Ramsay, Scarlett & Co., Inc. v. Comptroller of Treasury

• Decision Date: 01 September 1984
• Docket Number: No. 102,102
• Citation: 490 A.2d 1296,302 Md. 825
• Parties: RAMSAY, SCARLETT & CO., INC. v. COMPTROLLER OF the TREASURY. ,
• Court: Maryland Court of Appeals

Page 825

302 Md. 825

490 A.2d 1296

RAMSAY, SCARLETT & CO., INC. v. COMPTROLLER OF the TREASURY.

No. 102, Sept. Term, 1984.

Court of Appeals of Maryland.

April 25, 1985.

Paul Grimm, Baltimore (argued) (Neil S. Kurlander, William C. Stifler III and Niles, Barton & Wilmer, Baltimore, on brief), for appellant.

Gerald Langbaum, Asst. Atty. Gen., Baltimore (Stephen H. Sachs, Atty. Gen. and John K. Barry, Asst. Atty. Gen., Baltimore, on brief), for appellee.

Argued before MURPHY, C.J., SMITH, ELDRIDGE, COLE, RODOWSKY, and COUCH, JJ., and CHARLES E. ORTH, Jr., Associate Judge of the Court of Appeals of Maryland (retired), Specially Assigned.

MURPHY, Chief Judge.

This case involves an assessment of additional corporate income tax by the Maryland Comptroller of the Treasury upon Ramsay, Scarlett & Company, Inc. (Ramsay Scarlett), pursuant to the provisions of Maryland Code (1957, 1980 Repl.Vol.), Article 81, § 316(c), which insofar as pertinent reads as follows:

"(c) [Business income] shall be allocated to this State if the trade or business of the corporation is carried on wholly within this State, but if the trade or business of the corporation is carried on partly within and partly without this State so much of the business income of the corporation as is derived from or reasonably attributable to the trade or business of the corporation carried on within this State, shall be allocated to this State and any balance of the business income shall be allocated outside this State. The portion of the business income derived from or reasonably attributable to the trade or business carried on within this State may be determined by a separate accounting where practicable, but never in the case of a unitary business; however, where separate accounting is neither allowable nor practicable the portion of the business income of the corporation allowable to this State shall be determined in accordance with a three-factor formula of property, payroll and sales, in which each factor shall be given equal weight ...." (Emphasis added.)

Section 316(c) thus makes provision for allocating the net business income of a Maryland corporation with interstate activities; in effect, it requires that such taxable income be determined and allocated according to (1) whether the business enterprise is comprised of separate entities, in which event the "separate accounting" method may be utilized to segregate locally taxable business income on the basis of formal geographical or transactional accounting, or (2) whether the enterprise is a unitary business, in which case the apportionment formula method must be utilized to subject the entire business income to tax while apportioning a part thereof between Maryland and other taxing jurisdictions on the basis of objective measures indicative of a corporation's Maryland and out-of-state activities, i.e., property, payroll and sales factors. ¹

I

Ramsay Scarlett, a Maryland corporation, was established in 1926. The corporation's principal place of business is in Baltimore (the Maryland operation). It also maintains several out-of-state divisions, including an unincorporated bulk terminal operation in Louisiana (the Louisiana division). During the four-year tax period in question (1974-1977, inclusive), the Maryland operation engaged principally in steamship agency and stevedoring operations. The Louisiana division was engaged primarily in warehousing (or export bagging) and operated a barge facility--activities not common to Ramsay Scarlett's Maryland operation. The Louisiana division was also minimally involved in stevedoring and steamship agency work.

In filing its 1974-1977 Maryland income tax returns, Ramsay Scarlett used "separate accounting" for its Louisiana division, thus excluding income realized from its operations in Louisiana from Maryland taxation. The Comptroller was of the view that Ramsay Scarlett operated a unitary business and could not, in view of § 316(c), separately account for its Louisiana division. He, therefore, levied additional tax upon Ramsay Scarlett, amounting to $31,840 for the four-year period.

