Nelson Bros. Furniture Corp. v. Wisconsin Dept. of Revenue

• Decision Date: 26 October 1989
• Docket Number: No. 88-1647,88-1647
• Citation: 449 N.W.2d 328,152 Wis.2d 746
• Parties: NELSON BROTHERS FURNITURE CORPORATION, Petitioner-Appellant-Cross Respondent, v. WISCONSIN DEPARTMENT OF REVENUE, Respondent-Cross Appellant.
• Court: Wisconsin Court of Appeals

Page 328

449 N.W.2d 328

152 Wis.2d 746

NELSON BROTHERS FURNITURE CORPORATION Petitioner-Appellant-Cross Respondent, v. WISCONSIN DEPARTMENT OF REVENUE, Respondent-Cross Appellant.

No. 88-1647.

Court of Appeals of Wisconsin.

Submitted on Briefs May 5, 1989.

Opinion Released Oct. 26, 1989.

Opinion Filed Oct. 26, 1989.

Foley & Lardner by Timothy C. Frautschi, Madison, for petitioner-appellant-cross respondent.

Donald J. Hanaway, Atty. Gen., and Edward S. Marion, Asst. Atty. Gen., Madison, for respondent-cross appellant.

Before EICH, C.J., GARTZKE, P.J., and DYKMAN, J.

EICH, Chief Judge.

Nelson Brothers Furniture Corporation appeals from a judgment affirming a decision of the Wisconsin Tax Appeals Commission. The commission upheld a determination of the Department of Revenue that Nelson Brothers, an Illinois corporation carrying on a portion of its business in Wisconsin, had underpaid Wisconsin franchise taxes in the years 1974-78. For purposes of the tax, a corporation doing business in several states is required to allocate its total income to arrive at the amount attributable to Wisconsin.

The issues on the appeal are: (1) the appropriate scope of our review of the commission's decision where its inquiry was limited to whether the Department of Revenue abused its discretion in carrying out a specific statutory duty; (2) whether the department abused its discretion in directing a change in Nelson Brothers' accounting methods which led to increased Wisconsin franchise tax liability; and (3) whether the change violated Nelson Brothers' right to due process of law.

The department cross-appeals from that portion of the judgment remanding the matter to the commission with directions to consider Nelson Brothers' argument that, should the assessment stand, it is entitled to an "equitable recoupment" in the form of an adjustment to the apportionment formula. We conclude that our review is limited to whether the commission's determination is arbitrary or unreasonable, and that the trial court properly disposed of all issues. We therefore affirm the judgment.

Nelson Brothers sells furniture at seven retail stores in Illinois and two in the Milwaukee, Wisconsin, area. For the years in question, as in preceding years, Nelson Brothers used the "separate accounting method" to compute its taxable income. As its name implies, the method treats the company's business in the taxing state separately from that in the home state. The gross income from business activities within the taxing state is determined, relevant deductions subtracted, and the remaining net income is attributed in its entirety to the taxing state.

The Department of Revenue, after an audit, determined that because Nelson Brothers' Wisconsin operations were an integral part of a "unitary" business, the separate accounting method failed to properly reflect taxable income for the years in question. The department recomputed the company's income using a different method--the "apportionment" or "formula" method--and ordered Nelson Brothers to use that method to calculate its Wisconsin income in the future.

Under the apportionment method, the company's business activities within the taxing state are considered to be an inseparable part of its total business, both within and without the state. First, the company's total gross income from its entire business is determined. Allowable deductions are subtracted and the remaining net income is apportioned within and without the taxing state by means of a formula consisting of various factors--notably the company's property, payroll and sales--which are thought to be relevant in the production of income. The formula is set forth in Wis.Adm.Code, sec. Tax 2.39.

The change in accounting methods from separate accounting to apportionment resulted in increased tax liability for Nelson Brothers and the department assessed an underpayment for the years in question. The company petitioned the department for redetermination, and the petition was denied. Nelson Brothers appealed the assessment and the department's rulings to the commission. The commission concluded that the change was proper and denied Nelson Brothers' petition for redetermination.

Nelson Brothers also raised an "alternative" argument before the commission, contending that, should the assessment be affirmed, the company should be allowed an "equitable recoupment"--an offset against the newly-assessed liability representing an adjustment to the "sales factor" of the apportionment equation to reflect intangible income. The net effect of the adjustment would be to lower the tax due. Because Nelson Brothers had not raised the recoupment issue before the department, but argued it for the first time in its brief to the commission, the commission held that it lacked jurisdiction to consider it.

