Indiana Dept. of State Revenue v. Frank Purcell Walnut Lumber Co.

• Decision Date: 11 May 1972
• Docket Number: No. 271A31,271A31
• Parties: INDIANA DEPARTMENT OF STATE REVENUE, Appellant (Defendant Below), v. FRANK PURCELL WALNUT LUMBER CO., Inc., Appellee (Plaintiff Below).
• Court: Indiana Appellate Court

Page 336

282 N.E.2d 336

152 Ind.App. 122

INDIANA DEPARTMENT OF STATE REVENUE, Appellant (Defendant Below), v. FRANK PURCELL WALNUT LUMBER CO., Inc., Appellee (Plaintiff Below).

No. 271A31.

Court of Appeals of Indiana, Second District.

May 11, 1972.

As Corrected on Denial of Rehearing June 13, 1972.

Theodore L. Sendak, Atty. Gen., Larry J. McKinney, Mark Peden, Deputy Attys. Gen., for appellant.

William H. Krieg, Robert E. Johnson, Jerry Williams, Indianapolis (Krieg, DeVault, Alexander & Capehart, Indianapolis, of counsel), for appellee.

BUCHANAN, Judge.

STATEMENT OF THE CASE AND FACTS--This is an appeal from a summary judgment entered by the trial court against the (defendant-appellant) Indiana Department of State Revenue (Department) in an action instituted by (plaintiff-appellee) Frank Purcell Walnut Lumber Co., Inc. (Purcell), for a refund of gross income taxes paid under protest to the Department for fiscal years ending November 30, 1965, November 30, 1966, and November 30, 1967, arising from interstate sales of logs and timber.

Purcell is an Indiana corporation (incorporated in 1959) authorized to do business in Kansas City, Kansas. Purcell's sole shareholder is the Amos-Thompson Corporation (Amos), of Edinburg, Indiana, also formed under Indiana law.

From November 30, 1965 through the fiscal year ending November 30, 1967, Purcell had five directors, two being also directors of Amos and one being an employee of Amos. These three directors were Indiana residents; the remaining two were not. During these same fiscal years, Purcell had four officers; three of these officers were also officers of Amos, and the fourth was an employee of Amos. All four officers resided in Indiana. The officers and directors of Purcell served without compensation.

Purcell was formed by its Indiana attorneys for the sole purpose of acquiring and continuing the business of an active corporation then located in Kansas City, Kansas. After qualifying to do business in Kansas, Purcell purchased the assets of the Kansas corporation. As required by statute, Purcell maintained a resident agent in Edinburg, Indiana, who was also one of its officers and directors.

Purcell maintained its plant and office and conducted its business in Kansas City, Kansas from the same location used by Purcell's predecessor.

During the three years in question, Purcell was in the business of buying logs, trimming and processing, and selling logs and lumber. Logs were obtained by Purcell from Kansas, Missouri, Iowa, Nebraska, and Arkansas. Subsequent trimming and processing of the logs was completed at its plant in Kansas City. Purchasers of logs or lumber sent orders to the Kansas City office, where they were accepted or rejected. If the order was accepted, the logs or lumber would be shipped by rail to the buyer from the Kansas City office and payment made to the same place.

During these fiscal years most of Purcell's income was derived from sales to customers outside the State of Indiana, although logs and lumber were also sold to its sole shareholder, Amos. For the fiscal year ending November 30, 1965, 27% of Purcell's gross income was derived from sales to Amos. For the fiscal year ending November 30, 1966, 34% of Purcell's gross income was derived from sales to Amos, and for the fiscal year ending November 30, 1967, the percentage was 17%.

The income derived by Purcell from Amos was reported to the State of Indiana. The income tax liability on this income was computed under the Adjusted Gross Income Tax Act of 1963.

On January 20, 1969, the Department assessed a gross income tax deficiency against Purcell for the three fiscal years in question. The deficiency was imposed by the Department because it determined that this income was subject to taxation under the Gross Income Tax Act of 1933. Following Purcell's protest, a hearing was held. The Department denied the protest and ordered the deficiency ($4,399.00) paid along with a penalty ($439.90) and interest ($561.56), in the total sum of $5,400.46. Payment was made on May 29, 1969, and a petition for refund was filed June 30, 1969. The petition was denied by the Department and on September 9, 1969 this action for a refund was filed in the Johnson Circuit Court. Both parties subsequently moved for summary judgment and filed supporting affidavits. Following a hearing and oral argument, the Johnson Circuit Court entered summary judgment for Purcell, awarding the full amount of the deficiency, penalty, and interest paid, along with interest on that amount plus costs.

