Lawrence Industries, Inc. v. Sharp, 3-94-007-CV

• Court: Court of Appeals of Texas
• Citation: 890 S.W.2d 886
• Docket Number: No. 3-94-007-CV,3-94-007-CV
• Parties: LAWRENCE INDUSTRIES, INC., Appellant, v. John SHARP, Comptroller of Public Accounts of the State of Texas; Martha Whitehead, Successor in Office to Kay Bailey Hutchison, Treasurer of the State of Texas; and Dan Morales, Attorney General of the State of Texas, Appellees.
• Decision Date: 21 December 1994

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890 S.W.2d 886 LAWRENCE INDUSTRIES, INC., Appellant,
v.
John SHARP, Comptroller of Public Accounts of the State of
Texas; Martha Whitehead, Successor in Office to Kay Bailey
Hutchison, Treasurer of the State of Texas; and Dan
Morales, Attorney General of the State of Texas, Appellees. No. 3-94-007-CV. Court of Appeals of Texas,
Austin. Dec. 21, 1994.
Rehearing Overruled Feb. 15, 1995.

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Ray Langenberg, Scott, Douglass & Luton, Austin, for appellant.

Dan Morales, Atty. Gen., Ms. Christine Monzingo, Asst. Atty. Gen., Taxation Div., Austin, for appellees.

Before POWERS, JONES and KIDD, JJ.

JONES, Justice.

Appellant Lawrence Industries, Inc. ("Lawrence") brought a tax protest suit against the Comptroller and other statutory defendants, appellees, to recover assessed franchise taxes. Tex.Tax Code Ann. § 112.053 (West 1992) (hereinafter "Tax Code"). Following a nonjury trial, the trial court rendered judgment for the Comptroller. Lawrence appeals, asserting that it was not doing business in Texas and did not have sufficient constitutional nexus with the state to subject it to franchise tax. We will affirm.

FACTUAL AND PROCEDURAL BACKGROUND

Lawrence is a holding company incorporated in Delaware in 1981. A closely held corporation, Lawrence owns stock in a group of subsidiaries, principally Dailey, Inc., that manufacture and rent oil field equipment. In 1981 Lawrence applied for and received a certificate of authority to do business in Texas. After filing its first franchise tax return in 1982, Lawrence withdrew the certificate in 1983. Following a franchise tax audit covering May 1, 1983, through April 30, 1986, the Comptroller concluded that Lawrence was doing business in the state, subjecting it to franchise tax liability of $837,681.31 for the three reporting years. See Tax Code § 171.001(a)(1). After an unsuccessful administrative appeal of this assessment, Lawrence paid the tax under protest. As required by statute, a letter outlining the reasons for the protest accompanied this payment. Tax Code § 112.051(b). In this letter Lawrence contended that it was "not doing business in Texas during the audited period" and "did not have sufficient constitutional nexus with Texas to allow the imposition of the franchise tax."

Lawrence then filed a tax protest suit against the Comptroller to recover the assessment for the three-year audit period. Tax Code § 112.053. In a bench trial, Lawrence reasserted that it was not doing business in Texas within the provisions of the Tax Code and that it lacked sufficient constitutional nexus to the state to allow imposition of franchise taxes. Contrary to its initial position, however, Lawrence stipulated at trial that it was subject to the franchise tax for the last two audit years of the three-year period. The only issue at trial, therefore, was the propriety of the $502,740 tax assessment for the first audit year: May 1, 1983, through April 30, 1984 ("the audit year"). ¹

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At trial, Lawrence's case consisted primarily of the live testimony of William Sutton, an officer of Lawrence. Sutton testified that during the audit year Lawrence had its principal place of business in Nevada and that Lawrence was merely a holding company created for estate-planning purposes. In stark contrast, the Comptroller's case consisted of numerous documents that tended to show that Lawrence's principal place of business was Texas and that Lawrence managed and directed at least some of the activities of its subsidiaries. The court rendered judgment for the Comptroller.

Following a timely request, the trial court filed findings of fact and conclusions of law. In its first three findings of fact, the court found that Lawrence: (1) "is a Delaware corporation with a headquarters and principal place of business in Texas;" (2) "does business in Texas;" and (3) "has substantial physical presence in Texas." In addition to these factual findings, the trial court's conclusions of law state that Lawrence "does business in Texas and is subject to the Texas franchise tax within the meaning of Tex.Tax Code Ann. § 171.001" and "has federal Commerce Clause nexus with Texas." Further, the court concluded that it did not have subject matter jurisdiction over Lawrence's constitutional due process claims. Lawrence appeals, contending in two points of error that it was not doing business in Texas and lacked constitutional nexus with the state.

DOING BUSINESS IN TEXAS

Appellant's first point of error simply states: "Lawrence was not doing business in Texas." Lawrence's brief does not indicate whether this is a challenge to the trial court's fact finding or to its legal conclusion. When questioned during oral argument, and later in a post-submission letter brief, Lawrence adopted the position that "doing business" is a question of law for the court, requiring no deference to the trial court's express or implied fact findings. The Comptroller, on the other hand, maintains that Lawrence is actually challenging adverse determinations of fact made by the trial court, making this point of error essentially a sufficiency-of-the-evidence point. We begin with this threshold issue.

