Interstate Finance Corp. v. Wisconsin Dept. of Taxation

• Decision Date: 05 October 1965
• Citation: 28 Wis.2d 262,137 N.W.2d 38
• Parties: INTERSTATE FINANCE CORPORATION, Respondent, v. WISCONSIN DEPARTMENT OF TAXATION, Appellant.
• Court: Wisconsin Supreme Court

Page 38

137 N.W.2d 38

28 Wis.2d 262

INTERSTATE FINANCE CORPORATION, Respondent, v. WISCONSIN DEPARTMENT OF TAXATION, Appellant.

Supreme Court of Wisconsin.

Oct. 5, 1965.

Rehearing Denied Nov. 30, 1965.

Bronson C. La Follette, Atty. Gen., Harold H. Persons, Asst. Atty. Gen., Madison, for appellant.

Ross, Stevens, Pick & Spohn, Madison, Frank A. Ross, Sr., Madison, of counsel, for respondent. BEILFUSS, Justice.

On this appeal the issues are: (1) Were the operations of Interstate in Wisconsin an integral part of a multi-state unitary business; (2) If such operations were an integral part of a unitary business was it mandatory that the apportionment method be used to compute the Wisconsin taxable income; and (3) If the apportionment method is used should the income of Interstate's wholly owned subsidiaries be included in the accounting formula?

Interstate is engaged principally in automobile financing at both the wholesale and retail levels. The wholesale business involves financing of automobile dealers on their stock of automobiles. The retail business involves the purchase of the automobile dealer's interest in its consumer sales contracts.

All of the funds necessary for these loaning transactions are acquired by the home office. Interstate's outstanding accounts receivable are about $40,000,000. About 75 percent or $30,000,000 of these funds are acquired by Interstate in the money market on open account on plain note basis. All of the negotiations by which Interstate obtains the funds to carry on its business are conducted by the home office through its president, Mr. David B. Cassat, and his son and vice-president, George Cassat. Through the efforts of Mr. Cassat and his son, Interstate has obtained a substantial line of credit in a great many of the major banks throughout the country. Additional funds are obtained from insurance companies and other institutional lenders as well as from the sale of preferred stock.

Interstate's home office determines all matters of general company policy and exercises general supervisory control over the activities of each of the branches. It selects, trains, transfers, consults and generally oversees the branch managers. It sets policy and extensively reviews the activities of the branch office. The home office participates in loan decisions on wholesale business and loans over $5,000, maintains a central accounting system, takes possession of most of the security documents, accepts drafts, withdraws funds from branch depositories, pays all branch employes, and designates local law firms to be used by the branches. Quite significant is the fact that the home office expense is allocated to various branches based upon the number of accounts serviced compared with the total number serviced.

The branch manager does have considerably responsibility and authority. He selects, directs and supervises the staff of the branch office, including solicitors, collectors, stenographers and clerks. He makes the decision on all retail loans under $5,000 subject only to home office guide lines. He supervises collections. He checks security and the sufficiency of the security instruments. He determines local advertising policy.

As to the wholesale financing, the solicitation is done by the branches but the decision to finance the specific dealers is made jointly by the branch managers and the home office. The home office either dictates or approves the terms of the dealer wholesale loans at their inception.

The record reveals other evidence as to the participation of the home and branch offices but it is not necessary to report it in detail for a determination of the issues.

The statute directing the manner of imposition of income tax upon persons (including corporations) doing business within and without the state is sec. 71.07(2), Stats. In 1949, at the request of the governor, the statute was amended to its present form. The obvious purpose of the amendment was to expand the use of the apportionment formula in calculating the income tax of unitary business organizations doing business within and without the state.

