In re Tax Appeal of Nat'l Cooperative Refinery Ass'n, 87,295.

Citation44 P.3d 398,273 Kan. 500
Decision Date19 April 2002
Docket NumberNo. 87,295.,87,295.
CourtUnited States State Supreme Court of Kansas

273 Kan. 500
44 P.3d 398


No. 87,295.

Supreme Court of Kansas.

Opinion filed April 19, 2002.

John Michael Hale, of Legal Services Bureau, Kansas Department of Revenue, argued the cause and was on the briefs for appellant.

Jack D. Flesher, of Bever Dye, LC, of Wichita, argued the cause and was on the brief for appellee.

The opinion of the court was delivered by


The Kansas Department of Revenue (Revenue) appeals from a final order of the Board of Tax Appeals (BOTA). At issue is Revenue's assessment against National Cooperative Refinery Association (NCRA) for additional corporate income tax and interest for tax years ending September 30, 1993, 1994, and 1995. The additional assessment is due to Revenue's determining, pursuant to K.S.A. 79-32,141, that NCRA, a Kansas business, and Cenex, Inc. (Cenex), a Minnesota business, are unitary so that NCRA must use the combined report method of allocating income and expenses in order to clearly reflect income of the businesses. NCRA appealed Revenue's decision to BOTA, which overturned it. The appeal was transferred from the Court of Appeals on this court's order. K.S.A. 20-3018(c).

Revenue lists five issues; NCRA suggests that there is a single issue and three sub-issues. We conclude the issue on appeal is whether NCRA and Cenex are required by K.S.A. 79-32,141 to use the combined report method of allocation of income and expenses. BOTA held that they were not required to do so.

The parties filed a stipulation of facts, which BOTA incorporated into its order. NCRA filed proposed findings of fact, which BOTA also incorporated into its order. On this appeal, Revenue asserts that only a few facts are necessary for resolution of the issue, but does not challenge any of the facts incorporated by BOTA into its

273 Kan. 502
order. The following narrative statement of facts is based on the facts stated in and incorporated into BOTA's order. All facts reflect circumstances during the years for which the additional tax assessment was made, the tax years ending September 30, 1993, 1994, and 1995

NCRA is a Kansas cooperative marketing association organized in 1943 as a nonprofit association under the Kansas Cooperative Marketing Act, K.S.A. 17-1601 et seq. NCRA owns all outstanding capital stock of its subsidiary corporations—Clear Creek, Inc., Clear Creek Transportation, Inc., Petroleum Resources, Inc., PRC Property Holdings, Inc., Jayhawk Transportation Corp., and Jayhawk Pipeline Corp. NCRA and its subsidiaries filed consolidated federal and Kansas income tax returns for the tax years at issue.

Cenex is organized and operated under the cooperative association laws of Minnesota. It has approximately 1,600 members, which are local farmer cooperatives located in 15 north-central and northwest states.

NCRA is solely in the business of refining crude oil for supply of petroleum products, primarily fuel, to its stockholders. Cenex's business consists of furnishing to its members the following: farm supplies, including refined fuels, fertilizer, insecticides, herbicides, lubricants, propane, tires, vehicle accessories, and information/ technology services. Cenex owns a refinery that produces asphalt. NCRA produces no asphalt.

Cenex bought 44% of NCRA's stock in 1990. In July 1992, Cenex bought Farmland's NCRA stock to bring Cenex's ownership up to approximately 74%. Growmark, Inc., an Illinois cooperative association owns 19% of NCRA's stock, and MFA Oil Company, a Missouri cooperative, owns 7%. NCRA's stockholders (also known as members) have the right to purchase NCRA's products in proportion to the percentage of stock held.

Shortly after acquiring more than half of NCRA's stock, Cenex attempted to exercise control over NCRA. Growmark and MFA filed an action in the United States District Court for the District of Kansas seeking to block Cenex's attempt to seize control. Under the court-approved settlement of the action, NCRA is governed by a six-member board of directors, four appointed by Cenex, one by

273 Kan. 503
Growmark, and one by MFA. A general manager conducts day-today operations of NCRA and reports to the board of directors. The parties agreed that NCRA will continue to operate on a cooperative basis and agreed to retain historic policies and practices of product allocation and earnings allocations and distributions

NCRA's annual sales are approximately $650 million. Cenex's annual sales are approximately $2 billion. NCRA's total assets (at book) are $400 million. Cenex's total assets are well over $1 billion.

NCRA directors who were appointed by Cenex held no other positions of authority over NCRA and "did not participate in the management or operation of NCRA to any extent." NCRA and Cenex had no common managers, officers, or employees. There were no transfers of employees between NCRA and Cenex. Each company had its own separate personnel and hiring policies and employee benefit plans. There were no technical service agreements between the companies.