A. Factual or Legal Question

Because a factual finding that a company is "doing business" in a state often has direct legal consequences, it has sometimes been tossed into the imprecise category of a "mixed question of law and fact." See Harris v. Columbia Broadcasting Sys., Inc., 405 S.W.2d 613, 616 (Tex.Civ.App.--Austin 1966, writ ref'd n.r.e.); Chicago, R.I. & Pac. Ry. Co. v. Neil P. Anderson & Co., 130 S.W. 182, 183 (Tex.Civ.App.1910), rev'd on other grounds, 105 Tex. 1, 141 S.W. 513 (1911). However, it is possible to describe the factual and legal components of "doing business" with greater clarity.

The determination of whether a company is "doing business" in a state is inherently a factual inquiry. See Ramsey v. Investors Diversified Servs., Inc., 248 S.W.2d 263, 266-67 (Tex.Civ.App.--Austin 1952, writ ref'd n.r.e.); 19 C.J.S. Corporations § 907 (1990); 36 Am.Jur.2d Foreign Corporations § 317 (1968). The fact-finder, of course, has the duty to resolve any conflicts in the evidence to determine the actual conduct of the corporation. See Blackwood v. Tom Benson Chevrolet Co., 702 S.W.2d 732, 733 (Tex.App.--San Antonio 1985, no writ); Mediacomp, Inc. v. Capital Cities Communication Inc., 698 S.W.2d 207, 211 (Tex.App.--Houston [1st Dist.] 1985, no writ). Once the particular facts and circumstances of a case are resolved, these must be applied against the backdrop of the applicable statute. See 36 Am.Jur.2d Foreign Corporations § 317 (1968).

When there is no factual dispute as to a company's activities, the question of "doing business" is, for all intents and purposes, a legal question. This is because the true legal issue (whether a company is subject to paying franchise taxes) depends primarily on the

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answer to a single general factual determination (whether the company is doing business in the state). Thus, if a trial court finds on the basis of undisputed facts that a company is doing business in the state, this usually leads directly to a legal conclusion that the company is subject to paying franchise taxes, which is reviewable by a court of appeals for its correctness. See Bullock v. House of Lloyd, Inc., 797 S.W.2d 133, 134 (Tex.App.--Austin 1990) (appellate review of trial court judgment made on stipulated facts), rev'd sub nom. Sharp v. House of Lloyd, Inc., 815 S.W.2d 245 (Tex.1991); Ramsey, 248 S.W.2d at 266-67; see also Westech Eng'g, Inc. v. Clearwater Constructors, Inc., 835 S.W.2d 190, 196 (Tex.App.--Austin 1992, no writ) ("The trial court's conclusions of law are always reviewable."). Likewise, our own legal conclusion on undisputed facts that a company is "doing business" is reviewable by the supreme court. See Sharp v. House of Lloyd, Inc., 815 S.W.2d 245, 246 (Tex.1991); S.R. Smythe Co. v. Fort Worth Glass & Sand Co., 105 Tex. 8, 142 S.W. 1157, 1157 (1912) ("The sole question for decision is whether under the facts and circumstances presented, which are practically uncontroverted, the plaintiff transacted business in this state....").

However, when there is a dispute about the relevant characteristics or conduct of a company, a finding that the company is "doing business" presents a slightly different situation. In this context, it becomes clearer that the finding of "doing business" is really one of "ultimate" fact. A finding of ultimate fact is the product of logical reasoning and inference from more specific, evidentiary facts, i.e., those "basic" or "underlying" facts that are the direct product of the truth-finding function of the fact-finder. Wilson v. Metcalf, 257 S.W.2d 855, 858 (Tex.Civ.App.--Amarillo 1953, writ ref'd n.r.e.); 89 C.J.S. Trial § 648 (1955). This is similar to the relationship between findings of basic or underlying fact and findings of ultimate fact made by an administrative agency. ² See Administrative Procedure Act, Tex.Gov't Code Ann. § 2001.141 (West 1995). See generally John Powers, Judicial Review of the Findings of Fact Made by Texas Administrative Agencies in Contested Cases, 16 Tex.Tech L.Rev. 475, 476-79 (1985).

When a challenge is made to an ultimate factual finding, or to the underlying basic facts that support it, we must address it as we would any challenge to the sufficiency of the evidence to support a fact finding. See De Llano v. Moran, 160 Tex. 490, 333 S.W.2d 359, 360-61 (1960); cf. Posner v. Dallas County Child Welfare Unit, 784 S.W.2d 585, 587 (Tex.App.--Eastland 1990, writ denied) (unchallenged ultimate fact findings are binding). If there is some evidence of a substantial and probative character to support the trial court's findings of fact--i.e., if there is enough evidence that reasonable minds could differ--such findings are controlling and will not be disturbed, even though the appellate court might have reached a...