYE) 1985 through 1988 (the audit period) from single entity corporate tax returns to combined report formula apportionment tax returns. The denial of the assessment was based upon a determination by BOTA that Broce Kansas together with two Oklahoma corporations, Broce Construction Company of Oklahoma, Inc. (Broce Oklahoma) and Woodward Asphalt, Inc. (Woodward), were not conducting a unitary business during the audit period. We reverse and remand with directions.

On December 28, 1989, the Department issued two notices of assessment of additional corporate income tax and one notice of refund for TYE 1985 through 1988 to three Kansas corporations owned by Ray C. Broce. The notices of assessment were issued to Broce Kansas and Broce-O'Dell Concrete Products, Inc. (Broce-O'Dell); the notice of refund was issued to Broce Manufacturing Company, Inc. (Broce Manufacturing).

These notices were based upon the Department's determination that Broce Kansas, Broce-O'Dell, and Broce Manufacturing (collectively referred to as the Kansas taxpayers) together with Broce Oklahoma and Woodward were engaged in a unitary business. Woodward was only included in the unitary analysis for TYE 1988, the tax year in which the company was acquired by Broce Oklahoma.

Because the Department determined that these five companies were a unitary business, the Kansas taxpayers' state corporate income tax returns should have been filed using the combined report formula apportionment method rather than the single entity method. Using the combined report formula apportionment method, the Department combined the Kansas taxpayers' income with Woodward's income for TYE 1988 and Broce Oklahoma's income for the two years before the audit period as well as the audit period. When Broce Kansas' income for TYE 1983 and 1984 was recomputed using the combined report formula apportionment method, the company did not have a net operating loss (NOL) in either year. For this reason, the Department did not allow the NOLs shown on the single entity returns for TYE 1983 and 1984 to be carried forward and claimed as deductions in TYE 1985 through 1988. After recalculation, the Department determined that the Kansas taxpayers' total tax and interest due was over $300,000.

The Kansas taxpayers protested the Department's notices by filing a petition with the Director of Taxation. A designee of the Director of Taxation upheld the Department's determination of unity. The Kansas taxpayers then filed a petition for review with the Director, which was denied.

Under K.S.A. 74-2437, the Kansas taxpayers appealed the Director's order to BOTA, requesting a hearing de novo. The Kansas taxpayers moved for partial summary judgment, arguing that the Department was barred from disallowing Broce Kansas' NOL deductions because the statute of limitations for TYE 1983 and 1984 (the years in which the NOLs originated) had expired. BOTA found that K.S.A. 79-3230 prohibited the Department in 1989 from adjusting the closed year TYE 1983 and 1984 returns.

Before presenting testimony, the Department agreed to not include Broce-O'Dell and Broce Manufacturing in the unitary analysis. As a result, the issue presented to BOTA was whether Broce Kansas, Broce Oklahoma, and Woodward (collectively referred to as the taxpayers) conducted a unitary business during the audit period.

After hearing testimony, BOTA reversed the Director's finding of unity and abated the Department's assessment notices. BOTA rationalized that "while there are factors linking these companies, they are insufficient to show that the operation of Broce of Kansas are dependent upon and contribute to the operations of Broce of Oklahoma and Woodward."

Unitary Business

The Department's first argument on appeal is that BOTA erred in determining that Broce Kansas, Broce Oklahoma, and Woodward were not engaged in a unitary business during the audit period. "BOTA orders are subject to judicial review pursuant to the Act for Judicial Review and Civil Enforcement of Agency Actions, K.S.A. 77-601 et seq." In re Tax Appeal of Derby Refining Co., 17 Kan. App.2d 377, 380, 838 P.2d 354 (1992),

rev. denied 252 Kan. 1092 (1993). K.S.A. 77-621 provides:

"(c) The court shall grant relief only if it determines any one or more of the following:
"(7) the agency action is based on a determination of fact, made or implied by the agency, that is not supported by evidence that is substantial when viewed in light of the record as a whole, which includes the agency record for judicial review, supplemented by any additional evidence received by the court under this act." (Emphasis added.)

