McNamara v. George Engine Co., Inc.

• Decision Date: 11 January 1988
• Docket Number: No. 87-CA-539,87-CA-539
• Citation: 519 So.2d 217
• Parties: Shirley McNAMARA, Secretary of the Department of Revenue and Taxation, State of Louisiana v. GEORGE ENGINE COMPANY, INC.
• Court: Court of Appeal of Louisiana — District of US

Page 217

519 So.2d 217

Shirley McNAMARA, Secretary of the Department of Revenue and Taxation, State of Louisiana v. GEORGE ENGINE COMPANY, INC.

No. 87-CA-539.

Court of Appeal of Louisiana, Fifth Circuit.

Jan. 11, 1988.

Robert R. Rainer, Baton Rouge, for plaintiff-appellant.

Before BOWES, WICKER and GOTHARD, JJ.

WICKER, Judge.

This appeal arises from a suit for corporation income taxes brought on behalf of Shirley McNamara in her capacity as Secretary of the Department of Revenue and Taxation for the State of Louisiana (the State) against George Engine Company, Inc. (GECO), a Louisiana corporation with its commercial domicile in Louisiana. After the case was submitted on numerous stipulations, the trial court rendered judgment in favor of GECO, dismissing the State's suit. We reverse and remand.

The stipulations set forth the following pertinent facts: GECO is a corporation duly organized and validly existing under the laws of Louisiana. Since 1972 GECO's principal place of business, registered office and commercial domicile have been in Jefferson Parish, Louisiana. At all pertinent times, GECO has been engaged in the manufacture, modification, repair and sale of diesel engines as a franchise dealer of Detroit Diesel Allison Division of General Motors Corporation (GM/DDA) in Louisiana.

Although GECO was allowed to sell products and parts to customers wherever they may be located, it could not use any trademark materials of GM/DDA outside of its franchise territory in South Louisiana. In addition, the franchise agreement prohibited GECO from directly or indirectly establishing any place or places of business except those in South Louisiana.

In 1972 GM/DDA was operating a diesel engine sales and service facility in Miami, Florida. GM/DDA offered to franchise this operation to G.S. Frierson, Jr. (Frierson), who was then president of GECO. However, since GECO could not operate a second distributorship, GM/DDA required Frierson to "form an entirely separate subsidiary for the distributorship which would operate as a completely separate organization and profit center responsible for its own performance, profits and growth."

On May 12, 1972 Key Power Systems, Inc. (KPSI) was incorporated under the laws of the State of Florida. GECO owned 10,000 shares or 100% of the outstanding common capital stock of KPSI from 1972 until these shares were sold to Dwayne A. House on February 28, 1979. The purchase and sale agreement was executed on January 31, 1979.

On September 11, 1975 GECO pledged all of its stock in KPSI to the First National Bank of Chicago to secure a $7,500,000 line of credit. However, GECO is not authorized to do business in Illinois, and has no offices or property there. It also has no employees or agents in Illinois.

The certificate evidencing the ownership of the 10,000 shares of the capital stock of KPSI was continuously located outside Louisiana after the date of its pledge to the Illinois bank.

KPSI was financed by GECO's borrowing $1,000,000.00 from First National Bank of Commerce in New Orleans, Louisiana and an additional $1,000,000.00 loan from GM/DDA. The $1,000,000.00 loan from First National Bank of Commerce was contributed to KPSI in exchange for 10,000 shares of stock.

The same persons who served as officers and directors of GECO also served in KPSI. In addition KPSI used GECO for (1) financing; (2) inventory and parts management and control; (3) electronic data processing, including inventory and payroll until sometime after September 1975 when the payroll function had been completely transferred to KPSI. Billing (invoicing) had been transferred to KPSI prior to 1975.

Mr. Smith and Mr. H.F. Colby, who was Vice-President of KPSI and Executive Vice-President of GECO, visited the KPSI facility on an average of once a month and twice a month, respectively. Other GECO employees visited the KPSI location on an "as needed" basis.

James A. Cobb, Executive Vice-President of KPSI and Vice-President of GECO was paid by GECO.

From 1972 until the date KPSI stock was sold, KPSI was always indebted to GECO for working capital. In addition, at all times pertinent GECO charged KPSI a maintenance fee for common offices, salaries and other benefits; for electronic data processing services; interest on intercompany loans (at the same interest rate GECO was paying a bank); and for all other services, such as preparation of engines, at cost.