Purcell's income resulting from sales to customers outside the State of Indiana is not subject to taxation under either Act, was not considered by the Department when it computed the deficiency against Purcell, and is not in dispute in this action.

ISSUES--We dispose first of a threshold question raised by Purcell challenging the adequacy of the brief and Motion to Correct Errors. In our opinion the Department adequately complied with Rule TR. 59, IC 1971, 34--5--1--1, Rule 59 and Rule AP. 8.3 of the Indiana Rules of Procedure.

Although the Department's Motion to Correct Errors is couched in general language, attached to it was a supporting Memorandum containing argument which specifically indicated the Department's position. Even though the Motion to Correct Errors was generally phrased it essentially stated the grounds for the correction of errors required by Rule TR. 59(A)(4) and (8), i.e., that the decision of the Court was not supported by sufficient evidence and that it was contrary to law. Reading the Motion to Correct Errors which is included in the Department's brief with the supporting Memorandum it is apparent that the Department has substantially complied with Rule TR. 59.

While the Department's brief is just that, brief, it affords us sufficient information to determine the claimed error. Willsey v. Hartman, (Ind.App.1971) 269 N.E.2d 172, committed us to a liberal view of Rule AP. 8.3:

'It is true that the Motion for a New Trial is not fully set out verbatim in any one spot in the Brief, but the substance thereof is adequately presented by reading the Brief as a whole and there is no need to search the record to find any error, the primary reason for finding any brief insufficient.'

The Department's brief being deemed sufficient and neither party contending that there exists an issue as to any material fact we are left with only a question of law to be decided.

Two issues are thus presented for review:

ISSUE ONE. Was the income received by Purcell from Amos exempt from the Gross Income Tax Act, IC 1971 6--2--1--1, Ind.Ann.Stat. § 64--2601(m) (Burns 1970) (hereafter referred to as § 1(m))?

ISSUE TWO. Does the application of the Gross Income Tax Act to the income received by Purcell from Amos violate the commerce clause (Art. 1, Sec. 8) of the United States Constitution?

As to ISSUE ONE, the Department maintains that § 1(m) merely recognizes that any Indiana corporation doing business at a situs outside the state shall not pay taxes upon gross income received from sources outside the state. Since Purcell's income was received from a source within the state (Amos), the Department contends that the § 1(m) exclusion does not apply.

Purcell maintains that § 1(m) provides a specific statutory exemption for the income which Purcell derived from its sales to Amos.

As to ISSUE TWO, the Department argues that there is simply no issue in this case regarding multiple taxation or burdens on interstate commerce. Thus, the commerce clause is not applicable to the intrastate sale between Purcell and Amos.

Purcell disagrees by contending that the commerce clause of the federal Constitution prohibits the imposition of a gross income tax on income derived from sales in interstate commerce. Since the income in question was derived from sales between Purcell in Kansas and Amos in Indiana, Purcell maintains that interstate commerce was involved.

DECISION--ISSUE ONE. It is our opinion that the income derived by Purcell from Amos does not qualify for the § 1(m) exemption from gross income tax.

In pertinent part, § 1(m) provides:

'That with respect to individuals resident in Indiana and corporations incorporated under the laws of Indiana authorized to do and doing business in any other state and/or foreign country, the term 'gross income' shall not include gross receipts received from sources outside the state of Indiana in cases where such gross receipts are received from a trade or business situated and regularly carried on at a legal situs outside the state of Indiana, or from activities incident thereto * * *.' (Emphasis supplied.)

The gist of § 1(m) is that the gross income of an Indiana corporation doing business at a situs outside the State of Indiana 'shall not include gross receipts received from sources outside the state of Indiana * * *.' To qualify for exemption the corporation must be incorporated under the laws of Indiana, doing business in another state, and it must derive income from sources also outside the State of Indiana.

It is uncontroverted that Purcell is an Indiana corporation maintaining a resident agent in Edinburg, Indiana, as required by Ind.Ann.Stat. § 25--204 (Burns 1970), IC 1971, 23--1--2--5. Similarly, it is not disputed that during the fiscal years under review Purcell was, and is now, doing business at a legal situs outside the State of Indiana, i.e., Kansas City, Kansas. The critical term to interpret, then, is the word 'sources,' as used in the phrase 'receipts received from sources outside the state of Indiana * * *.' The Department maintains that the word 'sources' refers to the situs of customers of the Indiana corporation. Purcell, on the other hand, asserts that the word 'sources' refers to the situs at which the seller's business is being conducted.

Our interpretation of Section 1(m) is that gross income of an Indiana corporation which conducts its business outside this...