J. M. & M. S. Browning Co. v. State Tax Commission

• Decision Date: 09 January 1945
• Docket Number: 6727
• Citation: 107 Utah 457,154 P.2d 993
• Parties: J. M. & M. S. BROWNING CO. et al. v. STATE TAX COMMISSION
• Court: Utah Supreme Court

154 P.2d 993

107 Utah 457

J. M. & M. S. BROWNING CO. et al. v. STATE TAX COMMISSION

No. 6727

Supreme Court of Utah

January 9, 1945

Order of Tax Commission vacated and matter remanded for further proceedings.

Thatcher & Young, of Ogden, for plaintiffs.

Wayne Christofferson and Aldon J. Anderson, both of Salt Lake City, for defendant.

Wolfe Justice. McDonough and Wade, JJ., concur. Larson, Chief Justice, dissents. Turner, Justice (dissenting).

OPINION

Wolfe Justice.

Writ of review to determine the lawfulness of certain deficiency tax assessments levied against the four plaintiff corporations for the years 1937 and 1938.

All of the named corporations were organized under the laws of the State of Utah. The Browning Brothers Company, Browning Arms Company and Bar B Company are the wholly owned subsidiaries of J. M. & M. S. Browning Company. For the purpose of this suit they may be considered as one consolidated company. For the tax years 1937 and 1938 the plaintiff corporations filed consolidated corporate franchise tax returns with the Tax Commission. The Commission, after auditing the returns, gave the corporation notice of a proposed deficiency tax assessment of $ 1,240.26 for 1937 and $ 1,201.94 for 1938. The corporations, hereinafter sometimes referred to as petitioner, filed a claim requesting refunds of $ 1,597.63 and $ 608.83 for the years 1937 and 1938 respectively upon the theory that there had been an overpayment on the corporate franchise tax for each of these years.

After hearing the Commission sustained its proposed deficiency assessments and denied the petitioner's claim for refunds. The correctness of this ruling is questioned by this writ of review. There is no dispute concerning the facts most of which were presented by way of stipulation. The parties divide over the correct construction of Section 80-13-21, U. C. A. as it applies to the petitioner.

Before construing and applying Section 80-13-21 to the facts of this case we pause to note the nature of the tax liability imposed. Chapter 13 of Title 80, U. C. A. 1943, is entitled "Franchise and Privilege Taxes." Section 3 requires every bank or corporation, other than national banks or corporations expressly exempted, to pay to the state for the privilege of exercising its corporate franchise or for the privilege of doing business in this state, a tax equal to 3% of its net income allocated to the state in a particular manner. The tax is not an income tax. The net income of the tax paying corporation to be allocated to Utah is merely the measure of the amount of the tax. The tax is imposed on the privilege of exercising the corporate franchise or on the privilege of doing business in Utah. See American Inv. Corp. v. State Tax Commission, 101 Utah 189, 120 P. 2d. 331. The method of computing and allocating the net income to Utah is set forth in Section 80-13-21. This dispute arises over the construction of this latter section, which provides:

"80-13-21. Rules for Determining Net Income Allocated to This State.

"The portion of net income assignable to business done within this state, and which shall be the basis and measure of the tax imposed by this chapter may be determined by an allocation upon the basis of the following rules:

"(1) Rents, interest and dividends derived from business done outside this state less related expenses shall not be allocated to this state.

"(2) Gains from the sale or exchange of capital assets consisting of real or tangible personal property situated outside this state less losses from the sale or exchange of such assets situated outside this state shall not be allocated to this state.

"(3) Rents, interest and dividends derived from business done in this state less related expenses shall be allocated to this state.

"(4) Gains from the sale or exchange of capital assets consisting of real or tangible personal property situated within this state less losses from the sale or exchange of such assets situated in this state shall be allocated to this state.

"(5) If the bank or other corporation carries on no business out side this state, the whole of the remainder of net income may be allocated to this state.

