May Dept. Stores Co. v. Ind. Dept. of State Revenue

• Decision Date: 07 May 2001
• Docket Number: No. 49T10-9906-TA-144.,49T10-9906-TA-144.
• Citation: 749 N.E.2d 651
• Parties: THE MAY DEPARTMENT STORES COMPANY, Successor in Merger with Associated Dry Goods Corporation, Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

749 N.E.2d 651

THE MAY DEPARTMENT STORES COMPANY, Successor in Merger with Associated Dry Goods Corporation, Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

No. 49T10-9906-TA-144.

Tax Court of Indiana.

May 7, 2001.

Francina A. Dlouhy, J. Daniel Ogren, Baker & Daniels, Indianapolis, IN, Attorneys for Petitioner.

Steve Carter, Attorney General of Indiana, Vincent S. Mirkov, Deputy Attorney General, Indianapolis, IN, Attorneys for Respondent.

FISHER, J.

Petitioner, The May Department Stores Company (May), successor in merger with Associated Dry Goods Corporation (Associated), challenges the Indiana Department of State Revenue's (Department) refusal to refund May $384,424.03 in adjusted gross income tax, see IND.CODE ANN. § 6-3-2-1 (West 2000), supplemental net income tax, see I.C. § 6-3-8-1, and interest for the tax year beginning February 1, 1986 and ending January 31, 1987. The income taxed was primarily generated by Associated's sale of the assets comprising Joseph Horne Co. (Horne), a division of Associated. These gains were initially classified by Associated as nonbusiness income, which under the circumstances made them allocable outside of and nontaxable by Indiana. See I.C. § 6-3-1-21. However, the Department reclassified the gains as business income, a move that subjected the gains to apportionment and taxation by Indiana. See I.C. § 6-3-1-20. The issue for the Court's consideration is whether the gains were business or nonbusiness income. To resolve this issue, the Court must decide whether Indiana's definition of "business income" requires that both a "transactional" test and a "functional" test be applied in determining whether gains are business or nonbusiness income. The Court considers this issue in the context of May's motion for summary judgment.

FACTS AND PROCEDURAL HISTORY

The facts are undisputed.¹ May is a New York corporation that is qualified to do business in Indiana. May's principal place of business and commercial domicile is in St. Louis, Missouri. May is engaged in the business of department store retailing. On October 4, 1986, May acquired all of the stock of Associated, which was a Virginia corporation also engaged in department store retailing. Associated's principal place of business and corporate headquarters was in New York City, New York. Effective February 1, 1992, Associated was merged into May.

Prior to its acquisition by May, Associated owned retail department stores throughout the United States. These stores were grouped into divisions. Immediately prior to its acquisition by May, Associated had nine divisions, including Horne.² "Through its divisions, Associated was engaged in the business of department store retailing, buying and selling at retail clothing, apparel and accessories, home furnishings and related items." (Manos Aff. ¶ 4.) Horne, which was not separately incorporated, operated twelve store sites in Pennsylvania and four store sites in Ohio.

Adcor Realty Corporation (Adcor) was a wholly-owned subsidiary of Associated. It was a New York corporation with its principal office in New York City, New York. Adcor served as the holder of legal title to and other interests in much of the real estate used by Horne as well as Associated's other divisions. Like Associated, Adcor was merged into May effective February 1, 1992.

May announced its intention to acquire Associated in 1986. At that time, Kauffman's Department Store, a division of May, was conducting business in Pittsburgh, Pennsylvania. Horne operated ten store sites in or near Pittsburgh. The City of Pittsburgh feared that, after the proposed acquisition, May would monopolize the business of department store retailing in the area. Therefore, prior to May's acquisition of Associated, an action against May and Associated by the City of Pittsburgh and others was brought in the United States District Court for the Western District of Pennsylvania; the plaintiffs alleged that the proposed acquisition "would substantially lessen competition and tend to create a monopoly in violation of Section 7 of the Clayton Act." (Manos Aff. ¶ 10.)

The action was resolved by stipulation of the parties on September 24, 1986. The Stipulation and Order (Order) required May to "divest all of the assets and interests" of Horne.³ (Manos Aff., Ex. A.) By the Order's terms, May was obligated to take steps to open those stores of Horne that had previously been scheduled for opening. Moreover, May was responsible for maintaining Horne in good operating condition so that it could be divested as a "viable competitive entity." (Manos Aff., Ex. A.) One Horne store site was sold by Associated on December 19, 1986. On December 29, 1986, all of Horne's remaining assets were sold by Associated. In like manner, Adcor was required to sell any title to or interest in real estate used by Horne that it held.