GECO loaned money to KPSI from 1972 to 1979. Furthermore, from 1972 to 1974 or 1975 GECO prepared the payroll register and journal, created employee earnings records, cut the checks, and prepared employment tax returns for KPSI. From 1974 or 1975 until the sale of the stock in 1979, payroll checks for KPSI employees were cut in Miami.

Also made part of the record are GECO's Louisiana Corporation Income Tax and Franchise Tax Returns for the years 1977-78, 78-79, and 79-80. On its returns for the years 1977 and 1978 GECO reported its stock as an asset located in Louisiana. However, on its 1979 Louisiana Income Tax Return, GECO did not report the gain of $2,793,110.00 from the sale of the KPSI stock. Instead, GECO reported the gain on its 1979 Florida Corporation Income Tax Return.

The State seeks $126,803.52 from GECO together with statutory interest thereon from May 15, 1980, until paid and attorney fees. The State contends that the gain is taxable in Louisiana pursuant to L.S.A.-R.S. 47:243(A)(4).

After an adverse ruling from the trial court, appellant now specifies the following error:

That the trial court committed manifest and reversible error in failing to conclude that GECO had not proved by clear, convincing and unequivocal evidence that the shares of stock had acquired a business situs in a state other than Louisiana, and in dismissing the State's suit.

The crucial issue in this case is whether GECO has met its burden of showing that the shares of KPSI stock acquired a "business situs" in Florida.

The pertinent statute is L.S.A.-R.S. 47:243(A)(4) which provides:

Items of gross allocable income shall be allocated directly to the states from which such items of income are derived, as follows:

(4) Other interest, dividends and profits from sales and exchanges of capital assets consisting of incorporeal property or rights shall be allocated to the state in which the securities or credits producing such income have their situs, which shall be at the business situs of such securities or credits if they have been so used in connection with the taxpayer's business as to acquire a business situs, or, in the absence of such a business situs, shall be at the legal domicile of the taxpayer in the case of an individual or at the commercial domicile of the taxpayer in the case of a corporation ...

The "business situs" test was explained by the Louisiana Supreme Court in United Gas Corporation v. Fontenot, 241 La. 488, 129 So.2d 748 (1961) as follows:

The location of property is commonly known in law as its 'situs'. It may be said that in general, for purposes of due process within the meaning of the Fourteenth Amendment, it is necessary for a state to have jurisdiction over the property for it to be there subjected to taxation. In determining this taxation 'jurisdiction', or 'situs', two opposed considerations--place of ownership and place of property location--have, from the beginning, given rise to legal difficulties.

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Because of their very nature intangible assets and property rights have no physical location, even though represented by paper evidences such as stock certificates, being merely relationships between persons that the law recognizes by attaching to them certain sanctions enforceable in the courts [citation and footnote omitted], the problem of determining their 'situs', or the state having jurisdiction to tax them, has presented even more complex difficulties--particularly under rapidly changing economic and business conditions developing during this industrialized age ... However, because these intangibles do constitute valuable property rights and should, therefore, bear their just burden of the cost of government, a situs has been ascribed to them for taxation purposes through a fiction of the law that is easily traceable to the first part of the ancient Roman maxim 'mobilia sequuntur personam, immobilia situa' (movable things, or movables, follow the person; immovable, their locality).

This meant, simply, that tangible, or movable, property was regarded as being located at the legal domicile of the owner for the purpose of applying the law of that place to it in many situations, of which taxation was but one, although the property might, actually, be located elsewhere. From the standpoint of taxation, this fiction as originally applied permitted the state of the owner's legal domicile to impose a tax on his personalty wherever located under the theory it had jurisdiction over such property because it had there acquired a 'situs' since it followed the owner and was, consequently, attached to his person at his legal domicile.

However, the application of this fiction by the courts to the taxation of tangible personalty was not unassailable, and, being a court made rule designed to work out practical justice, where the reason for its existence no longer obtained and it became evident the facts of the case could not justify a strict adherence thereto, there was a deviation or departure from its application, as, for example, where the facts showed the location of the personalty had such permanence in another state it was regarded as a part of the property of that state, which alone had jurisdiction over it, physical location and permanency being the determinative features that led to the development of the exception to the mobilia rule that permitted a state other than the legal domicile of the owner to tax the tangible property in the foreign state. [citations omitted.] The theory underlying this exception in so far as...