Lone Star Steel Co. v. Dolan
| Decision Date | 24 September 1981 |
| Docket Number | No. 79CA0506,79CA0506 |
| Citation | 642 P.2d 29 |
| Parties | LONE STAR STEEL COMPANY, a Texas corporation, Plaintiff-Appellant, v. Joseph F. DOLAN, Executive Director, Department of Revenue, State of Colorado, Defendant-Appellee. . III |
| Court | Colorado Court of Appeals |
Welborn, Dufford, Cook & Brown, Miles C. Cortez, Jr., Beverly J. Quail, Denver, for plaintiff-appellant.
J. D. MacFarlane, Atty. Gen., Richard F. Hennessey, Deputy Atty. Gen., Mary J. Mullarkey, Sol. Gen., Chris J. Eliopulos, Asst. Atty. Gen., Denver, for defendant-appellee.
Lone Star Steel Company appeals the district court judgment affirming the determination of the Department of Revenue that it owes $22,455.10 in Colorado income tax for the years 1970, 1971, 1972, and 1973. Lone Star argues that under the Multistate Tax Compact, § 24-60-1301, C.R.S.1973, certain interest and dividend income was incorrectly characterized as business income and certain sales were erroneously apportioned to Colorado. We affirm.
Lone Star Steel is a Texas corporation engaged in the manufacture and sale of steel and steel products with its principal offices and manufacturing facilities in Texas. It is wholly owned by a New York corporation which is owned by Northwest Industries, Inc., a Delaware corporation. Lone Star has a pipe manufacturing plant in Colorado which manufactures and sells line pipe to customers located in Colorado and in other states. Some of this pipe is coated by Gaido-Lingle Company, a separately owned company, before it is shipped. The steel for this pipe is shipped from the steel manufacturing facility in Texas. The Colorado plant is managed by the Texas corporation and its bookkeeping is the responsibility of Texas personnel.
A subsidiary of Lone Star, Lone Star Steel International Sales Corporation, a Delaware corporation, is a domestic international sales corporation (DISC) under the Internal Revenue Code. It operates out of Lone Star's general offices in Texas and is managed by Lone Star personnel. It sells oil casing and tubing to domestic oil companies with overseas operations. Commissions are paid by Lone Star to the DISC on these sales.
Lone Star invests its surplus funds in unsecured promissory notes to its parent, Northwest. Funds are transferred to Northwest about two or three times a week. The terms of these notes are usually for three months and are based on the anticipatory needs of Lone Star for use of the principal in its general business operation. The notes are carried on Lone Star's books as current assets, and the interest received from those notes is deposited into Lone Star's general fund.
As permitted under § 24-60-1301, Art. III, C.R.S.1973, Lone Star elected to file its Colorado corporate income tax for the years in question under the Multistate Tax Compact. Lone Star excluded from the computation of its Colorado taxable income the dividend income from its DISC and the interest on the loans to Northwest as well as the sales of pipe wrapped by Gaido-Lingle and then shipped ultimately to out-of-state customers.
The first issue presented is whether under the Multistate Tax Compact the dividends which Lone Star receives from its DISC and the interest it receives on the loans to its parent are business income to be apportioned to Colorado or non-business income allocable to Lone Star's commercial domicile. We conclude that they are business income.
Business income is defined in the Compact as:
"Income arising from transactions and activity in the regular course of a taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations." Section 24-60-1301, Art. IV(1)(a), C.R.S.1973.
Non-business income is income other than business income. Section 24-60-1301, Art. IV(1)(e), C.R.S.1973.
The Compact presumes all income which arises from the conduct of a trade or business to be business income unless clearly shown to be otherwise. And, the taxpayer has the burden of proof to show, by clear and convincing evidence, that such income is not business income. 1 Code Colo.Reg. 201-3, Department of Revenue Reg. IV.1(a)(1).
In general, a DISC is a tax planning device "whose function is to provide a convenient bookkeeping mechanism for isolating export profits of (a domestic) enterprise." B. Bittker & J. Eustice, Federal Income Taxation of Corporations & Shareholders P 17.14 (4th ed. 1979); see I.R.C. §§ 991-997. The principal function of the DISC is to sell or lease property which has been manufactured by another for ultimate use outside the United States. A DISC is not subject to federal income tax, and approximately one-half of its earnings are taxed currently to its shareholders as constructive dividends and the rest of its earnings are taxable to the shareholders upon distribution. I.R.C., supra; Bittker & Eustice, supra.
Here, the DISC sells oil casing and tubing manufactured by Lone Star to domestic oil companies with overseas operations and receives a commission based on those sales. The dividends received by Lone Star from the DISC, therefore, represent part of the income earned by the DISC from the sale of Lone Star's products overseas. This clearly arises from transactions in the regular course of Lone Star's business operations.
"(T)ransforming the same income into dividends from legally separate entities works no change in the underlying economic realities of a unitary business, and accordingly it ought not to affect the apportionability of income the parent receives." Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980).
Lone Star contends that the interest it receives on the loans it makes to its parent Northwest is not business income because it does not arise from transactions and activity in the regular course of its trade or business.
Interest income from short term securities representing investment of idle funds until needed to meet the taxpayer's ordinary business obligations is considered business income. Montana Department of Revenue v. American Smelting & Refining Co., 173 Mont. 316, 567 P.2d 901 (1977); Champion International Corp. v. Bureau of Revenue, 88 N.M. 411, 540 P.2d 1300 (1975); Sperry & Hutchinson Co. v. Department of Revenue, 270 Or. 329, 527 P.2d 729 (1974); Montgomery Ward & Co., Inc. v. Commissioner of Taxation, 276 Minn. 479, 151 N.W.2d 294 (1967).
The notes here are purchased on a regular basis during periods of cash flow surplus and are payable when Lone Star needs the funds to pay taxes, dividends, and other business obligations. The interest is commingled with other corporate income in accounts used to pay ordinary business obligations. Thus, this is business income "arising from transactions and activity in the regular course of a taxpayer's trade or business." See Atlantic Richfield Co. v. State (Dolan), 198 Colo. 413, 601 P.2d 628 (1979); see also Kraftco v. Charnes, Colo.App., 636 P.2d 1300 (1981).
Lone Star argues that this interpretation of the Compact is unconstitutional because there is insufficient nexus between Colorado and the dividend and interest income and because it results in disproportionate taxation. Lone Star contends that the interest and dividend income comes from separate businesses not conducted in Colorado and, therefore, is not derived from its unitary steel business conducted here. We disagree.
In order to establish that this dividend and interest income is not part of its unitary business conducted in Colorado, Lone Star must show that the income was earned in a course of activities unrelated to the manufacture and sale of its steel products in Colorado. Mobil Oil Corp. v. Commissioner of Taxes, supra; see also Joslin Dry Goods Co. v. Dolan, Colo., 615 P.2d 16 (1980); Caterpillar Tractor Co. v. Lenckos...
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...is to sell or lease property which has been manufactured by another for ultimate use outside the United States. Lone Star Steel Company v. Dolan, 642 P.2d 29, 32 (Colo.App.1981), modified 668 P.2d 916 (Colo.1983).2 This statute was amended effective July 1, 1982, but the amendments are not ......
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Lone Star Steel Co. v. Dolan
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