Associated and certain of its subsidiaries, including Adcor, filed a consolidated Indiana adjusted gross income tax and supplemental income tax return for the tax year. On that return, the gains from the sale of Horne's assets that were realized by Associated and Adcor ($66,191,088) were reported as nonbusiness income. The Department audited the consolidated return for the tax year. On October 5, 1990, the Department issued a proposed assessment of additional adjusted gross income and supplemental net income tax against Associated and its affiliates. This assessment was attributable to the Department's reclassification of the gain from the sale of Horne's assets from nonbusiness income to business income.

On December 3, 1990, Associated protested the proposed assessment, and the Department thereafter conducted a hearing on the protest. On April 28, 1993, the Department issued a letter of findings denying Associated's protest. The Department issued a final assessment for the tax year on June 25, 1993. May, as successor in merger with Associated, paid the Department $384,424.03 ($247,555 in tax and $136,869.03 in interest).

On June 14, 1996, May filed a refund claim for the tax year. The Department has issued no final determination on this refund claim. On June 11, 1999, May filed this original tax appeal. May filed a motion for summary judgment on March 1, 2000. The Court conducted a hearing on the motion on July 13, 2000. Additional facts will be supplied where necessary.

ANALYSIS AND OPINION

Standard of Review

The Court hears appeals of refund claims de novo.⁴ I.C. § 6-8.1-9-1(d). Summary judgment is only appropriate where there is no genuine issue of material fact and the moving party is entitled to summary judgment as a matter of law. IND. TRIAL RULE 56(C); Mynsberge v. Department of State Revenue, 716 N.E.2d 629, 631 (Ind. Tax Ct.1999). Questions of statutory interpretation are particularly amenable to resolution by summary judgment. Mynsberge, 716 N.E.2d at 631.

Discussion

The parties dispute the definition of "business income." The issue before the Court is one of first impression in Indiana, although it has been much debated in other jurisdictions across the country. Pursuant to IND.CODE § 6-3-1-20,

The term "business income" means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitutes integral parts of the taxpayer's regular trade or business operations.

"Nonbusiness income," in turn, "means all income other than business income." I.C § 6-3-1-21. The distinction between business and nonbusiness income is important in calculating a taxpayer's income tax liability. Indiana corporations pay the greater of the gross income tax or adjusted gross income tax, plus the supplemental income tax. Longmire v. Indiana Dep't of State Revenue, 638 N.E.2d 894, 896 (Ind. Tax Ct.1994) (citing I.C. § 6-3-3-2). Pursuant to IND.CODE § 6-3-2-2, for the purpose of calculating a corporation's adjusted gross income tax liability, business income is apportioned between Indiana and other states using a three-factor formula,⁵ while nonbusiness income is allocated to Indiana or another state.⁶ A corporation's net income is its adjusted gross income, with certain adjustments. I.C. § 6-3-8-2(b). Thus, whether income is deemed business or nonbusiness income determines whether it is allocated to a specific state or whether it is apportioned between Indiana and other states wherein the taxpayer is conducting its trade or business.

Indiana's definition of business income mirrors that found in the Uniform Division of Income for Tax Purposes Act (UDITPA), although Indiana has not adopted UDITPA. See JEROME R. HELLERSTEIN & WALTER HELLERSTEIN, STATE TAXATION ¶ 9.01 (Table 9-1) (3d ed. 1998 & Supp. 2000) (listing states that have adopted UDITPA). Drafted in the mid 1950s, UDITPA in part sought to "promote uniformity in allocation practices among the states that impose tax on or measured by the net income of a corporation."⁷ R. Crawford & R. Uzes, The Distinction Between Business and Nonbusiness Income, THE STATE & LOCAL TAX PORTFOLIO SERIES ¶ 505.3 (1989 & Supp.1994). See also Pledger v. Getty Oil Exploration Co., 309 Ark. 257, 831 S.W.2d 121, 124 (1992)

("UDITPA is designed to fairly apportion among the states in which a corporation does business the fair amount of regular business income earned by the corporation's activities in each state."); HELLERSTEIN, supra ¶ 9.01 (stating "[m]ost states have sought to discharge their constitutional obligation to confine their corporate income taxes to income derived from the corporation's activities in the taxing state by adopting [UDITPA] or a closely analogous statute"). The key features of UDITPA and the Indiana statute are the concepts of "allocation" and "apportionment." "When income is allocated, it is attributed to the particular state or states that are considered to be the source of the income. . . . ...