Qualls v. Montgomery Ward & Co., Inc.
| Decision Date | 02 July 1979 |
| Docket Number | No. 1,No. 78-35,78-35,1 |
| Citation | 8 ALR 4th 916,585 S.W.2d 18,266 Ark. 207 |
| Court | Arkansas Supreme Court |
| Parties | , 8 A.L.R.4th 916 R. L. QUALLS, Director of Department of Finance and Administration, State of Arkansas, Appellants, v. MONTGOMERY WARD & COMPANY, INC., Appellee |
Jack East, III, Little Rock, for appellants.
Richard A. Williams, Little Rock, for appellee.
This case involves the very complex problem of apportionment of income of a multi-state corporation for purposes of income taxation in the various states in which the corporation does business. Montgomery Ward & Company, Inc., is an Illinois corporation. Its corporate headquarters and principal place of business are in Chicago, Illinois. Its primary business is sale of a wide range of merchandise at retail outlets located in all but one of the states of the United States. It is qualified to do, and, during the years involved, did, business in Arkansas through retail stores, catalog stores, and catalog agency stores. It derives income from interest on loans made by it to its subsidiary, affiliate, parent and related corporations. On its corporate income tax returns to the State of Arkansas for its fiscal years ending February 2, 1972, January 31, 1973, and January 30, 1974, Ward deducted this interest income from its nationwide income before computing income tax due the State of Arkansas pursuant to the apportionment provision of the Arkansas version of the Uniform Division of Income for Tax Purposes Act (Ark.Stat.Ann. § 84-2055, et seq. (Supp.1975 and 1977)).
After agents of the Arkansas Department of Finance and Administration had audited these returns, they disallowed this deduction of interest income and assessed an additional tax of $26,975.40, not all of which was attributable to this deduction. Ward protested and requested an administrative hearing, which was held before the Arkansas Revenue Department Hearing Board. On May 10, 1976, that board sustained the disallowance of this deduction, but reduced the assessment, because of the allowance of other protested items, to $17,148, which Ward paid under protest. Ward timely filed this suit for a refund in the Chancery Court of Pulaski County, where it was tried on April 5, 1977, and a decree entered on October 19, 1977. This appeal was taken from that decree. Ward has consistently taken the position that it correctly treated this interest as "non-business income," as defined by Ark.Stat.Ann. § 84-2055(e) (Supp.1977), and that it should be allocated to Illinois, the state in which its principal office is located, for purposes of taxation, pursuant to Ark.Stat.Ann. § 84-2061 (Supp.1977). Appellant, and his predecessors in office, have, at all times, contended that this interest income, for the years in question, should, for the purpose of taxation, be apportioned among all the states in which Ward did business, pursuant to Ark.Stat.Ann. § 84-2063 (Supp.1977). The chancery court agreed with appellee and rendered its decree for refund of the tax paid under protest. We disagree with the chancery court and agree with appellant.
In its complaint, Ward alleged that this interest was "non-business income," as defined by the statute, because it was not an integral part of its regular trade or business operations. In the alternative, Ward asserted that this section violated the due process and equal protection clauses of the Constitution of Arkansas and the Fourteenth Amendment to the Constitution of the United States and the commerce clause of the United States Constitution. The chancery court decided the case without reaching the constitutional questions. It was proper for that court to do this, if it correctly held that the interest was "non-business income." Since the correctness of that holding is appellant's first point for reversal, we approach it first.
The tax was assessed on the basis of a definition of business income now set out in Regulation IV.1(a) of the Arkansas Revenue Department, an agency of the Department of Finance and Administration. Pertinent language of that regulation follows:
In essence, all income which arises from the conduct of trade or business operations of a taxpayer is business income. For purposes of administration of Article IV (of the Multistate Tax Compact), the income of the taxpayer is business income unless clearly classified as nonbusiness income.
