Kennecott Copper Corp. v. State Tax Comn., 8091
| Decision Date | 21 September 1956 |
| Docket Number | No. 8091,8091 |
| Citation | 5 Utah 2d 306,301 P.2d 562 |
| Parties | d 306 KENNECOTT COPPER CORPORATION, a corporation, and Bingham and Garfield Railway Company, a corporation, Plaintiffs, v. The STATE TAX COMMISSION, Defendant. |
| Court | Utah Supreme Court |
C. C. Parsons, A. D. Moffat, Calvin A. Behle, Salt Lake City, Sullivan & Cromwell, New York City, for plaintiffs.
Dey, Hoppaugh, Mark, Johnson & Gilmour, C. M. Gilmour, Frank A. Johnson, Paul S. Roberts, Salt Lake City, for defendant.
Certiorari to review a decision of the State Tax Commission assessing franchise taxes against the plaintiff, Kennecott Copper Corporation, for the years 1942 to 1950, inclusive; determining that a deficiency existed, and requiring payment of interest to June 15, 1953, upon that deficiency. The deficiency was held by the Tax Commission to amount to $3,568,041.92 and interest was computed to be $1,283,647.81.
The tax assessed for the year 1942 was protested by Kennecott, and the parties appeared before this court in 1950 on questions similar to those here presented; namely, how should the business of Kennecott, a corporation performing various functions in several states, be allocated for the purpose of the Utah franchise tax and what items of cost of production and profit should be included in the computation of net income for the purpose of arriving at the percentage depletion allowed to mining companies by our statutes? This case, reported at 118 Utah 140, 221 P.2d 857, was remanded to the Commission to determine and enter a deficiency judgment in accordance with the views therein expressed.
Kennecott contends that for the purpose of determining taxable income, no sales of minerals or metals may be considered since these sales take place in its New York City office; on the other hand, Kennecott likewise claims the right to include the financial results of smelting and further processing and sales taking place outside the State for the purposes of the depletion allowance. The Commission's position appears similarly inconsistent in that it regards the accounting procedure used by Kennecott as controlling as to the allocation of income to Utah but not as to the amount from which percentage depletion is to be computed. The Kennecott brief supplies us with the mathematical results of an application of the two theories for the years in question:
Computation of Tax Liability
A. Depletion Kennecott Commission
Total net income from mineral products
before depletion $312,647,869.44 $312,647,869.44
Add profit in selling commission (a) 394,383.92
--------------- ---------------
$313,042,253.36 $312,647,869.44
Deduct income claimed by Commission
to be attributable to smelting
refining, transportation and selling $ 69,211,360.48
--------------- ---------------
Net Income subject to percentage
depletion $313,042,253.36 $243,436,508.96
Depletion allowance--33 1/3% $104,347,417.79 $ 81,145,502.98
--------------- ---------------
--------------- ---------------
B. Taxable Net Income
Total net income from mineral products
before depletion $312,647,869.44 $312,647,869.44
Add profit in selling commission $ 394,383.92
Add income not subject to depletion $ 1,067,720.20 $ 1,067,720.20
--------------- ---------------
Total $314,109,973.56 $313,715,589.64
Deduct depletion allowance $104,347,417.79 $ 81,145,502.98
--------------- ---------------
Total Net Income after depletion $209,762,555.77 $232,570,086.66
Deduct income specifically allocated
to Utah (deficit) $ -95,877.67 $ -950,877.67
--------------- ---------------
Net Income subject to apportionment $210,713,433.44 $233,520,964.33
Apportionment fraction (average) .64433 .93484
Apportionable income allocated to
Utah $135,769,340.28 $218,304,372.05
Add income specifically allocated to
Utah (deficit) $ -950,877.67 $ -950,877.67
--------------- ---------------
Total taxable income $134,818,462.61 $217,353,494.38
Franchise tax at 3% $ 4,044,553.88 $ 6,520,604.83
Less tax paid with returns $ 2,952,562.91 $ 2,952,562.91
--------------- ---------------
Deficiency $ 1,091,990.97 $ 3,568,041.92
Less: Tax paid as condition to
review case 7298 $189,683.82
Tax paid under stipulation Dec. 15
1953 $895,089.65 $1,084.773.47 $1,084,773.47
--------------- ---------------
Present deficiency $7,217.50 $2,483,268.45
--------------- ---------------
--------------- ---------------
Because the questions of taxation arise out of the nature of the Kennecott structure and method of doing business, we here adopt, almost in its entirety, the plaintiff's clear and detailed exposition of its operation.
