Pioneer Container Corp. v. Beshears

• Decision Date: 08 June 1984
• Docket Number: No. 56237,56237
• Parties: PIONEER CONTAINER CORPORATION, Appellant, v. Mark BESHEARS, Director of Taxation of the State of Kansas, Appellee.
• Court: Kansas Supreme Court

Page 396

684 P.2d 396

235 Kan. 745

PIONEER CONTAINER CORPORATION, Appellant, v. Mark BESHEARS, Director of Taxation of the State of Kansas, Appellee.

No. 56237.

Supreme Court of Kansas.

June 8, 1984.

Syllabus by the Court

1. A district court may not, on appeal, substitute its judgment for that of an administrative tribunal, but is restricted to considering whether, as a matter of law, (1) the tribunal acted fraudulently, arbitrarily or capriciously, (2) the administrative order is substantially supported by evidence, and (3) the tribunal's action was within the scope of its authority.

2. In reviewing a district court's judgment, as above, this court will, in the first instance, for the purpose of determining whether the district court observed the requirements and restrictions placed upon it, make the same review of the administrative tribunal's action as does the district court.

3. A multi-state business is a unitary business for income tax purposes when the operations conducted in one state benefit and are benefited by the operations conducted in another state or states. If its various parts are interdependent and of mutual benefit so as to form one integral business rather than several business entities, it is unitary.

4. Whether a multi-state business is separate or unitary depends upon the manner in which its business is conducted. The essential test to be applied is whether or not the operation of the portion of the business within the state is dependent upon or contributory to the operation of the business outside the state. If there is such relationship, the business is unitary.

5. The Kansas version of the Uniform Division of Income for Tax Purposes Act (UDITPA), K.S.A. 79-3271 et seq., is discussed.

6. The Director of Revenue is authorized by K.S.A. 79-32,141 to require the combined report method of allocation of income and expenses when it is determined that two or more corporations are engaged in a multi-state unitary business.

Conrad Miller, Jr., of McDowell, Rice & Smith, Chartered, Kansas City, argued the cause, and Charles F. Speer, Kansas City, was with him on briefs, for appellant.

David Prager, III, Topeka, Attorney, Kansas Dept. of Revenue, argued the cause, and William L. Edds, Topeka, Gen Counsel, Kansas Dept. of Revenue, was with him on briefs, for appellee.

James D. Dye, of Bever, Dye, Mustard & Belin, Wichita, was on brief of amicus curiae for that firm.

McFARLAND, Justice:

This is an appeal by plaintiff Pioneer Container Corporation (a Missouri corporation) from a judgment of the district court which affirmed an order of the Kansas Board of Tax Appeals finding plaintiff corporation and its wholly owned subsidiary, Pioneer Bag Company (a Kansas corporation, now defunct), constituted a unitary business and requiring a combined report method for allocation of income and expenses for state corporate income tax purposes.

For its first issue plaintiff contends the district court applied an improper standard of review.

In Kansas State Board of Healing Arts v. Foote, 200 Kan. 447, 436 P.2d 828 (1968), 28 A.L.R.3d 472, this court enunciated the standard rules for judicial review of administrative actions. In Foote this court declared a district court could not, on appeal, substitute its judgment for that of an administrative tribunal but was restricted to considering whether, as a matter of law, (1) the tribunal acted fraudulently, arbitrarily or capriciously, (2) the administrative order was substantially supported by evidence, and (3) the tribunal's actions were within the scope of its authority. 200 Kan. 447, 436 P.2d 828, Syl. p 1. See also In re Due Process Hearing of Bailey, 233 Kan. 714, 717, 664 P.2d 1379 (1983); Hemry v. State Board of Pharmacy, 232 Kan. 83, 86, 652 P.2d 670 (1982); Boswell, Inc. d/b/a Broadacres v. Harkins, 230 Kan. 738, 740, 640 P.2d 1208 (1982); Kansas Dept. of Health & Environment v. Banks, 230 Kan. 169, 171-72, 630 P.2d 1131 (1981); U.S.D. No. 461 v. Dice, 228 Kan. 40, 50, 612 P.2d 1203 (1980); Brinson v. School District, 223 Kan. 465, 469, 576 P.2d 602 (1978); Olathe Hospital Foundation, Inc. v. Extendicare, Inc., 217 Kan. 546, 539 P.2d 1 (1975). In reviewing a district court's judgment on an administrative action, Kansas appellate courts must first determine whether the district court observed the requirements and restrictions placed upon it and then make the same review of the administrative tribunal's action as did the district court. Kansas Dept. of Health & Environment v. Banks, 230 Kan. 169, 630 P.2d 1131, Syl. p 2; U.S.D. No. 461 v. Dice, 228 Kan. 40, 612 P.2d 1203, Syl. p 4; Olathe Hospital Foundation, Inc. v. Extendicare, Inc., 217 Kan. 546, 539 P.2d 1, Syl. p 4; Kansas State Board of Healing Arts v. Foote, 200 Kan. 447, 436 P.2d 828, Syl. p 2.