"Substantial evidence is such legal and relevant evidence as a reasonable person might accept as being sufficient to support a conclusion." In re Tax Appeal of Collingwood Grain, Inc., 257 Kan. 237, Syl. ¶ 2, 891 P.2d 422 (1995).

As to questions of law, BOTA exists to decide tax matters; therefore, its decisions should be given due consideration when it is acting within its area of expertise. Nevertheless, "`the determination of an administrative body on questions of law is not conclusive, and, while persuasive, is not binding on the courts.'" Board of Johnson County Comm'rs v. Smith, 18 Kan. App.2d 662, 664-65, 857 P.2d 1386 (1993) (quoting Kansas Bd. of Regents v. Pittsburg State Univ. Chap. of K-NEA, 233 Kan. 801, 810, 667 P.2d 306 [1983]). The appellate courts have unlimited review of questions of law. Gillespie v. Seymour, 250 Kan. 123, 129, 823 P.2d 782 (1991); Angleton v. Starkan, Inc., 250 Kan. 711, 716, 828 P.2d 933 (1992).

We further should note that as the appellant, the Department has the burden of proving that BOTA's actions were in error. K.S.A. 77-621(a)(1). The Department claims that it is entitled to relief because (1) BOTA erroneously interpreted and applied the law; (2) BOTA's action was based on determinations of fact that are not supported by the record as a whole; and (3) BOTA's action was unreasonable, arbitrary, or capricious. (Citing K.S.A. 77-621[c][4], [7], and [8].) Our Supreme Court has stated on several occasions that whether a multistate business is separate or unitary depends upon the manner in which the business is conducted. "The essential test to be applied is whether or not the operation of the portion of the business within the state is dependent upon or contributory to the operation of the business outside the state. If there is such a relationship, the business is unitary." In re Tax Appeal of A.M. Castle & Co., 245 Kan. 739, Syl. ¶ 3, 783 P.2d 1296 (1989); Pioneer Container Corp. v. Beshears, 235 Kan. 745, Syl. ¶ 4, 684 P.2d 396 (1984); Crawford Manufacturing Co. v. State Comm. of Revenue and Taxation, 180 Kan. 352, Syl. ¶ 2, 304 P.2d 504 (1956). This test is referred to as the dependency or contribution test. Castle,245 Kan. at 743.

"In determining whether two or more business entities actually constitute a unitary business for state income taxation purposes, the application of the ... [test] is much more difficult than the definition of the test itself." 245 Kan. at 744. The Department has promulgated K.A.R. 92-12-72 to assist in determining whether the activities of a corporation or group of corporations constitute a single trade or business. In K.A.R. 92-12-72, it is recognized that "[t]he determination of whether the activities of the taxpayer constitute a single trade or business or more than one (1) trade or business will turn on the facts in each case." Although each case must be determined on its own facts, there is "a strong presumption that the activities of the taxpayer constitute a single trade or business" when:

"(a) ... all of its activities are in the same general line.
"(b) A taxpayer is almost always engaged in a single trade or business when its various divisions or segments are engaged in different steps in a large, vertically structured enterprise.
"(c) A taxpayer who might otherwise be considered as engaging in more than one (1) trade or business is properly considered as engaged in one (1) trade or business when there is strong centralized management, coupled with the existence of centralized departments for such functions as financing, advertising, research or purchasing. Thus, some conglomerates may properly be considered as engaged in only one (1) trade or business when the central executive officers are normally involved in the operation of the various divisions and there are centralized offices which perform for the divisions the normal matters which a truly independent business would perform for itself, such as accounting, personnel, insurance, legal, purchasing, advertising, or financing." K.A.R. 92-12-72.

We now turn to the facts of this case and consideration of the controlling issue of whether substantial evidence supports BOTA's determination that Broce Kansas, Broce Oklahoma, and Woodward were not operated as a unitary business during the audit period.

Broce Kansas is a Kansas corporation with its principal place of business in Dodge City, Kansas, and does business as an asphalt paving and resurfacing contractor. Broce Kansas is qualified to bid on state and...

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