On appeal to the Tax Court, that agency held that whether a business is unitary involves a factual analysis applied in light of either one of two established legal tests, the first of which--the three unities test--focuses upon the presence of three factors, i.e., (1) unity of ownership, (2) unity of operation as evidenced by central purchasing, advertising, accounting and management divisions, and (3) unity of use in its centralized executive force and general system of operation. The other test for determining unitariness which the Tax Court recognized was whether one business enterprise was dependent upon or contributory to the other, i.e., that whether a number of business operations having a common ownership constitute a single or unitary business or several separate businesses for tax purposes turns on whether they are of mutual benefit to one another or whether each operation is independent of or contributory to others. After noting that these tests for determining unitariness were approved by us in Xerox Corp. v. Comptroller, 290 Md. 126, 428 A.2d 1208 (1981), the Tax Court considered the evidence before it. It said:

"Ramsay Scarlett has introduced a long list of functions that are performed independently by the Louisiana branch. Some of the more substantial functions are as follows: maintaining banking sources and checking accounts; borrowing independently; using local labor union workers; paying local wages; paying expenses; soliciting customers; collecting bills; determining rates to be charged and independent hiring and firing of employees. The Louisiana branch had its own head of operations and retained Louisiana legal and accounting services, wholly unconnected with the Baltimore operation.

"The Comptroller does not refute these contentions but rather introduces other factors which tend to indicate an interdependency between the two operations: Louisiana and Maryland employees were on a common profit sharing plan; there was some company-wide insurance; the Baltimore management did a periodic but limited review of the Louisiana operation; the payroll of office personnel was handled in Baltimore and profits from the Louisiana operation were sometimes transferred to the Baltimore operation.

"The Comptroller has identified some tangible connections between Ramsay Scarlett's Baltimore and Louisiana operations. However, the connections are incidental and most probably arise as matters of convenience. There is no indication that either the Baltimore or the Louisiana branch depends on these connections; nor do they establish central management or control. On the contrary, the evidence tends to indicate that through separate day to day management, purchasing, sales, accounting, advertising and financing, each of these branches operates independently."

The Tax Court also found from the evidence that even though Ramsay Scarlett's Board of Directors in Baltimore retained normal corporate management powers over its Louisiana division, the "actual management functions" of the division were exercised by personnel in Louisiana, as the Board "allowed the Louisiana branch to operate of its own force." While the Tax Court recognized that it was from Ramsay Scarlett's capital produced in Baltimore that the Louisiana division originated, it said that the appropriate focus under our cases was "on the ongoing business structure rather than past investment"; that the original investment in the Louisiana branch sixteen years earlier had long since been expended; and that the Louisiana division "now finances its own purchases." Finally, the Tax Court held that Ramsay Scarlett established "that its Louisiana operation branch operates independently from its Maryland operation, and the Comptroller has failed to establish that activities in Maryland have any substantial bearing on the Louisiana operation."

Upon the Comptroller's appeal to the Circuit Court for Baltimore City, that court (Bell, J.) noted that its on-the-record review of the Tax Court's order was a narrow one under Code, Art. 81, § 229(o ), as that section provided that the circuit court

"affirm the Tax Court order if it is not erroneous as a matter of law and if it is supported by substantial evidence appearing in the record."

The court, after considering the evidence produced before the Tax Court, concluded that the record contained substantial evidence to support the agency's factual finding that the Louisiana division operated independently of the Maryland operation and that Ramsay Scarlett's operations did not constitute a unitary business. It said:

"Reasoning minds reasonably could have reached that factual conclusion. In addition, this Court perceives no error of law."

The Court of Special Appeals vacated the circuit court's judgment and directed that the Tax Court order be reversed. Comptroller v. Ramsay, Scarlett & Co., 58 Md.App. 327, 473 A.2d 469 (1984). Citing Comptroller v. Diebold, Inc., 279 Md. 401, 369 A.2d 77 (1977), the intermediate appellate court noted that judicial review of Tax Court decisions under § 229(o ) is severely limited; that the standard by which a result reached by the Tax Court is reviewed is whether a reasoning mind reasonably could have reached the factual conclusion which the agency reached; and that the application of this test must not be either judicial fact-finding or a substitution of judicial judgment for agency judgment. 58 Md.App. at 337. This limitation upon judicial review, the court said, is addressed only to agency fact-finding and that, as to matters of law, the reviewing court may substitute its judgment for that of the agency. Id., 58 Md.App. at 338, 473 A.2d 469. It said that when agency conclusions are based on facts supported by substantial evidence, and when the conclusions are not contrary to law, a court ordinarily will not substitute its judgment...