Lockheed Martin v. Idaho State Tax Com'n

Decision Date21 April 2006
Docket NumberNo. 32022.,32022.
Citation142 Idaho 790,134 P.3d 641
PartiesLOCKHEED MARTIN CORPORATION, Petitioner-Respondent, v. IDAHO STATE TAX COMMISSION, Respondent-Appellant.
CourtIdaho Supreme Court

Hon. Lawrence G. Wasden, Attorney General, Boise, for appellant. Lawrence G. Allen, Deputy Attorney General, argued.

Hawley, Troxell, Ennis & Hawley, Boise, for respondent. Richard G. Smith argued.

EISMANN, Justice.

This appeal asks us to decide whether the district court correctly held that the taxpayer's contract to clean up nuclear and hazardous waste buried in a pit at the Idaho National Engineering Laboratory was not a construction contract. Because the taxpayer is a unitary corporation transacting business within and without the state of Idaho, a portion of its total business income is apportioned to Idaho. The taxpayer spent substantial sums of money in constructing facilities and equipment in an unsuccessful attempt to perform the clean up. The Tax Commission held that the contract was a long-term construction contract and that the value of the taxpayer's construction costs should be considered when apportioning its income to Idaho. The taxpayer sought review in the district court, which held that the contract was not a construction contract. We affirm the judgment of the district court.

I. FACTS AND PROCEDURAL HISTORY

This case involves the computation of Idaho taxable income for Lockheed Martin Corporation (Lockheed), which is the parent company of a worldwide, advanced-technology conglomerate with many subsidiaries and affiliated companies. One of those subsidiaries entered into a contract with the United States Department of Energy (DOE) to perform work at the Idaho National Engineering Laboratory (INEL),1 and that subsidiary subcontracted with another Lockheed subsidiary to perform the work. Because Lockheed and these subsidiaries are treated as a unitary business for the purposes of computing Idaho taxable income, we will refer to Lockheed as being the entity that contracted with DOE and was performing the work under that contract. For simplicity, we will also treat the contract with DOE and the subcontract between Lockheed's subsidiaries as being one contract, which we call the DOE contract.

The DOE contract required Lockheed to clean up radioactive and hazardous waste buried from 1967 through 1969 in Pit 9 at the INEL. Pit 9 is about 17.5 feet deep and approximately the size of a football field. Because it was not known whether the waste could be remediated using existing technology, the DOE contract was divided into three phases. In Phase I, potential contractors could demonstrate whether their proposed remediation processes could remove the radioactive waste from the soil. When a contractor was selected, Phase II would require the contractor to design and construct retrieval and treatment facilities and to demonstrate the effectiveness of its remediation process on a small portion of Pit 9. If the contractor successfully completed Phase II, then under Phase III it would be permitted to remediate all of the hazardous and nuclear waste in Pit 9. During Phase II, the contractor would receive advance payments as the project progressed, but the right to retain those payments was contingent upon the successful completion of Phase II.

Lockheed successfully completed Phase I and began its performance under Phase II of the contract. Its proposal involved constructing a large building (treatment building) that would move on rails over the pit. It would then use remotely controlled robots to assay, excavate, and retrieve the radioactive waste and soil. Any materials and soil with radioactivity levels greater than 10 nanocuries per gram would be moved into the treatment building for processing to remove radioactive substances and other hazardous materials. Those substances and materials would then be sent to a plasma arc melter contained in the treatment building, which would reduce them to a glass-like inert material which would be sent for long-term storage.

Lockheed began constructing the treatment building and offsite administrative and support facilities. By October 1997, the treatment building was about 77% complete and the offsite facilities were about 82% complete. Lockheed had also built a portion of the systems that would be used to extract and treat the radioactive substances and other hazardous materials. Lockheed did not successfully complete Phase II, however, because it could not obtain DOE approval regarding the safety of the project. The DOE terminated the contract on June 1, 1998. Lockheed had received approximately $56 million in advance payments of the approximately $179 million fixed fee it could earn under the contract, and it had spent approximately $302 million in attempting to perform the contract. It was ultimately required to refund the advance payments to the DOE.