Kennecott is a New York corporation which, since its incorporation in 1915, had had its principal offices and place of business in New York City. These are the executive, administrative, and financial offices of the corporation, where the corporation's president and other principal officers have their offices, where the Board of Directors regularly holds its meetings, and where there is located a large force of executive, administrative, accounting and clerical personnel. In the same office building, paying a proportionate share of the rent and office expenses, is a wholly owned subsidiary of Kennecott, Kennecott Sales Corporation, whose business is to market the products from the various Kennecott properties.
Kennecott has followed a divisional method of accounting for its various operations. One of these divisions is the Utah Copper Division, covering the mining, processing, and ultimate sale of the products originating from property in Utah. The Commission and this Court have held, and Kennecott does not dispute, that the tax returns of Kennecott for the Utah corporation franchise tax should include only such part of the activities and income of Kennecott as is represented by its Utah Copper Division, excluding from such tax returns the income clearly attributable to other divisions of Kennecott.
In Utah Kennecott is the owner of and operates the Utah Copper Mine and a precipitating plant in Bingham Canyon and two ore concentrators at Magna and Arthur. Kennecott is also the owner of certain transportation facilities between its mine and concentrators and between the concentrators and the smelter of the American Smelting and Refining Company at Garfield, Utah.
To recover the metals, most precipitates and all copper concentrates must be smelted, the metals being thus converted into what is known as blister copper. Kennecott delivers its precipitates and concentrates to various smelters at various locations, some within the state of Utah and some without the State. Almost all of the copper concentrate during the years involved was shipped to and smelted at the Garfield, Utah, smelter of American Smelting and Refining Company.
The blister copper resulting from the smelting operation contains the copper and other metals, which, to produce commercially marketable products, must be refined so that the refined metals will be separated one from the other. During the years from 1942 to 1950, the period here under examination, there was no refinery within this State and so refining was performed for Kennecott by American Smelting and Refining Company at refineries in eastern states.
Kennecott produced no commercial product in Utah other than molybdenite concentrates and a small quantity of copper precipitates, all of which, however, were sold by the Kennecott Sales Corporation in states other than Utah for delivery to buyers located outside Utah. Only the mining of the crude ores, concentration, and smelting, if smelted in Utah, were accomplished within the State; processes of smelting, where smelted outside Utah, and refining and sale were accomplished wholly outside Utah.
The Tax Commission determined that Kennecott's business as the Utah Division was a unitary business, within and without the State, and applied the allocation formula set forth in U.C.A.1943, 80-13-21(6), U.C.A.1953, 59-13-20(6), to obtain the amount of net income from the Utah Division attributable to Utah under the statute. That statute 1 directs the amount of income allocated to Utah to be computed by making calculations in the following steps:
As to the first two factors of this formula, the property and payroll factors, the parties are in agreement as to the figures to be used. As to the numerator of the third factor, receipts, Kennecott claims that the figure should be zero, inasmuch as all of the sales were made outside of the State by the Kennecott Sales Corporation or by Kennecott itself, and that such sales fell within the definition for exclusion of U.C.A.1943, 80-13-21(6)(e)(1st), U.C.A.1953, 59-13-20(6)(e)(1st), which reads:
'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,...
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