Nelson Brothers petitioned for judicial review and the circuit court affirmed the decision to change the company's accounting method, but remanded on the question of equitable recoupment, directing the commission to consider this issue on its merits. The appeal and cross-appeal followed.

I. SCOPE OF REVIEW

There is a preliminary question involving the scope of review. In the usual case, our review of administrative decisions under ch. 227, Stats., is the same as that of the trial court, Gilbert v. Medical Examining Board, 119 Wis.2d 168, 194, 349 N.W.2d 68, 79-80 (1984). We accept the agency's findings of fact if they are supported by substantial evidence in the record, Wehr Steel Co. v. ILHR Dept., 106 Wis.2d 111, 117, 315 N.W.2d 357, 361 (1982), and, generally, we decide the legal questions independently. Dept. of Revenue v. Milwaukee Refining Corp., 80 Wis.2d 44, 48, 257 N.W.2d 855, 858 (1977). Where, however, the agency has particular competence or expertise in the matter at hand, we will sustain its legal conclusions as long as they are rational. Wis. Power & Light v. Pub. Serv. Comm., 148 Wis.2d 881, 887, 437 N.W.2d 888, 891 (Ct.App.1989). Special deference to the agency may also be warranted where the agency's decision is "intertwined with value and policy determinations." Transp. Dept. v. Transp. Com'r, 135 Wis.2d 195, 199, 400 N.W.2d 15, 16 (Ct.App.1986).

In this case, however, the commission was not conducting its own de novo review of the department's decision, nor was it interpreting a statute--the type of agency action to which we generally defer. When the department ordered Nelson Brothers to adopt the apportionment method of accounting for its Wisconsin income, it was exercising a specific discretionary function delegated to it by sec. 71.07(2), Stats. (1985-86), ¹ and that exercise is what the commission was called upon to review.

Section 71.07(2), Stats. (1985-86), allows use of the separate accounting method to account for a multistate company's Wisconsin income in only two situations: (1) where the company's business is not "an integral part of a unitary business"; and (2) in any case where the department is satisfied that use of separate accounting will properly reflect the company's taxable Wisconsin income. The department and commission determined that Nelson Brothers' business is unitary, and the company has not challenged that determination on appeal. Thus, separate accounting is permissible only if it is established to the department's satisfaction that this method will properly reflect the portion of Nelson Brothers' income taxable in Wisconsin. And we agree with the parties that, under the statute, that determination is discretionary with the department.

As a result, the commission's review of the department's decision was confined to whether, on the facts as found by the commission, the department abused its discretion in ordering the change. And that frames the scope of our review: we look to the facts found by the commission, and the evidentiary basis for such findings; and then we consider whether, on those facts, the department exercised its discretion in a reasonable, non-arbitrary manner.

As we have said, in the usual case we accept the commission's factual findings if they are supported by substantial evidence in the record, and we give varying degrees of deference to the commission's legal conclusions if they relate to matters within the agency's particular expertise. This is not the usual case, however. We are dealing with a specific statute, sec. 71.07(2), Stats. (1985-86), which directs the department to exercise its discretion on a particular subject--whether to allow a multistate business to deviate from the statutorily-prescribed accounting method for determining its Wisconsin income.

Given that statute, the commission, when reviewing the department's action, was not called upon to consider the evidence in order to make its own determination--its own choice--of the proper accounting method under sec. 71.07(2), Stats. (1985-86). Rather, the commission was determining whether the department abused the discretion expressly granted by the statute when it made the choice. As a result, we owe no deference to the commission's conclusions. While its factual findings are conclusive if supported by the evidence, the commission's determination of the reasonableness of the department's actions based on that evidence is not one requiring application of any expertise or special competence in matters of taxation and tax policy. It is simply the application of a legal standard--reasonableness--to the found facts and is thus a question of law which we decide independently.

II. THE APPEAL

Nelson Brothers, challenging the department's action, argues first that the department should be "estopped" from requiring the change in accounting because of its acceptance of past tax filings in which the company used the separate accounting method. We agree with Nelson Brothers' assertion that consistency in a business's accounting methods is a relevant consideration in such matters, and that the United States Tax Court has so...