In April 2001, the Tax Commission conducted an audit of Lockheed for the tax years 1996 through 1998. One of Lockheed's Idaho subsidiaries had filed Idaho income tax returns listing much of the costs associated with the DOE contract as inventory. The audit staff did not challenge that listing, but did determine that Lockheed and its subsidiaries constituted a unitary business, resulting in more of Lockheed's income being apportioned to Idaho under Idaho Code § 63-3027. That statute provides a formula for computing Idaho taxable income for a corporation transacting business both within and without this state. The determination that Lockheed and its subsidiaries should be considered a unitary business required that all of their incomes be considered in the apportionment. The audit staff issued a notice of deficiency asserting that Lockheed owed additional Idaho income taxes and interest totaling $1,201,640.

Lockheed appealed to the Tax Commission. It did not challenge the unitary-business determination. Rather, it contended that the property relating to the DOE contract that it listed as inventory on its 1996 through 1998 Idaho income tax returns should be reclassified as construction in progress. The Tax Commission agreed. It held, however, that Lockheed was a construction contractor with respect to the DOE contract, and that therefore construction in progress under the DOE contract should be included in the property factor computation to the extent that such costs exceeded the advance payments. It modified the income tax deficiency, penalty, and interest to be $1,154,814.

Lockheed sought review of that decision by filing a complaint in the district court pursuant to Idaho Code § 63-3049(a). Both parties moved for summary judgment, and the district court entered judgment in favor of Lockheed. It held that the DOE contract was not a construction contract and that Lockheed was not a construction contractor. The Tax Commission then appealed.

II. ISSUES ON APPEAL

1. Did the district court err in holding that the DOE contract was not a construction contract?

2. Is Lockheed entitled to an award of attorney fees on appeal?

III. ANALYSIS

Lockheed filed this action in the district court pursuant to Idaho Code § 63-3049(a). That statute provides that upon service of the Tax Commission, "the case shall proceed as other civil cases." "Consequently, we will review this case as an ordinary civil action, and will utilize the administrative determination as merely an articulation of the position of a party to this civil action." Pratt v. State Tax Comm'n, 128 Idaho 883, 884, 920 P.2d 400, 401 (1996).

In an appeal from an order of summary judgment, this Court's standard of review is the same as the standard used by the trial court in ruling on a motion for summary judgment. Infanger v. City of Salmon, 137 Idaho 45, 44 P.3d 1100 (2002). All disputed facts are to be construed liberally in favor of the non-moving party, and all reasonable inferences that can be drawn from the record are to be drawn in favor of the non-moving party. Id. Summary judgment is appropriate if the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Id. If the evidence reveals no disputed issues of material fact, then only a question of law remains, over which this Court exercises free review. Id. If the matter will be tried to the court rather than the jury, the judge is free to determine what reasonable inferences should be drawn from the undisputed facts. Union Pac. Corp. v. Idaho State Tax Comm'n, 139 Idaho 572, 83 P.3d 116 (2004). Since this case was to be tried by the court rather than a jury, the district judge was free to draw reasonable inferences from the undisputed facts.

A. Did the District Court Err in Holding that the DOE Contract Was Not a Construction Contract?

Idaho Code § 63-3027 provides a formula for computing Idaho taxable income for a corporation transacting business both within and without this state. Union Pac. Corp. v. Idaho State Tax Comm'n, 136 Idaho 34, 28 P.3d 375 (2001). If two or more corporations are found to be a unitary business, they are treated as if they are a single corporation. I.C. § 63-3027(t). The corporation's Idaho taxable income is computed by multiplying all of its business income by a fraction. The numerator of the fraction is the property factor plus the payroll factor plus two times the sales factor, and the denominator is four. I.C. 63-3027(i). The property factor is calculated by dividing the average value of Lockheed's real and tangible personal property owned or rented and used in Idaho during the tax period by the value of all of Lockheed's real and tangible personal property owned or rented and used during the tax period. I.C. § 63-3027(k). The payroll factor is calculated by dividing the total compensation paid by Lockheed in this state during the tax year by the total compensation it paid everywhere during the tax...

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