"(6) If the bank or other corporation carries on any business outside this state, the said remainder may be divided into threeequal parts.

"(a) Of one third, such portion shall be attributed to business carried on within this state as shall be found by multiplying said third by a fraction whose numerator is the value of the corporation's tangible property situated within this state and whose denominator is the value of all the corporation's tangible property wherever situated.

"(b) Of another third, such portion shall be attributed to business carried on within this state as shall be found by multiplying said third by a fraction whose numerator is the total amount expended by the corporation for wages, salaries, commissions or other compensation to its employees and assignable to this state and whose denominator is the total expenditures of the corporation for wages, salaries, commissions or other compensation to all of its employees.

"(c) Of the remaining third, such portion shall be attributed to business carried on within this state as shall be found by multiplying said third by a fraction whose numerator is the amount of the corporation's gross receipts from business assignable to this state, and whose denominator is the amount of the corporation's gross receipts from all its business.

"(d) The amount assignable to this state of expenditures of the corporation for wages, salaries, commissions or other compensation to its employees shall be such expenditure for the taxable year as represents the compensation of employees not chiefly situated at, connected with or sent out from, premises for the transaction of business owned or rented by the corporation outside this state.

"(e) The amount of the corporation's gross receipts from business assignable to this state shall be the amount of its gross receipts for the taxable year from

"(1st) Sales, except those negotiated or effected in behalf of the corporation by agents agencies chiefly situated at, connected with or sent out from premises for the transaction of business owned or rented by the corporation outside this state, and sales otherwise determined by the tax commission to be attributable to the business conducted on such premises,

"(2nd) Rentals or royalties from property situated, or from the use of patents, within this state.

"(f) The value of the corporation's tangible property for the purpose of this section shall be the average value of such property during the taxable year.

"(7) In the allocation of net income, gain or loss shall be recognized and shall be computed on the same basis and in the same manner as is provided in this chapter for the determination of net income

"(8) If in the judgment of the tax commission the application of the foregoing rules does not allocate to this state the proportion of net income fairly and equitably attributable to this state, it may with such information as it may be able to obtain make such allocation as is fairly calculated to assign to this state the portion of net income reasonably attributable to the business done within this state and to avoid subjecting the taxpayer to double taxation."

In applying the various rules set forth in Section 80-13-21 for determining the net income of the petitioner to be allocated to this state the following additional facts should be noted: During the years in question the J. M. & M. S. Browning Company and the Browning Arms Company did business in Utah and in Missouri, and had employees chiefly situated at, and carried on business from premises which were rented outside the State of Utah. The Bar B Company did business only in Utah. The Browning Brothers Company was inactive. J. M. & M. S. Browning Company, among other things not material to the issues of this case, engaged in the business of investing and reinvesting its funds in domestic and foreign stocks and bonds and holding the same for investment. This activity was managed from its general office in Ogden, Utah. Occasionally it made loans also from its Ogden office. Its general executive and general accounting offices were maintained in Ogden, Utah. The record shows that it had income consisting of rents from properties situated both within and without the state of Utah, but there is nothing to show that any of the business activities connected with the management and control of these rental properties was carried on from offices located without the state. Since it does not appear that the Browning Arms Company carried on any investment business, it is not necessary here to note any further facts concerning the nature of its business activities.

The business of the Bar B Company consisted of conducting solely in Utah a general ranching and livestock raising business.

It may be noted that Section 80-13-21, subsection (1) and (3) provides for the allocation of rents, interest and dividends derived from business done within and without the state of Utah. There apparently is no dispute concerning the allocation of income in the form of interest. In regards to rents the Commission took the position that all income from rental properties should be allocated to Utah without regard to the location of the rental properties; that in obtaining rents the petitioner was engaged in the investment business and the rents received were derived from carrying on an investment business in this state. The petitioner took the view that income (rents) derived from rental of properties located within this state should be allocated to Utah; but contended that income derived from rental properties located...