Joslin Dry Goods Co. v. Dolan

• Decision Date: 05 August 1980
• Docket Number: No. 79SA253,79SA253
• Citation: 200 Colo. 291,615 P.2d 16
• Parties: The JOSLIN DRY GOODS COMPANY, a Colorado Corporation, Plaintiff-Appellee, v. Joseph DOLAN, Executive Director of the Department of Revenue, State ofColorado, Defendant-Appellant.
• Court: Colorado Supreme Court

Page 16

615 P.2d 16

200 Colo. 291

The JOSLIN DRY GOODS COMPANY, a Colorado Corporation, Plaintiff-Appellee, v. Joseph DOLAN, Executive Director of the Department of

Revenue, State ofColorado, Defendant-Appellant.

No. 79SA253.

Supreme Court of Colorado, En Banc.

Aug. 5, 1980.

As Modified on Denial of Rehearing Aug. 25, 1980.

Ivins, Phillips & Barker, Eric R. Fox, Washington, D. C., Grant, McHendrie, Haines & Crouse, Professional Corp., Pred & Miller, P. C., David A. Bottger, Denver, for plaintiff-appellee.

J. D. MacFarlane, Atty. Gen., Richard F. Hennessey, Deputy Atty. Gen., Mary J. Mullarkey, Sol. Gen., Chris J. Eliopulos, Sp. Asst. Atty. Gen., General Legal Services Section, Denver, for defendant-appellant.

William D. Dexter, Gen. Counsel, Olympia, Wash., for amicus curiae Multistate Tax Commission.

Jay T. Schmelter, Denver, for amici curiae Committee on State Taxation and The Colo. Ass'n of Commerce and Industry.

LEE, Justice.

The Colorado Department of Revenue (department) appeals from an order of the Denver District Court granting the motion for summary judgment made by the Joslin Dry Goods Company (Joslin). We reverse the judgment of the district court.

Joslin is a Colorado corporation which operates a number of department stores in Colorado. During the tax years in issue, 1971 through 1974, it was a wholly-owned subsidiary of Mercantile Stores Co., Inc. (Mercantile), a Delaware corporation primarily engaged in the operation of full-line retail department stores and the holding of stock in other corporations engaged in the operation of retail department stores.

During the tax years in issue, Joslin filed its Colorado corporate income tax returns on a separate accounting basis. ¹ On January 14, 1976, the department issued a Notice of Deficiency, assessing $125,452.09 in additional taxes and interest for those years.

In order to determine Joslin's taxable corporate income from sources in Colorado, the department employed a combined accounting report based upon the unitary operation of Joslin with Mercantile. Joslin's corporate tax for the years in issue was then determined by a three-factor formula method of allocation and apportionment of taxable income based upon the combined audit report. ²

Following an administrative hearing before the deputy director of the department on December 15, 1976, a Final Determination was issued, upholding the assessment. The department concluded that Joslin was part of a unitary business, that the use of the separate accounting method of reporting by Joslin was inadequate since it did not properly reflect income from sources within Colorado, and that the only way such income could be properly determined was through combined reporting.

Joslin appealed the Final Determination, contending that the department's recomputation of its taxable Colorado income by a "combined report" constituted distribution or allocation of gross income and deductions among affiliated corporations under section 39-22-303(5), C.R.S. 1973, but that the department had failed to show that such action was necessary "in order to prevent evasion of taxes," ³ as required by the statute. The district court agreed, holding that the action of the department "falls squarely within the ambit of section 39-22-303(5), C.R.S. 1973," but that the department, by its own admission, had neither alleged nor shown that such action was necessary to prevent tax evasion.

