Kennecott Copper Co. v. State Tax Commission

• Decision Date: 24 August 1950
• Docket Number: No. 7298,7298
• Citation: 221 P.2d 857,118 Utah 140
• Parties: KENNECOTT COPPER CO. et al. v. STATE TAX COMMISSION.
• Court: Utah Supreme Court

Page 857

221 P.2d 857

118 Utah 140

KENNECOTT COPPER CO. et al. v. STATE TAX COMMISSION.

No. 7298.

Supreme Court of Utah.

Aug. 24, 1950.

C. C. Parsons, W. M. McCrea, A. D. Moffat, Calvin Behle, all of Salt Lake City, for plaintiffs.

Wayne Christoffersen, Salt Lake City, for defendant.

LATIMER, Justice.

Certiorari to the State Tax Commission to review a decision assessing a franchise deficiency tax against the petitioner, Kennecott Copper Company.

This controversy was developed before the State Tax Commission on an agreed statement of facts, as augmented by a brief formal hearing. The testimony given at the hearing was limited in its scope and was largely for the purpose of explaining and amplifying the facts stated in the stipulation, with the result that the parties argue little over the facts. Insofar as necessary to a proper determination of the issues involved, the facts are as follows:

The Kennecott Copper Corporation is a New York corporation doing business in this and other states. It owns and operates the Utah Copper Mine, the Bingham and Garfield Railway Company and certain mills all located in this state. The corporation franchise tax returns of the railroad company are consolidated with those of the Utah Copper Division of Kennecott and for all purposes herein the transportation operations are included as part of the Utah Copper Division operations. The ores from the Utah Copper Mine are carried to Kennecott's Magna and Arthur mills over the Bingham and Garfield Railway and there milled. Under a contract arrangement with certain smelting companies the mill concentrates are then smelted and the product of the smelting (blister copper) is then transported by Kennecott to refineries which are outside the State of Utah. Kennecott has no interest in any of the smelters or in any of the common carriers used to transport the smelted products outside the state. The refined product is sold for Kennecott's account by Kennecott Sales Corporation, a wholly owned subsidiary, and one which receives an agreed commission for its services. Kennecott's operations are extensive, it purchases large quantities of supplies and equipment in and out of this state, and it engages the services of and pays a substantial number of employees in states where it operates.

At some date prior to the year in controversy, there had been a change in the operation of the Utah Mining property and Kennecott, in effect, merged the affairs of the Utah Copper Company with those of other divisions. However, a separate accounting system was maintained for the Utah Copper Division. For the taxable years 1935 to 1941 inclusive, the Utah State Tax Commission and Kennecott had a controversy as to the method of determining the proper proportion of Kennecott's Utah Copper Division income to be allocated to the State of Utah and over the proper formula for determining the amount to be allowed this division for depletion under the corporation franchise tax act. While that controversy was pending before this court, a settlement was reached between the parties and by stipulation the proceedings were dismissed under date of May 27, 1942. By that settlement, it was agreed that 66.926 percent of Kennecott's Utah Copper Division income alone was to be allocated to this state. In addition, the terms of that agreement settled all questions concerning Kennecott's Utah Copper Division franchise tax liability for the years 1935 to 1941 inclusive.

Subsequently, the Utah Copper Division filed a franchise tax return for the year 1942 and paid the amount it claimed due by using the formula agreed upon in the settlement agreement for the prior years. The State Tax Commission refused to accept the tax report furnished by the Company and by letter of March 10, 1945, proposed certain adjustments which were opposed by Kennecott. The Tax Commission concluded that Kennecott had improperly computed the Utah Division's tax liability and a deficiency assessment was imposed.

