J.C. Nichols Co. v. Director of Revenue
| Decision Date | 11 September 1990 |
| Docket Number | No. 72014,72014 |
| Citation | 796 S.W.2d 16 |
| Parties | J.C. NICHOLS COMPANY, Appellant, v. DIRECTOR OF REVENUE, Respondent. |
| Court | Missouri Supreme Court |
Charles P. Schleicher, Mark A. Firestone, Kansas City, for appellant.
William L. Webster, Atty. Gen., Mark Siedlik, Richard L. Wieler, Asst. Attys. Gen., George Cox, Raymond T. Wagner, Jr., Sp. Asst. Attys. Gen., Jefferson City, for respondent.
Two principal issues require resolution in this case: First, whether a taxpayer who segregates income by state but who utilizes a formula to allocate a portion of its expenses has segregated "income and deductions" and may avoid utilizing the single factor formula for determining Missouri income taxation, Section 143.451.2(1), RSMo 1986; and second, whether a taxpayer may assume approval by the Director of Revenue of its petitioned-for alternative accounting method by the silence of the Director and by filing income tax returns using that accounting method. Section 143.461.2, RSMo 1986. Because this case involves the construction of the revenue laws of this state, we have jurisdiction. Mo. Const. art. V, §§ 3 and 18, Section 621.189, RSMo 1986. The decision of the Administrative Hearing Commission is affirmed.
I.
Appellant, J.C. Nichols Company (Nichols), is a Missouri corporation with its principal offices in Kansas City, Missouri. Nichols develops, manages and sells real estate in both Kansas and Missouri. Following its incorporation in 1944, Nichols adopted an accounting practice that permitted it to allocate its income on a property-by-property basis. This method permitted Nichols to segregate its income from various properties in the two states. As to deductions, Nichols directly allocated 81.64 percent of the total expenses according to the location of the real estate, but apportioned other expenses to its various properties according to various formulae when those expenses could not practically or efficiently be allocated by its property-by-property method.
In 1972, the legislature adopted Sections 143.451 and 143.461, which will be discussed in more detail below. Apparently in response to that legislation, Nichols discussed its accounting method with an employee of the Director and, subsequent to that conversation, sent a letter to the Director indicating that Nichols would continue to follow its historical accounting method "unless I [the Nichols officer sending the letter] hear otherwise." The then Director did not respond to the Nichols letter.
Nichols continued to file its income tax returns using its property specific accounting method. In 1974, the Director informed Nichols of an income tax deficiency, stating, The record reveals that the Director audited Nichols for the years 1974-76; that audit yielded a refund for Nichols as did an audit of tax year 1979. 1 The Director accepted Nichols' 1978 return; Nichols used its historic accounting method. The Director's brief indicates that only tax years 1980-1984 are at issue in this case. In each of those tax years, the director sent a Notice of Deficiency to Nichols; Nichols filed a timely protest, which the Director denied. Nichols filed a timely petition for review with the Administrative Hearing Commission. The Commission decided in favor of the Director.
Nichols first urges that it does not have "interstate income." We disagree.
Section 143.451.1 refers to income resulting "from a transaction partially in this state and partially in another state or states." The source of income "is the place where it was produced." A transaction is "any business activity productive of income." In re Kansas City Star Company, 346 Mo. 658, 142 S.W.2d 1029, 1037 (Mo. banc 1940). Thus, a transaction is partially within and partially without Missouri "if the Missouri effort is among the efficient causes which contribute directly to the production of income." Wohl Shoe Co. v. Director of Revenue, 771 S.W.2d 339, 342 (Mo. banc 1989). Bank Building and Equipment Corporation of America v. Director of Revenue, 687 S.W.2d 168, 171 (Mo. banc 1985), put it more bluntly. There the Court found out-of-state construction transactions taxable because "the 'brains' of this specialized operation are located in St. Louis." See also Hayes Drilling, Inc. v. Director of Revenue, 704 S.W.2d 232, 234 (Mo. banc 1986). ("If the efficient entry by the taxpayer into the process by which income is produced occurs in this state, then that transaction is one 'partly within this state' within the meaning of Section 143.451.2.")