Neither company used the other's facilities, with the exception of one lease arrangement between the two companies. NCRA leases three storage tanks that Cenex owns near NCRA's refinery for $21,000 per year. The lease agreement is an arm's length transaction. NCRA has many storage tanks on its own property.

Cenex's refinery uses primarily Canadian crude oil; NCRA does not. They do not purchase crude oil from the same sources. Each maintains its own separate crude oil supply department and personnel.

In addition to their separate departments for supply, each company maintains its own separate department for production, environment and safety, security, product distribution, transportation, accounting, personnel and human resources and public relations. The two companies did not coordinate activities in security, pollution control and permits, health insurance, refinery operation manuals, personnel matters, research and library resources, disposition of by-products, and information systems. The two companies exchanged technical information concerning safety and environmental matters to the extent that most refiners engage in exchanges of that type of information.

273 Kan. 504
Each company arranged for its own legal, contracting, financial, and banking services. There were no joint borrowings. Neither company guaranteed any debts of the other. NCRA did make occasional loans of excess working capital to Cenex at prevailing market interest rates

NCRA's sales of its refined petroleum product to its stockholders are at arm's length prices determined by reference to markets established by unrelated parties. NCRA rarely purchases from Cenex, and, when it has, its purchases of truck tires and light cycle oil have been at market prices. Cenex purchases refined petroleum products from other suppliers.

NCRA did not participate in decisions about the operation of Cenex. Cenex participated in NCRA's decisions on refinery throughput volumes, product mix, and distribution volumes to the extent that any refiner or manufacturer has its largest customers designate quantities and delivery points and to the same extent as NCRA's other customers.

In 1994, NCRA and Cenex pooled insurance coverages. The savings were allocated between the two companies.

On appeal, Revenue argues that its decisions on the subject of unitary businesses are entitled to judicial deference and not subject to review, or, if subject to review, are reviewable only for arbitrariness, unlawfulness, or capriciousness. Revenue bases its position on K.S.A. 79-32,141, which authorizes only the Director of Revenue to require businesses to use the combined report method. We note that Revenue's arguments are contrary to K.S.A. 2001 Supp. 74-2438, which provides that "[a]n appeal may be taken to the state board of tax appeals from any finding, ruling, order, decision, final determination or other final action ... by any person aggrieved thereby." The statute further provides that "the board shall conduct a hearing in accordance with the provisions of the Kansas administrative procedure act. The hearing before the board shall be a de novo hearing unless the parties agree to submit the case on the record made before the secretary of revenue or the secretary's designee." We recently rejected this identical argument in In re Tax Appeal of Panhandle Eastern Pipe Line Co., 272 Kan. 1211, 39 P.3d 21 (2002). We held:

273 Kan. 505
"The authority of the Department is subject to review in that the legislature has conferred upon BOTA the authority to hear appeals of decisions of the Secretary of Revenue or the Secretary's designee. BOTA is the paramount, lawfully constituted taxing authority in Kansas and, as such, functions independently of the Secretary of Revenue in matters of administrative judgment and decision. Syl. ¶ 7.
"BOTA bears an independent responsibility to review the decision of the Department; this responsibility is foreign to the concept of deference. BOTA need not defer to the Department's interpretation of statute." Syl. ¶ 8.

In accordance with In re Tax Appeal of Broce Construction Co., Inc., 27 Kan. App.2d 967, 980-81, 9 P.3d 1281 (2000), BOTA presumed that Revenue's determination of unity was correct and placed the burden of proving otherwise on NCRA. BOTA concluded that the taxpayer met its burden by showing that NCRA and Cenex do not have a unitary relationship.

In its review, BOTA found:

"[T]he evidence does not show the requisite dependency or contribution between NCRA and Cenex to consider the entities unitary for combined reporting purposes. NCRA is in the business of refining crude oil into petroleum products, which are sold to its three members. Although Cenex is enttitled to purchase approximately

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2 cases
  • Creameries v. Roberts, M2009–00255–SC–R11–CV.
    • United States
    • Supreme Court of Tennessee
    • June 3, 2010
    ...state are dependent on or contribute to the operation of the separate business entity outside the state. In re Nat'l Coop. Refinery Ass'n, 273 Kan. 500, 44 P.3d 398, 404 (2002); see generally Louis Dreyfus Corp., 933 S.W.2d at 468 (citing courts that have used the dependency and contributio......
  • Creameries v. Roberts, M2009-00255-SC-R11-CV
    • United States
    • Supreme Court of Tennessee
    • January 24, 2011
    ...taxing state are dependent on or contribute to the operation of the separate business entity outside the state. In re Nat'l Coop. Refinery Ass'n, 44 P.3d 398, 404 (Kan. 2002); see generally Louis Dreyfus Corp., 933 S.W.2d at 468 (citing courts that have used the dependency and contribution ......

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