Kennecott filed a petition for redetermination of the assessment. In the petition, it alleged that the mining, processing, sale and distribution of metal was an operation of Kennecott and not of a division; that the single purpose of the company was the production and sale of refined metals; that the mining of the crude ores and their concentration and smelting was accomplished within the State of Utah; that the delivery of the refined metals and their sale and distribution were accomplished wholly outside the state; that the operation was indivisible; that Kennecott's business within the State of Utah was wholly interstate in character; that it had not transacted any intrastate business and was not, therefore, subject to tax; that the action of the Tax Commission in disallowing the items claimed in Kennecott's return was in violation of the provisions of Title 80, Chapter 13, Sections 3, 6, 7 and 8, Revised Statutes of Utah, 1933; that the method of computing the tax used by the company had been settled by agreement between the commission and the taxpayer and that the return was filed in accordance with this agreement; that the adjustments proposed by the State Tax Commission were arbitrary and unreasonable and a departure from the settlement and compromise agreement; that the commission was estopped from departing from the settlement agreement of 1942; that in its return for the year 1942 Kennecott had used the formula agreed upon by the compromise and settlement agreement; and that its return was filed pursuant to that formula. This petition, filed in 1945, covered in detail the objections made to the deficiency assessment, but no requests were made to allow the Utah Division to change either its method of accounting or its manner of determining its depletion allowance.

While a number of items were called into dispute before the State Tax Commission, the Commission concluded the taxpayer was entitled to certain claimed deductions and the parties have by agreement or assignment of error limited the remaining allowances or deductions in dispute to three items. The first of these is whether the federal income tax must be deducted before applying the statutory formula to determine the amount allowed for depletion. The second disputed item involves the question as to whether any net income, if derived from transportation, smelting, refining and selling, must be deducted from Utah Copper Division's net income before applying the statutory factor applicable to depletion. The third item depends upon whether subsidy payments made by the federal government for over-production of ore must be included as part of Kennecott's Utah Copper Division income.

The Commission, in its findings, ruled against the taxpayer on all three of the disputed items. In addition, the Commission refused to compute Kennecott's tax liability on a changed method of accounting or to permit Kennecott the right to change from a percentage method of determining depletion to a cost method or to a method not specifically provided for by statute. It is from these adverse rulings that the taxpayer appeals, and in this court it raises five assignments of error which cover the disputed items in the tax report and other rulings of the Commission claimed by Kennecott to be prejudicial. The errors assigned are as follows: (1) That the Tax Commission erred in refusing to follow the requirements of Section 80-13-21, U.C.A. 1943, which would permit Kennecott to allocate to Utah a proportionate part of its total income from all sources as distinguished from allocating a proportionate part of the Utah Division's income to this state; (2) the State Tax Commission erred in not permitting Kennecott a reasonable allowance for depletion; (3) that the commission misinterpreted the Utah statutes prescribing the percentage formula for determining depletion; (4) that the Tax Commission erred in discriminating against Kennecott;(5) that the Tax Commission erred in including in the tax base subsidies paid to Kennecott by the federal government.

We summarily dispose of petitioner's last contention. Petitioner tried substantially this same question in the United States District Court for the district of Utah. On appeal the Circuit Court of Appeals in the case of Salt Lake County v. Kennecott Copper Corporation, 10 Cir., 163 F.2d 484, held that the subsidies paid by the federal government were properly included as part of the gross proceeds realized from the sales or conversion of ore. The Circuit Court of Appeals relied on two previous decisions of this court, namely, United States Smelting, Refining & Mining Co. v. Haynes, 111 Utah 172, 176 P.2d 622, and Combined Metals Reduction Company v. State Tax Commission, 111 Utah 156, 176 P.2d 614. Petitioner substantially concedes that these decisions render its contention on this point untenable. Moreover, this court in the recent case of Kennecott Copper Corporation et al. v. State Tax Commission, Utah, 212 P.2d 187, again held that for tax purposes subsidy payments were to be included as part of the gross proceeds realized from the property. Their inclusion in gross income is therefore required.

Likewise, we dispose of petitioner's contention that federal taxes need not be deducted before applying the statutory formula to determine the depletion allowance. In New Park Mining Company v. State Tax Commission, Utah, 196 P.2d 485, 486, we passed on the identical question. Mr. Justice Wolfe, speaking for the court, disposed of the same contention in the following language: 'We have heretofore set out, the essential provisions of Section 80-13-7 and 80-13-8, U.C.A. 1943. The former statute defines net income as 'gross income * * * less the deductions allowed by Section 80-13-8.' The latter enumerates the various items to be deducted from gross income to determine net income. In making their argument plaintiffs have either overlooked or wholly ignored subsection (3) of Section 80-13-8. That subsection...