In reviewing this case, we note that in its Final Determination the department found that Joslin was a part of a unitary business. The recognized test for a unitary business 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." G. Altman and F. Keesling, supra, fn. 1. Accord, Edison California Stores v. McColgan, 30 Cal.2d 472, 183 P.2d 16 (1947). In its brief, Joslin stated that the correctness of the department's factual determination that Joslin is a part of a unitary business is not an issue before this court. We assume the correctness of this finding by the department. ⁴

This court has recognized the validity of the unitary concept and has held that, in apportioning net income of a unitary business between the states, "a method of allocation is valid if it is fairly calculated to assign to a state that portion of the net income 'reasonably attributable' to the business transacted in that state." UPRR v. Heckers, 181 Colo. 374, 509 P.2d 1255 (1973). Joslin does not challenge the reasonableness of the department's method of computing the deficiency assessment. ⁵

The sole issue in this case is whether the department can require Joslin to file a combined report ⁶ in light of the language found in section 39-22-303(5). That section states:

"In case of two or more corporations, whether domestic or foreign, owned or controlled directly or indirectly by the same interests, the executive director may distribute or allocate the gross income and deductions between or among such corporations or may require returns on a consolidated basis, if deemed necessary, in order to prevent evasion of taxes and to clearly reflect income."

The department asserts that the dual criteria evasion of taxes and clear reflection of income found in section 39-22-303(5) do not control the department's authority to require a combined report since the combined report is "only a device to ascertain the income attributable to the (in-state) business activity of the taxpaying corporation." Caterpillar Tractor Co. v. Lenckos, 77 Ill.App.3d 90, 395 N.E.2d 1167 (1979). We recognize that a combined report is distinct from the "consolidated return" referred to in the statute. See Keesling, "A Current Look at the Combined Report and Uniformity in Allocation Practices," 42 J. of Taxation 106 (Feb.1975); G. Altman and F. Keesling, supra ; Rudolph, "State Taxation of Interstate Business: The Unitary Business Concept and Affiliated Corporate Groups," 25 Tax L.Rev. 171 (1970); Keesling & Warren, "The Unitary Concept in the Allocation of Income," 12 Hastings L.J. 42 (1960).

Section 39-22-303(5) provides that the department may distribute or allocate income and deductions, or may require returns on a consolidated basis. We conclude that it is that statutory provision for distribution and allocation of income and deductions which authorizes the department to require combined reports since a combined report does allocate or apportion income. See Keesling, supra; Coca Cola Company v. Department of Revenue, 271 Or. 517, 533 P.2d 788 (1975).

The law in other jurisdictions which have addressed this issue is clear the power of the taxing authority to require a combined report is independent of the power to require a consolidated return.

The leading case in this area is Edison California Stores v. McColgan, supra. In that case, the court interpreted statutory language which was almost identical to the Colorado statute at issue here.

The plaintiff in Edison California Stores argued that the statute did not authorize the tax commissioner to apply the formula allocation method (combined reporting) to a California corporation, and even if the commissioner had the authority, application of the method was arbitrary and unreasonable since there was no issue of tax evasion.

The California court held that the authority to apply the formula allocation method

" * * * is not derived from the authority to require the filing of consolidated returns, since the latter indicates that the income of the group will be taxed as a unit. The power flows from the authorized method of ascertaining the income attributable to a taxpayer's activities within the state ; and by a parity of reasoning the authority to pursue the method is present whenever activities are partially within and partially without the state * * *." Edison California Stores, supra. (Emphasis added.)

Accord Zale-Salem, Inc. v. Tax Commission, 237 Or. 261, 391 P.2d 601 (1964). See Keesling & Warren, supra. The California court also held that "(t)ax evasion is not a factor which must be present before the formula allocation method may be employed." (Emphasis added.)

In Caterpillar Tractor Co., supra, Caterpillar argued that Edison California Stores was not controlling since Illinois had an express ban on consolidated returns in the reporting of Illinois corporate income tax. The Illinois court held that such a ban was "irrelevant to a determination of whether the unitary method of apportionment is to be used in Illinois," relying on the California court's determination that "the power (to require combined reporting) was not dependent on the power to require...