The Commission concluded that decisions to enter the real estate transactions at issue here were controlled by Nichols' Kansas City, Missouri headquarters. "The overall effort of [Nichols'] income-producing activities was directed from that office, and the management structure which produced the income from Kansas properties was in Missouri." This conclusion is supported by the record. On the authority of Bank Building, Hayes Drilling, and Wohl Shoe, we hold that Nichols' income is partially within Missouri and partially in another state within the meaning of Section 143.451.1. Nichols' first point is denied.
Nevertheless, Nichols argues, even if Section 143.451.2 applies, Nichols need not employ the single factor formula, Section 143.451.2, because its accounting method permits it to segregate its income and deductions. Section 143.451.2(1) states:
Where income results from a transaction partially in this state and partially in another state or states, and income and deductions of the portion in the state cannot be segregated, then such portions of income and deductions shall be allocated in this state and other state or states as will distribute to this state a portion based upon the portion of the transaction in this state and the portion in such other state or states.
(Emphasis added.)
Nichols' argument depends on two assumptions. First, Nichols contends that the segregation of income and deductions required by Section 143.451.2(1) as a condition precedent to avoidance of the single factor formula occurs if the taxpayer's method of accounting is more accurate than the single factor formula in apportioning income between the states. This is so, Nichols urges, even if some of the deductions (expenses in this case) must be apportioned according to a formula adopted by the taxpayer for that purpose. Second, Nichols believes that it has an absolute right to apportion its income provided its accounting method segregates all income and deductions on a property-by-property basis.
We need not consider Nichols' initial assumption for that position depends on the correctness of its second proposition. Even if Nichols' accounting method totally segregates its income and deductions and even if Section 143.451.2 permits de minimis failures of the accounting method so to segregate, Nichols' second assumption is flawed. The flaw is fatal to Nichols' argument.
The flaw in Nichols' second position is its assumption that the right to use an alternative accounting method that purports to segregate income and deductions under Section 143.451.2 is unfettered. This is contrary to the unambiguous language of the statute. Section 143.461.2 requires affirmative approval of the Director prior to the use of an alternative accounting method on a taxpayer's income tax return.
If the corporation shall keep its books and records so as to show by any other method of allocation between this state and other states involved of income from transactions partially within and partially without this state, including gross income and deductions applicable thereto, and such method shows the income applicable to this state, including gross income and deductions applicable thereto, then it may, on or before sixty days before the end of any taxable year, petition the director of revenue, in writing, to be permitted in its return required to be filed to apportion to this state according to the method shown by such books or records. If the director of revenue finds that such method does show the income applicable to this state including gross income and the deductions applicable thereto, he shall notify the corporation, at least thirty days prior to the last day on which such corporation's return for that taxable year is to be filed, that it may use that method as long as such method shows the income applicable to this state, including gross income and deductions applicable thereto.
(Emphasis added.) There is nothing in this record to indicate that the Director found Nichols' accounting method acceptable for Missouri income tax reporting purposes.
Nichols persists, however, hypothesizing two bases for this Court's inferring the requisite approval by the Director. First, Nichols contends that under In re Kansas City Star Co., 346 Mo. 658, 142 S.W.2d 1029 (Mo. banc 1940), this Court has found that a history of consistent accounting by a taxpayer to which the Director fails to object is tantamount to approval of that accounting method. Second, Nichols asserts that its September 20, 1983 letter to the Director constitutes a petition within the meaning of Section 143.461.2 and that the Director's failure to respond to the letter constitutes approval of Nichols' accounting method.
In Kansas City Star, the taxpayer filed its income tax returns for ten years using an alternative to the statutory accounting method. The state auditor did not object to those returns and deposited the taxpayer's payment in the state treasury. The statute then in force required the taxpayer to petition and the auditor to approve alternative accounting methods in language virtually identical to the language of Section 143.461.2. The Court held that the verified returns acted as implied requests for approval of the alternative accounting method and the auditor's failure to object to the returns inferred approval. "[T]he failure of re...
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