The statute has remained unchanged since 1949 and provides as follows:

'(2) Persons engaged in business within and without the state shall be taxed only on such income as is derived from business transacted and property located within the state. The amount of such income attributable to Wisconsin may be determined by an allocation and separate accounting thereof, when the business of such person within the state is not an integral part of a unitary business, provided, however, that the department of taxation may permit an allocation and separate accounting in any case in which it is satisfied that the use of such method will properly reflect the income taxable by this state. In all cases in which allocation and separate accounting is not permissible, the determination shall be made in the following manner: There shall first be deducted from the total net income of the taxpayer such part thereof (less related expenses, if any) as follows the situs of the property or the residence of the recipient; provided, that in the case of income which follows the residence of the recipient, the amount of interest and dividends deductible under this provision shall be limited to the total interest and divdends received which are in excess of the total interest (or related expenses, if any) paid and allowable as a deduction under section 71.04 during the income year. The remaining net income shall be apportioned to Wisconsin on the basis of the ratio obtained by taking the arithmetical average of the following 3 ratios: * * *.'

From the recited facts we conclude that the board has before it ample credible evidence upon which to find that Interstate was a unitary business and that the Wisconsin branches were an integral part thereof.

Celon Co. v. Wisconsin Department of Taxation (1955), 269 Wis. 372, 69 N.W.2d 453, construed sec. 71.07(2), Stats. In defining a unitary business the court quoted a definition contained in State ex rel. Maxwell v. Kent-Coffey Mfg. Co. (1933), 204 N.C. 365, 168 S.E. 397, 90 A.L.R. 476, as follows:

"It is admitted in the brief for appellee that its business is unitary. That term is simply descriptive, and primarily means that the concern to which it is applied is carrying on one kind of business--a business, the component parts of which are too closely connected and necessary to each other to justify division or separate consideration, as independent units. By contrast, a dual or multiform business must show units of a substantial separateness and completeness, such as might be maintained as an independent business (however convenient and profitable it may be to operate them conjointly), and capable of producing a profit in and of themselves.

"Conceding that a unitary business may produce an income which must be allocated to two or more states in which its activities are carried on, such a business may not be split up arbitrarily and conventionally in applying the tax laws. It would seem to be necessary that there should be some logical reference to the production of income; the distinction should be founded on a corresponding difference in apportionment of productive capital, investment, or employment, within the unitary business."

In W. R. Arthur & Co. v. Wisconsin Department of Taxation (1962), 18 Wis.2d 225, 230, 118 N.W.2d 168, 170, we said: 'A 'unitary' business is one which functions as a single unit; that is, it is not divided into a separate entity for each of the states in which it operates.'

The text authority, Altman & Kiesling, in Allocation of Income in State Taxation (2d Ed.), p. 101, states:

'* * * the essential test 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.'

The Wisconsin branches were wholly dependent upon the home office for the only commodity upon which its business was based, namely, money to lend. In addition thereto, the control and supervision by the home office over the branch managers and branch activities were substantial. Because of the policies, direction and control exercised by the home office, the branches could not operate independently. They were a dependent part of a business unit.

The branches were also an integral part of the entire business of Interstate. It is apparent the volume of business done by the Wisconsin branches was an important factor in determining the amount of money that Interstate borrowed in the money market for its overall business operations. It is equally significant that the expense of maintaining the home office was allocated proportionately to the number of accounts serviced by the various branches. These two factors alone made the Wisconsin branches an integral part of a unitary business.

Interstate contends that because of the nature of the finance business, as contrasted to a manufacturing or service business, the branches could operate independently. They could borrow the funds to do business with the same sources and same ease and their business could be successfully operated without control and supervision from the home office. Even if this allegation is accurate, the fact is that the branches were not operated in that manner. If the branches were to be operated independent of the home office, substantial changes would occur in the scope of business activities of both the home office and the branch offices. The Wisconsin branches were an integral part of a unitary business engaged in business within and without the state.

Celon Co. v. Wisconsin Department of Taxation, supra, held that sec. 71.07(2), Stats., required the Department of Taxation to accept the taxpayer's returns submitted on an apportionment basis rather than a separate accounting allocation when it appeared that the Wisconsin...