The district court herein utilized the Foote rules for judicial review of administration actions. Plaintiff contends the Foote rules were inapplicable herein by virtue of the matter having been submitted to the Board of Tax Appeals upon a stipulation of facts. This contention is fatally flawed. The case was not submitted to the Board of Tax Appeals on stipulated facts. Rather, the parties agreed the Board should use the record made at the hearing before the Director of Taxation in lieu of a de novo hearing. The testimony on the record was not consistent and, indeed, was conflicting in a number of respects. We conclude this issue is wholly lacking in merit.

For its second issue plaintiff contends the Board of Tax Appeals erroneously found that plaintiff and its subsidiary, Pioneer Bag Company, constituted a unitary business.

In tax law the concept of unitary business arises when a corporation has one or more subsidiaries or divisions which are dependent to or upon, or contribute to the parent corporation or other subsidiaries or divisions so, in essence, to constitute a homogenous enterprise. When such an entity exists it may be described as a unitary business and in determining the tax liability of the given subsidiary or division the taxing authority may consider the entire income of the unitary business and apportion taxes on the basis of the income attributable within the jurisdiction.

As defined by the Illinois Supreme Court:

"A unitary business operation is one in which there is a high degree of interrelationship and interdependence between, typically, one corporation, which generally is a parent corporation, and its corporate subsidiaries or otherwise associated corporations, which group is usually engaged in multistate, and in some cases in international, business operations. Because of this integrated relationship, which is reflected in all phases of the business operations, it is extremely difficult, for purposes of taxation, to determine accurately the measure of taxable income generated within a State by an individual corporation of the unitary group which is conducting business in the State. Typically, the corporation's transactions and the income derived from them actually represent the business efforts of the individual corporation, plus efforts of other and possibly all members of the unitary business operation. As a result, the claimed income of each member of the group standing alone does not, in a real sense, reflect the conducting of a unitary business operation because the income is not attributable solely to the effort of the particular corporation." Caterpillar Tractor Co. v. Lenckos, 84 Ill.2d 102, 108, 49 Ill.Dec. 329, 417 N.E.2d 1343 (1981).

See also PMD Investment Co. v. State, 216 Neb. 553, 345 N.W.2d 815 (1984).

In Crawford Manufacturing Co. v. State Comm. of Revenue and Taxation, 180 Kan. 352, 304 P.2d 504 (1956), this court held:

"A multi-state business is a unitary business for income tax purposes when the operations conducted in one state benefit and are benefited by the operations conducted in another state or states. If its various parts are interdependent and of mutual benefit so as to form one integral business rather than several business entities, it is unitary." Syl. p 1.

"Whether a multi-state business is separate or unitary depends upon the manner in which its business is conducted. The essential test to be applied is whether or not the operation of the portion of the business within the state is dependent upon or contributory to the operation of the business outside the state. If there is such relationship, the business is unitary." Syl. p 2.

"Various portions of a business may be carried on exclusively in different states without destroying its unitary character if the integral parts are of mutual benefit to one another." Syl. p 3. (Emphasis supplied.)

See also Webb Resources v. McCoy, 194 Kan. 758, 401 P.2d 879 (1965).

We turn now to the facts of this case.

The Board of Tax Appeals made the following findings:

"[P]rior to the formation of Pioneer Bag all of the assets and property used to form the company were owned by Pioneer Container Corporation, a Missouri corporation (hereafter referred to as Pioneer Container). Pioneer Bag was incorporated for the express purpose of selling off the burlap bag division to a third party. The sale was never consumated and Mr. William Gore was hired by Pioneer Container as general manager to operate Pioneer Bag. During the tax years at issue (February 26, 1978 through February 24, 1980) Mr. Gore operated the plant, manufacturing burlap bags and made sales of burlap bags and paper bags (the latter being manufactured by Pioneer Container). A salesman for Pioneer Container sold burlap bags, as well as paper bags, which were manufactured by Pioneer Bag.

"Pioneer Container paid the bills of Pioneer Bag from co-mingled funds. The funds of the two companies were kept in one bank account at Commerce Bank at Kansas City. With the exception of the payroll account for Pioneer Bag, the funds received on sales by Pioneer Bag were never separated from the funds of Pioneer Container. Only one cash receipt...