* * * Income of any type or class and from any source is business income if it arises from transactions and activity occurring in the regular course of a trade or business. Accordingly, the critical element in determining whether income is "business income" or "nonbusiness income" is the identification of the transactions and activity which are the elements of a particular trade or business. In general all transactions and activities of the taxpayer which are dependent upon or contribute to the operations of the taxpayer's economic enterprise as a whole constitute the taxpayer's trade or business and will be transactions and activity arising in the regular course of, and will constitute integral parts of, a trade or business.
Regulation IV.7(3) also speaks on the subject, viz:
Interest income is business income where the intangible with respect to which the interest was received arises out of or was created in the regular course of the taxpayer's trade or business operations or where the purpose for acquiring and holding the intangible is related to or incidental to such trade or business operations.
Several examples illustrative of the application of interest income to be treated as business income under Regulation IV.7(3) follow the text of the regulation. None of them specifically cover the interest involved here, but they do include interest on federal income tax refunds, interest on a judgment against a debtor, interest on a special account maintained to cover workmen's compensation, rain and storm damage, and machinery replacement, interest on temporary investment of funds intended for payment of federal, state and local taxes, interest on funds held pending redemption of money orders and traveler's checks issued by the taxpayer, interest on working capital and extra cash invested in securities, and interest on the proceeds of sale of a subsidiary which are held in an interest-bearing account until utilized.
Litigation related to income taxes is usually complex because of the necessity for tax laws to be drafted in language peculiar to that field of taxation, but broad enough to cover the declaration of legislative intent as to taxable income, deductions, and exemptions. In order to carry out the legislative intent, it is necessary for the General Assembly to adopt statutory definitions of terms used in an effort to minimize differences in interpretations of the legislative intent which would inevitably arise from efforts to apply the usual and ordinary meanings given the statutory words. In a uniform act definitions are, of course, intended to promote uniformity in the application of tax laws.
Dealing with the equitable taxation of a multi-state corporation, enmeshed in a pattern of intercorporate and intracorporate dealings with parents, affiliates and subsidiaries, appears to have been a serious problem to the legislators and administrators and the problem of judicial interpretation of unfamiliar technical language applied to an unfamiliar field becomes the most perplexing of all statutory interpretations. When constitutional issues are involved, the matter is further complicated. An additional problem is the necessity for preserving and promoting uniformity of application of a uniform act in all the states adopting it. See Ark.Stat.Ann. § 84-2073 (Repl.1977).
There is virtually no dispute about the facts. The real question involved is one of statutory interpretation and the application of that interpretation to the facts. The basic question is whether interest earned on loans and advances by one member of a complex corporate family to its corporate parent, its corporate siblings, and its corporate children, is business or non-business income, as those terms are defined by statute.
The basic statutory provision involved is a section of Act 413 of 1961, which as amended, is digested as Ark.Stat.Ann. § 84-2055 et seq. (Supp.1977). The act is the adoption by Arkansas of the Uniform Division of Income for Tax Purposes Act, known as UDITPA. It appears to have been adopted as an effort to bring about uniformity among the states in taxing the income of multi-state corporations and to establish an equitable basis for taxation by avoiding potential duplication of taxing of the same income and by providing for a fair means of assigning taxable income among the states. The particular section is Ark.Stat.Ann. § 84-2055(a), defining business income. Appellant contends that the interest in question is business income to Ward and that it should be apportioned among the states in which Ward does business, in the same manner as Ward's other business income. Ward contends, and the chancery court held, that this interest is not an integral part of its regular trade or business and, therefore, is non-business income taxable only in the State of Illinois. The answer requires us to interpret § 84-2055(a) and apply it to the facts. The pertinent part of that section reads:
"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 constitute integral parts of the taxpayer's regular trade or business operations. * * *
Non-business income is all income other than business income as above defined. Ark.Stat.Ann. § 84-2055(e) (Supp.1977).
The method of assigning income among the various states under UDITPA involves a three-factor apportionment formula. This formula involves a...
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